A couple of weeks ago the Zimbabwe Stock Exchange published a document detailing a new circuit measure meant to bring sanity to the market and curb speculation which has become rife. Among other things, traders on the Zimbabwe stock exchange will now pay a steep capital gains tax of 40% instead of the usual 20% if they buy and dump shares in less than 270 days. This is meant to put a handle on the illicit flow of funds on the market that had seen the ZSE outperforming virtually any sector of the economy.
Government has noted regulatory weaknessses in the custodial system of the Zimbabwe Stock Exchnage sub-systems which are fueling parallel market activities. The current system allows cliens to sell shares and then transfer the proceeds to third parties for purposes of trading forex.
In addition, brokers can transfer funds from one client sub-account to another, which have become the basis for fueling parallel market activities. In view of this challenge, the following measures are being put into place,with immediate effect, to foster discipline on the Zimbabwe Stock Exchnage:
i. Iner account transfers between client sub-account with a broker is now prohibited;
ii. Third party fundingof client sub-accounts is no longer permitted;
iii. Transfer out of client sub account with a broker shall only be allowed to the customer’s bank account and not to third parties; and
iv The Zimbabwe Stock Exchange will have powers to undertake regular and continuos monitoring of broker transactions, share trading and custodial changes. For this purpose ana electronic monitoring system will be established in the Zimbabwe Stock Exchange urgently. The Securities and Exchange Commission will continue to undertake the overall regulatory role, including oversite of the Zimbabwe stock exchange
Review of Capital Gains Tax for Short Term Investments
Capital gains tax currently … at rate of 20% … has, with immediate effect, [been] reviewed for shares held for a period not exceeding 270 days to 40%Some measures targeted at the ZSE
This is not surprising really. It was kind of a long time coming. In recent weeks and months, we had seen a surge in people who are traditionally not investors touting the benefits of the ZSE even though they did not seem to understand that the benefits they were seeing were essentially a bubble brought about by the ease with which money could be moved in the shadows using shares. Here shares were being used in very much the same way that criminals use art, Bitcoin and other cryptocurrencies.
The brokerage account system is very similar to Econet/Ecocash’s agency system before the RBZ smashed it with a hammer. People could move freely using the system with very little oversight. The money would essentially disappear from the RBZ’s gaze as soon as it entered the Ecocash system. The same is happening here. Money that goes into brokerage accounts is essentially lost to the system and there ebbs and flows in naughty ways.
Bringing a monitoring system and levying a steep tax might put an end to all this but it’s kind of hard to predict whether this will work or not. Interest rates of 40% have failed to stop the black market before and now the government has been forced to stop lending altogether. Only time will tell how this all ends.