NBF ReformCommitteeReport

SECURITIES AND EXCHANGE COMMISSION OF PAKISTAN
Report of Non-Bank Financial Sector Reform Committee for Public Comments

Way-forward for Pakistans NBF Sector
Report of Non-Bank Financial Sector Reform Committee for Public Comments

Way-forward for Pakistans NBF Sector
Securities and Exchange Commission of Pakistan
Table of Contents
Chairmans Message.. . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... 1 Introduction .. . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... 6 1. Pakistans financial sector .. . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . 7 2. NBF sector under SECP purview .. . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . 9 2.1 Regulatory structure .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . 9 2.2 Criteria for NBF sector activities .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. 10 2.3 Present status .. . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . . 10
Part I NBF Sector Background and Issues .. . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . 11 Chapter 1: Non-banking financial services.. . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . 12 1.1 Background .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. 12 1.2 Permissible activities.. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. 14 1.3 Issues .. . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . 15 1.4 Points to ponder .. . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . .. 16 Chapter 2: Asset management services .. . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . 17 2.1 Background .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. 17 2.2 Regulatory structure .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. 18 2.3 Fund categories.. . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . 19 2.4 Issues .. . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . 20 2.5 Points to ponder .. . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . .. 27 Chapter 3: REIT management services .. . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . 28 3.1 Background .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. 28 3.2 Regulatory structure .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. 28 3.3 Fiscal incentives .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. 30 3.4 Issues .. . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . 31 3.5 Points to ponder .. . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . .. 34 Chapter 4: Private equity and venture capital management services.. . .... . .... . .... . .... . .... . .... . .... . .... . .... . . 35 4.1 Background .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. 35 4.2 Regulatory structure .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. 35 4.3 Issues .. . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . 36 4.4 Points to ponder .. . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . .. 36 Chapter 5: Modaraba management services .. . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . 37 5.1 Background .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. 37 5.2 Regulatory structure .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. 37 5.3 Tax benefit.. . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . 38 5.4 Issues .. . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . 38 5.5 Points to ponder .. . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . .. 38
Part II Review of NBF Sector in Other Jurisdictions .. . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . 39 Chapter 1: Non-banking financial services.. . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . 40 1.1 Investment finance services, leasing and housing finance services.. . .... . .... . .... . .... . .... . .... . .... . 40 Chapter 2: Asset management services .. . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . 43 2.1 Retail investor base .. . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . 43 2.2 Ownership structure.. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. 47 2.3 Fund management activities .. . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . 48 2.4 Fund managers skill set .. . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . 49 2.5 Capital requirements.. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. 49 2.6 NAV calculation by fund managers .. . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . 50 Chapter 3: REIT management services .. . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . 52 3.1 Developmental REIT.. . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . .. 52 3.2 Fund size .. . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . . 53 3.3 RMC capital.. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. 53 3.4 RMC fee .. . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . . 54 3.5 Fund structure .. . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . 54 Chapter 4: Private equity and venture capital management services.. . .... . .... . .... . .... . .... . .... . .... . .... . .... . . 55 4.1 Features of PE&VC funds in other jurisdictions: .. . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . 55 4.2 Main investors of PE funds in other jurisdictions .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. 56 Chapter 5: Modaraba management services .. . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . 57 Part III Way Forward.. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. 59 Chapter 1: Non-banking financial services.. . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . 60 1.1 Suggested regime for cluster one activities.. . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . .. 60 1.2 Comparison of present regulatory model with the suggested model .. . ... . . ... . . ... . . ... . . ... . . ... . . 75 1.3 Benefits of suggested regime over present regime.. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. 76 1.4 Suggested measures for prevalent regime for cluster one activities/entities .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. 78 1.5 Summary. . . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . .. 81
Chapter 2: Asset management services .. . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . 82 2.1 Proposals for enhancing retail penetration.. . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . .. 82 2.2 Majority bank owned AMCs opportunity or limiting competition.. . . ... . . ... . . ... . . ... . . ... . . ... . . .. 87 2.3 Multiple fund management activities.. . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . 88 2.4 Fund managers skill set .. . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . 88 2.5 Capital requirements for AMCs .. . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . 88 2.6 Independent NAV calculation.. . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . .. 88 2.7 Independent board of trustees .. . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . 89 2.8 Revamping of open-end funds financial statements.. . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . . 89 2.9 Series of capital protected funds.. . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . 89 2.10 Development of debt capital market.. . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . 89 2.11 Summary. . . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . .. 90 Chapter 3: REIT management services .. . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . 91 3.1 Suggestions for improving REIT regulatory framework.. . .... . .... . .... . .... . .... . .... . .... . .... . .... . . 91 3.2 Summary. . . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . .. 94 Chapter 4: Private equity and venture capital management services.. . .... . .... . .... . .... . .... . .... . .... . .... . .... . . 95 4.1 Suggestions for improving PE & VC regulatory framework .. . .... . .... . .... . .... . .... . .... . .... . .... . . 95 4.2 Fiscal and structural measures.. . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . .. 96 4.3 Summary. . . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . .. 96 Chapter 5: Modaraba management services .. . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . 97 5.1 Suggestions for improving modaraba regulatory framework.. . .... . .... . .... . .... . .... . .... . .... . .... . . 97 5.2 Summary. . . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . .. 99 Chapter 6: Macro level issues .. . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . 6.1 Introduction .. . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . 6.2 Enhancing savings rate and efficient allocations of savings.. . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . 6.3 Promoting image of Pakistan:.. . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . 6.4 Attracting non-resident Pakistanis.. . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . 6.5 Channelling investments to underserved segments.. . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . 6.6 Developing sustainable structures for old-age survival.. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. 6.7 Summary. . . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . ... . . Chapter 7: Summarized way forward and concerned authorities .. . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... 7.1 SECP.. . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . 7.2 SECP and SBP.. . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... 7.3 SBP .. . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . 7.4 Federal Government.. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. .. . .. 7.5 FBR .. . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . 101 101 101 102 102 103 103 104 105 105 106 107 107 107
NBF Sector Reform Committee Report Chairmans Message
Chairmans Message
It gives me great pleasure in presenting the report of the Non-Bank Financial (NBF) Sector Reform Committee (the Committee) suggesting reforms for the development of the NBF sector in Pakistan. The Committee, comprising of leading market professionals and senior SECP officials, has put in a lot of efforts in furnishing its recommendations for promotion and growth of a sustainable NBF sector. It is a roadmap for the SECPs initiatives in the near future. Pakistans financial sector is banking centric with the NBF sector accounting for only 4.9% (excluding insurance sector) of the financial sectors total assets. This dependence on the banking sector makes our financial system vulnerable to risks through lack of diversification and also restricts the scope of product innovation. A strong NBF sector would not only promote savings by offering different asset classes to the investors but will also provide alternative fund raising opportunities to the participants of financial system. To ensure development of NBF sector, there was a need for in-depth review of the whole business model and prevalent regime for this sector, with a fresh perspective. The task of reviewing the entire NBF sector activities was challenging, not only because the issues faced by each constituent of the sector were significant, but also owing to the unique and diversified characteristics of each activity and its stakeholders. Hence, instead of following a one-sizefits-all strategy, a careful and detailed study of each activity of NBF sector was needed. Considering this, the SECP constituted the Committee, comprising of twelve leading market professionals possessing requisite expertise and four members from the SECP. Initial review of the NBF sector was conducted by the SECP team in-house and a detailed presentation was made to the Committee. Thereafter, the Committee discussed each activity of the NBF sector at length in order to arrive at a comprehensive set of recommendations for sustainable growth. This report contains findings and recommendations of the Committee for each activity of the sector. In view of the number of activities under discussion, their unique characteristics and diverse background of members of the Committee, it was difficult to reach a consensus on every recommendation. Therefore, the recommendations contained in this report represent a majority view of the Committee. The report, approved by the Commission, consists of three parts. Part I covers the overall background and current standing of Pakistans NBF sector. Part II discusses the study of international NBF models being practiced in jurisdictions that have successfully developed and nurtured their NBF sector. Part III presents the final recommendations which cover various component of our NBF sector. In view of the different activities performed by the industry participants, the NBF sector has been divided into two main clusters. Cluster one activities represent non-banking financial services performed by leasing companies, investment finance companies (investment banks) and housing finance companies entities engaged in lending and deposit taking activities.
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Cluster two comprises of asset management companies (AMCs) managing mutual funds, pension funds and also providing investment advisory services, private equity and venture capital companies, REIT management companies and modaraba management companies entities engaged in fund management services. I would like to briefly mention some of the key reforms suggested by the Committee, which have been amply discussed in the report. Our mutual fund industry represents 4.3% of the banking and non-banking financial sector assets. The long term growth of this industry is directly linked with the level of participation by retail investors. The Committee has proposed providing meaningful incentives to AMCs for targeting retail investors, such as charging distribution expenses to fund as a percentage of net assets and making it mandatory for AMCs to establish their own distribution network. Other proposed reforms for mutual fund industry include distribution of mutual fund units through the stock exchanges, reduction in the annual regulatory fee provided more than 50% of a funds net assets are held by retail clients, introduction of concept of expense ratio, introduction of multiple classes of units based on the investment amount, improving the skill set of key personnel such as fund managers by specifying the minimum criteria, etc. In terms of improving investor knowledge, the Committee has proposed nationwide, comprehensive and sustained investor awareness programs. The scope of investment advisory services has been enhanced to include management of private pool of investments under fund structure. Investment finance services (IFS) is being broken down and re-defined as stock brokerage, investment advisory, corporate advisory, securities financing and securities underwriting services, and each component of IFS has been further defined. Flexibility has been offered to an entity to be reclassified as Non-Bank Finance Company (NBFC) to obtain either a full scope or limited scope IFS license. The suggested regime for IFS consists of two business models viz., without deposit taking to be solely regulated by SECP and the other with deposit taking as well as lending activities to be jointly regulated by SECP and SBP. The Committee has also proposed that housing finance and leasing business, whether deposit taking or otherwise, should not be regulated by SECP and should fall under the domain of SBP. To facilitate the launching of REITs in Pakistan, the Committee has proposed reduction in REIT fund size to address the issue of capital constraints and allow launching of medium size REIT projects having better potential for growth and return. Other significant proposals include reduction in capital requirements for RMCs to facilitate entry of professionally qualified fund managers in the REITs business, allowing AMCs to manage REITs also, expanding the domain of REIT eligible cities and rationalization of the whole approval process to speed up the regulatory due diligence process. In order to develop non-banking financial services, the Committee, in line with international best practices, has proposed the implementation of the concept of activity based regulatory regime in Pakistan for cluster one entities. In terms of the proposed regime, capital market activities of all entities are to be regulated by the Capital Market Regulator (CMR), i.e., SECP and deposit taking/financing/ lending activities of all the financial sector participants would be regulated by the Banking Regulator (BR), i.e., SBP. This recommendation is in contrast to the prevalent concept of entity based regulatory domain in our country. In a globally integrated market, for effective and seamless regulation across the financial sector, it is imperative that the SBP and the SECP work in close cooperation, however, historically, our two regulatory bodies have worked in separate domains with limited coordination. This will need to change if we truly desire to develop Pakistans financial sector as our engine of growth. This disconnect may sometimes result in formulating policy which, instead of taking a holistic view of the financial markets, only seeks to address the vulnerabilities of a specific sector falling under the domain of one of the regulators.
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NBF Sector Reform Committee Report Chairmans Message
The recommendations of the Committee are now being rolled out for seeking feedback from all stakeholders and conducting roundtables to ensure extensive public consultation. For this purpose, hard copies of the report have been circulated among all the stakeholders and a soft version of this report has been placed on SECP website (www.secp.gov.pk). To facilitate interactive consultation process a web forum (http://:forum.secp.gov.pk/forum.php) has been created. All stakeholders should use this forum to deliberate upon the ideas presented in the report and assist us in reaching definitive conclusions for introducing a business friendly regime for the NBF sector. This web discussion forum will be the primary medium for furnishing comments on the report. I am extremely thankful to the members of the Committee for their devotion, productive discussions and valuable suggestions. Their expertise and vision will make this document a plan for the future. I would also like to thank the Specialized Companies Division team and the Commissioners of the SECP for contributing to this report and for their wholehearted support. The Committee comprised of the following members: 1. Mr. Muhammad Ali, Chairman SECP and Chairman of the Committee. 2. Dr. Amjad Waheed, Chief Executive, National Fullerton Asset Management Ltd. 3. Mr. Anwer A. Sheikh, Director, AKD REIT Management Ltd. 4. Mr. Basheer A. Chowdhry, Chairman, NBFI & Modaraba Association of Pakistan. 5. Mr. Imran Malik, Chief Executive, First Credit and Investment Bank Ltd. 6. Mr. Muddassar Malik, Chief Executive, BMA Asset Management Company Ltd. 7. Mr. Muhammad Jawaid Iqbal, Group Chief, Corporate & Investment Banking, Allied Bank Ltd. 8. Mr. Najam Ali, Chief Executive, Next Capital Ltd. 9. Mr. Nasim Beg, Chairman Arif Habib REIT Management Ltd. 10. Mr. Samad Dawood, Chief Executive, Cyan Limited. 11. Mr. Shahid Ghaffar, Chief Executive, HBL Asset Management Ltd. 12. Ms. Shazia Bashir, Chief Executive, Escorts Investment Bank Ltd. 13. Mr. Teizoon Kisat, Chief Executive Officer, Orix Leasing Pakistan Ltd. 14. Mr. Akif Saeed, Executive Director, SECP. 15. Mr. Asif Jalal Bhatti, Executive Director, SECP. 16. Mr. Muhammad Afzal, Director (SCD), SECP. Lastly, I believe that this is the beginning of an ongoing process to ensure existence of an encouraging business environment for sustainable development of our financial markets. I am confident that implementation of the suggestions would make a significant contribution in providing the impetus for growth of our NBF sector. However, without the active participation of industry participants these measures will not bear fruit. We are, therefore, looking forward to a mutually beneficial partnership between the SECP, industry participants and all stakeholders.
Non-Bank Financial (NBF) Sector Reform Committee
Mr. Anwer A. Sheikh Director, AKD REIT Management Ltd. Dr. Amjad Waheed Chief Executive, National Fullerton Asset Management Ltd. Mr. Muhammad Ali Chairman SECP and Chairman of the Committee
Mr. Basheer A. Chowdhry Chairman, NBFI & Modaraba Association of Pakistan
Mr. Nasim Beg Chairman Arif Habib REIT Management Ltd.
Mr. Samad Dawood Chief Executive, Cyan Limited Mr. Shahid Ghaffar Chief Executive, HBL Asset Management Ltd. Ms. Shazia Bashir Chief Executive, Escorts Investment Bank Ltd.
NBF Sector Reform Committee Report Reform Committee
Mr. Imran Malik Chief Executive, First Credit and Investment Bank Ltd.
Mr. Muddassar Malik Chief Executive, BMA Asset Management Company Ltd.
Mr. M. Jawaid Iqbal Group Chief, Corporate & Investment Banking, Allied Bank Ltd.
Mr. Najam Ali Chief Executive, Next Capital Ltd.
Mr. Muhammad Afzal Director (SCD), SECP Mr. Asif Jalal Bhatti Executive Director, SECP Mr. Akif Saeed Executive Director, SECP Mr. Teizoon Kisat Chief Executive Officer, Orix Leasing Pakistan Ltd.
Introduction
NBF Sector Reform Committee Report Introduction Pakistans financial sector
1. Pakistans financial sector

Pakistans financial sector consists of the following type of entities: i. ii. iii. iv. v. vi. vii. Scheduled Banks Development Finance Institutions (DFIs) Micro Finance Institutions (MFIs) Non-Banking Finance Companies (NBFCs) Insurance Companies Modarabas Directorate of National Savings (DNS)
Scheduled Banks, DFIs and MFIs are regulated by the State Bank of Pakistan (SBP) whereas NBFCs, Insurance Companies and Modarabas are under the regulatory ambit of Securities and Exchange Commission of Pakistan (SECP). The NBFCs include Assets Management Companies (AMCs), Pension Fund Managers, Real Estate Investment Trust (REIT) Management Companies, Private Equity Fund Managers, Investment Advisors (IAs), Leasing Companies, Housing Finance Companies and Investment Finance Companies i.e. Investment banks engaged in Investment Finance Services (IFS). The Directorate of National Savings falls under the purview of Federal Government. As on June 30, 2012, aggregate assets of Pakistans financial sector amounted to Rs. 11,613 billion. Out of these assets, 72% were with Scheduled Banks and 17.1% were with DNS whereas NBFCs, Insurance Companies and DFIs held 4.7%, 4.2% and 1.3% of the said assets, respectively.
As evident from the table above, the bulk of the assets of financial sector, with the exclusion of DNS, are under SBPs regulatory purview. Presently, SBP regulates 88.9% of the banking and Non-Bank Financial (NBF) sector assets and the remaining 11.1% assets of the financial sector are under the regulatory purview of SECP.
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Summary of financial sector, being regulated by SBP and SECP is given in the table below:
NBF Sector Reform Committee Report Introduction NBF sector under SECP purview
2. NBF sector under SECP purview

2.1 Regulatory structure The regulatory framework for NBF Sector under SECP purview comprises of Companies Ordinance 1984, Modaraba Companies and Modaraba (Floatation and Control) Ordinance 1980, Modaraba Companies and Modaraba Rules 1981, NBFCs (Establishment and Regulation) Rules 2003, Prudential Regulations for Modarabas 2004, NBFCs and Notified Entities Regulations 2008, Private Equity and Venture Capital Fund Regulations 2008 and REIT Regulations 2008. In view of the activities performed, the NBF Sector under SECP ambit has been divided into two clusters i.e. Non-Banking Financial Services categorized as Cluster One and Fund Management Services categorized as Cluster Two. Cluster one comprises of Leasing Companies, Investment Finance Companies (Investment Banks) and Housing Finance Companies engaged in non-banking financial services i.e. mainly lending and deposit taking activities. Cluster two comprises of the entities engaged in fund management services which include AMCs managing mutual funds, voluntary pension funds & also providing investment advisory services; Fund Management Companies (FMCs) providing Private Equity & Venture Capital Fund Management Services; REIT Management Companies and Modaraba Management Companies.
2.2 Criteria for NBF sector activities The table below exhibits the minimum criteria which need to be complied with for undertaking Cluster One and Cluster Two activities:
2.3 Present status On the basis of last nine years performance commencing from June 30, 2003, except for Mutual Fund industry which has achieved a commendable Compound Annual Growth Rate (CAGR) of 26% as of June 30, 2012, the performance of other players of NBF sector under SECP purview has been dismal. Leasing and investment banking activity are continuously shrinking whereas housing finance activity has ceased to exist. Modaraba, an Islamic mode of business, despite having incomparable business advantage of tax holiday coupled with its ability to carry out wide range of business activities under one umbrella, has not been able to attract the entrepreneurs. Pension fund industry is at a nascent stage and sectors like REITs & Private Equity, having substantial potential, are still untapped.
1 2
Base year June 30, 2010 Base year June 30, 2007
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NBF Sector Reform Committee Report Part - I: NBF Sector - Background and Issues
Part I NBF Sector Background and Issues
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Chapter 1: Non-Banking financial services

1.1 Background The Non-banking Financial Services mean activities performed by leasing companies, investment finance companies (investment banks) & housing finance companies entities primarily engaged in primarily lending & deposit taking activities. The brief background of leasing companies, housing finance companies and investment finance companies, presently classified as Cluster one entities is given below.
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NBF Sector Reform Committee Report Part - I: NBF Sector - Background and Issues Chapter 1: Non-Banking financial services
Apparently, the transfer of investment finance companies, leasing companies, discount houses and housing finance companies from SBP regulatory purview to SECP regulatory ambit was due to the following main reasons: i. In case of commercial banks, the entire life cycle of a commercial bank (i.e. licensing, regulation, monitoring & inspection and winding-up) is with SBP.
ii. In case of Cluster One Entities, the case was quite different as compared to the commercial banks. The incorporation, licensing and winding-up was with CLA/ SECP whereas the regulation, monitoring and inspection functions were with SBP. iii. Due to absence of winding up powers in case of Cluster One entities, SBP was facing issues in winding up of these entities. Moreover, the entities transferred to SECP were facing serious survival issues owing to the absence of following factors: i. No concept of maintaining minimum equity requirement. ii. No fit and proper requirement for sponsors, directors and management. iii. No minimum conditions/rating requirements for deposit taking. iv. No concept of independent directors and compliance function. v. Very limited branch network. vi. Absence of level playing field. Most of the Cluster One entities were problematic financial institutions and SBP, prior to their transfer to SECP, had already recommended the winding-up of 4 investment finance companies and 2 discount houses. Consequently, during the last ten years, the number of entities transferred to SECP reduced significantly from 47 to 16 only. As a result of decline in number of entities, the total assets of cluster one entities have decreased from Rs. 101 billion as of June 30, 2003 to Rs. 50 billion as of June 30, 2012. The deposits of cluster one entities during the said period have decreased from Rs. 25 billion to Rs. 13 billion. Comparative position of total assets, deposits and equity of cluster one entities as on June 30, 2003 and June 30, 2012 is given in table below:
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1.2 Permissible activities The details of permissible primary as well as ancillary activities for Cluster one entities are given in the NBFC & NE Regulations, 2008. The key activities which may be undertaken by these entities and the funding options available to them are summarized in table below:
The following funding options are available to Cluster One Entities to fund their operations:
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NBF Sector Reform Committee Report Part - I: NBF Sector - Background and Issues Chapter 1: Non-Banking financial services
1.3 Issues Cluster One entities are part of the countrys regulated financial sector for the last more than two decades, however, these entities have neither exhibited any reasonable growth in terms of assets/ number of players nor have they made the requisite contribution to the financial system. A detailed analysis of the industry reveals lackluster performance for the following reasons:
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1.4 Points to ponder
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NBF Sector Reform Committee Report Part - I: NBF Sector - Background and Issues Chapter 2: Asset management services
Chapter 2: Asset management services

2.1 Background The way the mutual funds industry has progressed since 1962 to date can be summarized as under:
The overall industry trend since 1998, in terms of its total assets under management and number of funds established is shown in the graph below:
450 400 350 300 250 200 150 100

50 160 326
410 127 291 227 87 67 44 126

25
160 147 140

120
135
295 101 238
100 80 60
40
112 23 14 1721 1725 50 17 23
33
16
1418
20 0
0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 AUM (Rs. in Billion) Number of Funds
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2.2 Regulatory structure In terms of prevalent regulatory framework, asset management services being part of cluster two activities comprises of mutual funds, pension funds and investment advisory services. This business model is based on two-tier system whereby the Asset Management Company i.e. Fund Manager and the fund being managed by it are two separate entities. A mutual fund is set up either in the form of an investment company or a trust. The investment company is established as a public limited company and the AMC manages its assets and appoints a custodian for safe custody of assets of the investment company. In other case, a trust is established through a trust deed, a principal document for the formation and management of mutual fund, executed between the AMC and the trustee. The AMC manages the assets of the mutual funds in the interests of the unit holders whereas the trustee provides safe custody of assets of the mutual fund. The investment in a mutual fund is solicited through an offering document which is published document containing information on mutual fund to invite public for purchase of its units or certificates. In addition to the minimum requirements given on Table 3, an AMC has to ensure compliance to the following requirements:
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2.3 Fund categories In order to meet diverse investment needs and offer multitude of investment solutions to investors, an AMC is entitled to offer various types of open-end funds which are categorized primarily in accordance with their investment objective and risk profile. Currently, AMCs can offer following categories of mutual funds.
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The total assets of the mutual funds industry as of June 30, 2012 stood at Rs. 410 billion, that were collectively managed by 25 AMCs. Total number of mutual funds in the industry is 147, out of which 133 are open-end whereas 14 are closed-end funds. The figure below depicts the composition of underlying assets held through open-end mutual funds as on June 30, 2012.
2.4 Issues i. Limited retail investor base
Typically, mutual fund is a product highly suitable for retail investors and for this reason a large part of the investments in mutual funds is held by households / individuals. A widespread retail base not only results in increased assets under management but can enhance stability of the fund, and the industry in general, leading to reduction in the systemic risk. Contrary to most advanced jurisdictions, composition of investors in mutual funds is highly tilted towards financial institutions, which is not beneficial for the industry. Participation of retail investors in the mutual funds industry constitutes a very small proportion and presently more than 90% of total assets under management are held by institutions. Number of total investors in the mutual funds industry is less than 100,000, which is only 0.3% of the approximately 30 million households in Pakistan and compares extremely unfavorably against approximately 20 million bank accounts in the country. The following are some of the reasons, besides macroeconomic factors, which have resulted in limiting retail participation so far.
a) Limited investor awareness
One of the primary reasons for limited retail investor participation is lack of awareness of the general public about mutual funds and the benefits they offer. Due to limited awareness, retail investors in Pakistan are inclined towards parking their money in banks despite these offering lower returns versus money market schemes.
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b)
Lack of branch network / limited distribution outreach
Another key factor, which has a direct linkage with limited awareness and which hampers the retail participation, is lack of a wide distribution network. Currently majority Asset Management Companies (AMCs) have presence only in Karachi, with few having branches in Lahore and Islamabad. The complete detail of AMCs branch network is given in table below:
Only NIT, the oldest AMC with a reasonable level of retail participation, has presence in 15 main cities with 22 branches. Investors who may have knowledge of mutual funds and are desirous of investing may find it difficult to do so due to the limited number of distribution outlets. National Investment Trust Limited (NITL) enjoys a perception level in investors minds closer to banks whereas other
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AMCs do not. One of the major reasons for this is lack of presence and contact with the investor base. As the services of AMCs are restricted to large metropolitan cities only, it is difficult for even informed investors in small cities to access mutual funds. A large part of potential clientele remains untapped by the industry despite increase in wealth in these areas in the recent past. Though majority of AMCs are owned by banks, the branch network of banks has also not played an effective role in mutual funds distribution. In most jurisdictions, banks play a significant role in distribution of mutual funds units and this activity is a significant part of their income, however in Pakistan this role has been negligible due to higher spreads enjoyed by banks on their deposits and fearing competition from the AMCs. During the last 12 months ending June 30, 2012, slightly over 3% units were sold through bank branch networks indicating a serious lack of interest on part of the banks to distribute mutual funds. Reliance on the banks to achieve distribution of mutual funds units may not result in the requisite growth and development of the industry in the foreseeable future. Apart from AMCs and banks, a few dedicated distribution companies exist that have started the distribution activity recently. However, no proper setup for independent distribution companies in Pakistan has so far been developed due to the limited business potential given the small size of the industry.
Focus on institutional clients
c)
One of the major factors for investment by commercial banks in open end money market and debt funds has been the preferential tax treatment for making investment in debt instruments through mutual funds versus investing directly in such assets. This differential tax treatment has been addressed in the recent Finance Act which will eliminate the arbitrage available to commercial banks by June 2013. The preferential tax treatment available to institutions makes it easy for AMCs to target banks and large ticket investors, who make sizeable investments in the funds. Further, attracting large ticket investments from institutional clients does not require the level of dedicated effort on part of the AMCs that is usually required for building a reasonable retail investor base. This easy access to large ticket investments, on one hand is beneficial for AMCs as it increases their assets under management and on other hand is beneficial for financial institutions in the form of higher after tax yield. However, it reduces the motivation to develop a retail clientele which is essential for development of the AMC industry.
Cost associated with targeting retail investors
d)
Owing to the costs associated with servicing retail clients who generally invest small amounts of money, AMCs have been reluctant to target them. As witnessed in other jurisdictions, asset management business will flourish in the long-run and will be sustainable and profitable only by attracting retail clients.
High expense ratio
e)
Investment by retail investors may also be low due to the high expense ratio of majority of funds, particularly vis--vis international jurisdictions. The reasons for such high expenses are: (i) High rate of management fee as compared to other jurisdictions. (ii) Equity funds charging the maximum rate of management fee, and in some cases, not even passing the benefit of economies of scales to unit holders.
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(iii) Higher brokerage and settlement charges paid by some equity funds. (iv) Lack of competition in equity funds industry.
f) Other factors
Besides the above issues some other likely reasons for this limited retail investor participation are: (i) High return / low risk offered by the DNS with no KYC requirements. (ii) Implicit safety of capital in DNS or banks deposits (despite banks offering lower returns versus returns of mutual funds with similar risk profile e.g. money market schemes). (iii) Presumptive tax regime for NSS holders and bank depositors with no requirement for filing of tax returns.
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ii. Underdeveloped debt capital market Mutual funds flourish due to their simple structure, transparent operations and fair pricing of assets held. Fair pricing of debt securities held in the portfolio of income and other mutual funds is imperative so as to reflect the underlying securities true fundamentals. Despite the SECP and MUFAP having jointly devised a mechanism for valuation of debt securities and assigned the responsibility for valuation to MUFAP, the problem of fair valuation still remains owing to limited secondary market trading on the Bond Automated Trading System (BATS) of the Karachi Stock Exchange. In addition, there is no requirement for reporting of trades in unlisted debt securities. In case of income funds, issues such as lack of fair price discovery of debt securities, weak role of rating agencies, lack of effective debenture trustees, lack of an active secondary market, limited supply of fresh securities and some other deeply embedded issues curtail growth of this particular category of fund. Besides fair pricing, proper and timely rating of debt securities is critical. In this regard, the rating agencies play a vital role in analysing credit and liquidity risk of borrowers. Like many world financial markets, ratings performed in Pakistan were not truly reflective of the actual creditworthiness of the borrower, particularly during the 2008 crisis. Notwithstanding the above, dependence of the AMCs only on rating agencies for assessing issuer creditworthiness is also not justified, as AMCs are obligated to safeguard the interest of unit holders. They must therefore, exercise proper due diligence and care before making investments in debt securities, which was not the case. Debenture trustee is responsible to monitor compliance of the issuer with covenants of a debt security. However, this significant role of the trustee was not appropriately played causing losses to the bond holders and leading to loss of investor confidence in general. iii. Majority bank-owned AMCs opportunity or limiting competition Majority of the assets of mutual funds are under management of AMCs that are bank owned (nearly 73% excluding NITL). Considering Pakistans financial sector which is already bankingcentric, bulk of ownership of fund managers with banks can worsen this problem, owing to the inherent conflict of interest banks have versus other financial products, as explained above. In Pakistan banks earn interest rate spreads that are on the higher side within the region. A reasonably large mutual funds industry which offers investors competitive services and returns that are better than an average deposit rate and which is easily accessible, can pose serious challenge to banks and may weaken the strong bargaining position of banks. Hence banks may not be inclined in playing any vital role in the development of the mutual funds sector. Mutual funds industry which is being run primarily by bank-owned AMCs may also pose challenge for non-bank owned AMCs. Most banks not only have financial muscle but have countrywide branch network, which bank-owned AMCs can leverage at the expense of other non-bank AMCs and they need to tie up with either a bank (a service which latter may not be inclined to offer) or a private distribution company to sell their funds to the public, which is more challenging.
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iv. Limited fund management activities Presently, an AMC, as a NBFC, is entitled to undertake following fund management activities: a. Asset management services. b. Pension fund management services. c. Investment advisory services. An AMC is neither permitted to manage a Real Estate Investment Trust (REIT), a Private Equity Fund or a Venture Capital Fund. For this purpose, AMCs desirous of undertaking any of the abovementioned fund management activities need to setup a separate entity. For instance, to manage a REIT, a REIT Management Company needs to be set up under the REITs Regulations. Establishing separate / dedicated entities may lead to higher overheads and an inefficient structure, as it is deemed that setup / requirements for offering many services by the AMCs under the present regime are common with other fund managers (e.g. back office staff, infrastructure, systems, etc.) except for some specific aspects where additional resources may be necessary. v. Fund managers skill set In order for an AMC (including the fund managers) to satisfactorily discharge fiduciary responsibility towards the unitholders of the fund, it is imperative that it is fully equipped with skilled human resources who have appropriate professional qualification, sound performance track record and experience Presently, there is no specific skill set requirements imposed on fund managers. The fund managers currently practicing in our market have differing qualifications and experience, with some as CFA charter-holders and others having simple degrees. This indicates inadequate emphasis on the skill set of fund managers who are primarily responsible for managing public money. vi. High capital requirements Current capital requirement of Rs. 200 million for setting up an AMC is perceived to be on higher side. Instead of imposing only a high level of equity requirement, competence and integrity of the persons desiring to offer such services also needs to be focused upon. Further, high equity acts as a strong barrier for entry, limiting pool of service providers and hence competition within the industry. vii. NAV calculation by fund manager The valuation of the assets held by a mutual fund is critical to investors because it affects, among other things, the returns to the investors, financial and performance reporting and fees paid to the AMC. Valuation is extremely important because a mutual fund must redeem and sell its units at their net asset value. As per requirements of the regulatory framework, the AMC is responsible for calculating and disseminating NAV, to the public latest by 1830 hours or earlier. The valuation of mutual fund assets presents potential conflicts between the interests of those who value the assets and the mutual fund investors. There are many different ways in which this could occur. For example, an AMC could overvalue the mutual fund assets in an attempt to attract more investors by showing an inflated performance record, therefore earning more management fees. The AMC could also undervalue the mutual fund assets and cause the mutual fund to sell them to affiliates at an artificially low price.
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Owing to the inherent conflict of interest, fair calculation of NAV by an independent third-party requires review of this issue. viii. Governance conflict Currently, the board of directors of an AMC reviews the performance of all the mutual funds managed by the AMC. The board primarily looks after the interest of the AMC and can be completely in conflict with the interest of the unit holders of the mutual funds. ix. Misleading performance presentation The focus of financial reports of open end funds is primarily on the profits, capital gains and dividends earned by such funds rather than being on the growth in NAV and performance relative to benchmarks. This can be misleading and may lead to wrong decisions by investors. Such standards are based on the financial disclosures of a business concern where income earned and sources of income are important, but for an open end fund only the growth in NAV is highly relevant. x. Series of capital protected funds Presently the AMCs are launching capital protected funds with limited life of 1 to 3 years. It involves a lengthy process including several steps for establishment of fund and revocation of fund. Every time a fund matures and a new capital protected fund is to be offered, a new set of constitutive documents is prepared and launched. 2.5 Points to ponder
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Chapter 3: REIT management services

3.1 Background In 2005, a taskforce was constituted to expand capital market activities by bringing real estate as a new asset class to the market and to provide an additional avenue of investment to small investors. REITs would also serve as a medium to channel private savings into real estate investment. Other benefits likely to ensue from REITs include documentation of real estate, fulfillment of housing needs, development of industrial and commercial complexes including industrial parks, warehouses, hospitals, educational facilities and infrastructure projects like ports, roads, etc. The taskforce, which included leading bankers, businessmen, lawyers and public sector officials, prepared draft legislation in 2007. SECP steered the project and the initial legislation drafted was notified for public opinion and subsequently discussed with over 200 individuals comprising leading real estate developers, lawyers, appraisers (valuers), bankers, businessmen and investment advisors. After extensive public consultation Real Estate Investment Trust (REIT) Regulations, 2008 were notified on 31st January 2008 and since that time these Regulations are the governing law of REITs in Pakistan. 3.2 Regulatory structure Considering dynamics of market and feedback from market players, the REIT Regulations notified in 2008 were amended in 2010 with the intent to encourage setting up of REITs. Any person or a group of persons intending to launch a REIT scheme has to form a public limited company. Once registered, as a company, the sponsors can get the license to operate and manage REIT schemes. The launch of a REIT scheme involves a number of approvals from SECP.
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NBF Sector Reform Committee Report Part - I: NBF Sector - Background and Issues Chapter 3: REIT management services
The salient features of the existing legal framework, the steps to be followed for formation of a REIT Management Company (RMC) and launch of a REIT scheme are given below:
Steps for incorporation of RMC
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Steps for launch of REIT Scheme
3.3 Fiscal incentives Both the provincial and federal governments have announced incentives for promotions of REITs as follows: i. Provincial governments
Real estate is a provincial subject and provincial governments make tenancy laws and regulate the construction activities in their respective jurisdictions. Local administration of cities and towns are authorized to allow housing schemes and collect duties and transfer fees. As the property transactions are not recorded at the value paid, therefore, actual value of the property is difficult to track over years. Government uses DC rates as a basis for charging duties and fees, as an alternate to actual price of the real estate. In the case of REITs, the transactions of properties will have to be recorded at the actual price because the Regulator will not allow issue of units of a REIT Scheme at understated or overstated values. In a market, where price distortion is widespread for duty evasion, the investors of REITs could have been at a disadvantage compared to the investors not routing their transactions through REITs who will have to pay duties on the basis of the DC rates instead of the actual price of a property. This issue was explained by SECP and the industry participants to the provincial governments. The provincial governments appreciated the issue and announced following preferential rates of duties for REIT Schemes.
Government of Punjab
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Government of Sind
ii. Federal government To promote REIT industry, the Federal Board of Revenue has also given incentives at the REIT Scheme level. If a REIT Scheme distributes 90% of its profits it is exempted from payment of Income tax. Also profits and gains accruing to the seller of a property to a REIT Scheme have been exempted from tax up to the year 2015. 3.4 Issues The real estate market in Pakistan is facing multiple challenges, which are hindering investment in this sector. These factors are summarized below: i. Prolonged property litigation: Litigation is one of the major risks associated with real estate investment. In most of the cases legal proceedings consume years and generations to conclude. Disputes range from multiple claims on title to encroachments and encumbrances. The property developers in the private sector and the development authorities set up by the federal and provincial governments confront the problem of taking over possession of the property leading to delays in development work and cost escalation.
ii. Poor record keeping: A number of property frauds take place due to multiple claims on title and forgery of documents. Many issues arise due to primitive methods of record keeping followed by concerned departments i.e. from Patwaris to Revenue Board. The record is maintained and processed manually. Despite several attempts by provincial governments to mechanize land records the traditional system is still persisting. The language used for recording and reporting the land record has special parlance, deeply rooted in centuries old traditions, which is hard to decode and beyond comprehension of the common man. iii. Distortion in recorded price: The culture of under-reporting the price of a property is rampant. The documented price shown is lower than the actual price to save stamp duty and registration fee. Government announces a minimum value of property and the levies are based on these minimum values commonly known as DC rates. iv. Capacity of appraisers: In the absence of reliable price discovery mechanism, the lenders rely on the information supplied by property valuers. The valuers have not built up the databank of property related transactions. Their judgments are based on information gathered through informal sources and nonscientific surveys including estimates given by property dealers. Valuers normally do not use advanced methods like discounted cash flow for valuation of built up properties. v. Absence of mortgage market: In Pakistan, a market for long-term home financing or mortgage hardly exists. Only a limited number of individuals have been able to secure loans due to stringent conditions imposed by the banks.
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In spite of all the aforesaid limitations, the SECP in consultation with the industry notified REIT Regulations 2008, to kick start the process of bringing investment in real estate within the reach of common investors and commencing the process of transparency in this sector. Macro-economic and legal issues facing the real estate business cannot be adequately addressed in the short run by SECP alone. However, SECP can take the lead by tailoring the regulatory framework to suit the local conditions. In this regard, following aspects of REIT regulations need consideration:
i. Fund size
The fund Size of a REIT scheme that is currently set at Rs. 2 billion for both Rental and Developmental REIT Scheme, and Rs.3 billion for hybrid REIT Scheme, is on the higher side. The large fund size is among the major constraints that restricts the admissibility of economically viable properties for a REIT scheme.
Stake of RMC
ii.
The stake of RMC has been kept at 20% of the fund to ensure that the management company remains actively engaged in the management of a project throughout its life. This requirement, however, serves as a barrier to entry for professionals in REIT business. The requirement may be relaxed and instead affiliated parties of the RMC may hold stake in place of the RMC, if so required. For Rental schemes specifically, the requirement to hold units of the REIT Scheme by the RMC or affiliated companies or strategic investors may be made obligatory for the first project and relaxed gradually for subsequent schemes. The minimum Capital of RMC has currently been fixed at Rs.200 million. The requirement was kept higher as RMC had to maintain 20 % holding in a REIT scheme and size of the REIT was also presumed to be above Rs. 2 billion. Any reduction in the capital of RMC would encourage professionals to explore options of starting REIT management business. The fee of RMC has been capped at 1% of the initial REIT fund for developmental REIT which does not induce capable managers to enter this business. Since REIT is a relatively new product requiring a lot more effort than managing a mutual fund, upward revision of the cap on management fee would enable this product to compete with other financial services like mutual fund management. The concept of performance fee may also be incorporated in REIT Regulations, which would serve as an incentive for better performance.
Customer advances
iii. RMC capital
iv. RMC fee
v.
The utilization of customer advances has been capped at 30%. In the absence of any provision for borrowing under the present Regulations, a project may suffer if there is a shortfall due to the need for initial construction work, any estimation error or cost overruns. The limit for use of customer advances by a REIT scheme may therefore be enhanced to cater for such eventualities. Apart from above, the possibility of allowing the borrowed funds for completion of REIT projects may be considered despite the following ground realities: i) Borrowing is advantageous in jurisdictions where the interest rates are substantially lower than expected yields of REITs. At present, KIBOR is around 10% and the borrowing rate for the REIT scheme is expected to be in vicinity of 14% to 15%. Borrowing for Rental
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REIT schemes is not feasible owing to rental yields in the range of 6-7%. ii) Borrowing will require mortgaging of property as collateral with the lenders. The lenders use forced sale value of the mortgaged property and also take an additional margin of 20% to grant any facility. In case of default, property worth Rs.100 million would be practically adjusted against a loan of approximately Rs.60 million. It would not be fair to borrow money by pledging a property against which customers advances have been collected on the promise of sale of that property on ownership basis to customers. In case of borrowing, the lender shall have first right on assets of the REIT Scheme and as a consequence the rights of the customers as well as unit holders will be seriously compromised. The maximum unit-holding limit for common investors has been fixed at 10 % under the current Regulations. In order to enable REITs to gain impetus at a time when response of capital markets remain uncertain, it would be prudent to relax the limit of 10% holding at-least for the Pre-IPO investors and sponsors. The relaxation would keep the window of investment open in REITs by high net-worth and strategic investors to support REITs. REITs are allowed only in federal and provincial capitals for the time being. It is pertinent to note that many large cities offer considerable potential for the real estate market owing to robust business activity. REITs therefore must not be confined to provincial and federal capitals only and be allowed in such cities which provide opportunities for gains on real estate investment and meet the criteria to be laid by SECP. Regulations prescribe that a real estate of a Rental REIT scheme must have a residual lease period of 30 years. This may be of detriment to growth of REITs in Pakistan as investors may like to bring projects of smaller duration in REIT schemes. Any land with a remaining lease period of five years over the life of the proposed Rental REIT project may be allowed for a REIT Scheme. Regulatory prescriptions in some of the countries where REITs are operating have been covered in Part II of the report and specific proposals aimed at reforming the regulatory framework for REITs in Pakistan have been discussed in Part III of the report.
vi. Limit on holding REIT units
vii. REITs in other cities
viii. Leased land and REIT scheme
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NBF Sector Reform Committee Report Part - I: NBF Sector - Background and Issues Chapter 4: Private equity and venture capital management services
Chapter 4: Private equity and venture capital management services

4.1 Background In 1995, a regulatory framework was provided for Private Equity and Venture Capital (PE & VC) in Pakistan. The framework envisioned a two tier system comprising of a management company and a fund also to be incorporated as a company under the Companies Ordinance, 1984. The management company was required to maintain a net capital balance of only Rs. 0.1 million. The paid up capital for PE & VC Fund was fixed at Rs. 100 million. In 2001, the regulatory framework was revised. The limit of paid up capital for the fund management company was enhanced to Rs. 5 million and that for the fund was curtailed to Rs. 50 million. A mechanism for raising capital through private placements was introduced. Under the revised Rules, three companies were licensed. Two of which managed to raise capital not only from the institutional investors but also from general public. The third one was sponsored by a high net-worth individual and a few institutional investors, initially. These companies never became profitable and ultimately exited the NBF sector. 4.2 Regulatory structure The prevalent regulatory framework was introduced by SECP in 2008 and its salient features are as under:
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4.3 Issues Contrary to the expectation, PE & VC sector has failed to take off in Pakistan. The issues faced by the PE & VC sector are briefly stated below:
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NBF Sector Reform Committee Report Part - I: NBF Sector - Background and Issues Chapter 5: Modaraba management services
Chapter 5: Modaraba management services

5.1 Background In Pakistan the process of offering Islamic financial products was initiated in 1980 when the Government introduced the concept of modaraba as a legal entity for carrying out business in the corporate and non-banking financial sector. According to the concept of modaraba in Islam, it is a partnership, wherein one party provides finance for the purpose of carrying on the business and the other party participates in the business venture with skills and efforts. The party who provides the finance is called the Rabb-ul-Mal (the provider of capital) i.e. Modaraba Fund, whereas the other party who puts in expertise and management skills is called the Modarib (manager) i.e. Management Company. The prevalent regulatory regime for Modarabas comprises of Modaraba Companies & Modaraba (Floatation & Control) Ordinance, 1980 (the Modaraba Ordinance) and Modaraba Companies and Modarabas Rues 1981 (the Modaraba Rules), promulgated in early 80s by the Government of Pakistan. 5.2 Regulatory structure The Modaraba law was designed keeping in mind the original concept of the modaraba. The role of Mudarib was given to the Modaraba Management Company (MMC), a corporate legal entity and the finance was to be arranged by another legal entity licensed by the Registrar Modaraba called Modaraba which raises money through public subscription (IPO). The persons who contribute in the pool of funds (the Modaraba fund) are collectively called as the Rabb-ul-Maal. Hence it is a two tier system. Firstly, the company is incorporated/ registered with the Registrar of Companies under the Companies Ordinance, 1984 and then it is to be registered (licensed) with the Registrar Modaraba of SECP as a Modaraba Management Company (MMC). The Modaraba or Modaraba Fund (pool of funds) created through public subscription (IPO) has to be listed on stock exchange(s). The Modaraba can undertake only Shariah compliant businesses approved by the Religious Board (the Board) duly appointed by the Federal Government for the Modarabas by notification in the official Gazette. The Board has approved a number of agreements for carrying out the business of modarabas and the management companies are bound to follow these agreements which include Trading Agreements (Murabaha, Salam, Ijarah and Istisna), Financing Agreements (Modaraba, Musharakah) etc. Except for commercial banking a modaraba can do every business in the financial sector subject to compliance with Shariah principles. Unlike non-banking finance companies (NBFCs), a modaraba is not required to obtain the license for each business activity in the non-banking financial sector and it can undertake a number of businesses under one umbrella. Currently, Modarabas are engaged in a wide range of business activities such as trading, import and export of various permissible commodities, manufacturing, Ijarah, Murabaha Financing, Musharakah Financing, Investment in equity market, brokerage house business, etc. Primarily, the funds are raised by the Modaraba by issuance of modaraba certificates to the general public. For generating further funds, the Religious Board has approved various non-equity based instruments such as Certificate of Musharakah (COM), Certificate of Investment (Modaraba), TFCs (Musharakah based) & Sukuk etc.
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The joint session of the parliament has recently approved the amendments in the Modaraba Ordinance empowering the SECP to make Regulations and issue circulars, code and guidelines etc. so as to strengthen regulatory framework for the Modaraba sector. 5.3 Tax benefit Section 37 of the Modaraba Ordinance provides that the income of the Modaraba shall be exempt from tax under Income Tax Ordinance, 1979, if not less than ninety percent of its profits in a year is distributed to the holders of the Modaraba Certificates. 5.4 Issues Following are the weaknesses of Modaraba sector:
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NBF Sector Reform Committee Report Part II: Review of NBF Sector in Other Jurisdictions
Part II Review of NBF Sector in Other Jurisdictions
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Chapter 1: Non-banking financial services

1.1 Investment finance services, leasing and housing finance services In order to review our existing business model of Cluster One entities for a sustainable development of NBF Sector, the study of NBF Sector models in Malaysia, Hong Kong, India, Singapore and United States of America was carried out and can be summarized as under:
For comparative purposes, the foreign currencies, wherever applicable have been converted into Pak Rupees using exchange rate as on June 30, 2012.
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NBF Sector Reform Committee Report Part II: Review of NBF Sector in Other Jurisdictions Chapter 1: Non-banking financial services
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The study of above five international jurisdictions reveals the following conclusions: i. Deposit taking activities are not regulated by Capital Market Regulator (CMR), rather such activities are solely regulated by the Banking Regulator (BR). In case, the entities engaged in capital market activities are also into deposit taking business, such entities are jointly regulated by the BR and CMR.
ii. Housing finance and leasing whether deposit taking or not are not regulated by CMR. iii. Non-deposit taking Investment banking activities are regulated by CMR. iv. In case where deposit taking is allowed, even then such entities are not at par with commercial banks i.e. they are restricted in terms of minimum deposit size, minimum duration of deposits, persons from whom deposit can be obtained, overall deposit limit, liquidity requirements etc.
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NBF Sector Reform Committee Report Part II: Review of NBF Sector in Other Jurisdictions Chapter 2: Asset management services

2.1 Retail investor base As stated earlier, one of the reasons for low retail penetration of mutual funds in Pakistan is the limited distribution outreach. Internationally, various distribution channels are available and used. Commercial banks sell asset management products along with other banking products. Insurance companies sell asset management products by packaging insurance features / products with them. Broker-dealers also sell asset management services with brokerage services and for this purpose use broker networks. Apart from these, non-traditional sales channel like mutual fund super markets, fee based financial advisers also exist in certain jurisdictions. A summary of the prevailing practices in terms of distribution network available and used in each of the jurisdictions is stated below:
i.
Costs associated with targeting retail investors
Expenses associated with marketing and distribution of mutual funds is one of the primary costs incurred for attracting retail investors. Whether the fund manager or the mutual fund bears this cost was an aspect that required review of other jurisdictions. Internationally, certain jurisdictions like the USA and India allow distribution and marketing expenses to be charged to the fund and investors. In the USA, the Securities and Exchange Commission (SEC) allowed the adoption of rule 12b-1 (that allows fund managers to charge fees for marketing/ distribution expenses) during the 1970s. However in 2010, the SEC has given a proposal in which mutual fund distribution and services fee will be capped at 0.25% of net assets per year.
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In India, marketing expense can be charged to the fund. However, as per directive issued by SEBI in 2009, front-end load which was deducted by an AMC is no longer permissible. Distributors of a mutual fund have to communicate to the investors, any upfront commission payable to distributors by the investor. Such commission is paid by the investor directly to the distributor by a separate cheque based on his assessment of various factors including the service rendered by the distributor. Besides marketing and distribution expenses, certain other expenses that are permissible to be charged to a fund were also studied in some other markets. Following is an international review of the expenses that are permissible to be charged to a mutual fund.
ii. High expense ratio As stated earlier, high expense ratio of a fund is also a reason for low retail penetration. Practices adopted in other jurisdictions for controlling / containing overall fund expense ratio was studied. In this regard, Principle prescribed by the International Organization of Securities Commissions (IOSCO) proposes disclosure of fees and charges in relation to the Collective Investment Scheme. As per this review, all regulators consider that it is both appropriate and necessary to take regulatory steps in the area of fees and expenses. As a general rule, regulators do not dictate the level of fees and expenses; the focus of regulatory approaches has been to promote a competitive and informed market, which will then ensure that fees and expenses are understood in the context of the type and quality of services provided. Regulatory steps rely on a combination of general principles, disclosure requirements, prohibited practices and precise rules. This combination varies among regulators depending on their regulatory framework and on their assessment of the issues raised by fees and expenses. IOSCO Technical Committee in 2003 completed the review of existing practices with respect to fees and expenses of CIS in various jurisdictions. According to the report, only Ireland has ceiling on the maximum expenses. The report also highlighted that six jurisdictions (Canada, Japan, Mexico, Spain, Sweden, and United States) have formally adopted a concept of Total Expense Ratio (TER) whereas Switzerland will shortly require the publication of a TER from all domestic and foreign CIS. In certain jurisdictions (Australia, France, Japan, Luxembourg, Mexico, Netherlands and the USA), there were no specific regulations regarding cost that can be charged to CIS though there may exist requirements on how fees may be charged to the CIS (as is the case in the US for distribution fees). Whereas, three jurisdictions (Canada, Hong Kong and UK) explicitly prohibit some specific costs being charged to the fund and eight jurisdictions (Brazil, France, Germany, Italy, Portugal, Spain, Switzerland and UK) have a list of authorized costs that may be charged to a CIS.
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In India, the regulator has imposed a cap on the overall expenses of a fund through following means: a. Prescribed list of admissible expenses. b. Cap on maximum management fee as given in Table below:
c. Cap on maximum expense ratio as given in Table below:
In Malaysia, the regulator uses the following techniques for expense charges to CIS: a. No cap on maximum expense ratio. b. No cap on maximum management fee. c. Disclosure of expense ratio. d. List of expense which can be charged to CIS Spanish mutual fund law is one of the few of its kind that imposes maximum levels on all kinds of mutual fund fees, including management fees. For mutual funds charging a management fee on assets under management, the maximum annual fee is 2.25% of assets under management. Annual custody fees may not exceed 0.40% of a funds assets. Finally, the maximum one-time sales charge (which includes front loads and redemption fees) is 5% of the amount bought or redeemed.
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a)
Management fee comparison
Following Table indicates the range of management fee charged by AMCs in four jurisdictions.
b)
Expense ratio in other jurisdictions
Summary of expense ratio in multiple jurisdictions, taken from research conducted on global mutual fund fees, is reproduced in Table below:-
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From the above research following key conclusions are derived in respect of expense ratio:
2.2 Ownership structure In economies such as the USA and UK, autonomous AMCs (ones that are not owned by financial institutions) are more prevalent. In Singapore and Hong Kong, foreign AMCs have established offices to undertake asset management services which may or may not be owned by financial institutions depending upon the country of origin. In India only 18% of total assets under management are managed by bank-owned AMCs. However, in Malaysia the AMCs are owned by financial institutions. The significant problem faced by financial institution owned AMCs is that it could be selling its products to clients that are in competition with parent company products.
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2.3 Fund management activities The extent to which a single entity is allowed to carry out fund management for multiple types of funds (REITs, Private Equity, Mutual Funds, Hedge Funds, other private pool, etc.), varies internationally, with no uniform practice being followed. Jurisdictions such as Malaysia and Hong Kong allow single license for mutual funds as well as REIT management services. Specific details are summarized below:
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2.4 Fund managers skill set Owing to their important role, fund managers in most countries are required to comply with stringent requirements. Barring a few countries (e.g. India), internationally licensing and certification requirements exist for fund managers and other key personnel of an AMC.
2.5 Capital requirements Capital requirement for management of CIS varies among the various jurisdictions studied. In the developed economies like the USA, capital requirement is low. In UK, capital requirement is linked with assets under management. Hong Kong and Singapore where many foreign domiciled AMCs operates, mandate low capital requirement. In Malaysia and India, however, capital requirements are at par with our regulatory requirements.
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2.6 NAV calculation by fund managers Based on the international research conducted, a management company may delegate back office activities to third parties but delegating and outsourcing to a third party does not relieve a management company or trustee from the responsibility for proper conduct of the delegated and outsourced activities. A management company or trustee remains responsible for the actions and omissions of its delegate or service provider as though they were its own actions and omissions.
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Practices being followed in different countries are listed below:
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Worldwide REITs comprise of properties which promise stable cash flows over a period of time. Equity, mortgage (debt) and hybrid REITs are found in different countries. Equity REITs generate revenue principally from rents of properties. Mortgage REITs lend money for mortgages to owners of real estate or for purchase of existing mortgages or mortgage-backed securities. Their revenues primarily consist of interest earned on mortgage loans. Hybrid REITs combine the investment strategies of equity REITs and mortgage REITs and invest in both properties as well as mortgages.
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3.1 Developmental REIT Development of property or construction work has not been found as the main investment strategy of REITs in other countries, except for Turkey. The table below provides insights in this regard.
The jurisdictions mentioned above compose 80% of World REITs on the basis of market capitalization (Ref: EPRA Global REIT Survey 2009 and Ref: Global REIT Report 2010) SECP introduced the concept of developmental REIT in the REIT framework, which is constructing and selling of the property. It is a significant departure from aforementioned international model of REITs. However, the return on investment in developmental REITs is expected to be higher than the rental REITS.
www.investopedia.com
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NBF Sector Reform Committee Report Part II: Review of NBF Sector in Other Jurisdictions Chapter 3: REIT management services
3.2 Fund size Some of the jurisdictions have specified minimum size for a REIT fund while others are silent on this aspect of the REITs as shown in the table below.
Source: EPRA Global REIT Survey 2009
3.3 RMC capital Different countries have varying capital requirements for RMCs as can be seen from the data given below:
The capital requirements are closely linked with the requirements of RMCs stake in the REIT scheme, the level of ethical standard of the fund managers conduct and legal system of the country.
Malaysian REIT guidelines
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3.4 RMC fee There are no uniform practices in respect of prescribing fee, both in terms of rate and the basis. Some countries have left it to the discretion of fund managers to levy fee, others have placed upper caps as reflected below:
3.5 Fund structure The REITs are found in corporate as well as trust structure as can be seen from the table below.
In Pakistan, the REITs can be set up in trust structure only.
Asian- Pacific REITs CFA Institute Correspondence with Mr. Elvin Fernandez former chairman of IVSC
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NBF Sector Reform Committee Report Part II: Review of NBF Sector in Other Jurisdictions Chapter 4: Private equity and venture capital management services

4.1 Features of PE&VC funds in other jurisdictions: Internationally, PE & VC are found in trust as well as in company structure. Comparative position reflecting features of PE & VC funds operating in different jurisdictions is tabulated below:
Source: AIF Regulations (India), Australian VC Act (Australia), VCC Guidelines (Malaysia) and Small Business VC Act (Canada)
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4.2 Main investors of PE funds in other jurisdictions Review of other jurisdictions like the USA, Canada, South Africa, Australia, etc., indicated that following types of investors contribute in the private equity funds:
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NBF Sector Reform Committee Report Part II: Review of NBF Sector in Other Jurisdictions Chapter 5: Modaraba management services
Chapter 5: Modaraba management services

Internationally, Modaraba is used as an Islamic financial product, whereas, in Pakistan, Modaraba is formed as a corporate entity. It is a unique model all over the world. Another corporate entity namely Modaraba Management Company (Modarib) manages the business of the Modaraba. Keeping in view the uniqueness of the Modaraba, its issues/problems cannot be compared internationally Based on international research, the overall position of the Islamic financial institutions and the products offered by them in Malaysia, Iran, Turkey and Bahrain is as under: Malaysia In Malaysia, separate legislation for Islamic banking exist side-by-side with those for the conventional banking system. Bank Negara Malaysia (the Central Bank) supervises and regulates commercial banks, investment banks, Islamic banks, finance companies (leasing and hire purchase businesses etc.). Islamic banks, finance companies and investment banks are allowed to raise deposit. There is 100% tax holidays for ten years for Islamic finance in Malaysia. Securities Commission Malaysia (the capital market regulator) regulates conventional as well as Islamic capital market. It issues licenses and regulates the activities i.e. equity market, derivatives, fund management, investment advisory, financial planning and private retirement schemes, takaful companies, Islamic REITs etc. Iran Central Bank of the Islamic Republic of Iran (the Central Bank) registers and grants license to commercial banks which are obliged to follow the Islamic banking principles. All banks have to comply with the Law of Usury (Interest) Free Banking. Only commercial banks raise deposits with the permission of the central bank. Investment banks (non-deposit taking), pension funds and investment companies are regulated by Securities and Exchange Organization (the Capital Market regulator). These institutions are obliged to provide Riba free products and services. A flat corporate tax rate of 25% is applicable. 15 years tax holiday is available in Iran for the institutions established in special Industrial Free Zones. Turkey In Turkey, Banking Regulation and Supervision Authority (BRSA) (the Central Bank) is the regulatory and supervisory authority which issue licenses to deposit banks (accepting deposit and granting loan), participation banks (interest free banking/Islamic banking - collecting fund through participation accounts and granting loan) and development & investment banks (granting loan and/or fulfill the duties assigned thereto by their special Laws). The conventional and participation banks are operating side by side. The supervision and inspection of banks, leasing and factoring institutions in Turkey is performed by BRSA. Banks are subject to regulation and supervision by the Capital Market Authority for their capital market operations. Capital Markets Board of Turkey (the Capital Market regulator) regulates Capital market institutions i.e. intermediary institutions (banks & brokerage firms), investment companies (including real estate investment trusts & venture capital companies), mutual funds (collective investment institutions), rating institutions, asset management, investment advisory etc. Corporate tax rate 25% is applicable in Turkey.
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Bahrain In Bahrain, a concept of single regulator structure is in place and the Central Bank of Bahrain (CBB), being a sole regulator, regulates and supervises both financial and capital market activities under the uniform standards, rules and regulations including the bourses law. The CBB incorporates, registers and grants license to banks and financial institutions like insurance firms (Takaful and re-Takaful), investment firms (dealing in securities; as brokers; managing assets; managing portfolios; consulting for dealing in securities; custodial services; arranging securities buying and selling transactions, etc.), specialized firms (personal, consumer, real estate, or residential financing etc.) and mutual funds. All banks and financial institutions in Bahrain are obliged to provide Islamic financial products and services. In addition to this, the CBB also regulates the precious metal exchange (commodity exchange). Except income of oil companies, there is no corporate tax in Bahrain.
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NBF Sector Reform Committee Report Part III: Way Forward
Part III Way Forward
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Chapter 1: Non-banking financial services

Keeping in view the study of international jurisdictions and lessons learnt from the past, the concept of activity based regulatory regime may be introduced and implemented in our country. In terms of activity based regime, capital market activities of all the entities including commercial banks and DFIs are to be regulated by Capital Market Regulator (CMR) i.e. SECP and deposit taking/ financing activities of all the financial sector participants are to be regulated by Banking Regulator (BR) i.e. SBP against the prevalent concept of entity based regulatory domain. The following regulatory regime based on the concept of CMR i.e. SECP and BR i.e. SBP is recommended for cluster one activities: 1.1 Suggested regime for cluster one activities a) Investment finance services
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NBF Sector Reform Committee Report Part III: Way Forward Chapter 1: Non-banking financial services
The suggested IFS regime consists of two business models i.e. one without deposit taking and the other with deposit taking as well as lending activities. Both the models are in line with international best practices. The proposed non-deposit taking IFS model (to be solely regulated by CMR i.e. SECP) and proposed deposit taking and lending IFS model (to be jointly regulated by CMR i.e. SECP and BR i.e. SBP) are given below:
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b) Investment Advisory Services (IAS)
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c) Corporate Advisory Services (CAS)
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d) Underwriters
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e)
Leasing and housing finance services
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1.2 Comparison of present regulatory model with the suggested model The present and the proposed regimes for cluster one activities are given below:
Present regulatory regime (Entity based)
Proposed Regulatory Regime (Activity based)
After implementation of the activity based regulatory regime, SECP shall be responsible for supervision of capital market activities of all the financial market participants including financial institutions under SBP regulatory ambit whereas SBP shall be responsible for supervision of deposit taking and lending activities of all the financial market participants including financial institutions under SECP domain.
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1.3 Benefits of suggested regime over present regime The suggested regulatory regime for Cluster one activities is expected to addresses the issues highlighted above and would benefit the overall financial system as discussed below: i. Better resource mobilization: Cluster one entities presently rely on expensive sources of funding for financing their operations. Under the suggested regime, the leasing companies, housing finance companies and deposit taking investment finance companies would be regulated by SBP. These entities would have access to various cheap sources of funding available with SBP and would be able to better serve their target markets. The financial position of cluster one entities is expected to improve significantly owing to availability of similar cheap funding sources as are available to other entities regulated by SBP. The improved financial position of cluster one entities would not only restore depositors confidence but would also enable such entities to tap the debt and equity markets and obtain credit lines from other financial institutions for funding their operations.
ii. Level playing field: Presently, only few entities are performing cluster one activities after ensuring compliance with the prescribed regulatory requirements whereas a number of other entities are carrying out the same activities without compliance to any criteria. This leads to arbitrage within the financial system. As per the suggested regime for cluster one activities, an entity shall only perform cluster one activities after obtaining license/registration and ensuring compliance with prescribed regulatory requirements. This would eliminate the existing regulatory arbitrage, thus providing a level playing field to all market participants of the financial system. iii. Lender of last resort: It is difficult for financial institutions to overcome financial distress without the help of the lender of last resort. It was observed during the recent financial crises that a number of cluster one entities could not manage their liquidity problems as no support was available from the banking regulator. Under the proposed regulatory regime, leasing companies, housing finance companies and deposit taking investment finance companies would have access to the SBP discount window facility and other facilities available with SBP in times of financial distress. This in turn would help such entities in overcoming their financial problems/crisis. iv. Effective monitoring: As per the proposed regime for cluster one activities, SBP shall be monitoring the deposit taking and financing activities for the entire financial system whereas SECP shall be monitoring the capital market activities of the entire financial system. This activity based supervision would not only result in close monitoring of all the cluster one activities but would also improve market discipline. The suggested activity based regime is expected to arrest the continuous declining trend of this sector. v. Development of priority sectors: SBP has introduced a number of schemes for the development of SME sector which is the target market for leasing companies. Commercial banks are not able to provide the requisite financing to the SME sector at the desired level despite availability of cheap sources of funding and access to SME funds available with SBP. Under the proposed regulatory regime, leasing companies would have access to SME sector specific funds available with SBP. Leasing companies would be in a better position to cater to the needs of the SME sector thus contributing towards its development.
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vi. Depositors protection: Access of deposit taking NBFCs to SBP discount window facility coupled with existing clauses in the Banking Companies Ordinance regarding protection of small depositors, proposed Depositors Protection Fund Act, etc. will contribute significantly towards increasing the confidence of depositors in these entities. vii. Development of investment advisory services: Introduction of a detailed centralized regulatory framework for investment advisory services covering the activities of NBFCs, brokerage houses, commercial banks and other entities, coupled with separate regulatory frameworks for simple advice, non-discretionary and discretionary portfolio management, and private fund management, etc. will contribute significantly towards development of investment advisory services and in turn to the development of capital markets in Pakistan. viii. Development of investment finance services: Presently investment finance companies are focusing on quasi commercial banking activities instead of core investment finance services. With the implementation of the proposed regulatory regime, investment finance companies would focus on their core activities i.e. investment advisory, corporate advisory, etc. ix. Reduced systemic risk: The proposed regulatory framework will contain the regulatory arbitrage since all major financial sector activities would be regulated. This will result in reducing the overall systemic risk of the financial system.
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1.4 Suggested measures for prevalent regime for Cluster One Activities/Entities The proposed activity based regulatory structure may take some time for implementation as it requires consent of different stakeholders as well as amendments in various statutes. In order to smoothly run the existing investment finance companies and leasing companies presently under SECPs regulatory purview, and to safeguard the interest of various stakeholders, the following measures shall be taken: i. Cluster one entities engaged in deposit taking/lending activities shall be required to maintain Capital Adequacy Ratio (CAR) of 8% for the first two years and 10% from third year onwards.
ii. The deposits of cluster one entities, having valid deposit raising permission, shall be capped in the manner given below:
iii. The cluster one entities having deposit raising permission shall be required to put in place an effective Asset Liability Management System. These entities shall monitor their cumulative mismatches (running total) in maturity of assets and liabilities across all time buckets by establishing internal prudential limits. However, the mismatches (negative gap) during 1-30 days shall not exceed 10% of the total assets. iv. Deposit taking cluster one entities shall be required to get approval from SECP for each deposit taking scheme, product and instrument to be offered to the investors. The details of all the deposit taking schemes, products and instruments would be placed on SECPs website for information of the general public. Moreover, deposit taking cluster one entities shall be required to seek prior approval of SECP for any advertisements aimed at inviting public to participate in deposit taking schemes since, at present, no formal guidelines exist for the advertisements by NBFCs. SECP may, however, introduce guidelines for advertisements by NBF sector to ensure standardized disclosures and release of factual information to enable investors to make informed decisions. Once these guidelines are issued the condition of seeking prior approval may be withdrawn. v. Aggregate liabilities including non-fund based liabilities of a cluster one entity shall not exceed 10 times of its equity against the existing limit of 20 times. Non-fund based liabilities of cluster one entities shall not exceed the limits given below:
vi. Total fund based and non- fund based exposure to a single person shall be reduced from existing limit of 30% of equity of an NBFC to 20%. Maximum fund based exposure to a single
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person shall be reduced from existing limit of 20% of the equity of an NBFC to 15%. vii. Total fund based and non-fund based exposure to a group shall be reduced from existing limit of 50% of equity of an NBFC to 25%. Maximum fund based exposure to a group shall be reduced from existing limit of 35% of the equity of an NBFC to 20%. viii. The requirement of ensuring 1:1 current ratio of a borrower shall be withdrawn. However, cluster one entities shall prescribe the minimum current ratio under their credit policy keeping in view the quality of the current assets, nature of the current liabilities, nature of industry to which borrower belongs, average size of current ratio of that industry, appropriateness of risk mitigants available to the cluster one entity, etc. ix. Long term strategic overseas investments made by cluster one entities in similar line of business may be excluded from the limit of unquoted investments (Rule 7 (2) (h) of NBFC Rules 2003) x. Closure of bank account, account with a broker or branch shall require approval of management instead of board of directors. xi. Amendment to the existing definition of investment finance services shall be introduced to include its various components i.e. stock brokerage services, investment advisory services, corporate advisory services, securities financing services and securities underwriting services. Moreover, definition of each said component of IFS shall be incorporated and detailed guidelines for each such component of IFS shall be issued. xii. The existing restriction on deposit taking of investment finance companies with stock brokerage license shall continue. xiii. The possibility of arranging necessary liquidity/funding lines for cluster one entities shall be explored. xiv. As per the existing regulatory framework, existing deposit taking investment finance and leasing companies are required to comply with minimum equity of Rs 1 billion and Rs 700 million respectively by June 30, 2013. However, keeping in view the problems faced by these entities in complying with the enhanced equity requirements, the time for compliance with the enhanced minimum equity requirement has been extended till June 30, 2018. Cluster one entities shall now comply with the minimum equity requirement in the manner given below:
xv. Investment finance companies which intend to provide investment finance services and also to engage in deposit taking/lending activities shall be regulated jointly by SECP and SBP as per the proposed regulatory regime. However, existing investment finance companies providing investment finance services and also engaged in deposit taking/lending activities may be given sufficient time to decide about their future business model i.e. whether they want to be classified as service providers for capital markets only (to be regulated by SECP) or want to
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continue with their deposit taking/lending activities as well (to be jointly regulated by SECP and SBP). In addition to the above interim measures, SECP shall introduce a separate regulatory regime to encourage mid-size non-deposit taking cluster one entities and appropriate amendments in the prevalent NBFC regulatory framework shall be made to introduce a conducive and relaxed regime for non-deposit taking cluster one entities. The minimum equity requirement for undertaking nondeposit taking investment finance services, leasing and housing finance services may be introduced as under:
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1.5 Summary The way forward suggested by the Committee for Non-Banking Financial Services can be summarized as under:
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2.1 Proposals for enhancing retail penetration In order to enhance the investor base in mutual funds, dedicated efforts are required for improving the understanding of the public about mutual funds. For this purpose, multiple investor awareness seminars on a nationwide scale are needed with participation of all the stakeholders including SECP, MUFAP, stock exchanges, CDC, NCCPL, etc. The ban on AMCs with respect to management fee sharing and reduction in tax arbitrage for commercial banks (which hold a major portion of mutual fund units) in terms of their investment in mutual funds, are expected to facilitate broadening of the investor base. However, these steps alone may not be sufficient to achieve the desired objective of broadening the investor base. It is therefore necessary to consider and deliberate other initiatives. With this objective in mind, following initiatives have been considered in determining the future course of action for enhancing retail penetration. These incentives / proposals broadly cover the following aspects: a. Incentives for AMCs to target retail investors. b. Development of own branch network by AMCs. c. Distribution of mutual funds through stock exchanges. d. Distribution of mutual funds through other channels. e. Product innovation. f. Multiple classes of units. g. Introduction of expense ratio. a. Incentives for AMCs to target retail investors In order to incentivize AMCs to attract retail investors in the mutual fund industry, following may be considered:
(i) Charging of a certain percentage of marketing and selling / distribution expenses to the fund
One of the arguments given by market participants for limited retail participation in mutual funds has been that AMCs are not allowed to charge the fund any marketing and selling expenses for sale of fund units. Owing to this restriction, coupled with the limited resources of AMCs, widespread distribution of mutual funds becomes difficult. In line with the practices in some jurisdictions, such as USA and India, where distribution and marketing expenses can be charged to the fund / investors (subject to certain conditions), we may consider allowing the AMCs to charge marketing and distribution / selling expenses to the funds for a predetermined time period (e.g. 3 to 5 years). The outcome of this practice in terms of its overall impact on the mutual funds industry in general and particular AMCs and their funds can be subsequently assessed. Permission to the AMCs to charge selling and marketing / distribution expense to the fund may be subject to the following conditions:
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NBF Sector Reform Committee Report Part III: Way Forward Chapter 2: Asset management services
(a) Distribution and marketing expense to be charged as a percentage of the net assets of the fund, will be subject to a maximum of actual expenses incurred or cap of 0.5%, whichever is lower. These expenses may be proportionately charged to all funds under management of an AMC. (b) An AMC charging these expenses to funds under its management shall be fully responsible for the effective and proper utilization of these funds in the long-term interest of its unit-holders / investors. (c) The Trustee shall reimburse the distribution and marketing expenses to the AMC after ensuring proper utilization of these funds for increasing retail participation. (d) The marketing and distribution expenses chargeable to a fund will be eligible for utilization of payment of commissions to external distributors, rents and utilities linked to AMCs retail distribution network, sales related back office expense, advertising, seminars and other promotional expenses such as printing of brochures. (e) In respect of AMCs own branch network, it shall deploy trained and competent staff and implement necessary infrastructure to cater to needs of its clients in order to be eligible for such compensation. (f) Enhanced disclosures through the funds periodic accounts in relation to the amount of fees and expenses charged to the fund
(ii) Charging of certain other expenses (e.g. NAV calculation, shariah advisory fee, bond pricing agency fee, etc.) to fund
Expenses that are permissible to be charged to a fund exclude expenses for registrar services, accounting and valuation services or shariah advisory. The benefits of these services are derived by the unit-holders in their normal course of receiving the asset management services but the expenses are borne by the AMCs consequently reducing their profitability and hence their ability to expand the branch and distribution network. Therefore, in order to facilitate AMCs to improve their profitability and to enable them to incur expenditure on establishing / expanding branch and distribution network, these expenses may be allowed to be charged to funds on actual basis subject to a cap as disclosed in the constitutive documents of a fund. In order to promote retail/individual investor base, substantial reduction (up to 50%) may be considered in the annual regulatory fee payable by a fund to the SECP in the next three years, provided such funds have at least 1,000 investors and more than 50% of their ownership is held by individuals/ household investors (in terms of the funds net assets). In addition, reduction in initial fund registration fee of the SECP, in case of series of capital protected funds may also be considered.
(iii) Reduction in SECP fee
b. Development of own branch network by AMCs At present distribution of mutual funds is being done primarily by the AMCs themselves and only a small proportion of funds are sold / distributed through commercial banks, stockbrokerage houses and independent distributors.
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High level of participation of the public and retail investors can be made possible only by ensuring a wide distribution network. Given the limited role of banks and other entities as distributors, and in order to ensure nationwide distribution of mutual funds, it is suggested for every AMC to have presence in a minimum 21cities in the next 10 years. AMCs will be required to expand their presence by opening branches / retail outlets as given in the Table below. The expenses associated with setting up or running of these branches / retail outlets may be met out of the selling and distribution expenses (to be charged to the fund) for expansion of outreach of mutual fund to retail investors. It will not be mandatory for AMCs that already have requisite presence (through minimum number of branches / retail outlets in the required number of cities) to open any new branches.
*Branch / retail outlet may be an independent branch of an AMC, separate counter placed in a bank, insurance company, postal office, telecom company, etc.
Moreover, AMCs may either singly or jointly (i.e. in collaboration with other AMCs / entities) establish distribution companies / branches / retail outlets for sale of mutual funds. The restrictions under existing regulatory framework in terms of investments by AMCs in unlisted companies may be relaxed in order to allow setting up of single or joint distribution companies for mutual funds, subject to compliance with other requirements. c. Distribution of Mutual Funds through Stock Exchanges The efforts to provide better and wider access of mutual funds to the retail investors can also be supplemented through involvement of the stock exchanges. In this respect, the trading platform and other infrastructure of the stock exchanges for secondary market transactions can be modified and enhanced for enabling outreach of mutual funds to retail investors through involvement of the stockbrokers. To facilitate sale of mutual funds, the Securities and Exchange Board of India (SEBI) in 2009 allowed transaction (issuance and redemption) in mutual funds through stock brokers on stock exchange. Following SEBIs approval, the two Indian Exchanges, i.e. the National Stock Exchange of India (NSE) and the Bombay Stock Exchange (BSE) commenced offering such services in November-December, 2009 and the volumes have substantially increased indicating effectiveness of enhancing retail penetration through this system.
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On a similar pattern the stock exchanges in Pakistan may also develop an electronic system / platform for facilitating issuance and redemption of mutual fund units through brokers on daily NAV basis (as determined and disseminated by the AMCs). All stock exchange brokers may be provided access to such an automated, on-line order collection platform for offering issuance and redemption services in units of mutual funds to their clients. This will enable investors to place issuance or redemption orders for units of mutual funds through their brokers, similar to the mechanism for placing orders for trading through the secondary market in listed securities. However, the clients order will not be placed through the order matching system, rather on receipt of a client request, the broker will place an issuance/ redemption order for units of a particular fund (having a unique symbol for identification purposes) on the basis of NAV of the fund calculated and disseminated by an AMC on daily basis. The clearing and settlement for such orders will be carried out through NCCPL having direct interface with the central depository and banks. Besides expansion of outreach, such a system can offer additional benefits of: Opportunity for investors to invest in multiple asset classes through a single (dematerialzied) account (maintained with CDC). Option for brokerage firms to earn additional income in the form of commission on sale / distribution of mutual fund units. Offer investors an opportunity to earn some return on the unutilized margin held with brokers (for the purpose of trading / investing in the stock market), by investing surplus cash in money market / income funds. Automated order handling of issuance and redemption of units. Clearing and settlement of issuance / redemption transactions though NCCPL/CDC. Dissemination of details about the funds, aggregation of entire portfolio in a single place, easy monitoring of portfolio position and efficient investment decision making.
In this regard, Mutual Funds Association of Pakistan along with the stock exchanges, Central Depository Company and NCCPL may be engaged in speedy implementation of such a system. d. Distribution of Mutual Funds through other Channels Insurance companies regularly engage individual sales agents for distribution/sale of their insurance products. Given the large size of available pool of insurance agents (nearly 100,000) and their experience of selling insurance products, they can be certified through the Institute of Capital Markets about mutual funds. This will equip the already available pool of agents with requisite knowledge to enable them to efficiently engage in selling of mutual funds, thus offering clients a wider range of financial choices / products to choose from. e. Product innovation SECP is willing to offer operational flexibility to encourage product innovation by AMCs to effectively compete against banks in order to attract the large pool of savers. Through product innovation, Money Market Funds (with stringent investment avenues and requirements) can compete with banking products e.g. if AMCs can make an agreement with a commercial bank for issuance of co-branded cheque books and ATM cards for their unit holders allow85
ing them to withdraw, say 90% of their aggregate investment on a single day. There can be various other such innovative ideas and SECP would welcome these with a very quick turnaround time. f. Multiple classes of units
AMCs may offer lower management fee to their investors who bring large ticket investments in the mutual fund, given that active marketing and distribution network is not required to attract such investors and such large investment bring economies of scale for the overall fund. In November 2011, permission was granted to a mutual fund to offer different classes of units with different levels of management fee based on the investment amount which may be allowed on an industry-wide basis. Hence AMCs may offer different classes of units of mutual funds for retail and institutional investors with different level of management fee based on investment amount. g. Introduction of expense ratio Various concepts discussed above, if implemented, would lead to certain additional costs / expenses to be charged to the fund. Thus there is a need for introducing the concept of Total Expense Ratio (TER) , a practice being followed in multiple jurisdictions.
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The present regulatory framework neither covers the concept of expense ratio nor requires mutual funds to disclose their expense ratio. With respect to the fund expenses, regulatory framework prescribes following limits: a. Maximum cap of management fee of 3% for all funds in first five years and 2% for subsequent years. b. List of admissible expenses that can be charged to a fund. Internationally, such as in India and Malaysia, as discussed in Part II, the regulatory requirements in respect of a funds total expense ratio are clearly specified. For instance in India, there is a cap on total expenses of a fund in three different ways: a. List of admissible expenses is prescribed. b. Cap on management fee. c. Cap on the TER. Likewise, in Malaysia, the following mechanism is put in place to control expenses charged to a fund. a. List of expenses that can be charged to a fund are specified. b. Disclosure of expense ratio, although no cap on management fee or on maximum expense ratio has been specified.
TER represents the ratio of the funds total operating costs to its average net assets and is calculated at least once a year
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Summary of findings of SECPs in-house study of the expense ratio and management fee of different types of funds in various jurisdictions is:
It is apparent that the management fee and total expense ratio in respect of the mutual funds industry in Pakistan is on the higher side. In order to make the mutual funds an attractive product for retail investors, following strategy regarding expense ratio is proposed: a. Capping of maximum expense ratio at 4% for equity funds, 2% for income funds and 2% for money market funds. For the purpose of cap on the total expense ratio, the costs incurred in relation to any government levy on funds such as sales tax, Workers Welfare Fund or SECP fee shall be excluded. b. Capping of management fee at 2% for equity funds, 1.5% for income funds and 1% for money market funds. c. SECP will prescribe a list of eligible expenses by allowing some additional expenses like marketing, accounting, etc. d. Mandatory disclosures by AMCs of all expenses charged to the fund in periodic accounts and fund manager report along with the expense ratio to enable investors to evaluate cost efficiency of a fund. 2.2 Majority bank owned AMCs opportunity or limiting competition In Pakistan majority of AMCs are owned by financial institutions. As discussed in Part II, bank owned as well as non-bank owned ownership structures have been observed in different jurisdictions. Owing to the varied practices, no change is being recommended at this stage. Notwithstanding, the risks, the benefits of bank dominated AMCs managing bulk of the mutual funds are 1) banks financial muscle to support business expansion through equity injection or withstanding periods of financial distress; and 2) the likelihood that the management experience of running a bank over many years may benefit in managing asset management business successfully. In addition, the existing branch network of banks can be leveraged for distribution of mutual fund units. In contrast, independent, non-bank owned AMCs also offer some advantages over their bankowned counterparts. An independent AMC is better positioned to advise general public about the benefits of investing in mutual funds versus holding money in bank deposits. Bank-owned AMCs may be less inclined to follow this path owing to inherent conflict of banks because they earn larger spreads on the deposits than the fee earned by their AMCs. High level of dependence on banks in terms of development of the mutual funds industry may be counterproductive. Therefore, having independent AMCs can lead to a healthy competition in the financial sector through alternate financial products / services which the public can use for savings purposes.
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2.3 Multiple fund management activities As some international jurisdictions permit multiple fund management activities by AMCs, the same concept may also be considered. An AMC, in addition to managing mutual funds, may be allowed fund management activities relating to REITs and PE & VC funds. However, such consideration shall be subject to ensuring the following conditions: i If an AMC has sound track record of managing investor funds and can demonstrate that it has the right people having technical expertise which conforms to the fit and proper criteria specified for RMCs, they may be given the license to manage REITs. Separate / dedicated fund managers having relevant experience appointed for each separate fund / types of investments being managed. An AMC which also intends to undertake REIT management services shall fulfill additional capital adequacy requirements of at least Rs. 30 million (i.e. in addition to the equity requirements prescribed for providing assets management services).
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iii No material conflict of interest should exist across different activities; iv Key personnel, systems, bank accounts, etc. segregated activity wise and introduction of systems and policies ensuring Chinese Walls. 2.4 Fund managers skill set It is imperative to institute specific academic and experience requirements for fund managers to ensure high ethical standards and quality fund management. Therefore mandatory licensing or certification requirements may be introduced for fund managers and other key personnel in consultation with the Institute of Capital Markets. 2.5 Capital requirements for AMCs Given that the services being offered by AMCs are specialized in nature and require dedicated services to be offered on an ongoing basis, there is a need to ensure their financial viability. Through introduction of minimum capital requirements, it is ensured that capital is sufficient for establishing requisite infrastructure and systems, deploy quality human capital and have an ability to sustain business losses. An AMC also requires additional financial resources for establishing a reasonable distribution network for sale of its mutual funds. The existing capital requirement of Rs. 200 million for an AMC is at par with the requirements in Malaysia and India. As mentioned above, sufficient capital is imperative to ensure smooth operations and loss-absorption. Therefore, no change to the minimum capital requirement is being recommended. 2.6 Independent NAV calculation Review of Regulations in India, Malaysia, UK & Hong Kong reveals that it is the responsibility of the Management Company to calculate Net Asset Value (NAV) and to value Mutual Funds assets. However, a Management Company may delegate back office activities to third parties as already permitted in Pakistan and in the said jurisdictions as well. Among the third-parties to whom the back office NAV calculation function can be delegated may include the trustee as well as a Bond Pricing Agency.
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An AMC will still be responsible even if this function is delegated to a third party. In addition, the trustee of the fund will need to ensure verification that valuation function is being performed satisfactorily by the AMC or its delegate. In view of the above, no change is proposed in the present framework to mandate outsourcing of calculation of NAV by the AMC to a third party. 2.7 Independent board of trustees It is important that the Trustee of mutual funds form an independent Board of Trustees consisting of two or three adequately suited members (appointed by the trustee) who are competent to approve the funds accounts and question the performance of each fund. These Trustee Board members should be allowed to be on Boards of up to five to seven Funds. The cost (fee) of such members would have to be paid by the respective Fund. 2.8 Revamping of open-end funds financial statements The financial reports of open end funds should be based on the growth in NAV and performance relative to benchmarks and peers. Therefore, it is suggested that financial statements for open end funds may be redesigned to reflect the true performance for facilitating investors in making informed investor decisions. 2.9 Series of capital protected funds In order to provide this product on an ongoing basis and to minimize the high level of documentation and approvals required, it is suggested to allow AMCs to launch series of capital protected funds of various durations having single set of constitutive document. 2.10 Development of debt capital market The long-term solution of the issues associated with debt securities lies in having higher trading volumes by encouraging participation through the Bond Automated Trading System (BATS). Trading through BATS will not only provide liquidity and transparency to the investors but will also lead to fair price discovery of debt securities. In addition, reporting of all transactions in debt securities (including those which are unlisted on an exchange) through a centralized system for capturing accurate price information is highly recommended. Furthermore, having an independent bond pricing agency to price illiquid debt securities will also help. SECP has already approved draft regulations for Bond Pricing Agencies for public consultation. In order to make the role of rating agencies more effective, it is imperative that they are stringently regulated by the SECP and criteria must be developed to cancel the rating agencys license if changes or modifications in ratings are excessive and not backed by change in fundamentals. SECP has finalized the revised regulatory framework for credit rating agencies and will be sharing it with general public in the near future. Furthermore, SECP should register and properly regulate debenture trustees for which purpose Debenture Trustee Regulations have been introduced. The new regime for Credit Rating Agencies has already been finalized by the SECP.
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2.11 Summary The recommendations of the Committee for Asset Management Services can be summarized as under:
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NBF Sector Reform Committee Report Part III: Way Forward Chapter 3: REIT management services

3.1 Suggestions for improving REIT regulatory framework To address the issues linked with the existing framework, realize the potential presented by REITs for growth of capital markets and the economy, and to provide an alternate avenue of investment to the savers, the following measures are proposed: i. Fund size
Keeping in view the properties available in the market, the REIT fund size may be reduced to Rs 200 million for all the three kinds of REIT schemes, which is the minimum level prescribed by stock exchanges for listing. The reduction in REIT fund size will allow launching of medium and small size REIT projects having better potential for growth and higher return on investment. ii. RMCs stake in a REIT scheme As per existing regime, RMC must own minimum of 20% units of a REIT Scheme being managed by it till completion of the project. As RMC is in the business of managing properties, it may not be required to have such a high stake in a REIT Scheme. Similarly, RMCs may not have enough resources to acquire and retain investment in every REIT scheme they offer till completion of the projects. However, considering the fact that REIT business is at its introductory stage and the track record of RMCs is not available, some kind of arrangement needs to be put in place for ensuring continued commitment by RMC to complete a project. For this purpose, certain minimum investment by the RMC in the REIT scheme will help in tying up its interest with the project completion. Accordingly, following arrangements are recommended for mandatory holding by an RMC in a REIT Scheme: a. Mandatory holding by RMC in a REIT scheme may be reduced from 20% to 10%. b. RMC may fulfill the aforementioned requirement by holding the stake itself or in association with an investor or by arranging an investor to retain the holding in its place. iii. RMCs capital requirement As stated above, RMC may need to have some stake in the REIT schemes managed by it. Therefore, it needs a reasonable level of paid-up capital to meet that requirement. It will also need capital to service the initial cost of establishing an office, systems, HR, etc. Since the fund size has been proposed to be reduced, the equity requirements for RMC may be brought down from Rs. 200 to Rs. 50 million. The word capital may, however, be replaced with the term equity as has been stipulated in the case of rest of the participants of financial sector like AMCs, leasing companies, investment banks, etc. iv. Fee for RMCs Currently REIT model specify a fee up to 1% of the initial REIT Fund for developmental REIT scheme and up to 3% of operating income in case of rental REIT scheme. The fee should be structured in a manner that is sufficient to meet day to day needs of RMCs while retaining its significant interest in completion of REIT project and better management of the property. Therefore, the fixed fee prescribed in the Regulations may be enhanced and the concept of performance fee may also be introduced. In this regard, a base fee equal to maximum of 5% of the initial fund size instead of 1% and a performance fee not exceeding 15% of the return generated in excess of the
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benchmark may be introduced. An RMC shall clearly state the yield benchmark and resultant performance fee structure in offering document of the REIT schemes. As far as the payment of fixed fee to the RMC is concerned it may be paid on monthly basis whereas the performance fee may be credited to RMC at the time of final disposal of REIT assets to ensure that the performance fee is based on the actual realized value of the REIT project. The suggestion to link RMC fee with the NAV of the REIT Scheme was also deliberated and was not found feasible. The main reasons for not linking fee with NAV were 1) NAV of the REIT project is likely to rise due to inflation in which RMC has no performance role and 2) it may motivate RMC to inflate value. v. Borrowing and customer advances Under the current Regulations, REIT schemes are prohibited to use borrowed funds. However, customer advances may be used up to 30 % of value of a project. It was noted that in some jurisdictions, borrowing is allowed to REITs, however, detailed examination revealed that Pakistan is perhaps the only country where developmental REIT is allowed. The developmental REIT carries additional risks of delays, cost overruns, below target sales, cash inflows, changes in economic and legal conditions, etc. Keeping in view the above, RMCs may be allowed to utilize customer advance up to 70% of the sale value of the project instead of existing limit of 30 % specified in the REIT Regulations to complete the project. REITs may be allowed to utilize borrowed money to cater for any unforeseen circumstances and borrowing shall be unsecured (i.e. no REIT asset in any form shall be mortgaged, pledged, hypothecated, etc. for borrowing). The unsecured borrowing shall not exceed 30% of the initial value of the land at which it was transferred to the REIT Scheme. Some likely implications of using borrowed money, particularly when borrowed against REIT property have been stated in Chapter 3 of Part II of this report. vi. Public offer The current REIT Regulations stipulate that at least 25 % of the units of a REIT scheme shall be offered to public. As a matter of principle, like other businesses, the size of public offer of REIT Schemes may be left to the Listing Regulations of the relevant stock exchange. However, as already discussed in sub-para (v), the investment in Developmental REIT is riskier than investment in Rental REIT, therefore, only qualified investors may be allowed to invest in such REITs. To this end, face value of the unit of Developmental REITs may be fixed at Rs. 100,000/-. vii. REITs in other cities Under the current Regulations, REITs can be set up only in federal and provincial capitals. There is considerable potential in other cities with robust commercial and business activity. Therefore, it is desirable to include other cities among the existing eligible cities where REITS can be established. SECP will look at the possibility of allowing REITs in other cities after considering the relevant factors like population, infrastructure, law and order, commercial activity, etc. viii. AMCs to manage REIT schemes AMCs have frequent interaction with investors in the capital markets and have already incurred expenditure on evolving infrastructure facilities. However, AMCs have the drawback that they do not possess expertise of dealing in real estate. In 2008, this matter was discussed and it was
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NBF Sector Reform Committee Report Part III: Way Forward Chapter 3: REIT management services
concluded that the business of REITs which includes constructing property is a specialized business and AMCs generally lack the expertise to manage and build properties, therefore, it shall be managed by establishing a separate entity i.e. RMC. The issue has been deliberated again and it is concluded that, if an AMC has proven track record of managing investors funds in the best interest of unit holders and is ready to induct people having technical expertise which conforms to the fit and proper criteria specified for RMCs, they may be given the license to manage REITs. An AMC which also intends to undertake REIT management services shall have to increase its equity by Rs.30 million in addition to the equity requirements prescribed for undertaking asset management services. ix. Suggested process for registration of REIT scheme In addition to the issues discussed above, the existing process of registration of REIT schemes was reviewed to make it simpler, reduce turnaround time and facilitate launch of REIT schemes. The revised approval flow of registration and launch of REIT schemes is as follows:
Suggested Product Approval Flow
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3.2 Summary The recommendations of the Committee with regard to REIT Management Services can be summarized as under:
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NBF Sector Reform Committee Report Part III: Way Forward Chapter 4: Private equity and venture capital management services

4.1 Suggestions for improving PE & VC regulatory framework In order to address the issues and irritants as well as facilitate equity investments in PE & VC, the following measures are proposed: i. Capital requirement for Private Equity Fund Manager
Private equity funds have flourished in loosely regulated but judiciously administered jurisdictions, where the ethical standards for management of third party funds are well developed. Fund managers need limited HR, mostly rewarded on performance. Office, system and infrastructure requirements are also limited as compared to AMCs. Therefore, capital requirement of fund management companies needs to be reduced. The requirements of paid up capital of private equity fund managers may be reduced from current level of Rs. 30 million to Rs. 20 million. ii. Minimum investment in the Fund The limit of minimum investment by any single investor in the fund which is currently set at Rs. 10 million, needs downward revision to a level of Rs. 3 million keeping in view the financial capability and risk appetite of investors community in Pakistan. iii. Removal of upper cap on investment The current PE&VC Regulations require that the connected persons along with the Fund Management Company (FMC) cannot hold more than 30% of the units of the fund. Keeping in view lack of investors interest in the private equity sector, the fund management company and its associates may need to inject 100% equity in a fund initially. The requirement of capping the holding of FMC and connected persons may thus be removed to promote growth in the sector. The investors would not be keen to invest in private equity unless it emerges successfully out of its infancy stage. Track record of fund managers both in terms of technical ability and professional integrity is of paramount significance for persuading investors to spare money for new ventures. iv. Validity of fund management license The investment horizon in private equity venture can extend beyond five years for fruitful results. The validity of license may be increased from current three (3) years to seven (7) years or it may be made perpetual provided fee is paid annually and relevant laws are adhered to by the fund manager. v. Permitting AMC to manage private equity fund In order to leverage on the professional knowledge, infrastructure facilities and relationships developed by AMCs with investors, it is desirable to allow them to manage private equity funds as well. However, only such AMCs may be given license to undertake private equity management services that have proven track record of managing investors funds in the best interest of unit holders and are able to demonstrate that they are willing to induct right people with requisite technical expertise to manage private equity funds. AMCs may not be required to increase their capital to undertake PE & VC activity.
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4.2 Fiscal and structural measures High risk free rate of return and current tax regime, the two factors beyond SECPs domain, hinder the growth of PE & VC sector. High returns on government serutities results in diversion of funds to fixed income instruments. The incentives built in the tax regime for private equity revolves around allowing distribution of income without any additional tax burden on investors. If there is no distribution there will be no utility of the tax incentive for the investor. The tax incentive needs to be structured so as to induce investors to contribute to private equity and venture funds. Following arrangement may be discussed and agreed between SECP, FBR and SBP. a. Government may identify target priority areas of investment such as low cost housing, low cost schooling, basic health care units, SMEs, infrastructure and export oriented industries. PE & VC funds may be offered financing/ investment depending on their performance. b. Current tax rate on private companies is higher than on AOPs. Private equity fund can only invest in businesses incorporated as companies. In order to encourage investment in the relatively better regulated corporate structure, it is desirable to rationalize tax structure for businesses run as private companies versus partnerships or sole proprietorships. Foreign investors prefer to invest in funds established in foreign jurisdictions. In order to induce investment from foreign investors, the following arrangement may be put in place in consultation with SBP: Local companies/ entrepreneurs may be facilitated to set up FMCs abroad. FMCs so incorporated shall establish private equity funds, which shall raise funds from international investors in foreign currencies and from local investors in Pak rupees. These funds shall invest in local market/companies to promote business activity.
4.3 Summary The recommendations of the Committee with regard to PE & VC can be summarized as under:
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NBF Sector Reform Committee Report Part III: Way Forward Chapter 5: Islamic finance and modarabas
Chapter 5: Islamic finance and modarabas

5.1 Suggestions for improving Modaraba regulatory framework In order to promote Islamic finance and modaraba in Pakistan and the growth of capital markets, the following measures are recommended: i. Implementation of activity based regulatory regime
The activity based regulatory regime suggested in Chapter 1 of this Part for cluster one entities, may also be introduced and implemented for Modarabas. Accordingly the deposit taking activities shall be supervised by SBP. However, registration, floatation and all other business activities of Modarabas except deposit taking activities shall be regulated by SECP. ii. Minimum equity requirement The concept of minimum equity requirements for Modarabas, in line with requirements for the other participants of financial sector, may be introduced. iii. Remuneration of modaraba company Section 18 of the Modaraba Ordinance and relevant rule of the Modaraba Rules shall be amended so as to increase the maximum limit of remuneration of the modaraba company from 10% to 15%. Further, the possibility of introducing the concept of performance/dividend payout based bonus/incentive for the modarabas which declares more than 20% dividend to its certificate holders shall be explored, in addition to the said remuneration of 15%. iv. Concept of AGM In line with the legal framework applicable to other corporate entities within the regulatory ambit of the SECP, the concept of annual general meeting for Modarabas may be introduced, subject to clearance of Religious Board. Moreover, the timeframe for the circulation of annual accounts may be reduced from 6 months to 4 months in line with other legal entities. v. Empowerment to certificate holders In line with the regulatory regime for mutual funds, the certificate holders of Modaraba may be empowered to initiate action for the change of management of a Modaraba. Further the provision for the voluntary winding up in line with the provisions of the Companies Ordinance may also be introduced. vi. Consolidation The voluntarily mergers of smaller Modarabas shall be encouraged so as to create strong entities. Transfer of management of dormant modarabas to new sponsors shall also be facilitated on case to case basis, keeping in view the fit and proper criteria. vii. Modaraba to undertake REIT business The Modarabas may be allowed to undertake real estate business activity subject to the compliance of regulatory requirements under the REITs Regulations.
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viii. Promotion of Islamic financial services/ products SECP in coordination with other key stakeholders shall take all necessary steps for promotion of Islamic Financial Services/ Products. ix. Resource mobilization Considering the dire need of cheaper funds for modarabas, SECP shall explore the possibilities of introducing new fund raising products for the sector under the arrangements of modaraba and musharakah. In addition to this, possibility of financial assistance of SBP shall be explored in obtaining lines of financing from Islamic Development Bank or its subsidiary ICD through the Ministry of Finance/ EAD. Necessary facilitation shall be extended to Modarabas in providing access to NBFI Sector Fund, SBP managed funds and multilateral agencies support, if any, for SME financing. x. Awareness The NBFI and Modaraba Association shall highlight the uniqueness and advantages of the concept of Modaraba through seminars, media coverage and collective publicity efforts etc.
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NBF Sector Reform Committee Report Part III: Way Forward Chapter 5: Islamic finance and modarabas
5.2 Summary The way forward suggested for Islamic Finance & Modarabas, actions required and the stakeholders involved can be summarized as under:
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NBF Sector Reform Committee Report Part III: Way Forward Chapter 6: Macro level issues
Chapter 6: Macro level issues

6.1 Introduction The macro environment impacts growth of all business sectors including activities of the NBF sector. Efforts of SECP to create an environment conducive for development of NBF sector will bear fruits only when the regulatory regime is in sync with the policy direction set by the government. The Committee understands that government is striving to promote image of Pakistan, increase savings rate, channelize savings to underserved sectors, evolve safety nets for old age survivals, etc. In order to achieve these objectives, government may also consider the following suggestions: 6.2 Enhancing savings rate and efficient allocations of savings The following table indicates that in terms of the overall saving rate, Pakistan ranks lowest among a number of countries in Asia.
Increasing the saving rate should be our national priority. This has been achieved in our neighbouring countries despite low incomes. Thus, the premise that people cannot save because of low income is not necessarily true. Most people above the poverty level do and can save, provided incentives are structured properly and necessary avenues for savings are made available to them. Currently, a large chunk of savings in the form of bank deposits earns negative real returns, as a result of which the purchasing power of these savings erodes over time. Savings rate cannot be increased as there is little incentive for public to save and financial institutions are shy to expand into the rural areas where disposable income has increased significantly in the recent past due to high commodity prices. Mutual funds can be a viable alternative for investors and can serve as a hedge against inflation. However, mutual funds have not yet been able to move beyond corporate clients and sophisticated investors. The taxation policy needs revision to improve the saving rate and in this respect following measures are suggested: i) Provide tax incentives for long term savings. The incentive should be in the form of tax deferral and not in the form of exemptions.
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ii) Interest income (whether called profit or otherwise) on deposits and NSS must be taxed at full rates. The current tax policy allows the wealthy to lawfully pay only 10% tax. iii) Banks can be encouraged to serve micro-level borrowers and underserved sectors i.e. SMEs, infrastructure, agriculture, housing, etc. by offering them fiscal incentives on lending to neglected sectors or by imposing a higher tax rate in case they do not meet the targets set by SBP. NSS have been subsidising savers (large and small) at the cost of tax payers. Whereas it is necessary to continue offering this vehicle to small savers especially in smaller towns and the rural areas but not to high net worth individuals. NSS investments by savers should be restricted to Rs. 5 million per adult citizen who is a registered tax payer and has declared savings of that amount (link through CNIC and NTN) and Rs. 1 million for non-taxpayers (link through CNIC). NBFCs must have a level playing field with the banks and NSS. Mutual funds should also have the advantages available to banks in the form of the secrecy protection available to bank deposit holders. Ideally, there should be full disclosure for investments across the board. 6.3 Promoting image of Pakistan: Promoting image of Pakistan should be undertaken in a holistic manner through co-operation and co-ordination amongst the various stakeholders so as to get maximum mileage and at the same time have meaningful road shows. All existing efforts of marketing Pakistan however should continue and it should be ensured that the road shows are held at an opportune time i.e. when the international markets are conducive. For the purpose of marketing of Pakistan at international forums, there are multiple aspects in respect of which Pakistan is considered to have an edge over other countries and some of these areas are given below: i) A history and track record of good experience of several multi-national corporations; ii) Good corporate governance practices inculcated in business environment; iii) Well-developed infrastructure for secondary market equity trading; iv) Investor friendly tax regime; and v) Ownership control allowed in most industries (to foreign investors) and Pakistan ranks much better than neighbours on this score. In order to make effective marketing efforts, it is suggested that the SECP and the SBP should hold a roundtable with all stakeholders and should coordinate an annual Pakistan Road Show in all relevant cities of the world (with the Finance Minister or Prime Minister attending and driving these shows). 6.4 Attracting non-resident Pakistanis Non-Resident Pakistanis (NRPs) being a special source of funding need to be addressed separately. Investment for development of infrastructure facilities with government guarantee can be one of the avenues for investment by NRPs. For this, government can have equity or debt instruments on which NRPs can get a dollar return better than the market. The instrument should be cashable both in dollars or rupees with a government guarantee.
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NBF Sector Reform Committee Report Part III: Way Forward Chapter 6: Macro level issues
6.5 Channelling investments to underserved segments We need to channel investments towards underserved economic sectors and those sectors that need special attention such as micro finance, SME financing, social services, agriculture, housing, infrastructure development (including public-private partnerships through PSDP). In order to achieve this, the way forward is to provide fiscal incentives to commercial banks if they provide financing to investment banks, leasing, venture capital, private equity by levying activity based tax regime on banks. This will encourage banks to divert a portion of their resources to NBFCs. Similarly tax incentives (lower tax) on income earned by banks by selling life insurance, mutual funds and VPS should be offered. This will encourage (i) effective use of bank distribution network, (ii) develop life insurance, VPS and mutual funds industry and (iii) provision of long term capital for economic growth. Government can co-invest with banks through Special Purpose Vehicles (SPVs) such as REITS, PE Funds, etc. This will ensure that the government does not have to follow the time consuming process of PC-1s, tendering, etc. and projects can be off the ground in a matter of a few months. The condition of our infrastructure facilities like roads, railways and aviation is not up to the mark. Development of these sectors requires heavy investment. Therefore, the government may evolve a system to raise and channel private savings into developing and maintaining infrastructure facilities. Issue of project related bonds (not interest paying but related to cash flows) both for existing as well new projects could be one of the options available for funding. The bonds should have special features to attract and retain heavy investment for longer durations. To provide financing for young entrepreneurs, start-ups, venture capital, etc., the government should consider co-investing with PE & VC Funds run by FMCs. 6.6 Developing sustainable structures for old-age survival In order to avoid old-age poverty, it is desirable to increase private savings and channel regular flows to the productive and promising sectors of the market so as to evolve sustainable structures for elderly people. With Pakistan demographics, the young population can afford investment of these funds for up to forty years. A very large portion of infrastructure development could also be financed through such long-term savings. Ideally, there should be a system of compulsory savings towards old-age pension. Such legislation has been successfully adopted in some countries. Studies show that a person needs to save at least 20% to 25% of his/her working life earnings to achieve a reasonable pension income. It will require legislative commitment to make savings of that magnitude mandatory. However, if we are able to do so, it has the potential to change the fortune of the country. Move in this direction can begin with 10% and with a roadmap to achieve 25% over the next decade.
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6.7 Summary The recommendations of the Committee are summarized below:
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NBF Sector Reform Committee Report Part III: Way Forward Chapter 7: Summarized way forward and concerned authorities
Chapter 7: Summarized way forward and concerned authorities

7.1 SECP
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7.2 SECP and SBP
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NBF Sector Reform Committee Report Part III: Way Forward Chapter 7: Summarized way forward and concerned authorities
7.3 SBP
7.4 Federal Government
7.5 FBR
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Securities & Exchange Commission of Pakistan

NIC Building, 63 Jinnah Avenue, Islamabad, Pakistan PABX: +92 51 9207091-4 www.secp.gov.pk

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SECURITIES AND EXCHANGE COMMISSION OF PAKISTAN

Report of Non-Bank Financial Sector Reform Committee for Public Comments

Report of Non-Bank Financial Sector Reform Committee for Public Comments

Securities and Exchange Commission of Pakistan

Securities and Exchange Commission of Pakistan

Securities and Exchange Commission of Pakistan

Securities and Exchange Commission of Pakistan

NBF Sector Reform Committee Report Chairmans Message

Securities and Exchange Commission of Pakistan

NBF Sector Reform Committee Report Chairmans Message

Securities and Exchange Commission of Pakistan

Non-Bank Financial (NBF) Sector Reform Committee

Mr. Basheer A. Chowdhry Chairman, NBFI & Modaraba Association of Pakistan

Mr. Nasim Beg Chairman Arif Habib REIT Management Ltd.

NBF Sector Reform Committee Report Reform Committee

Mr. Najam Ali Chief Executive, Next Capital Ltd.

Securities and Exchange Commission of Pakistan

NBF Sector Reform Committee Report Introduction Pakistans financial sector

1. Pakistans financial sector

Securities and Exchange Commission of Pakistan

2. NBF sector under SECP purview

Securities and Exchange Commission of Pakistan

Part I NBF Sector Background and Issues

Securities and Exchange Commission of Pakistan

Chapter 1: Non-Banking financial services

Securities and Exchange Commission of Pakistan

Securities and Exchange Commission of Pakistan

1.4 Points to ponder

Chapter 2: Asset management services

450 400 350 300 250 200 150 100

410 127 291 227 87 67 44 126

160 147 140

295 101 238

112 23 14 1721 1725 50 17 23

Securities and Exchange Commission of Pakistan

Securities and Exchange Commission of Pakistan

2.4 Issues i. Limited retail investor base

Lack of branch network / limited distribution outreach

Securities and Exchange Commission of Pakistan

Securities and Exchange Commission of Pakistan

Securities and Exchange Commission of Pakistan

Securities and Exchange Commission of Pakistan

Chapter 3: REIT management services

Steps for incorporation of RMC

Securities and Exchange Commission of Pakistan

Steps for launch of REIT Scheme

Securities and Exchange Commission of Pakistan

iii. RMC capital

iv. RMC fee

vi. Limit on holding REIT units

vii. REITs in other cities

viii. Leased land and REIT scheme

Securities and Exchange Commission of Pakistan

3.5 Points to ponder

Chapter 4: Private equity and venture capital management services

Securities and Exchange Commission of Pakistan

4.4 Points to ponder

Chapter 5: Modaraba management services

Securities and Exchange Commission of Pakistan

5.5 Points to ponder

Part II Review of NBF Sector in Other Jurisdictions

Securities and Exchange Commission of Pakistan

Chapter 1: Non-banking financial services

Securities and Exchange Commission of Pakistan