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Banks' equity investment: KSE asks State Bank to raise limit to 40 percent

KARACHI (May 05 2003) : The Karachi Stock Exchange (KSE) has suggested to the State Bank of Pakistan to raise the limit of commercial banks' investment in equity market, from the proposed 20 percent to 40 percent.

Moin Fudda, Managing Director of KSE, told Business Recorder that a rally in stocks made Karachi's benchmark index of 100 companies the world's best performer last year.

This was caused by a series of changes introduced by the regulator. Aid inflows, declining interest rates and central bank's step to crack down on the 'hundi' and 'hawala' system encouraged overseas Pakistanis to send money through banking channels.

The State Bank of Pakistan has recently circulated draft rules in which it has proposed to limit commercial banks' investment in any company to 5 percent of the lender's capital base, besides restricting total equity investments to 20 percent of the amount.

''We have forwarded our proposals to the central bank to enhance the limit to 40 percent of equity of the bank and also when these prudential regulations are introduced, the banks could regularise their positions in three years as against one year restriction,'' Fudda said.

HE said: “We would be happy not only that the KSE-100 index only reaches the 3000 coveted mark, rather it should consolidate above this mark.”

He added that the government should exempt capital gains tax permanently since investors are not entitled to claim tax credit for loss of capital.

The removal of uncertainty will create investors' long-term confidence.

Fudda said KSE has also proposed making dividend fully exempt from tax. It is a double taxation since the companies are already paying tax on their profits.

“Full tax exemptions on dividends and continuation of capital gains tax, coupled with other factors, can take the market well above 3000 points barrier with a certain stability,” Fudda said.

According to the findings, 21 commercial banks, including National Bank of Pakistan, Muslim Commercial Bank, Bank Al-Falah, Faysal Bank and Meezan Bank, have made hefty investments in equities.

The new law, if promulgated, would not have an immediate impact on the equity market as banks would have to regularise their positions within an agreed time scale.

As per the annual reports of these banks for the period ended December 31, 2002, nine banks out of 21 are exceeding the prescribed limit and have to sell shares worth Rs 6.9 billion.

The paid up capital of these banks stood at Rs 43.467 billion and equity participation should be around Rs 13.966 billion but the investment held in the listed companies shares is nearly Rs 16.866 billion, an analyst said.

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