Prepared By

Submitted to

Course
Money and Capital Markets
(FIN 512 A)

pakistan
Submission Date
August 22, 2009
 TABLE OF CONTENTS

INTRODUCTION.........................................................................................................................................................3
NON-BANKING FINANCE CORPORATIONS (NBFCS) RULES.......................................................................4
LEASING......................................................................................................................................................................13
COLLECTIVE INVESTMENT SCHEMES OPEN END SCHEME AND CLOSED END SCHEMES............................................................17
PRUDENTIAL REGULATIONS FOR BANKS WITH PARTICULAR REFERENCE TO THEIR
OPERATIONS IN THE MONEY & CAPITAL MARKETS................................................................................20
EXPOSURE AGAINST SHARES / TFCS AND ACQUISITION OF SHARES....................................................................................20
INVESTMENTS AND OTHER ASSETS:.................................................................................................................................22
ASSUMING OBLIGATIONS ON BEHALF OF NBFCS...........................................................................................................23
PAYMENT OF DIVIDEND................................................................................................................................................23
PAKISTAN BANKS’ ASSOCIATION.....................................................................................................................24
LEASING/MODARABA ASSOCIATION OF PAKISTAN..................................................................................25
LEASING/IJARAH...........................................................................................................................................................25
MUTUAL FUND ASSOCIATION OF PAKISTAN (MUFAP).............................................................................27
INVESTMENT BANKS ASSOCIATION OF PAKISTAN...................................................................................29
ECONOMIES OF SCALE:..................................................................................................................................................30
ECONOMIES OF SCOPE:..................................................................................................................................................30
ABSOLUTE SIZE AND MARKET POWER:............................................................................................................................30
RISK DIVERSIFICATION:.................................................................................................................................................30
KSE RULES WITH RESPECT TO RISK MANAGEMENT................................................................................33
RISK MANAGEMENT......................................................................................................................................................33
Our Rigorous Audit And Internal Compliance Process......................................................................................33
Corporate Governance........................................................................................................................................33
Our Protection Pyramid......................................................................................................................................33
Current Taxes – Capital Market Transactions...................................................................................................34
Maintaining Market Integrity Is The Key To A Fair, Efficient And Transparent Market..................................34
Foreign Investors Are At Par With Local Investors Across All Sectors.............................................................35
Investment Policy & Tax Incentives (Local Investor Specific)...........................................................................35
BIBLIOGRAPHY.......................................................................................................................................................36

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 INTRODUCTION

The money and capital markets deal in highly marketable liquid debt instruments such as
promissory notes, the nills of exchange , treasury bills as well as long term suecurities such as
common stocks , share documents and bonds. Thus apart from tsangible assets like buildings etc
they control all of the wealth in the entire counties markets.

It is essential to regulate these markets to safeguard the interests of all the parties . The major
organizations involved in these regulatory procedures in Pakistan are as follow:

1. The State bank of Pakistan

2. The Securities and exchange commission of Pakistan
3. The KSE or LSE

To safeguard the interests of the key market players like the commercial banks, mutual funds,
leasing companies, modarabas, brokerage houses, these conglomerates have formed there own
associations.
These associations are as follows:

1. Pakistan Banks Association

2. Leasing /Modaraba Association of Pakistan
3. Mutual Fund Association of Pakistan (MUFAP)
4. Investment Banks Association of Pakistan

Our report covers the various important roles of rules and regulations set out by the regulatory
bodies in Pakistan and roles of various Associations in the safeguard of their interests in
Pakistan

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 NON-BANKING FINANCE CORPORATIONS (NBFCS)
RULES
The NBFC rules are set out by the SECP and are to be followed by all NBFCs like
savings banks, investment houses,insurance companies, provident funds and other
financial operations.

Some of the rules as set out for NBFCs are:

Aggregate Liabilities
1) Aggregate liabilities, excluding Contingent Liabilities and security deposits, of an
NBFC shall not exceed seven times of its equity for the first two years of its operation
and ten times of its equity in the subsequent years.
2) Contingent Liabilities of an NBFC shall not exceed seven times of its equity for the
first two years of its operation and ten times of its equity in the subsequent years.

Internal audit function.–

1) An NBFC shall have an internal audit function, reporting directly to the audit
committee of the board of the NBFC.
2) The internal audit function may either be performed by creating an internal audit
department or by outsourcing the function.
3) The internal audit function shall be responsible for monitoring compliance with the
Ordinance, Rules and these Regulations by establishing effective means of testing,
checking and compliance of the policies and procedures framed by the board of the
NBFC.

Submission of information by the NBFC.–

An NBFC shall submit such information including periodical statements, reports,
statistics and data in such forms and manner and within such time as may be required
by the Commission from time to time.

Code of conduct.–
An NBFC shall acquire and maintain membership of such association(s) which have
been constituted in consultation with the Commission and abide by the code of conduct
prescribed by the said association(s).

Prevention of NBFCs involvement in money laundering and other illegal trades.–

1) All NBFC shall ensure prevention of money laundering and other illegal trades and
abide by such directives and circulars as may be issued by the Commission to
safeguard the NBFC against involvement in money laundering activities and other illegal
trades.

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2) Notwithstanding the generality of the above regulation an NBFC shall comply with
the following conditions,

a) It shall accept deposits from an investor only after ensuring that an account
has been opened in the name of the investor using the account opening form
developed by the respective industry associations in consultation with the
Commission;
b) It shall determine the true identity of the prospective customer before
extending its services and care shall be taken to identify ownership of all
accounts and those using safe custody;
c) It shall establish effective procedures for obtaining identification from new
customers and devise a policy to ensure that business transactions are not
conducted with persons who fail to provide evidence of their identity;
d) It shall conduct its business in conformity with the Rules and these
Regulations and shall not offer services or provide any assistance in
transactions which, in the opinion of the NBFC, are associated with money
derived from illegal activities;
e) It shall establish effective procedures for monitoring of Borrower accounts on
a regular basis, checking identities and bonafide of remitters and beneficiaries
of transactions and retain record of transactions; and
f) It shall not make payment or receive amounts in cash exceeding Rs. 50,000/-.

3) All transactions into or from the account maintained with the NBFC which are not
usual transactions shall be thoroughly scrutinized and properly investigated by the
NBFC.

Procedure for prior approval for appointment of directors and chief executives.-

An NBFC shall follow the following procedure for obtaining approval of appointment or
any change of its directors or chief executive, -
a) In the case of removal of its chief executive before the expiration of his
term or where the chief executive decided to tender his resignation, the
NBFC shall inform the Commission at least one month before the change:
b) Not later than 10 days before the notice of meeting called for the election
of directors or within 10 days of the occurrence of any casual vacancy
submit an application for the appointment or change to the Commission;
c) The application shall be submitted in compliance with the requirements
and be accompanied by information and documents required therein
d) Any deficiency or shortcoming in the information or documents submitted
by the NBFC to the Commission shall be rectified by the NBFC within 14
days of the issue of the letter by the Commission informing the NBFC of
the deficiency or shortcoming:

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Leasing, Investment Finance Services and Housing Finance Services

Application of this Part. - The provisions of this part shall apply to Leasing
Companies,
Investment Finance Companies and Housing Finance Companies.

Allocation of assets in case of multiple licensing. - An NBFC engaged in leasing,

investment finance services or housing finance services or any combination thereof,
shall invest at least twenty percent of its assets in each such form of business:

Permission to issue of Certificates of Deposit by an NBFC licensed to provide

leasing or investment finance services or housing finance services.-

1) A Leasing Company, Investment Finance Company or a Housing Finance

Company may apply to the Commission for permission to issue Certificates of Deposit,
after complying with the following conditions, namely:-

a) That the NBFC is listed on a stock exchange and has been, as per the
audited accounts, making profits for a period of at least two years:

Provided further that the requirement to list the NBFC on a stock

exchange shall not apply to an NBFC which, -
(i) Is raising deposits from financial institutions only;
(ii) Is preparing its accounts in conformity with the provisions of the Ordinance,
the Rules, and these Regulations and making them available to the public;

b) the operations of the NBFC and the conduct of its directors with
respect to the NBFC has been in accordance with law;

c) the NBFC has been assigned a credit rating of minimum investment

grade from a credit rating agency registered with the Commission

d) a disclosure statement setting out information about the product

shall be submitted to the Commission along with application and a copy of
such statement shall be made available free of cost at the registered and
every other office of the NBFC:

2) An NBFC which has been given permission to issue Certificates of Deposit shall
comply with the following conditions, namely:-

a) The NBFC shall maintain the minimum investment grade rating and have it
updated at least once every year during the term of the issue:

Provided that if the credit rating of the NBFC falls below the investment
grade, the permission to issue Certificate of Deposit shall automatically

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 stand cancelled with immediate effect and the NBFC shall immediately
cease to issue further Certificate of Deposit or roll-over the existing
certificates and the existing Certificate of Deposit shall be encashed as
and when they become due:

Provided further that if the credit rating of the NBFC is subsequently

upgraded to investment grade, it may apply to the Commission for a fresh
permission for issuance of Certificates of Deposit;

b) the NBFC shall publish its investment grade rating in financial statements,
advertisements and brochures published in relation to the promotion of its
business;
c) the Certificate of Deposit issued by the NBFC shall be registered in the
name of the person to whom it is issued;
d) the maturity period of Certificate of Deposit shall not be less than thirty days

e) a Certificate of Deposit may be issued at fixed or floating rate of interest as

specified in the product disclosure statement wherein the mechanism for
determining the rate of interest shall also be disclosed;

f) all amendments to the disclosure statement setting out information about the
product shall be made with the prior written approval of the Commission;

g) all advertisements for inviting general public for making investment in

Certificates of Deposit shall contain the credit rating of the NBFC, the name
of the rating agency, the date on which the credit rating was issued,
expected rate of profit and tenor of the Certificate of Deposit and a copy of
such advertisement shall be submitted to the Commission within three days
from the date of issue;

h) the deposits raised by the NBFC, from individual depositors including sole
proprietorships shall not exceed three times of the equity of the NBFC;

i) at least 15 per cent of the funds raised through issue of Certificates of

Deposit by the NBFC, excluding the Certificates of Deposit held by financial
institutions, shall be invested in Government Securities and such
investments shall be kept unencumbered and disclosed separately in the
annual and quarterly accounts of the NBFC; and

j) the NBFC shall provide a return on the Certificate of Deposits which

may be different for different volumes and maturities of deposits provided
that uniformity is observed within each category:

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Other Sources of raising Funds: An NBFC licensed to provide leasing, investment
finance services or housing finance services may raise funds through, -
(a) commercial paper, any security or deposit of not less than thirty days
maturity;
(b) foreign debentures whether short or long term;
(c) issuance of redeemable capital;
(d) lines of credit; and
(e) re-discount facility.

Creation of reserve fund.– An NBFC shall create a reserve fund wherein at least 20%
of the after tax profits of the NBFC shall be credited till the time that the reserve fund
equals the amount of the paid up capital of the NBFC and thereafter a sum not less than
5% of its after tax profits shall be credited to the reserve fund.

Explanation. - Issuance of bonus shares may be made from the reserve fund

Maximum Exposure of NBFC to a single person or Group.-

(1) The total outstanding Exposure (fund based and non fund based) by an NBFC to a
person shall not at any time exceed 30% of the equity of an NBFC (as disclosed in the
latest financial statements):

Provided that the maximum outstanding fund based Exposure does not
exceed 20% of the equity of an NBFC.

(2) The total outstanding Exposure (fund based and non fund based) by a NBFC to any
group shall not exceed 50% of the equity of an NBFC (as disclosed in the latest
financial statements):

Provided that the maximum outstanding fund-based Exposure does not

exceed 35% of the equity of an NBFC.

(3) Exposure under this Regulation shall be calculated as under, -

a) 100% of the deposits placed with the lending NBFC shall be deducted from
Exposure;
b) 90% of the following shall be deducted from Exposure, -

i) deposits with another financial institution under perfected lien;

ii) encashment value of Government Securities and National Saving
Scheme securities deposited by the Borrower as collateral; and
iii) face value of Special US Dollar Bonds converted at interbank rate
into Pak Rupee equivalent, deposited by the Borrower as collateral;

c) 85% of the unconditional financial guarantees, payable on demand, issued by

commercial banks rated at least ‘A’ or equivalent by a credit rating agency
registered with the Commission, accepted as collateral by NBFCs shall be
deducted from the Exposure;

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 d) 50% of listed Term Finance Certificates held as security with duly marked lien
shall be deducted:

Explanation.- The TFCs to qualify for this purpose should have been rated at
least ‘A’ or equivalent by a credit rating agency registered with the
Commission; and

e) The following weightage will be applicable in respect of placements with

financial institutions, -
(i) 25% weightage on Exposure to financial institutions with ‘AAA’
Rating.
(ii) 75% weightage on Exposure to financial institutions rated at least
‘A‘.

Limit on money market placements.-

An NBFC shall make clean money market placement only with financial institutions and
its aggregate Exposure shall not exceed its equity:

Explanation. For the purpose of this Regulation “clean money market

placement” means Exposure without taking any security or collateral.

Restrictions on certain types of transactions. – An NBFC shall not, -

a) provide a Facility against shares and TFCs issued by it;
b) provide a Facility against Unlisted Debt Security and Unlisted
EquitySecurity;
c) provide a Facility to any company against shares and TFCs of that company
or group companies of that company;
d) provide a Facility against shares in physical form of a listed company;
e) provide a Facility against unsecured TFCs, non-rated TFCs and TFCs rated
below investment grade by a credit rating agency registered with the
Commission;
f) provide a Facility against shares of the sponsor directors (issued in their
own name or in the name of their close relative) of banks and NBFCs;
g) hold shares on aggregate basis, whether as pledgee, mortgagee or absolute
owner, of an amount exceeding 20% of the paid-up share capital of that
company or 20% of its own equity, whichever is less:

h) provide a Facility to its chief executive, directors, individuals or firms or

companies in which it or any of its directors is interested as a partner or
director or guarantor, major shareholders and their close relatives, firms or
companies without the approval by the majority of the directors of that
NBFC:

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Consumer Financing by an NBFC licensed to provide leasing or investment
finance services.- A Leasing Company or Investment Finance Company may
undertake Consumer Financing provided that such NBFC carries out Consumer
Finance business in accordance with the requirements specified by the Commission.

Minimum conditions for providing Facility. –

1) An NBFC shall while providing a Facility to a Borrower which exceeds one million
rupees, give due weight to the credit report relating to the Borrower or its group
obtained from a Credit Information Bureau.
2) If the credit report of Credit Information Bureau indicates overdue or default by a
Borrower, the NBFC shall not extend any Facility:

3) In case the Borrower is an individual the NBFC shall obtain documentary evidence
of the means of the Borrower such as wealth statement, statement of assets and
liabilities or any other document as may be considered appropriate by the management
of the NBFC.

4) An NBFC shall, before providing any Facility (including renewal, enhancement and
rescheduling or restructuring), ensure that the application for loan is accompanied with
a “Borrower’s Basic Fact Sheet” as prescribed in Schedule XII.
5) An NBFC shall ensure that the information requested in the basic fact sheet is
provided by the Borrower under his seal and signature.

Margin against Facility. –

.
1) An NBFC shall comply with to the following margin requirements

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11
2) All guarantees provided shall be for a specific amount and expiry date and shall
contain claim lodgment date and shall be backed by 100% realizable securities except
that in the case of performance bonds, bid bonds and mobilisation advance where the
condition of 100% cover of realizable securities may be relaxed upto 50% provided that
NBFCs hold at least 20% of the guaranteed amount in the form of Liquid Assets as
security.

Linkage between Equity of the Borrower and total Exposure from financial
institutions.–
1) An NBFC while taking an Exposure shall ensure that the total Exposure
availed by the Borrower from financial institutions does not exceed 10 times the Equity
of the Borrower as disclosed in the financial statements of the Borrower.
2) The agreement for providing a Subordinate Loan shall state that the repayment of
the Subordinated Loan will be subject to the prior approval of the NBFC.
3) The Subordinated Loan shall be disclosed in the annual audited financial
statements of the Borrower.

Financial indicators of the Borrowers.-

1) an NBFC shall at the time of allowing fresh Exposure, enhancement or renewal
ensure that the current assets to current liabilities ratio of the Borrower is not lower than
1:1:

Provided that an NBFC in exceptional cases may relax the aforementioned ratio up to
0.75:1 if it is satisfied that appropriate risk control measures have been put in place and
recording its reasons on the approval form and the exception approval file to be
maintained at its central credit office containing all such approvals.

2) Above Regulation shall not apply to, -

a) Facility granted to financial institutions with minimum investment grade
rating by a credit rating agency registered with the Commission;
b) fully secured Exposure against Liquid Assets held as collateral;
c) export finance; and
d) finance provided to ginning and rice husking factories.

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Leasing

Terms and conditions applicable to Leasing Companies.- A Leasing Company shall

in addition to the conditions specified in the Rules, these Regulations and any other
conditions that may be specified by the Commission operate in accordance with the
following conditions, namely: -

a) A Leasing Company, if undertaking the business of leasing only, shall invest at least
seventy per cent of its assets in the business of leasing:

b) A Leasing Company shall not engage in the following leasing operations, -

i. land; and
ii. residential buildings and apartments;

c) A Leasing Company shall not fix a period of lease for less than three years in the
case of a finance lease agreement, except in the case of computers and other
equipment used in information technology or Consumer Leasing;

d) The total investment of a Leasing Company in shares, equities or scrips shall not
exceed fifty per cent of the equity of the Leasing Company and the shares shall be
valued at the cost of acquisition for the purpose of calculating the Exposure of the
Leasing Company under this clause;

e) A Leasing Company shall not own shares, equities or scrips of any one company in
excess of ten per cent of its own equity or of the issued capital of that company,
whichever is lower:

Provided that this restriction shall not be applicable to investments made

by a Leasing Company in its own subsidiaries and long term strategic
investments out of surplus equity;

Explanation:- For the purpose of this Regulation the expression “share, equities or
scrips” include listed shares, modaraba certificates, units and certificates of Collective
Investment Schemes.

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Investment Finance Services

Terms and conditions applicable to Investment Finance Companies.-

An Investment Finance Company shall, subject to the conditions specified in the Rules,
these Regulations and any other conditions that may be specified by the Commission,
undertake the following activities or functions, namely:

a) In case of money market activities, -

i. Issue Certificates of Deposit or commercial paper of not less than thirty days
maturity subject to such conditions as may be specified by the Commission;
ii. Discount or trade in commercial paper issued by its client, Government
Securities, promissory notes, bills, Bankers’ Acceptances and other money
market instruments, acting either as a broker or acting on its own account; and
iii. Assist in the issue of commercial paper, including introduction of companies to
the money market, preparation of documentation, distribution and market
making; and

b) In case of capital market activities, -

i. Invest in listed securities, both equity and non-equity instruments;
ii. Provide professional analysis to institutional and individual investors, for
remuneration, on investing in, purchasing or selling of securities either directly in
writing or through publications;
iii. Underwrite stocks and shares, instruments of redeemable capital and other
negotiable term obligations of corporations and financial institutions, acting singly
or jointly as manager, underwriter or distributor for issues;
iv. Take an active part in all stages of preparation for public issues or private
placement;
v. Manage portfolios of securities including stocks, shares, pension fund, provident
fund, participation term certificates and other negotiable and debt instruments for
Eligible Investor both individual and institutional clients on a discretionary as well
as non-discretionary basis as specified in Regulation 34; and
vi. Provide Margin Loans to individual and institutional investors;

c) In case of project financing activities, -

i. Make investment in projects through,
I. Underwriting of public issue of stocks, shares and securities;
II. Short-term and long-term participation term certificates; and
III. Term finance certificates of varying features;
ii. Guarantee and counter-guarantee loans and obligations, including establishment
of documentary credits; and
iii. Open letters of credit for their corporate clients for the import of machinery
installation, expansion, balancing, modernization and replacement;

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d) In case of corporate finance services, -
i. Act as adviser and financial agent for companies in obtaining direct bank loans,
syndicated loans, export credits, leases and project finances, both domestically
and internationally;
ii. Assist companies in private placement of debt and equity, domestically or
overseas;
iii. Act as adviser to companies in corporate or financial restructuring as well as in
the preparation of resource mobilization plans;
iv. Act as adviser to companies in mergers, acquisition and divestitures;
v. Assist companies with cash management systems;
vi. Prepare feasibility, market or industry studies for companies, both domestic and
overseas;
vii. Assist to raise equity for new and existing companies, by acting as financial
agent;
viii. Act as custodian for securities owned or held by clients pursuant to their
instructions and provide each or any of the following services;
I. Custody of securities;
II. Placing or execution of orders for purchase or sale of securities;
III. Receipt of dividends and other income on securities;
IV. Execution of voting and other rights in connection with securities;
V. Holding securities on behalf of their clients; and
VI. Transacting aforesaid activities through nominees, agents, or attorneys;

ix. Act as nominees, agent, attorney, administrator, executor or trustee for clients;
x. Act as trustee for Collective Investment Schemes, private equity and venture
capital funds, real estate investment trusts and debt instruments, if so approved
by the Commission; and

e) In case of general activities, -

Raise funds through equity, foreign and local debentures both short and long term,
commercial paper issued locally or overseas, sale of short and long term
participation certificates and term finance certificates;
Act as authorized seller for securities and certificates, denominated in local or
foreign currency, issued by Federal or Provincial Governments, statutory bodies,
and state-owned corporations, including instruments of National Savings
Schemes;
Provide safe deposit vaults to clients;
Handle payments and collections for clients;
Extend Secured loans and advances; and
Provide discounting services.

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. Limits for investment in equities.-
1) An Investment Finance Company shall not make aggregate investment in listed
equity securities, both in the ready as well as in futures market, exceeding fifty percent
of its own equity:

Provided that investment in equity securities of any company shall not exceed
ten percent of the paid-up capital of the investee company or ten per cent of its
own equity, whichever is less and the shares acquired in excess of ten per cent
limit, due to the Underwriting Commitments, will be sold off within a period of
seven months from the date of acquisition of such shares:

Provided further that this restriction shall not be applicable to investments made
by a Investment Finance Company in its own subsidiaries and long term strategic
investments out of surplus equity:

Provided further that Investment Finance Companies shall comply with this
condition latest by June 30, 2011 on a diminishing balance basis:

2) Total spread transactions by an Investment Finance Company shall not exceed

two times of its equity:

3) Total investment by an Investment Finance Company in cash settled futures,

exchange traded options and index futures shall not exceed fifty percent of its equity
and its Exposure in single scrip shall not exceed ten percent of its equity:

Provided that there shall be a maximum loss limit as determined and recorded in
writing by the board of directors of an NBFC on each contract and thereafter the
Investment Finance Company shall immediately square its position:

Explanation: For the purpose of Regulation 30(3) Exposure shall be calculated

on the basis of nominal value of the contract.

Underwriting Commitments.- All Underwriting Commitments by an Investment

Finance Company shall be fully backed by available funds, firm standby lines of credit
or other funding arrangements.

Conditions for Margin Loans.- The grant of Margin Loans by an Investment Finance
Company to its clients shall be in accordance with the following conditions, -

a) The aggregate of Margin Loans shall not exceed fifty per cent of the equity of the
Investment Finance Company;
b) The margin to be maintained by the client with the Investment Finance Company
shall not be less than thirty per cent of the loan amount outstanding, calculated as
residual value obtained after deducting the loan amount outstanding from the market
value of the portfolio;

16
c) Margin Loans to a single client or associated company or undertaking shall not
exceed ten per cent of the equity of the Investment Finance Company; and
d) Margin Loans shall be approved in accordance with a written pre-defined policy
approved by the board of the Investment Finance Company and shall not be granted
to any employee, officer, director, shareholder having beneficial ownership of ten
percent or their close relatives having beneficial ownership of more than ten per cent
in the paid-up capital of the Investment Finance Company, whether directly or
indirectly:.

Collective Investment Schemes Open End Scheme and Closed End

Schemes

39. Appointment of trustee.- An Asset Management Company for every Open End
Scheme or Closed End Scheme for which registration is requested shall appoint a
trustee with the approval of the Commission.

40. Conditions applicable to trustee.-

1) A trustee shall be, -
a) A scheduled bank licensed under the Banking Companies Ordinance, 1962
(LVII of 1962) which has minimum A+ rating from a credit rating company
registered with the Commission, and has been in business for at least five
years;
b) A trust company, set up as a subsidiary by a scheduled bank having minimum
A+ rating from a credit rating company registered with the Commission;
c) A foreign bank operating as a scheduled bank in Pakistan and operating as
trustee internationally;
d) A central depository company approved by the Commission;
e) An Investment Finance Company which has minimum A+ rating from a credit
rating company registered with the Commission; Such other company as the
Commission may specify through a circular issued under the Ordinance.

2) In exercising its authority the Commission shall consider the availability of

appropriate systems, business continuity plan, personnel, management and such other
matters as the Commission deems appropriate.

3) The trustee shall arrange for its annual system audit by an auditor and provide the
report of such audit to the Commission and the concerned Asset Management
Company, within four months of the close of the financial year of the trustee.

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 Obligations of trustee of the Open End Scheme or Closed End Scheme.- A trustee
shall, -
a) Take under its control all the property of the Open End Scheme or Closed End
Scheme and hold it in trust for the unit or certificate holders in accordance with the
Rules, Regulations and the provisions of the Constitutive Documents and the cash
and registerable assets shall be registered in the name of, or to the order of, the
trustee;
b) Be liable for any loss caused due to its willful acts or omissions or that of its agents
in relation to any custody of assets or investment forming part of the property of the
Open End Scheme or Closed End Scheme;
c) Ensure that the sale, purchase, issue and transfer of units or certificates affected by
the Open End Scheme or Closed End Scheme are carried out in accordance with
the provisions of the Constitutive Documents;
d) Ensure that repurchase, redemption and cancellation of units are carried out in
accordance with the provisions of the Constitutive Documents;
e) Carry out the instructions of the Asset Management Company, in respect of
investments unless they are in conflict with the provisions of these Regulations or
the Constitutive Documents;
f) Ensure that the investment and borrowing limitations set out in these Regulations
and the Constitutive Documents are complied with;
g) Ensure that the conditions under which the Open End Scheme or Closed End
Scheme has been registered are complied with;
h) Issue a report to be included in the annual and second quarter report of the
Collective Investment Scheme and therein state whether, in its opinion, the Asset
Management Company has in all material respects managed the Open End Scheme
or Closed End Scheme in accordance with the provisions of the Constitutive
Documents, the Rules and these Regulations, and if the Asset Management
Company has not done so, the respects in which it has not done so and the steps
that the trustee has taken in respect thereof;
i) Ensure that the Asset Management Company, has specified a criteria in writing to
provide for a diverse panel of brokers at the time of offering of a scheme or for any
subsequent change;
j) Ensure that the Asset Management Company has been diligent in appointing
brokers to avoid undue concentration of business with any broker;
k) Ensure that units of an Open End Scheme have been issued after realization of
subscription money;
l) Ensure that the methodology and procedures adopted by the Asset Management
Company in calculating the value of units are adequate and the pricing and valuation
for sale, issue, repurchase, redemption and cancellation are carried out in
accordance with the provisions of the Constitutive Documents and regulatory
requirements;
m) Immediately inform the Commission if any action of the Asset Management
Company contravenes the Ordinance, the Rules, these Regulations, Constitutive
Documents, guidelines, codes, circulars, directives or any other applicable laws; and
n) Comply with the directions of the Commission given in the interest of the unit holders
or certificate holders.

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Trustee and the Asset Management Company to be independent.-

1) The trustee shall be independent of the Asset Management Company.

Explanation. - the term “independent” means that there shall be no cross-shareholding

nor common directorship between the Asset Management Company and trustee.

2) A director or employee of the trustee shall not be involved in the affairs of Asset
Management Company.

Registration of Open End Scheme or Closed End Scheme.-

No units or certificates of an Open End Scheme or Closed End Scheme shall be offered
to the public unless the scheme is registered as a Notified Entity with the Commission.

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 PRUDENTIAL REGULATIONS FOR BANKS WITH
PARTICULAR REFERENCE TO THEIR OPERATIONS
IN THE MONEY & CAPITAL MARKETS

REGULATION R-6
Exposure Against Shares / Tfcs And Acquisition Of Shares

1. A) EXPOSURE AGAINST SHARES / TFCs:

Banks / DFIs shall not:

a) Take exposure against the security of shares / TFCs issued by them.

b) Provide unsecured credit to finance subscription towards floatation of share capital
and issue of TFCs.
c) Take exposure against the non-listed TFCs or the shares of companies not listed on
the Stock Exchange(s). However, banks / DFIs may make direct investment in non
listed TFCs.
d) Take exposure on any person against the shares / TFCs issued by that person or its
subsidiary companies. For the purpose of this clause, person shall not include
individual.
e) Take exposure against ‘sponsor director’s shares’ (issued in their own name or in
the name of their family members) of banks / DFIs.
f) Take exposure on any one person (whether singly or together with other family
members or companies owned and controlled by him or his family members) against
shares of any commercial bank / DFI in excess of 5% of paid-up capital of the share
issuing bank / DFI.
g) Take exposure against the shares / TFCs of listed companies that are not members
of the Central Depository System.
h) Take exposure against unsecured TFCs or non-rated TFCs or TFCs rated below
‘BBB’ or equivalent. Exposure may, however, be taken against unsecured /
subordinated TFCs, which are issued by the banks / DFIs for meeting their minimum
capital requirements, as per terms and conditions stipulated in BSD Circular No. 12
of August 25, 2004.
i) Take exposure against shares unless the beneficiary of the facility is absolute owner
of the shares so pledged or has the necessary mandate to pledge the shares of third
party as security for availing financing facility from the bank/ DFI

1. B) ACQUISITION OF SHARES:
a) Banks / DFIs shall not own shares of any company / scrips in excess of 5% of
their own equity. Further, the total investments of banks in shares should not
exceed 20% of their own equity. The shares acquired in excess of 5% limit due to
the underwriting commitments will be sold off / off loaded within a period of three
months.

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b) Banks/DFIs may also take exposure in future contracts to the extent of 10% of
their equity on aggregate basis. In this connection, the 10% exposure limit for
future contracts will include both positions taken in futures buying and selling.
c) Banks/DFIs may combine the limits for ready market and future contracts and
have the aggregate exposure in shares to the extent of 30% of their equity (in
case of Islamic Banks/DFIs up to 45% of their equity) provided that investment in
future contracts shall not exceed 10% of their equity.
d) Banks/DFIs will obtain prior approval from the State Bank while purchasing
shares of a company in excess of 5% of their paid-up capital or 10% of the
capital of Investee Company, whichever is lower. These limits will be calculated
as under:

 In the case of Investee Company, 10% limit will be calculated by taking

10% of the number of its paid-up shares.
 In the case of investing bank, 5% limit will be calculated by taking 5% of
paid-up shares of the bank and then multiplying with their face value

The bank’s/DFI's request will be considered in the light of the nature of

relationship of the investing bank and the investee company. Further, other
factors, such as financial standing of the investing bank, its aggregate
investment portfolio, experience in managing the same, efficacy of internal
controls etc. will also be taken into account.

In case, shares in excess of above limit are acquired by the bank/DFI through
settlement of a facility or by any other means, the information to this effect will
be conveyed to the State Bank of Pakistan within three days of the acquisition
of such shares. Furthermore, the shares so acquired should be disposed off
within one year to comply with the limits given 2 above

Regarding strategic investment, the banks/DFIs will exercise proper diligence,

as their decision to make strategic investment carries great significance,
keeping in view the implications of such investment in terms of liquidity
management and long term outlook of the investee companies. In this regard,
the banks/DFIs should take into account all relevant factors. Accordingly, the
following should be ensured:

 A committee, clearly designated/empowered by the bank, should take the

decision for strategic investment.
 All Record of transactions/decisions, taken by the committee, regarding
strategic investment should be properly maintained and kept in a separate
file, for provision of the same to the SBP Inspection Team during their visit to
the bank.
 The banks/DFIs will report their investment in strategic portfolio to the
Banking Policy Department, within 2 working days from the date of such
investment

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e) While calculating the maximum limit for investment in shares, the amount of
provisions created against permanent diminution by debiting the Profit & Loss
account, as instructed vide BSD Circular No.10 dated July 13, 2004, may be
deducted from the cost of acquisition 16 of such investments and the maximum limit.
Further, investment in preference shares, which fulfill the criteria of equity instrument
as laid down in Part-A of these regulations, shall be considered as part of investment
in equities. Correspondingly, any investment in preference shares that do not
conform to these conditions shall not be included in the limits prescribed under this
regulation. However, such investment portfolio will be considered as part of the
maximum exposure limit as prescribed under R-1 of these regulations.

2. Banks / DFIs shall not hold shares in any company whether as pledge, mortgagee,
or absolute owner, of an amount exceeding 30% of the paid-up share capital of that
company or 30% of their own paid-up share capital and reserves, whichever is less.
3. Exposure against the shares of listed companies shall be subject to minimum margin
of 30% of their current market value, though the banks / DFIs may, if they wish, set
higher margin requirements keeping in view other factors. However, banks / DFIs
should not give a margin call until the margin reaches to the level of 25%. Banks /
DFIs will monitor the margin on at least weekly basis and will take appropriate action
for top-up and sell-out on the basis of their Board of Directors’ approved credit policy
and pre-fact written authorization from the borrower enabling the bank / DFI to do
this.
4. Exposure against TFCs rated ‘A’ (or equivalent) and above by a credit rating agency
on the approved panel of State Bank of Pakistan shall be subject to a minimum
margin of 10% while the exposure against TFCs rated ‘A-‘ and ‘BBB’ shall be subject
to a minimum margin of 20%.

Investments and Other Assets:

5. The banks shall classify their investments into three categories viz. ‘Held for
Trading’, ‘Available for Sale’ and ‘Held to Maturity’. However, investments in
subsidiaries and associates shall be reported separately in accordance with
International Accounting Standards as applicable in Pakistan and shall not be
subject to mark to market. Investment portfolio in ‘Held for Trading’ and ‘Available for
Sale’ and other assets will be subject to detailed evaluation for the purpose of their
classification keeping in view various subjective and objective factors given as under

e) Quoted Securities:
Government Securities will be valued at PKRV (Reuter Page). TFCs, PTCs and shares
will be valued at their market value. The difference between the market value and book
value will be treated as surplus/deficit.

f) Un-quoted Securities:
PTCs and TFCs will be classified on the evaluation / inspection date on the basis of
default in their repayment in line with the criteria prescribed for classification of medium
and long-term facilities. Shares will be carried at the cost. However, in cases where the
breakup value of such shares is less than the cost, the difference of the cost and

22
breakup value will be classified as loss and provided for accordingly by charging to the
Profit and Loss account of the bank / DFI.

g) Treatment of Surplus/deficit:
The measurement of surplus/deficit shall be done on portfolio basis. The surplus/deficit
arising as a result of revaluation of ‘Held for Trading’ securities shall be taken into Profit
& Loss Account. The surplus/deficit on revaluation of ‘Available for Sale’ category shall
be taken to “Surplus/Deficit on Revaluation of Securities”. Impairment in the value of
‘Available for Sale’ or ‘Held to Maturity’ securities will be provided for by charging it to
the Profit and Loss Account.

h) Other Assets:
Classification of Other Assets and provision required there-against shall be determined
keeping in view the risk involved and the requirements of the International Accounting
Standards

REGULATION R-9
Assuming Obligations On Behalf Of NBFCs
Banks / DFIs shall not issue any guarantee or letter of comfort nor assume any
obligation whatsoever in respect of deposits, sale of investment certificates, issue of
commercial papers, or borrowings of any non-banking finance company. Banks / DFIs
may, however, underwrite TFCs, commercial papers and other debt instruments issued
by NBFCs, and issue guarantees in favor of multilateral agencies for providing credit to
NBFCs, provided the banks’ / DFIs’ such exposure remains within the per party
exposure limit as prescribed in Regulation R-1. Banks / DFIs may also allow exposure
to any of their client against the guarantee of an NBFC which is rated at least ‘A’ or
equivalent by a credit rating agency on the approved panel of State Bank of Pakistan.
The total amount of guarantees issued by an NBFC, and accepted by the banks, on the
strength of which the exposure will be allowed by the commercial bank / DFI will not
exceed per party limit of the bank / DFI as mentioned in Regulation R-1. Before taking
exposure against the guarantee of NBFC, banks / DFIs shall ensure that total
guarantees issued by an NBFC in favor of banks / DFIs do not exceed 2.5 times of
capital of the NBFC as evidenced by the latest available audited financial statements of
the NBFC and such other means as the banks / DFIs may deem appropriate

REGULATION R-11
Payment Of Dividend
Banks / DFIs shall not pay any dividend on their shares unless and until:
a) They meet the minimum capital requirements as laid down by the State Bank of
Pakistan from time to time;
b) All their classified assets have been fully and duly provided for in accordance with
the Prudential Regulations and to the satisfaction of the State Bank of Pakistan; and
c) All the requirements laid down in Banking Companies Ordinance, 1962 relating to
payment of dividend are fully complied

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 PAKISTAN BANKS’ ASSOCIATION
Pakistan Banks’ Association (PBA) represents the Pakistan Banking Industry.
Established in 1953, its main objective is to coordinate the efforts of the banking
industry, and to share a common vision of progress and development with its members.

PBA Membership is institutionalized and is available only to the Banks operating in

Pakistan. Currently there are 48 members, categorized into 6 groups (one of these
groups is under formation). Its governing body is an Executive Committee (EC)
comprising of 14 members, represented by the Chief Executives of the respective
member institutions. PBA’s Principal Executive is the Chairman of the Executive
Committee, elected periodically from within the EC. Presently, PBA has 10 functional
Sub Committees, each chaired by a member of the Executive Committee. Remaining
members of the Sub Committees are relevant Executives of member banks. Find more
about PBA and it’s governance in the PBA Profile Section. Particulars of members
such as their corporate and management profiles, branch networks and financial
statements are available in the PBA Members Section.

Over the years the role of PBA has broadened considerably. It is now referred to by the
State Bank of Pakistan in formulation of regulations for the banking industry, and has
been entrusted with the function of regulating and monitoring certain services provided
to the banking industry by outside service providers. These service providers include
‘Professional Valuers’, who are evaluators allowed to appraise the values of assets
collateralized to banks, and Security Agencies offering security services to the Banking
Industry

PBA membership is open to the Financial Institutions operating in Pakistan. It currently

has 48 members. The members are broadly categorized into following six groups:

o Nationalized Commercial Banks and Government Owned Banks

o Privatized Banks
o Development Financial Institutions
o Small and Medium Enterprise (group under formation)
o Private Banks
o Foreign Banks

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 LEASING/MODARABA ASSOCIATION OF PAKISTAN
Modaraba Companies and Modaraba (floatation & control) Ordinance was promulgated
in 1980 to provide the statutory framework for organizing business enterprises
according to the injunction of Islam. The new law refined the Modaraba concept and
brought it in conformity with the prevalent Corporate Structure. To some extent most
Modaraba in Pakistan are like close-ended mutual funds in that they are exempt from
income tax provided they distribute 90% of their profits as cash dividend among their
certificate holders.

Objectives of the Association

Modaraba Association of Pakistan was incorporated in April 1994. The main objectives
are to

• Promote the Islamic way of business and in particular, encourage public

awareness of the role of Modarabas in the provisions of Islamic modes of
financing.
• Promote, safeguard and protect the interest of the members of MAP.
• Act as an organ of communication for and to represent members of MAP in all or
any of their relationships with Government, trade associations, the press and any
other bodies.
• Maintain and disseminate important information, data and statistics among the
members.
• Conduct surveys and analysis on the Islamic modes of business and finance with
particular reference to Modarabas and research studies for solving any problems
encountered in the conduct of Islamic modes of business and finance.

Leasing/Ijarah

Leasing (Ijarah) is the most common type of business undertaken by Modarabas. Ijarah
is akin to leasing, more accurately operating lease. It is defined as the transfer of
usufruct of an asset by a lessor to a lessee in exchange for rent. The ownership of the
asset remains with the lessor throughout the tenor of the lease and at the end of the
lease, the lessee may purchase the asset at a mutually agreed price.

Leasing is carried out either through companies established under the Companies
Ordinance or by Modarabas established under Modaraba Companies and Modaraba
(Floatation and Control) Ordinance, 1980. Leasing enjoys the privilege of being
regarded as an Islamic mode of financing and conforms to Islamic principles.
Accordingly Modarabas, in particular, Leasing Modarabas, carry on the business of
leasing. Their documentation is reviewed and approved by the Religious Board which
confirms the compliance of the transactions and the documentation with Islamic
principles.

25
Modaraba generally treat leases as operating lease and their documentation is
prepared accordingly. However, most leasing transactions done by leasing companies
are in the form of finance lease and the documentation and accounting treatment is
accordingly in compliance with IAS 17.

Regulatory Framework
The industry is monitored and regulated by Securities & Exchange Commission of
Pakistan. Registrar Modaraba is responsible for monitoring and regulating leasing
modarabas, within the overall organizational set-up of SECP.

Leasing Companies and Modarabas have separate regulatory frameworks. However,

there are a large number of common ground rules, particularly in respect of the conduct
of leasing business. The rules and regulations applicable to leasing are enumerated in
the following:

 Companies Ordinance, 1984

 Income Tax Ordinance, 1979
 Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980
 Prudential Regulations for Modarabas as revised by Securities & Exchange
Commission of Pakistan in year 2000.

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MUTUAL FUND ASSOCIATION OF PAKISTAN (MUFAP)
Mutual Funds Association of Pakistan (MUFAP) is the trade body for Pakistan’s multi
billion rupees asset management industry. The money our members manage is in a
wide variety of investment vehicles including stocks, bonds, money market instruments,
government securities and bank deposits. Our role is to ensure transparency, high
ethical conduct and growth of the mutual fund industry.

MUFAP was formed in 1996 by Mr. Zaigham Mahmood Rizvi, ex-Chairman and founder
member, and was formally licensed in 2001 as a public limited company (by guarantee)
under Section 42 of the Companies Ordinance, 1984 by Ministry of Commerce (MOC)
and is thus a quasi legal entity. After the establishment of MUFAP in 1996, private and
foreign firms were allowed to float open-ended funds for the general public. This time
also saw the stock market’s performance scale new heights as a result of positive
government policies and incentives, registering a growth of more than 15 times in the
net assets of the mutual funds between 2000-2008.

Mutual Funds were initially overseen by the Corporate Law Authority (“CLA”) under its
Securities Wing. The CLA, then a division of the Ministry of Finance, was gradually
transformed and made independent as the Securities and Exchange Commission of
Pakistan (“SECP”) as part of the Capital Market Development Program (CMDP)
initiative of the Asian Development Bank undertaken for Pakistan. The CMDP
envisaged formation of four types of Self-Regulated Organizations (“SROs”) to function
under the SECP:

1. Stock Exchanges recognized as separate SROs;

2. Mutual Funds Association of Pakistan (MUFAP);
3. Leasing Association of Pakistan (LAP); and
4. Modaraba Association of Pakistan (MAP).

MUFAP’s role is to establish the essential codes and standards within the industry to
ensure the trust and confidence of investors and build the industry as a whole.
MUFAP’s core objectives encompass:

1. Overseeing industry compliance under prescribed prudential standards;

2. Perform onsite supervision based on agreed criteria;
3. Conducting registration and testing/ examinations;
4. Developing cooperative programs with governmental agencies and industrial
organizations to resolve problems affecting investors;
5. Liaising between the industry and SECP and other concerned government
bodies to highlight and resolve issues affecting the mutual fund industry; and
6. Presenting budgeting proposals and other recommendations to the SECP for the
development of the industry.

Since inception, the Association’s most notable achievements are highlighted below:

27
 1. Successfully negotiated with the Ministry of Finance in bringing the CFS MK II
financing issue to an amicable end saving massive defaults on the part of broker
fiancées in the year 2008-09.
2. Successfully launched the "Pricing Mechanism" for valuation of debt securities in
the year 2008-09 as a first step towards development of the bond market in
Pakistan.
3. Successfully tested the first batch of Sales and Marketing teams of AMCs for
furthering their marketing and selling skills in the year 2008-09.
4. Successfully negotiated the tax benefits under Voluntary Pension Schemes
(VPS) to bring them in line with the benefits offered in retirement funds as
available in Income Tax Ordinance, 2001 securing some advantages for the
VPS.
5. Successfully organized the 12th Asia Oceania Regional Meeting 2007 of member
countries of International Investment Funds Association (“IIFA”). The meeting
was largely attended by the participants from India, Bangladesh, Taiwan, China,
Australia, Philippines, Hong Kong, Japan and Singapore.
6. Conducted a workshop on “Compliance and Ethics” in 2005 for its members;
7. Conducted a workshop on “Corporate Governance” in 2002, in collaboration with
MAP and LAP.
8. Negotiated exemption from with-holding tax deduction on transactions of mutual
funds thereby, preventing double tax deduction for the investors.
9. Hosted “Performance Excellence Award” ceremony in recognition of NIT’s
performance in 2005.
10. Held discussions with the Indian counterparts on the possibilities of listing Indian
mutual funds on KSE; channeling Indian investment into Pakistan markets and
various levels of technical collaboration.
11. Organized a talk show consisting of 13 episodes on Indus TV for investor
education on mutual funds.
12. Developed the MUFAP Advertising and Communication Standards for Asset
Management and Investment Advisory services.
13. Submitted proposals for the Federal budget aimed at encouraging further
investment in mutual funds.
14. Highlighted issues relating to lower fee structure, double Zakat deduction on
mutual funds, negative impact of offering higher NSS rates on mutual funds, and
proposed the capitalization of incorporation and initial public offering of funds.

Pakistan’s mutual fund industry has taken a giant leap forward over the last decade with
the rising number of asset management companies, and size and number of funds.
Moreover, the sector represents a strong presence of well-known financial groups, who
bring professional expertise, risk management, large distribution networks and
innovative product offerings putting the industry at par with its regional peers. Investor
confidence remains high on the back of superior profitability delivered in an environment
of fairness and transparency, through an effective regulatory framework. The future
holds tremendous potential and MUFAP remains committed to its mission of raising the
professional standards of the industry, improving public awareness and advancing the
interests of all the stakeholders.

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 INVESTMENT BANKS ASSOCIATION OF PAKISTAN
IBAP provide an effective platform for investment banks to address their collective
issues and participate in the industry reform process. Investment banking is an
important pillar of the financial sector and particularly the NBFC regime in Pakistan. It
took its roots in 1987; however, it’s still at a nascent stage. Today, investment banks in
Pakistan are providing a full array of capital market products and advisory services to
their clients. The industry is comprised of a variety of companies which are actively and
efficiently serving institutional, corporate, government as well as individual clients.
Subsequent to the transfer of regulatory authority over investment banks from SBP to
SECP in December 2002, and promulgation of the NBFC Rules, the SECP has
undertaken a two pronged approach. One is to liquidate the investment banks which
were in financial trouble and the other is to develop and strengthen the existing ones
into healthy NBFCs. Currently there are 13 investment banks among which only 9 are
licenced; the remaining are in liquidation proceedings. Within the NBFC sector,
investment banking is at the higher end in terms of the specialized services they
provide, particularly the capital market product and advisory services.

Due to the inherent design of the NBFC Rules, the investment banks have strengthened
their balance sheets by obtaining leasing and other licenses allowed to NBFCs under
NBFC Rules. This has allowed them to move a step ahead in terms of risk
diversification as they are able to operate as multiple product entities. Some of the
leasing companies have also followed and obtained investment banking licenses. Such
product diversification helped these NBFCs to not only increase their spreads but have
given them a higher capability of risk diversification. These are compact, highly
innovative, financial institutions which now, through the NBFC Rules, have the power to
change their operating plans with changes in market dynamics.

There is still, however, a pressing need to promptly improve the financial health and
performance of NBFCs. The development of the sector is critical to enhance domestic
resource mobilization and to foster competition in the financial sector.

A number of Asian countries, including India, Sri Lanka and Bangladesh have achieved
rapid savings growth outside the banking system by developing the NBFC sector.

In Pakistan, this sector faces severe competition from commercial banks, development
finance institutions (DFIs), brokerage firms, introduction of Islamic banking services and
accountancy firms offering corporate financial services. The commercial banks with
availability of low cost funds and strong balance sheets and brokerage firms indulging in
underwriting and capital market advisory activities make the NBFCs’ environment
difficult; the sector is calling for a paradigm shift to embrace the universal licensing
regime. Despite the competition, NBFCs have immense importance in the economy and
they meet the credit gap in the borrowing profile.

In order to further strengthen the sector, particularly in the face of this competition, the
SECP would like to move towards integration through instituting a Universal Non-

29
banking regime. This will include a universal license, under which the NBFCs can
undertake all the activities allowed to them simultaneously without the need for applying
for separate licences. In case if one activity is being concentrated, the NBFC will have
the choice to decide for obtaining one single-activity based license. Capital
requirements for such a universal nonbanking licence are currently being worked out.

Significant benefits that would emanate for NBFCs from this model are:

Economies of Scale:
Bankers regularly argue that 'Bigger is better' and usually point to economies of scale
as a major reason. Exploitation of scale economies can save costs in overhead, back
office operations, information technology, and investment banking-type operations.

Economies of Scope:
Economies of scope arise in multi-product firms because costs of offering various
activities by different units are greater than the costs when they are offered under one
roof. Cost economies can derive from access to information, management of the client
relationship, distribution and marketing economies, reputational and pecuniary capital
economies, and risk management. Economies on the consumer side include the
potential for lower search, information, monitoring, and transaction costs; the potential
to negotiate better deals; and the potential for lower product price in a competitive
market.

Absolute Size and Market Power:

Universal banks are able to extract economic rents from the market by application of
market power. Banks can obtain more information about firms through the various
products the banks offer and potentially can develop a longer-term relationship.

Risk Diversification:
There are potential risk-reduction gains fro m diversification in universal financial service
organizations, and these gains increase with the number of activities undertaken.
Additionally, diversification provides stable income streams and spreads credit risk
across various functions. It also has the potential benefit of cross selling leading to
higher revenues.

However, these benefits are accompanied by various challenges which include the
impact of failure of a large institution on the economy; bureaucratic and inflexibility in
procedures; conflicts of interest; deployment of capital; and from the regulatory point of
view, monitoring and supervision.

With this move towards Universal Non-banking, the SECP would also like to see various
industry associations merge into one single NBFC Association. It has been urged the
individual associations to work out the modalities for this since it will enhance their
capacity in terms of resources for technical expertise and research The new office
bearers of the Investment Banks Association will bring new vitality to the organization.
The three essential ethical principles for investment banks:

30
Integrity: Whether you are offering an investment opportunity or providing a helping
hand in project financing, it is quite necessary that you should remain honest to your
clients. Quoting a higher than the actual rate of return or not disclosing all the hidden
service charges not only breaches the mutual trust but may also harm investor
confidence, the very crucial factor in the whole business cycle. Therefore, the
Investment Banks, while appreciating their due importance in the economy, should not
only profess to be honest with their clients but also demonstrate due honesty and
integrity.

Prudent Person Rule: Prudent Person Rule requires that a person acting on behalf
of its clients should act in the same manner as he would act in his own case. As
financial intermediaries and as entities operating discretionary and nondiscretionary
investment accounts for their clients, it is the utmost responsibility of investment banks
to ensure that in their financial dealings, the interests of their clients are not
compromised. They should make all the endeavors to earn the maximum return for their
depositors and on the converse, minimize cost for their borrowers and companies
seeking financial advisory.

Avoiding Conflict of Interest: Major Investment Banks are part of big

conglomerate groups and, as such, it is imperative for them to ensure that while their
clients repose their trust and confidence in them, they should not act in any such way
that may prejudice their client’s interests in favor of their own group’s interests. This can
only be achieved if investment banks keep themselves at arms’ length from financial
interests of their parent group. Several regulatory measures, including restriction on
investment in connected persons, also aim for the same objective.

the NBFC sector should develop a strong compliance culture. Transparency of

compliance with regulation is necessary to succeed. They must go beyond the technical
rules to develop voluntary standards of ethics and compliance that go further than
current law to protect the industry’s reputation and avoid any appearance of conflicts of
interest.

The sector should also prepare a supportive human resource development plan to
identify new skill requirements for an enhanced competitive international financial
services market. It is not just within the NBFC sector, but also in comparison to
commercial banks that investment banks are at the higher end due to their involvement
in capital market mobilization. The human resource plan should therefore be adequately
supported by Codes of Ethics and Conduct and Fit and Proper Tests.

The SECP is of the view that a well developed NBFC sector is an important component
of developing a broad, efficient financial system and, consequently, of providing a sound
base for economic growth and prosperity. The sector as a whole, and particularly the
investment banking sector, needs to be more innovative in the development of products
and activities. You need to move beyond what the commercial banks are involved in

31
develop your own niche; I assure you that the SECP would fully support initiatives for
the development of the market and provide the necessary regulatory framework for it.

32
KSE RULES WITH RESPECT TO RISK MANAGEMENT
Risk Management
Our Rigorous Audit And Internal Compliance Process

• System Audit of brokers in order to ensure compliance with the regulatory

framework.
• Continuous regulatory audit of systems and brokers to ensure compliance
with regulations and code of corporate governance.
• To be an assurance and consulting activity.
• To ensure that internal processes are being self-regulated and code of
ethics and corporate governance is being adhered to
• Evaluating and improving the effectiveness of controls and governing
processes.
• Conducting periodic audits of financial reporting, Information systems and
compliance with relevant tax laws and regulations.
• Development of Audit Committee Charter and Internal Audit Charter.
• Development of Internal Audit Framework.
• Development of an audit plan for 12 months, covering all major auditable
activities of the exchange.
• Continuous system audit of brokers.

Corporate Governance

• Board of Directors consists of 10 members.

• 5 Elected Member Directors.
• 4 Non-Member Directors are appointed by Securities of Exchange
Commission of Pakistan (SECP) renowned business personalities from all
industries.
• MD is ex-officio member of the Board and is responsible for the
operational administrative matters of the Exchange.
• Chairman is elected by the Board out of the Non-Member Directors.

Our Protection Pyramid

“Enhancing investor confidence is at the heart of all our services”

The Management of the KSE considers that investors’ confidence in the fair dealings at
the Exchange is key to rapid development of the Capital Markets. Therefore, a number
of initiatives have been taken to enhance investor confidence in our markets.

• Customer Services Department helps resolve disputes between investors

and brokers through a panel of arbitrators.

33
 • Investor Protection Fund (IPF) created to protect investors in the event of
a member/broker default.
• Clearing House Protection Fund (CHPF) created to protect
members/brokers in the event of another member/broker default.
• Investor Guide available in both printed and electronic form.
• Investor education seminars held on a regular basis.
• Investor help desk to answer investor queries.

Current Taxes – Capital Market Transactions

• Capital Value Tax (CVT) on purchase of shares.

• Presumptive Tax in lieu of Commission Sale Value of value of sale.
• Presumptive Tax in lieu of Commission Buy Value of value of purchase.
• Withholding Tax on Sale calculated on value of sale.
• Withholding Tax on Carry Over Trades.
• Current Taxes.

Maintaining Market Integrity Is The Key To A Fair, Efficient And Transparent

Market

• The KSE is a frontline regulator for the Capital Markets and has
implemented strong risk management, audit and surveillance systems.
• Unique Identification Number (UIN): creates a link between every order
entered into the trading system and the entity behind that order to ensure greater
transparency and thus provide investor protection.
• Introduction of new Risk Management System (RMS) based on
internationally accepted Value at Risk (VaR) principles with pre-trade
verifications.
• Netting of clients’ exposure across different markets, across different
scrips, across clients and across different settlement periods has been prohibited
by new RMS.
• Implementation of T+2 Settlement System which was previously on T+3
Settlement System on Ready Market.
• Comprehensive default regulations implemented.
• Collections of margins by eligible securities as collateral and valuation of
such securities in order to protect both brokers and investors.
• Market Control and Surveillance monitor price fluctuations and trading
patterns on a real time basis to ensure compliance with regulations.
Implementation of Advance Warning and Control System (AWACS) software.

1. Identifying unusual trading patterns of market conditions that may indicate violation.
2. Analyzing the trading information in order to identify speculators involved in price
manipulation.
3. Awareness of market participants of effective surveillance for transparency and
fairness in trading.

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Foreign Investors Are At Par With Local Investors Across All Sectors

• 100% foreign shareholding is allowed.

• Dividend is taxed as a separate block of income at 10%.
• Un-restricted repatriation of profits and principal.

Investment Policy & Tax Incentives (Local Investor Specific)

All mutual funds and modaraba companies are exempt from income tax provided they
pay out 90% of their earnings.

• Dividend is subject to withholding tax at different rates.

• Dividend income is taxed as a separate block of income in the hands of
individual shareholders.
• Any income derived from TFCs is subject to income tax.

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Bibliography
http//www.sbp.org.pk/publications/prudential/PRs/Corporate.pdf.url

http//www.secp.gov.pk/corporatelaws/pdf/NBFC_Rules_Final.pdf.url

http//www.secp.gov.pk/corporatelaws/pdf/Regulations_NBFCs_NE_2008.pdf.url

State Bank of Pakistan.url

Pakistan’s Banker Association.url

Modaraba Association of Pakistan.url

Mufap.url

Mutual Funds Pakistan Pakistan Regulations.url

http//www.secp.gov.pk/ChairmanSpeeches/PDF/211205_IBAP?lunch_Lhr.pdf.url

Risk Management The Karachi Stock Exchange.url

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