New regulations have been gazetted to operationalise the Government’s directive for tighter conditions on trading of securities on the Zimbabwe stock Exchange announced by President Mnangagwa on May 7.
This comes after the Government identified loopholes in sub-systems of the ZSE’s custodial functions believed to be part of activities fuelling parallel market activities.
Deficiencies in the systems allowed clients to sell shares and transfer the proceeds to third parties for speculative trading in forex.
Finance and Economic Development Minister Mthuli Ncube has since issued Statutory Instrument 103A to operationalise the policy measures adopted by the Government to stymie speculative trading in the market, especially in the equities and currency markets.
Where a holder of a securities dealer’s licence receives funds in their trust account from a non-client, the holder must immediately report that fact to the Financial Intelligence Unit and the relevant exchange, even if the person making the transfer is not known to the account holder, the SI read.
Malpractices by brokers on the ZSE formed part of illegal and speculative activities that fuelled depreciation of the Zimbabwean dollar through the transfer of funds between brokers’ sub-accounts, which has now been outlawed by authorities.
Besides the need to notify the authorities, the licence holder also has to follow the instructions of the Financial Intelligence Unit and retain the funds from a non-client pending forfeiture proceedings if the FIU informs the holder that there is a reasonable suspicion that the funds represent the proceeds of a serious offence as defined in the Money Laundering and Proceeds of Crime Act.
But they can return the funds to the non-client if the FIU informs the holder that there is no such suspicion
The move clips the wings of rogue brokers that had been involved in third party funding of accounts given every withdrawal from a sub-account will now need to be made into the account holder’s own bank account.
Licence holders are forbidden to transfer funds from one trading account to another, even if these funds are routed through the holder’s trust account, and even if the licence holder is instructed by any of their registered clients to do so.
The sole exception is to allow licence holders to transfer funds between the accounts of a single client with multiple accounts.
SI 103A also requires that whenever money deposited in the trust account of a holder of a securities dealer’s licence becomes payable to any registered client, the holder shall pay the money within the trading and payment times prescribed by the relevant authority to the registered client entitled to it and to not any other person.
To promote long term investments on the stock market, the Treasury has doubled capital gains tax on shares held for 270 days or less to 40 percent, bringing them into line with the maximum marginal tax rate for Pay as You Earn.
This in effect makes swift turnover of shares similar to an income source rather than an investment source.
Capital gains tax on selling equities was previously set at 20 percent for all trading and that lower level was seen as not deterrent enough to discourage speculative trading in shares. Perpetrators used price bubbles on the stock exchange to make huge profits and unleash attacks on the local currency in the parallel market.
The capital gains tax will remain at 20 percent for long term investors beyond 270 days.
Research firm Morgan and Co last month warned the new measures by the Government would have a negative impact on trading volumes on the local stock market and an increase in trading costs via the capital gains tax increment although did not state that this was the intention of the authorities to curb pure speculative behaviour while continuing to encourage investment.
“The new measures only serve as a circuit breaker, and we envisage trading activity to gradually recover in the medium term given the limited Zimbabwe dollar investment options for retail and institutional investors,” the research firm said.
Takudzwa Mapfumo, a retail trader, said the measures targeting speculative traders were counterproductive as they made it hard for small market players to navigate the market and take positions when opportunities to do so arise.
“The market has turned elitist again as it has shut the door for us retail investors, that 40 percent capital gains tax is not a deterrent but a prohibitive measure. As small traders we hop and jump around stocks searching for positions that make us better in the short term,” Mapfumo said.
The whole point of the measures as explained by the President were to recognise that the hopping around the market was a type of income activity and needed to be taxed similar to incomes.
One broker, on condition of anonymity said, “From what I am seeing so far, market activity has slowed down and is likely to stay so for the week as traders digest the information released. But it is just short term as investors will return on the ZSE for value preservation.”
President Mnangagwa early this month said, “The security agents of Government and the Financial Intelligence Unit shall, with immediate effect, enhance their roles to effectively monitor financial transactions in order to address the delinquent arbitrage behaviour in the economy.”
In order to deter people from trying to break the rules, civil penalties were also reviewed upwards by making appropriate legal changes in order to elevate some of the financial crimes to become criminal offenses which usually attract jail sentences.