Pakistan to start new options in securities

Posted on 09.09.06 by StockPK Team @ 10:00 pm    

The federal government intends to start three new options ie call, switch and swap in its securities.

Sources of banking industry said that by starting these three new options in both federal as well as provincial securities, institutional investors, both local and foreign, will be lured to make investment.

India by changing its Security Act of forties, 4 years ago had created depth and widened investment scope in its union securities.

The initiative of Indian government also led to investment in union securities by overseas Indians.

Sources of banking industry said to meet the modern day requirements of security markets, a new draft of securities business, to be called the Government Securities Bill 2006 has been prepared under which three new investment options in government securities have been proposed.

The Section 34 of the bill said, “the government may, in relation to securities issued by it, call or switch the security from the holder as per terms and conditions prescribed at the time of issuance of that security or enter into swap agreement with any person as per terms and conditions mutually agreed upon.

Another important feature of the proposed bill is both federal and provincial governments will be legally authorised to Sharia Compliant securities.

The Sharia compliant security first will be approved by Sharia Board of State Bank of Pakistan and proposed law says, “Sharia compliant security means security approved by the Sharia Board appointed by the bank to raise funds by the government under Islamic modes of financing.”

Government of Pakistan had already launched Sukuk Bonds in international markets but since there was legal authority available to raise funds by issuing Sharia compliant securities, government did not tried to mop up the funds from capital markets of the country.

Last month Japan had launched Sukuk Funds to attract Middle Eastern funds.

The launching of Pakistan-based Sukuk funds will also attract Middle Eastern funds.

Besides Treasury Bills, federal government will be empowered to re-launch promissory note and bear bond in security market.

By re-launching of these two old security instruments, the security markets of the country will have not only depth but the excess liquidity of billions of rupees will be mopped up.

Another security to be called Trustee Stock will also be launched.

Trustee Stocks are issued all over the developed world but in Pakistan, central bank of the country never promulgated rules and regulations to start issuance of trustee stock and to regulate its business.

A new instrument to be called “Book-entry Treasury Bill” along with Treasury bill will also be floated.

Besides this the State Bank of Pakistan has been empowered to “renew, stripping or re-constitution” of federal and provincial securities.

Stripping of government security will be of two types.

First stripping of government security will be allowed on the basis of interest or (rate of) return.

Second stripping will be allowed under principle amount of the security.

Central bank will also have powers of conversion of one security to another.

Sub-section of Section 19 of the bill said, “If a person entitled to a government security applies to Bank (SBP) to have the government security converted into a government security of another form, or into a government security issued in connection with another loan or to have it consolidated with other like government securities, or to have it sub-divided or to have it renewed, stripped or re-constituted, the bank (SBP) may subject to such conditions and on payment of such fees as may be prescribed, cancel the security and order the issue of a new government security or government securities.”

No details of this proposed new instrument has been provided in the proposed security bill.

For the purpose of transparency in federal and provincial budgetary accounts, A Sinking Fund will be established for the repayment of loans, created by issuance of securities.

The amount, of Sinking Fund will also be invested in approved investment plans thus, the generated profit will be used for repayment of loan or debt created by issuance of securities.

The three designated functions of the Sinking Fund would be as follows: A government (Federal or Provincial) may from time to time appropriate out of its Government Securities Fund moneys for the creation of a Sinking Fund or the re-payment of the principle sums payable on any of the government securities issued by it under this Act (bill).

The total amount in a Sinking Fund shall not exceed the outstanding principle sums payable on government securities issued by that government.

The government may at any time apply all any part of the moneys in the sinking fund to the purchase of any stock, bond, fund or security or investment, except any stock, bond, fund or security issued by the government under any written law.

The overall financial control of the securities will be governed by creation of Government Securities Fund.

At present, the financial matters of government securities are governed under Federal and Provincial consolidated fund, and for which international donors like IMF and World Bank have serious reservations.

The money raised by issuance of securities is mingled with non-required expenditures.

However under the new and proposed legislation federal and provincial governments have maintained their discretion to spend the collected fund for any expenditure government deemed it to be necessary.

The overall investment policy of the government securities fund has proposed that a government may all at or any part of the moneys in its government securities fund to the purchase of trust stock or of any other stock fund, security or investment or for any expenditure government deem it to be necessary except investment in any stock, bond, fund or security issued by the government.

However for sake of transparency in accounting procedures it has been proposed that no money shall be withdrawn from government securities fund unless they are charged on Government Securities Fund or otherwise authrised by the government to be withdrawn under this Act (bill).

Source: The News