KARACHI, Dec 6: The Ministry of Finance is deliberating on what to do with the Letter of Comfort (LoC) holders in National Investment Trust (NIT) in respect of their booking capital gains and the riddle is likely to be solved in the next few days.
But NIT chairman Tariq Iqbal Khan on Thursday dispelled rumours that the treatment to be meted out to the three banks: NBP; Bank of Punjab and Faysal Bank -- that hold majority of LoCs -- would not be at par.
Rumours were rife in the market that the state-run bank might get the ‘step motherly’ treatment. The chairman NIT, however, clarified: “Whatever the decision, all LoC holders will be treated alike, for otherwise it will not be fair,” he said.
The LoCs were issued by the government in 2001 to three banks that held substantial number of units in NIT so as to restrain those institutions from going for redemption at a time when the NIT was in dire financial straits. Of the 770 million units for which NIT had been issued back in 2001, NBP held 432 million units, followed by Bank of Punjab 149 million units and Faysal Bank 157 million units.
Against the abysmally low market price of Rs7 per unit at the time, the government had ‘guaranteed’ to pay price of Rs13.70 which ruled on August 2006 – the extended date of redemption. Along the years, the incremental benefit due to the difference of comfort price of Rs13.70 and the currently ruling NIT unit price of Rs60 has resulted in billion of rupees of windfall gains to the three banks.
On April 1, 2007, the Fund had been split into two parts; one representing LoCs and the other non-LoC holders. Financial institutions, banks and insurance companies that close their year on December 31 are making a scramble to convert their “unrealised gains” into “realised gains”, before the end of December, mainly as a means to pre-empt the levy of capital gains, in case the exemption on capital gains is not extended beyond June 30, 2008.
An income tax expert explained that according to the 7th schedule of the Income Tax Ordinance, 2001 as attached to the Finance Act, 2007, investments in equities made within the 12 months would be liable to tax at 35 per cent and that over more than a year at 10 per cent, unless the ‘unrealised gains’ is brought onto the books through a book entry by Dec 31, the end of their accounting year.
The LoC holders must first sell the units and then buy back them to take the ‘unrealised gains’ to the books.
The NIT chief observed that a number of proposals were being considered to resolve the issue and a decision of Ministry of Finance was awaited. He, however, reiterated that all LoC holders would receive similar treatment and no one would have a chance to grumble.