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Regulatory Framework for Real Estate Investment Trusts

The SECP has prepared draft Real Estate Investment Trusts (REITs) Rules. These draft Rules, along with a Consultative Paper, have been made public for soliciting comments and suggestions from stakeholders and experts. Once received, the comments shall be considered for incorporation in the draft before approaching the Ministry of Finance and Ministry of Law for vetting and notification. 

In recognition of international and regional financial market developments and in order to modernize Pakistan's financial sector, the SECP has been working on the potential of introducing REITs in Pakistan as a new investment and saving vehicle. The formulation of the draft REITs regulatory framework is a significant milestone in this regard. The REITs Rules lay down the requirements for establishment of REITs in Pakistan and are based on the study of international jurisdictions by a Task Force constituted by the SECP for the purpose. The Task Force has highlighted certain impediments in the real estate sector that are expected to hinder the growth of REITs in Pakistan. The Task Force also gave its recommendations to the Federal and Provincial Governments on fiscal incentives and removing the various impediments, to ensure an orderly and transparent introduction of REITs in Pakistan's financial market.

 

 

 

 

Private Equity Funds

 

The SECP is in the process of establishing guidelines for private equity business in Pakistan as well as guidelines for valuation of private equity funds and governance principles for Private Equity Management Company.

Private equity can be looked as a pre-emptive tool before further liberalization of Pakistani economy, which will give local investors a chance to hold local assets. It may help Pakistani firms to become global, especially in this new wave of globalization. By pooling their money together, a lot of small Pakistani investors will be able to contribute to the development of industry and infrastructure in Pakistan

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Specialized Companies Returns Submission & Compliance System

The SECP has developed an information system – the Specialized Companies Returns Submission and Compliance System (SCRCS) – for making the off-site surveillance mechanism more effective. It is expected that this system will be operational within the first quarter of year 2006. The SCRCS will not only rationalize the number of returns submitted by non-banking finance companies but will also enhance the efficacy and utility of the submitted information.

 

 

Consolidation of Financial Sector

 

The SECP has been encouraging mergers and consolidation in the financial sector. The consolidation has resulted in improving the resource mobilization potential and the operational efficiency of NBFCs including modarabas due to strengthening of capital base and economies of scale, respectively .

 

 
Development of Mutual Funds Industry

In order to promote investment through mutual funds, the SECP has allowed provident funds to invest up to 50 percent of their funds in unit trust schemes authorized by the SECP and, further, to expose up to 20 percent of their funds to a single scheme. Moreover, the SECP has given permission to form index funds, sector funds and fund of funds as well as conversion of a closed-end fund to an open-end fund in order to provide product diversification.

It has been made obligatory for asset management companies to get the unit trust schemes that they manage, rated by a rating agency registered with the SECP. Management companies are also required to widely disseminate ratings of their funds so that institutional as well as individual investors may make informed decisions.

 

 

 

Supervision of Privatized Mutual Funds

 

Upon privatization of ICP mutual funds, three lots of funds were formed: ICP Mutual Funds Lot ‘A' comprising of 13 funds; ICP Mutual Funds Lot ‘B' comprising of 12 funds; and Lot ‘C' comprising of SEMF. These funds were privatized without being converted into a corporate or trust structure. New fund managers were given a time limit of six months by the Privatization Commission and ICP (under the Management Rights Transfer Agreement) to restructure the privatized funds and bring them in a form acceptable under the prevalent Rules. The SECP took necessary actions, including amendments in Rules as well as transforming and aligning the structure of the privatized funds according to the existing legal provisions for facilitating their privatization. Among other conditions, the SECP required that assets of these funds should be placed in custody of separate entities, which were eligible to act as the custodian and trustee of these funds. Subsequently, the new fund managers were also allowed to merge certain funds and transform them into a trust .

 

 

 

Islamic Debt Instruments

With a view to assisting the modaraba sector in resource mobilization, they were allowed to issue Musharaka based Term Finance Certificates on the basis of profit and loss sharing principles. It is expected that this will open a useful avenue of resource mobilization for the Modaraba sector and will also add to the growth of the corporate debt market under Islamic financial principles.

 

 

Anti-Money Laundering

 

As part of its drive to combat money laundering practices in the financial sector, the SECP directed the NBFCs and modarabas to accept deposits from investors only after ensuring that an account had been opened in the investor's name using a standardized account opening form. Moreover, these entities were directed to use cross cheques from 1 July 2003 onwards for payments and receipts exceeding Rs. 50,000. The anti-money laundering requirements have also been incorporated in the Prudential Regulations issued by the SECP for NBFCs and modarabas.