Capital market: Brokers seek law for restoring concept of 'security'

PSX Stock Brokers Association has approached the Tax Reforms Implementation Committee and the Federal Board of Revenue (FBR) seeking introduction of a special legislation to restore the concept of the term "security" at the stock exchange, as the FBR's field formations' interpretation of a court judgment has serious implications on the corporate sector.

In a letter to the FBR, PSX Stock Brokers Association President Basharat Ullah Khan said Tuesday that due to the judgment by the FBR, field officers are in the process of reopening assessments of all the newly-listed companies where the law of limitation permits the FBR. Similarly, the tax cases of investors, who had participated in Initial Public Offering (IPO) of those companies, are also being reopened.

He said as a result, the companies that were thinking of listing themselves on the stock exchange have changed their mind. This has hampered the process of capital formation, which is very necessary for achievement of industrialization, at a fast pace - a top priority of the Prime Minister.

Sharing details of the judgment, the president PSX Stock Brokers Association stated reference to a decision of the Sindh High Court (2016 PTD 1813/2016 SLD 1141) dated 04-03-2016 namely Khalid Mansoor VS FBR and 3 others (the judgment) wherein the court gave a ruling that share of a company, acquired only after announcement of its listing (by the Stock Exchange) shall be treated as security, while the shares acquired prior to announcement of listing shall continue to be shares.

It appears that a number of issues were not addressed properly including definition of a public/listed company as given in Section 2(47)(b) of the Income Tax Ordinance, 2001, the importance of concept of "Tax Year" in income tax proceedings, Rules on the subject framed by the FBR itself and Procedures & Practices of listing of a Company on a Stock Exchange. Legal Wing of the FBR also could not visualize the effect of the judgment on corporate sector, capital market and tax laws when they decided not to go in appeal against the said judgment. With the passage of time the impact of the rulings has become visible:

a) Shares of a listed company have been split into two categories, for rest of the life of a listed company. Shares acquired after announcement of listing (by the Stock Exchange) are Securities while shares available/acquired prior to the said announcement by the Exchange are Shares.

b) Share acquired by investors in Initial Public Offering (IPO) also do not attain the status of a "Security" as the process of IPO has to be complete before Stock Exchange fixes a date for its Securities to be traded on their trading platform. It is at the end of the first day of trading, that the Stock Exchange makes announcement about listing of the relevant company.

c) The concept of "Tax Year" has lost its significance. Announcement of listing by the Exchange has become all important.

d) The shares held by Sponsors/Initial Shareholders of a listed company have lost the status of a "Security". Such shares cannot be sold on trading platform of the Stock Exchange. Acceptability of these shares by Banks as a collateral has also become doubtful.

e) The concept of "Free Float", so important for a Stock Exchange has lost its significance.

f) Investors/Holders of shares have become doubtful of the nature of their holding. They are unaware as to what tax treatment at the hands of the FBR, would they suffer, on disposal of their shares.

g) In view of adoption, of the above said judgment, by FBR, the Field Officers of FBR are in the process of reopening of assessments of all the newly listed companies where the law of limitation permits the FBR. Similarly the tax cases of investors, who had participated in Initial Public Offering (IPO) of those companies, are also being reopened.

h) As a result, the companies that were thinking of listing themselves on the Stock Exchange have changed their mind. This has hampered the process of Capital Formation, so very necessary for achievement of industrialization, at a fast pace - a top priority of the Prime Minister.

Taking notice of these facts, the matter has been taken up with the Chairman FBR Syed Muhammad Shabbar Zaidi, requesting him to take immediate remedial measures to restore the confidence of corporate world and to halt the unending fall of capital market, Basharat added.