Cleaning up: Default by broker leaves many problems for regulators

Victims ask authorities to provide some relief regarding CGT collection

Kazim Alam July 20, 2015
The CGT regime requires that the holders of UINs must pay the tax on the profits they have earned on the sale of their shares. PHOTO: FILE


In the wake of its wilful default in April, Ace Securities has left behind numerous problems for the regulators to solve. One of these problems pertains to the collection of capital gains tax (CGT) on the sale of securities with a holding period of less than two years.

Betraying their clients’ trust by misappropriating their funds, Ace Securities Chairman Iqbal Ismail and CEO Haroon Iqbal fled the country along with the ill-gotten money three months ago. It means that far from receiving any gains on the sale of their securities, the unsuspecting clients of Ace Securities actually lost whatever investments they had in the first place.

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Nonetheless, the National Clearing Company of Pakistan (NCCPL), which is the provider of clearing and settlement services to the stock exchange, is required to collect the CGT on behalf of the Federal Board of Revenue (FBR) on such sales of securities.

What the CGT entails

In simple words, the CGT regime requires that the holders of Unique Identification Numbers (UINs) must pay the tax on the profits they have earned on the sale of their shares even if their broker carried out those transactions without their consent. Otherwise, the UINs of such investors will get blocked by the authorities concerned.

Few people will fault the taxman on this point. After all, shares were indeed sold and profits were made, albeit by a broker that violated its mandate and fled with the proceeds of the sale of its clients’ stock investments.

While most victims of the fraud by Ace Securities have yet to be compensated in any shape or form, many have approached the authorities concerned to at least provide them with some relief regarding CGT collection.

Speaking to The Express Tribune, NCCPL CEO Muhammad Lukman said his institution is cognisant of the unusual predicament of such investors. “We’ve received a few such cases. We’ll do everything in our capacity to help these investors,” he said.

Noting that the NCCPL is fully automated, Lukman said the institution cannot tinker with the system manually once a tax liability is created.

“In an unusual situation like this, we first verify investors’ claims with the stock exchange concerned and then write to the FBR on a case-to-case basis. We cannot waive the CGT by ourselves,” he added.

FBR spokesperson Shahid Hussain Asad said he was unable to comment on the issue without discussing it with the relevant authorities first.

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Sources say the amount of unverified claims against Ace Securities is now hovering around Rs580 million. Out of the 550 clients that invested in the stock market through Ace Securities, around 65% could be categorised as small investors with investments up to Rs300,000 each.

After the fraud

The Karachi Stock Exchange (KSE) recently started making initial payments to these small-size, approved claimants to the regulator’s compensation. The KSE disbursed cheques of Rs25,000 to some of the fraud victims of Ace Securities last week.

The exchange has the right to sell the assets of Ace Securities in order to meet the latter’s obligations towards investors, the NCCPL and other trading right entitlement (TRE) certificate holders.

These assets include securities and deposits of Ace Securities held in the custody of the exchange; securities, cash and bank guarantees held in the custody of the NCCPL; base minimum capital maintained with the exchange; and all other securities deliverable to Ace Securities by other TRE certificate holders or the NCCPL.

According to former staffers of Ace Securities, the father-son duo of Iqbal Ismail and Haroon Iqbal left Pakistan for Canada and is reportedly in the middle of obtaining Canadian immigration. Investors have also written to the regulators to demand that they should request the Canadian government to repatriate the run-away duo because of the ongoing investigation of fraud against it.

Published in The Express Tribune, July 21st,  2015.

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