During the last five months, coronavirus has adversely affected businesses across the country. With an increase in COVID-19 cases worldwide, Pakistan has also witnessed a surge in cases, which restrained business spending. However, the government has taken several measures to address this issue. The imposition of lockdown and smart lockdown positively reduced the number of corona cases. As of July 27, only 34,000 active cases exist in the country.
To boost the market-related activities, the initiatives taken by the government are also commendable. For instance, a substantial decrease in the discount rate, deferment of loan instalments, incentives announced for the construction industry, enhancement of Ehsas emergency cash program, etc.
The stock market of a country acts as a barometer of economic activity as it is representative of all macroeconomic activities that take place in the country. Any information that is not favourable to the economy makes the stock market more vulnerable. The following figures demonstrate the position of market return (KSE-100 index) and a growth in positive coronavirus cases throughout the country. These diagrams illustrate that coronavirus cases directly influenced stock market activities. A decrease in the number of cases reduces the stock market vulnerability. Furthermore, it is observed that investors are obtaining positive returns over the last month.
To create an enabling environment, the government should provide tax incentives for newly-listed firms for five years
It is difficult to predict how long will the coronavirus exist. Vaccination is the only solution that helps mitigate the virus and alleviate the issue. Under these conditions, it is important to take necessary steps so that investors’ confidence can be ensured and the possibilities of new ventures may be explored. To create an enabling environment, the government should provide tax incentives for newly-listed firms for five years. This will help new firms enlist their shares on the stock market and provide an opportunity for investors to participate in the offerings. Alternatively, large-sized firms may be given tax rebates for five years. The proposed option will help large firms survive owing to a reduction in the cost of doing business. Moreover, sponsors generally hold the majority of shares. In this case, there is no benefit of listing. In terms of shareholding of sponsors, the government should set a limit (say max 40 per cent). This measure will help create market activities for a respective firm and investors would prefer to participate due to a reduction in potential conflicts of interest.
The government may also consider offering an income tax incentive to fresh entrants in the PSX e.g. their maximum tax slab can be reduced by five per cent for five years from the date of listing. Conversely, those income tax may be levied at a higher rate on those public limited companies whose annual turnover exceeds a given amount say 10 billion rupees.
In 2013, the government imposed a capital gain tax on the profits derived from trading of shares. However, there will be no capital gain tax if an investor holds the same shares for seven years. The government should now consider reducing the holding period to three years. This will surely help to boost trading activities within the market and provide an option for investors to switch from one firm to another in the absence of the capital gain tax. The pandemic adversely affected the market activities in the country. It is also important to create a support fund that can assist the firms to survive in the market. Again, a limit needs to be set, for example, if PSX market value to book value ratio decreases to 1.2 times, this support funds jump in and helps the PSX to retain its viability. Earlier, the government has approved 20 billion rupees to stabilise the stock market of the country by issuing a sovereign guarantee for investing in National Investment Trust (NIT). It is worth mentioning here that NIT subsequently earned huge profit while disposing of the shares acquired by it through support fund.
It is also important that the regulatory framework should be further strengthened. The Competition Commission of Pakistan should be structured in a way that provides a level playing field for all firms. There should be a proper mechanism for evaluating the quality of products that can be applied to all firms in true spirit. This will help to build the confidence of investors to participate in the stock market. The Securities and Exchange Commission of Pakistan may also devise a mechanism for the issuance of green IPOs and green TFCs that help overcome environmental issues and help sustain a firm over a long horizon. In short, these measures are crucial to promoting stock market activities on a sustainable basis. This will not only attract investment but also build investors’ confidence on the PSX even during stressed conditions like prevailing Coronavirus pandemic.
The writer is associated with the School of Social Sciences and Humanities, National University of Sciences & Technology (NUST), Islamabad