Issued for the month of August, Institute of Capital Markets. ICM Newsletter. Message from the Chief Executive

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1 Institute of Capital Markets ICM Newsletter Message from the Chief Executive Inside this issue: Regulatory Updates 2 Article of the Month 3 Investor Terms of the Month ICM Updates 6 5 The last few years have seen a rapid growth in size, quality and sophistication of capital markets, because of changes in the policy and regulatory environment, the entrepreneurial initiatives of individuals and institutions, and the availability of trained manpower. The continuing growth of capital markets is further adding to the demand for well-trained professionals. The Institute of Capital Markets (ICM), Pakistan s first securities market institute, has been established as a permanent platform to develop quality human capital, capable to meet the emerging professional knowledge needs of capital markets and create standards among market professionals. The Institute's main activities are (1) certifying the professionals working in the capital markets by examinations. The institute s key responsibility is to educate the professionals working in different segments of the capital markets of Pakistan through examining their knowledge in their relevant field of work; (2) studying and researching the latest developments in the capital markets in order to discover whether there is such a thing as an ideal market economy; and (3) executing the Investor Education and Awareness Initiatives, launched by SECP and other stakeholders. The Institute's research is intended, first and foremost, to be neutral, professional and practical. Rooted in practice, it aims to contribute to the healthy development of Pakistani capital markets as well as to related policies by conducting neutral and professional studies of how these markets and the financial systems are regulated and organized and how they perform. The economy is changing all the time. The Institute hopes that, by responding to these changes positively, it can contribute to the dynamic development of the country's capital markets as well as of the economy itself.

2 SECP Introduces new Takaful Rules Regulatory Updates SECP has introduced new Takaful Rules, 2012, for the Islamic insurance sector of the country, thus replacing the older Takaful Rules, These rules will be applicable for all the Takaful Companies undertaking the business of insurance under Sharia Compliance. These rules standardizes the; Authorization and Conditions for transacting the Takaful business; how should a Takaful operator conduct the business; how the participants of the Takaful funds should be guided and protected; what are the contracting rules for Takaful operators for registering with the apex regulator; the guiding principles for Shariah compliance; reporting requirements, and window Takaful operations. As per the Takaful Rules, 2012; Window Takaful Operations has also been introduced for the conventional insurers. These operations authorize the Conventional insurers to transfer funds from shareholder s fund to the statutory fund for its Takaful business. The provisions of these rules are aimed to regulate the Takaful operators in the country in modern terms, and to streamline them with the current Shariah compliance within the country. State Bank of Pakistan s Monetary Policy Decision The State Bank of Pakistan (SBP), in its Monetary Policy decision released on August 10, 2012, decreased the key policy rate to 10.5 percent from 12 percent effective from 13 August, 2012 till the next monetary policy announcement. The two major factors were deemed important for this decision; i) inflation outlook, which has improved with a projection of 10.5 percent for FY13 and; ii) loans to private sector businesses which have sharply decreased consecutively between last two years. The inflation has constantly lead the Central Bank to an increased real interest rate. In taking the monetary policy decision, the Central Board of Directors of SBP has decided to gave a relatively higher weight to the state of private sector credit and investment in the economy, knowing that the projected inflation for FY13 could remain slightly higher than the target. However it was also been noted that the SBP is constantly injecting in the money market to ensure liquidity for the banking channels. This rate cut has also pushed the equity markets to touch its peak indices, in which KSE-100 has gained more than 3.5% adding to the previous growth of the FY12-13 and ticked its 4 year high since June, Page 2

3 Voluntary Pension Scheme (VPS) By: Mashmooma Zehra Majeed (CEO, MUFAP) Article of the Month Voluntary Pension Schemes (VPS) or Pension Schemes are referred to fund(s) established under the Voluntary Pension System Rules, 2005 (VPS Rules). VPS is managed by a Pension Fund Manager that can be an asset management company or life assurance company having been licensed by the Securities and Exchange Commission of Pakistan (SECP). Currently six asset management companies have been licensed by the SECP for this purpose, who are offering eleven pension schemes, out of which six schemes have investments which are Shariah compliant. VPS provides a portable, individualized, flexible and funded (based on defined contribution) framework to the individuals to save and invest during their working life and receive income and payments in the period after their retirement. Sub-Funds: VPS is a one-window operation which provides investments in a diversified portfolio of equity securities and fixed income instruments. SECP mandated investment policies govern each asset class. Each VPS has three sub-funds, under the umbrella. Page 3 Equity Sub Fund: The objective of the Equity sub fund is by investing in listed equity securities to achieve long term capital growth. Debt Sub Fund: The objective of the Debt sub fund is to provide income along with capital preservation by investing primarily in tradable debt securities. Money Market Sub Fund: The objective of the Money Market sub fund is to provide regular income along with capital preservation by investing primarily in short term debt securities. Allocation Schemes: The contributions made in the VPS are allocated the units of sub-funds at Net Asset Value, as per the Allocation Scheme selected by individual. Who can invest in VPS Individuals over the age of 18 years and holding a Computerized National Identity Card (CNIC)/ National Identity Card for Overseas Pakistanis (NICOP) for nonresident Pakistanis or a valid National Tax Number (NTN) Employer on behalf of their employees Accumulated balances from Approved Employment Pension or Annuity Scheme or Approved Occupational Savings Scheme (i.e. approved gratuity fund or recognized provident fund) can be transferred to VPS. This is subject to subject to incorporating the provision to this effect in the trust deed of the same which is to be approved by Commissioner of Income Tax. Therefore it is advised to consult the tax advisors. Benefits at Retirement The investor can select their retirement age which can be any-

4 time between the ages of 60 and 70. The later the age of retirement, the more monthly pension the investor will get. At retirement, they can choose to do the following without incurring any tax liabilities: Withdraw up to fifty per cent (50%) of the accumulated amount in their Individual Pension Account as cash. From the remaining fifty percent: 1. Purchase an Approved Annuity Plan from a Life Insurance Company; or 2. Enter into an agreement with the Pension Fund Manager to transfer the remaining balance to an Approved Income Payment Plan offered by the Pension Fund Manager or any other Pension Fund Manager. 3. Monthly instalments received from an Approved Income Payment Plan are exempt from tax subject to the condition that the accumulated balance is invested for a period of 10 years. Note: Any withdrawals before retirement age or in excess of allowable lump sum at retirement will be subject to withholding tax. Tax Credit Contributions made in Voluntary Pension Scheme during any one tax year (July 1 to June 30) shall be entitled to a tax credit under Section 63 of the Income Tax Ordinance Tax credit can be availed at the Investor's average rate of tax on amount of actual contribution or 20% of the annual taxable income whichever is lower. For participants joining the VPS at 41 years or above and additional tax credit of 2% is allowed for every year over 41 years; the maximum tax credit allowed shall be 50% of the annual tax credit. The additional tax credit is allowed for ten years starting from July 1, This effectively means that the investor will be allowed tax credit equal to the effective tax on contribution. The tax liability may be reduced for both self-employed and salaried individuals. Conclusion: The promotion and growth of schemes like VPS would help develop saving habits among the masses in the country and help them become self sufficient and maintain their standard of living after retirement. VPS is a good opportunity for all those individuals who don't have access to pension schemes such as selfemployed or employees not covered by occupational pensions or non resident Pakistanis to build their pension funds. It also provides a good opportunity to the corporate sector to shift from defined benefit to defined contribution by supplementing or replacing existing occupational retirement schemes with matching contributions to VPS for their employees. VPS would enable a larger population to have pensions to supplement their incomes as they attain old age and additionally the presence of large amounts with the pension fund managers would be helpful in improving liquidity in capital markets as more funds will be available for investment as is the case internationally. Page 4

5 Investor s Terms of the Month Bond A bond is a debt instrument that is issued for a period of more than one year with the purpose of raising capital by borrowing. It is a type of security that resembles a loan where the issuer is the borrower (debtor), the holder is the lender (creditor), and the coupon is the interest. Generally, a bond is a promise to repay the principal along with interest (coupons) on a specified date (maturity). Some bonds do not pay interest, but all bonds require a repayment of principal. Bonds are often divided into different categories based on tax status, credit quality, issuer type, maturity and secured/ unsecured. The yield from a bond is made up of three components: coupon interest, capital gains and interest on interest (if a bond pays no coupon interest, the only yield will be capital gains). Capital Rationing Limiting a company's new investments, either by setting a Page 5 cap on parts of the capital budget or by using a higher cost of capital when weighing the merits of potential investments. This might happen when a company has not enjoyed good returns from investments in the recent past. Capital rationing also could take place if a company has excess production capacity on hand. Bell-shaped-curve Portfolio Investment Portfolio in which major part of the investment amount is put in bonds with medium maturity periods, and progressively smaller amounts in bonds with small and long maturity periods. When drawn as a graph, its investment distribution (just as all normal distribution) traces a bell-like shape. Available earnings Part of a firm s annual profit available for distribution as dividend to stockholders. It is arrived at by deducting all costs, depreciation, taxes, and preference dividend, from total earnings. Dividing available earnings by the number of outstanding common stock (ordinary shares) gives earnings per share (EPS). Quote of the Month: There s no denying that a collapse in stock prices today would pose serious macroeconomic challenges for the United States. Consumer spending would slow, and the U.S. economy would become less of a magnet for foreign investors. Economic growth, which in any case has recently been at unsustainable levels, would decline somewhat. History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse. Ben Bernanke Chairman, Federal Reserve, Central Bank of United States

6 Institute of Capital Markets ICM Updates ICM s Capacity Building Project The ICM, with the help of the World Bank IDF Grant, is further enhancing its HR strengths and capacity to introduce new Certification Programmes. ICM aims to help strengthen the Risk Management regime and companies, as well as to bring further transparency in capital markets, in addition to providing protection to the investors. This grant will also support the ICM to develop human resource capital within organization to prepare different knowledge and awareness Programmes for the market participants. ICM will also provide institutionally independent and neutral research on issues of concern that are presently being faced by Pakistan's capital markets, particularly with respect to increasing the breadth and depth of markets and also act as a platform for exchange of ideas on capital markets issues. Analyst Certification Programme The ICM contemplates the launch of ICM Pakistan Markets and Regulations Certification Programme. This programme aims to certify the Research Analysts working in equity brokerage houses, asset management companies or working independently, signing off research reports, prospectus or other similar public documents. This programme intends to inculcate the laws and guidelines related to the capital and financial markets. The ICM is planning to launch the Analyst Certification Programme in September 2012, after the review of the ICM s Curriculum Committee. Investor Education and Awareness Initiatives ICM, in collaboration with its major stakeholders in the capital markets, has launched Investor Education and Awareness Initiatives. The Launching Ceremony of the Investor Education and Awareness Programme was held on July at Karachi Stock Exchange. This programme contemplates the awareness for general investors of Stock Exchange, Commodities Exchange, Mutual Funds and other Capital Market Instruments. The Guidebooks prepared by the ICM for Investors were first been distributed among the participants of the seminar and then will be made available to all the members of the ICM. ICM has published the list of its future investor education seminars scheduled till November 2012 on its website. These seminars will be conducted in different cities of the country. The Associate and Registered Members of the Institute are also encouraged to attend these learning sessions and they must also encourage their investors to participate. ICM Contact details: Institute of Capital Markets, 5th Floor, State Life Building No.2, Off: I. I. Chundrigar Road, Karachi Phone: newsletter@icm.org.pk Web: