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EAB body suggests reforms for capital market

RECORDER REPORT

KARACHI: The sub-committee constituted by the Economic Advisory Board (EAB) on capital market reforms has suggested modernisation of market infrastructure and allowing banks to set up equity brokerage operations without prior approval of the State Bank. However, a clarification from the SBP, that brokerage, is incidental to the business of banking will be necessary.

Among the medium-term measures for the development of a corporate debt market, it has been suggested that commercial banks should be allowed to keep listed securities outside the constraints of the credit ceiling. In case of Non Banking Financial Institutions - NBFIs, the Statutory Liquidity Ratio (SLR) limit for listed securities should be raised from one percent to two percent.

It has been pointed out that capital gains income distributed by mutual funds to individuals is tax at 10 percent while direct investors are exempted from such tax. The body suggested that measures should be taken to remove this tax anomaly to bring about reforms in the mutual funds industry.

Prescribed investment exposure limits for mutual funds should be abolished. However, mutual funds should be required to spell out their investment policy in their prospectus. Investment adviser rules should be amended to exempt the requirement of listing mutual funds for an initial incubation period provided only private funds are used during this period.

Similarly closed-end mutual funds should disclose their Net Asset Value (NAVs) on a weekly basis. Securities and Exchange Commission of Pakistan (SECP) should have the authority to take corrective measures in case NAVs are not disclosed for 6 weeks and SECP should constitute a consultative body representing mutual funds to periodically review industry issues.

At present mutual funds income is tax-free if they distribute 90 percent of their total income. Total income should be replaced with 90 percent of income other than capital gains. This will help mutual funds realize capital gains in exceptional years and to retain those proceeds for re-investment without being taxed.

Open-ended mutual funds established under the Asset Management Companies Rules 1995 should be treated at par in all respects. As in the case of NIT units, private sector open-end fund units should also be allowed as eligible security for Statutory Liquidity Ratio, and the Insurance Act should be amended to allow insurance companies to invest in such units.

The law requiring company courts to decide cases within 90 days should be implemented to strengthen governance, regulation and and supervision of capital market.

Companies should present their accounts every quarter. These reports should be presented within 45 days of the end of the quarter. Audited accounts should be presented within three months of the end of the financial period.

Companies should be required to file financial reports on the pattern of these report filed by US companies with their annual report. Process audits on the pattern of the cement industry be introduced in their industries. Material non-public information arising out of extraordinary/unusual course of events/activities should be disclosed to the public promptly, and Directors' fee for attending board meetings should be linked to the capital base of the company.