Brokers struggle to survive new equity rules, tax structure

KARACHI: New capital market rules to improve public participation in equity trading and tax burden are compelling brokers to exit with two more brokerage houses set to pack up, dealers said on Tuesday.

Two stock brokers applied with the Pakistan Stock Exchange (PSX) to relinquish their trading rights, following suit of their counterparts.

MAN Securities (Pvt) Ltd and Pace Investment and Securities (Pvt) Ltd are winding up the equity trading business through surrendering their trading rights entitlement (TRE) certificates, they added.

A broker said brokerage business has significantly declined due to reduced activity on economic and political uncertainty as well as higher taxes.

“If things don’t improve there will be lay-offs and small brokerage houses would wind up businesses,” the broker said. “A number of TREC holders had already surrendered their certificate and opted for other business such as real estate.”

Analysts said the regulatory regime got tough since January 11, 2016 when all the three stock exchanges in the country, Karachi, Lahore and Islamabad were merged into PSX.

Following the integration, there were two options left for the brokers who kept a small number of investors and instead were the major investors themselves. Firstly, they could have gone for a merger. Secondly, they could go out of the market after 12 months of the integration.

Earlier, the investors-to-brokers ratio was considerably thin as there were 400 brokers, but the number of investors was 250,000.

“Especially, the condition of declaring a brokerage house a public company if its revenues surpass Rs100 million was the most difficult for the members of the PSX,” one member told The News in one of the previous interviews. “They do not want to share their family business with anyone.”

In 2016, a large number of brokers had left the market, but a lull period temporarily ensued demutualisation.

Traditionally, brokers’ fraternity dominated stock exchanges in the country, but after the divestment of 40 percent of Pakistan Stock Exchange’s strategic stake to Chinese investors and subsequently its 20 percent public offering paved the way for new systems for the development of local capital market. Even after de-mutualisation, brokers still possess 40 percent or 16 million shares of the PSX.

Meanwhile, PSX advised all TREC holders and shareholders of the exchange to submit their proposals on direct and indirect taxes for the forthcoming budget 2018/19.

The PSX taxation committee will review the proposals and the board would approve the rationale one for onward submission to the Federal Board of Revenue (FBR) and Securities and Exchange Commission of Pakistan.

A broker said FBR had completely ignored the PSX budget proposals and despite several subsequent assurances the taxation structure was not revised. “It seems PSX would be submitting the budget proposals almost the same as last year.”

Key proposals PSX presented last year included rationalisation of tax on bonus shares, tax credit on the enlistment on the stock exchange, revision in capital gains tax on the disposal of securities and unrealised gains on the sale of property to real estate investment trust (REIT) schemes, treatment of REIT as investment in a stock fund and minimum tax on services rendered by the PSX.

An analyst said higher taxes adversely affected the brokerage business and given the economic and political uncertainty the brokerage business has already declined.

“Taxation regime should be rationalised for stock market, which is the funds-generating engine for corporate as well as SME (small and medium enterprise) sectors.”

KSE 100-share Index of PSX lost 15 percent during the last year – its worst performance since 2008.