Pakistan May Set Up Small-Company Exchange, SEC Chief Says

Pakistan may set up a stock exchange for small companies to raise capital as part of government plans to provide more financing channels for Asia’s fifth-smallest economy and as initial public offerings dry up.

The Securities & Exchange Commission of Pakistan may form the exchange or create a board within the bourse, Muhammad Ali, chairman of the regulator, said in an interview at Bloomberg’s office in Karachi yesterday. There haven’t been any listings on the Karachi Stock Exchange this year after four companies went public in 2011, according to the exchange’s website.

“So much creativity dies in this country without seeing the light of day because we can’t provide vehicles for financial capital,” said Ali, 43. “Unless this happens we won’t achieve corporatization, documentation of the economy or tax collection.”

Prime Minister Yousuf Raza Gilani’s government is seeking to get more revenue from an underground economy that employs more than three quarters of the nation’s 54 million workers and is worth as much as 50 percent of the $200 billion official gross domestic product. There are 60,000 registered companies and 3 million small- and medium-sized sole proprietors and partnerships, most of which are part of the underground economy.

Photographer: Asim Hafeez/Bloomberg

Muhammad Ali, chairman of the Securities and Exchange Commission of Pakistan. Close

Muhammad Ali, chairman of the Securities and Exchange Commission of Pakistan.

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Photographer: Asim Hafeez/Bloomberg

Muhammad Ali, chairman of the Securities and Exchange Commission of Pakistan.

The Karachi Stock Exchange 100 Index (KSE100) has surged 24 percent this year after the government eased rules on a capital-gains tax and demand for energy and building materials bolstered company earnings. The measure was little changed at 14,019.56 at 10:03 a.m. local time.

Huge Potential

The stocks gauge, which slid 5.6 percent in 2011, is trading at 6.9 times estimated earnings, the lowest valuation in Asia, reflecting the country’s struggles to cope with militant attacks and political instability. The BSE India Sensitive Index trades at 12.4 times forward profit after gaining 3.1 percent this year.

“A platform for small businesses will allow investors to tap the potential of growing companies,” Farid Khan, who manages 65 billion rupees ($706 million) in stocks and bonds as chief executive of ABL Asset Management Co. in Karachi, said by telephone yesterday. “However, only selective institutions should be allowed to invest in these companies because these are higher risk concerns.”

Companies may be segregated into categories with rules allowing only larger investors to trade in riskier stocks, said Ali, who joined the agency in December 2010.

His commission has recommended changes in tax rates and also plans to amend the company law by next year to introduce different reporting requirements for smaller businesses that list on the exchange. There are 591 companies listed companies.

Bigger Tax Net

The SEC has also proposed that the 35 percent corporate tax rate be reduced and the 25 percent levy paid by unlisted businesses be raised to encourage public share offerings.

“If we have this fiscal change and a new law that differentiates between reporting requirements based on the size of the company, businesses will be corporatized in the country and that’s the way forward to document the economy and broaden the tax net,” said Ali, a former broker who led Indosuez W.I. Carr Securities in Karachi for six years.

Pakistan’s ratio of tax to gross domestic product was 8.6 percent in June, one of the world’s lowest, according to Macro- economic Insights in Islamabad. Only 25 percent of the economy is taxed if the undocumented sector is taken into account, Sakib Sherani, the chief executive officer of the economic research company, said by e-mail last month.

The budget gap, which was 6.3 percent of GDP last year, may expand to 7 percent in the year ending in June, according to the International Monetary Fund.

Commodity Exchanges

The regulator also plans to offer licenses to set up more commodities exchanges in the country by next year, Ali said. The Pakistan Mercantile Exchange Ltd. was set up in 2007 in Karachi and offers futures trading in commodities including gold, oil, and sugar.

“We need more commodities markets because being an agriculture economy there is demand so that farmers can hedge their positions,” Ali said. “We would like to see two more exchanges so that they all compete with each other and then over a five or 10 year period only one remains.”

Agriculture makes up 21 percent of Pakistan’s GDP and employs 45 percent of the country’s workforce, according to the government statistics. Pakistan is the sixth most populous country in the world.

To contact the reporters on this story: Naween A. Mangi in Karachi, Pakistan at Nmangi1@bloomberg.net Farhan Sharif in Karachi, Pakistan at fsharif2@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net

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