The Securities and Exchange Commission of Pakistan (SECP) has restricted the period of long-term directors' loans to 12 months. The apex regulator's clarification came in continuation of guidelines dated July 03, 2013, it issued while explaining the treatment of various items in respect of calculation of Net Capital Balance (NCB) under Third Schedule of Securities and Exchange Rules, 1971.
"The balance of director's loan account in which receipts/payments transactions pertaining to one year period till the date of reporting period of NCB are recorded should be classified as short term loan for NCB purpose irrespective of its classification/disclosure in the books of accounts of the brokerage house," said the SECVP quoting the old guidelines.
However, the regulator said, recently it had received views from the market participants wherein it had been highlighted that the directors' loan extended to brokerage houses were normally of long-term nature. Further, it was argued that such loan fall under the category of "Subordinated Loan", hence, it should be classified and treated as long term liability under NCS statement.
The SECP has, therefore, reviewed and analysed the matter and has concluded that for the purpose of calculating NCB, loan from director to their brokerage house, would be considered as long-term loan if loan agreement executed on stamp paper clearly reflects repayment after 12 months of the reporting period.
The SECP said the director's loan or part of such loan due to be payable within 12 months from the reporting period shall be classified as short-term loan irrespective of its classification/disclosure in the books of accounts of the brokerage house. In case of early repayment of long-term loan from director, the brokerage house shall immediately report the transaction to the Stock Exchange for adjustment of its trading exposure to that extent, it added.
The brokerage house, within 15 days of such repayment of director's long-term loan shall provide to the Stock Exchange a fresh NCB certificate duly certified by the auditor. To take effect immediately, the clarifications, SECP said, should be complied with by all brokerage houses and TREC Holders of the stock exchanges and the auditors appointed by them for certification of NCB. "Any violation or circumvention of this direction shall be dealt with under the provisions of the applicable law," it warned.