- PSX proposals and recommendations favourably considered in budget 2021-22
- Under RDA overseas Pakistanis have a transparent and convenient conduit to invest in PSE
Interview with Mr. Farrukh H. Khan — CEO & MD, Pakistan Stock Exchange Limited
PAGE: Tell me something about yourself and Pakistan Stock Exchange, please:
Farrukh H. Khan: About myself, I have held several senior positions in the past which include positions of responsibility in banking, starting companies as well as non-executive directorships in major public and private companies. I was head of treasury and investment banking at American Express Bank in 1991 when I started BMA Capital with some other partners. I was the founding CEO. This was at a time when the Pakistan Stock Exchange (PSX) was opened to foreign investors for the first time. At BMA, I helped lead manage the US$813 million GDR offering and London listing of OGDCL, Pakistan’s largest listed company, and successfully advised Etisalat on their $2.6 billion acquisition of Pak telecom which was the largest mergers and acquisition transaction and the largest foreign direct investment in Pakistan’s history.
I then joined Acumen, the leading Impact Investment fund globally and moved to London to help develop their global business development function and also joined the management committee of the firm. The responsibilities I have held so far allowed me to equip myself with the necessary knowledge & experience required for the position. I am CEO &MD of Pakistan Stock Exchange.
About my educational background, I did my BA (Hons.) in Economics & Finance from the University of Manchester and qualified as a Chartered Accountant from the Institute of Chartered Accountants in England & Wales, UK.
About Pakistan Stock Exchange, it is the only national stock exchange of the country. It came into existence in January 2016 after the merger of Karachi Stock Exchange (established in 1947), Lahore Stock Exchange (established in 1970) and Islamabad Stock Exchange (established in 1992). Hence, PSX has a distinguished and long history, and is amongst the oldest exchanges in Asia. Presently, 40% shareholding in PSX is held by a consortium of leading Chinese exchanges (Shanghai Stock Exchange, Shenzhen Stock Exchange, & China Financial Futures Exchange), and 60% by general public, which includes initial shareholders, local and foreign investors.
Since I have had the honor of taking over the office of the CEO in February 2020, I have had the privilege to oversee much progress taking place at the Exchange. Despite the pandemic and the ensuing lockdowns, the terrorist attack, and the torrential rains that affected Karachi, Pakistan Stock Exchange continued to function normally as all business continuity measures were already in place and functioning smoothly.
In fact, we have seen several developments taking place at the Exchange front over the last one & half year with the launch of ETFs, harmonization of the PSX Rule Book, listing of a Shariah compliant debt instrument (PHL’s Rs 200 billion Pakistan Energy Sukuk II) for the first time through PSX’s state-of-the-art book building system, the relatively higher number of equity listings (seven to be exact) so far in the current fiscal FY21, the on-boarding of banks as market makers for debt securities on PSX, and a new regime for brokers – initiated by SECP & implemented by PSX – which is partly launched and part of it (broker categorization) is expected to be launched this year, 2021.
Besides this, PSX has collaborated with State Bank in its launch of the Roshan Digital Account platform and is continuously working with banks to improve its functioning and outreach for overseas Pakistanis. Furthermore, PSX played an important supportive role in the online digital account opening process to facilitate online brokerage account opening for investors who may have difficulty in doing so physically or may be located in distant areas, away from the major urban economic centers of the country. We are also in the process of installing a state-of-the-art trading and surveillance system, which will be much faster and secure, and will also enable PSX to launch new products like options and other derivatives. So, despite all the challenges, PSX continues to progress and develop Pakistan’s capital markets, for the benefit of all stakeholders.
PAGE: Could you tell us about the budget proposals sent by the Pakistan Stock Exchange and have they been incorporated in the budget?
Farrukh H. Khan: Pakistan Stock Exchange presented several budget proposals for the benefit of the capital markets and the economy as a whole. These proposals were looked at favorably by the Minister of Finance and FBR. We are fortunate that the Government has paid heed to our recommendations and adapted some of the proposals in the budget FY 2021-22. One of the recommendations presented by Pakistan Stock Exchange was the alignment of rates of Capital Gains Tax (CGT) on disposal of securities with other countries in the region & OECD countries and with the rates of CGT on sale of immovable property. With the recent initiatives given to the real estate & construction sector, particularly the reduction in capital gains tax, a tax driven distortion has been created between the attractiveness of different asset classes. PSX presented the case that the CGT rate of 15% on disposal of securities was very high and that too without any benefit of holding period. It is higher than the rates on sale of immovable property which are ranging from 2.5% to 10% based on various slabs of capital gains.
Moreover, capital gain on immovable property is subject to reduction of 25% to 100% based on various slabs of holding period of immovable property such that there is no tax on capital gain for immovable property where its holding period is more than four years. Therefore, in order to avoid the tax driven distortion in the attractiveness of the various asset classes, PSX submitted the proposal to the MoF that the CGT rate be 10% upto holding period of 12 months and 0% for holding period of more than 12 months. We are pleased to note that the Ministry of Finance did consider the significance of reducing CGT on disposal of securities and did reduce CGT to 12.5% from 15% in the Budget announced for FY2021-22.
Another proposal that was presented to the MoF was the reduction of withholding tax on income from margin financing transactions. It was proposed that the rate of withholding tax on the gross income earned on margin financing transactions be reduced from 10% to 2.5% or to charge 10% on the net income (spread) earned on such financing. The purpose of the proposed reduction in the rate of tax on margin financing transaction was to help develop the market and increase tax collection by FBR because, in the past, the size of similar market for margin transactions was several times higher. It is a very positive development that this proposal was incorporated in the latest budget presented and the 10% withholding tax on margin financing collected by NCCPL has now been removed. This will encourage utilization of margin financing by investors, thereby leading to greater activity in the market and higher volumes. Yet another proposal presented to the government was enhanced tax credit for listed small and medium enterprises. In order to encourage small and medium enterprises to get listed on the SME Board, it was proposed that the rate of tax for such listed SMEs be lowered by giving tax credit of 50% of tax payable for 3 to 4 years and 20% onwards of the tax payable.
Small and medium enterprises contribute significantly to the economy providing 80% of all employment in the country. PSX has launched an SME board to attract smaller companies to get listed on the Exchange. This is to facilitate SMEs to raise capital from the capital market rather than through the banks, which can be an expensive source of financing for the SMEs. The rationale behind proposing the enhanced tax credit for SMEs is to give the SME sector a boost through listing which will inculcate a range of benefits for the SMEs including greater access to growth capital (for innovative SMEs), documentation, good governance, new jobs through entrepreneurship, more investment opportunity for domestic investors and local venture capitalists. In the budgetary announcement, concessional tax regimes have been introduced for Small and Medium Enterprises having annual turnover not exceeding Rs. 250 million i.e. SMEs have an option to be taxed either on profit before tax @ 15% or on turnover @ 0.5%. A proposal presented to the MoF was regarding the development of regulated commodity market. In this matter, we proposed exemption of commodity futures contracts and EWRs from the application of withholding taxes under Income Tax Ordinance, 2001 like these are exempt from GST under Sales Tax Act, 1990. It was to be applicable only on physical settlement of futures contract by exchange of delivery of underlying commodity.
On contract, CGT being already applicable, the reason for this proposed exemption was that the buyer of a commodity withheld tax (4%-9%) from seller before making payment with the exception of growers. This tax added cost and kept the investors at a disadvantageous position when dealing in actual commodity exchange at PMEX in futures contracts/e-WHRs as grain markets are not documented and as such this tax was actually not being paid. We believe that development of regulated and organized commodity markets will greatly benefit the agriculture sector. Moreover, revenue impact will be neutral to positive due to adjustability of withholding tax while documentation leading towards more income tax from traders and related parties. We are very pleased with the fact that this proposal was also accepted by the Government and it is proposed that provisions of section 153 shall not apply to commodity future contracts listed on a Future Exchange License under Future Markets Act, 2016.
PAGE: What kind of performance could we witness in the stock exchange of Pakistan in the wake of the Federal Budget?
Farrukh H. Khan: The Federal Budget FY2021-22 has the ingredients that can impact the market positively. The Budget is focused on growth and hence as the economy and different sectors grow, this bodes well for the capital market. For the capital markets, the reduction of CGT rate by 2.5% and removal of 10% withholding tax on margin financing by NCCPL is indeed positive news for the market and its stakeholders. From the perspective of individual sectors, several amendments and initiatives have been introduced which will encourage growth in different sectors, thereby adding to the growth and profitability of individual companies in these sectors, leading to greater shareholder value for investors. I would not like to comment on specific sectors or companies. A number of research reports have come out detailing the impact on sectors and companies. I would also highlight that investors can very easily gain a diversified exposure to the market by investing in ETFs.
PAGE: Could you tell us about the investment made by the Pakistani diaspora in Pakistan Stock Exchange?
Farrukh H. Khan: Recently, with the launch of the Roshan Digital Account (RDA), overseas Pakistanis now have a transparent and convenient conduit to invest in Pakistan Stock Exchange. Investment in Pakistan’s stock market through RDAs is an attractive opportunity for overseas Pakistanis to both gain from and contribute to Pakistan’s economic growth. Overseas Pakistanis who are employed abroad via work permits & work visas can build wealth in their native homeland through the RDA. At the same time, investment flowing in Pakistan’s stock market is channeled into the companies listed which in turn generate shareholder value in the form of capital appreciation as well as dividend income. So it is an overall win-win situation benefitting the overseas investors as well as the local industry and other sectors of the economy. As of June 15, 2021, more than 4900 RDA accounts have been opened and more than Rs 2.315 billion have been received for capital market investment. Overall, overseas Pakistanis have opened more than 22,000 accounts (as of May 27, 2021) wherefrom funds have been directed to the stock market. Investment by overseas Pakistanis in Pakistan Stock Exchange is an asset not just for the capital market but also for Pakistan.
PAGE: Kindly share your perspective about the taxation and its impact on the performance of Pakistan Stock Exchange:
Farrukh H. Khan: Fiscal discipline and tax measures have a direct and profound impact on the structure and functioning of the capital markets. The stock market is one of the most documented sectors of the economy and over the decades GOP has perhaps been the biggest beneficiary from it. It is imperative for the growth of Pakistan’s economy to create conducive environment which will help to attract more companies and investors to the capital markets. An efficient, equitable and broad-based tax system and a culture of corporatization are interdependent. In addition, a broad based capital market helps to achieve important economic and social objectives like increasing the number of tax payers, savings and investment rates, and reducing wealth inequality. As the markets grow, they will contribute to growth of Pakistan’s economy and create new revenue sources for FBR. To achieve this, well thought through, balanced, regionally competitive and long term tax policies and measures are needed. Tax measures are an important policy tool to increase investments and savings in the economy and to stay competitive with other markets. Capital markets are highly specialized and have many varied and different segments, each with their own commercial imperatives that need to be fully understood before successful tax measures can be implemented. Innovations and new products are a constant feature of capital markets. As much as favorable tax treatment, investors need a stable and predictable tax environment. Government of Pakistan must consider adopting long term measures to promote savings and investment and development of the capital market.