The recently announced raft of measures by Government to protect the local currency through restricting arbitrage opportunities on the Zimbabwe Stock Exchange (ZSE) have been received with mixed views, with some brokers lamenting the regulations will impact negatively on volumes.
Others argued that the new measures have turned the bourse an “elitist” one, shutting some retail investors out.
In his address to the nation on Saturday evening, President Emerson Mnangagwa said: “Government has noted regulatory weaknesses in the custodial system of the Zimbabwe Stock Exchange sub-systems, which are fueling parallel market activities.
The current system allows clients to sell shares and then transfer the proceeds to third parties for purposes of trading forex.”
Brokers on the ZSE have been using their operations to fuel the demise of the Zimbabwean Dollar through the transfer of funds between sub-accounts, which has now been banned by authorities, according to Government.
However, Research firm Morgan and Co, said the new measures will have a negative impact on trading volumes on the local stock market given, limited to access to ZWL liquidity and an increase in trading costs via the capital gains tax increment.
“The new measures only serve as a circuit breaker, and we envisage trading activity to gradually recover in the medium term given the limited ZWL investment options for retail and institutional investors,” The research firm said.
The new measures have been put in place in order to reduce retail investors from seeking arbitrage opportunities on the stock market by speculatively buying and selling of shares.
Takudzwa Mapfumo, a retail trader said the measures were “counterproductive” as it makes it hard for small time traders 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.
However, the capital gains tax for shares held for more than 270 days will remain at 20 percent.
One broker on condition of anonymity said; “From what I am seeing so far, market activity has slowed down an 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.”
However, the regulations clip the wings of rogue brokers that have been involved in third party funding of accounts as now every withdrawal from a sub-account is to be made into the account holders respective bank account.
President Mnangagwa reaffirmed the nation that the ZSE will continue to have powers to undertake regular and continuous monitoring of broker transactions, share trading and custodial changes.
In order to implement this, it was agreed that, an electronic monitoring system will be established on the ZSE urgently and likewise the Securities and Exchange Commission (SEC) will continue to undertake the overall regulatory role including oversight of the ZSE.
Capital gains tax on selling equities had been pegged at 20 percent and this was seen as not deterrent enough from speculative buying and selling of shares. Perpetrators have used price bubbles on the stock exchange to take profits and attack the currency on the parallel market.
As a result, in the year to date, the local dollar has lost its value by 52.78 percent on the auction market and 96.07 percent on the parallel market. In the same period, the stock market has gained 151.30 percent and is now valued at $3.39 trillion.
“Accordingly, to promote long term investments on the stock market, Government has, with immediate effect, reviewed capital gains tax for shares held for a period not exceeding 270 days to 40 percent in line with individual maximum marginal tax rate for Pay as You Eam (PAYE),” President Mnangagwa said on Saturday.
This measure will deter short term speculative buying and selling of shares. The capital gains tax will remain at 20 percent for long term investors beyond 270 days.
President Mnangagwa concluded that, “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 behavior in the economy.”
In order to deter people from trying to break the rules, civil penalties will be reviewed upwards by making appropriate legal changes in order to elevate some of the financial crimes to become criminal offences which automatically attract jail sentence.