KARACHI, Nov 19: Adamjee Insurance Company Limited proposes to hold an extraordinary general meeting on Thursday, to seek shareholders’ approval for raising the value of its investments on the balance sheet from book value to ‘mark-to-market’ prices.
That would give it a huge windfall of realised capital gains.
As at the close of financial year December 2006, investments were carried on the books of the company at Rs4.503 billion, while the market value was calculated at almost twice that figure at Rs8.062 billion.
Adamjee’s investment in 11 million shares of associated company-- MCB Bank Limited (before acquisition of more shares earlier this year) alone produces capital gains of Rs2.3 billion, given the value of Rs1.4 billion at which the stocks stand in the books and market value of Rs3.7 billion based on the MCB stock price of Rs338 on Monday.
Analysts said numerous companies were opting to convert their ‘unrealised gains’ into ‘realised gains’, mainly as a means to pre-empt levy of capital gains tax, if at all it materialised.
The attempt would provide such companies with one time gain. The government has granted exemption of tax on capital gains till June 30, 2008, but analysts contend that for companies that close their financial year not in June -- but December, would have to capture the capital gains before December end.
In case they do not do so, such companies would be liable to levy of tax, in the unlikely event of the government deciding not to extend the exemption beyond June 30, 2008.
Ignoring the recent pull back, the stock market has experienced a bull run extending right from 2002, which has witnessed the KSE-100 index shoot up by an incredible 10,000 points.
For companies that are given to place the better part of their funds in equity investments, the market value of portfolio has risen hugely since they first acquired shares many years ago.
“It is perfectly legal for companies to book capital gains,” says a professional accountant. But market participants criticise the government for its short sightedness.
“For many years, the government has been pushing the exemption of tax on capital gains on yearly basis vide the federal budget,” says a major investor.
He said it puts corporates on the tenterhooks, wondering whether the hammer would drop after 12 months. Fund managers have been urging the government to announce exemption for a longer period so that both local and foreign investors can plan their investment strategy accordingly.
Former prime minister Shaukat Aziz was said to have given a patient hearing to the KSE board’s grumblings on the capital gains tax issue in a meeting a fortnight ago and promised to look into the matter. But as the PM himself faded into history, the issue of levy of tax on capital gains would continue to linger.
The Adamjee Insurance notice to the shareholders for extraordinary general meeting to be held on Thursday would resolve that: “the approval of shareholders of the company be and is hereby accorded in terms of Section 208 of the Companies Ordinance, 1984 for the investment of an amount of up to Rs6.250 billion in the purchase of the ordinary shares of MCB Bank Limited and such an investment may be made in one or more trenches”.
