In a surprise move, the Pakistan Tehreek-e-Insaf (PTI) government through an Ordinance dated April 30, 2020 amended the Pakistan Muslim League-Nawaz’s (PML-N) enacted the Companies Law 2017, apparently to protect offshore companies’ mafia shareholders as well as some other vested interests.
Prior to general elections 2013, Pakistan was facing serious macroeconomic instability, an imminent sovereign default, high fiscal deficit, low GDP growth, high inflation, marginal increase in taxes collection, low forex reserves, fragile capital market and rising poverty in addition to 20-hour load-shedding daily. It was in FATF’s black list.
After winning the general election and taking office in June 2013, the PML-N economic team was mandated by Prime Minister Nawaz Sharif and the cabinet to deal with the above mentioned issues to save the country from predicted sovereign default and to implement an economic roadmap promised to the nation through the PML-N’s election manifesto. The team worked diligently and within the first 18 months, the economic direction began to change positively: macroeconomic indicators improved, Pakistan launched its euro bond successfully and got in FATF’s grey list from its black list.
Keeping in view the PML-N’s goals to achieve 6-7 percent GDP growth to create jobs and reduce poverty with low single-digit inflation and interest rates, corporate sector and capital market-related reforms were essential within next two years. It was with this objective in mind, this scribe along with the finance division engaged SECP Chairman Zafar Hijazi and his team. Together, we finalised in December 2014 the future roadmap with time lines to replace out-dated corporate legislations in Pakistan, to strictly implement the Stock Exchanges Corporatization, Demutualization and Integration Act 2012 (which was vehemently resisted by the three stock exchanges) and to implement required reforms to achieve maximum compliance of requirements of International Organisation of Securities Commission (IOSCO) to make our capital markets more transparent with an ultimate goal to regain status of Emerging Market in MSCI index. All these targets were achieved by mid-2017.
On the corporate legislation front, the targets achieved include passage of the Securities Act 2015 (replacing 46-year-old Securities and Exchange Ordinance 1969), the Future Market Act 2016, the Securities and Exchange Commission of Pakistan (Amendment) Act 2016, the Limited Liability Partnership Act 2016, and above all, the primary law governing the corporate sector, the Companies Act 2017 a brief history of which need to be placed on record.
At the time of Independence, the Companies Act 1913 was adopted which was later replaced with the Companies Ordinance 1984. In the following years, patch works were done in 1984 Ordinance but a comprehensive corporate law in line with international requirements and trends was missing. In this backdrop, SECP in 2005 constituted the Corporate Laws Review Commission (CLRC), headed by the former chief justice Ajmal Mian, which invited suggestions from professional bodies, law firms, stock exchanges, Bar Associations and Chambers of Commerce and Industry. The CLRC recommended that a new companies bill be drafted rather than improving through changes in the Companies Ordinance 1984. The CLRC was reconstituted in 2012 but the work on the new company law could not be advanced.
The goal decided with the SECP in December 2014 was successfully achieved when the first draft of the companies bill was in hand within a year after a series of meetings between SECP and the Finance Division, chaired by this scribe. It was decided to solicit public views and suggestions on the draft bill by placing it on the SECP’s website in December 2015 and the SECP to hold simultaneously consultative sessions with major stakeholders, including professional bodies like ICAP/ICMA and Chambers of Commerce and Industries in Lahore, Faisalabad, Multan, Karachi, Islamabad, Peshawar and Quetta.
These sessions were attended by eminent experts and representative bodies of corporate and financial sector. I chaired two of these seminars held in Islamabad and Karachi in March/September 2016. The draft Companies Bill was amended accordingly in the light of suggestions received and was placed again on SECP’s website to finally seek suggestions from national/international organisations, corporate sector and professionals. Consultative sessions were again held throughout Pakistan and advertisements in the press were given to solicit further public comments.
Finally, the draft Companies Bill, duly vetted by the Law Ministry and approved by the cabinet was introduced in the National Assembly on November 18, 2016. The House referred it to the Standing Committee on Finance. Numerous meetings were held with the NA Standing Committee and its sub-committee which included main opposition parties’ members - PPPP (Syed Naveed Qamar) and PTI (Asad Umer). After the bill, as amended in National Assembly, was passed, it was introduced in the Senate on February 17, 2017. The Senate, after due process, passed the Bill with further amendments on May 15, 2017.
Consequently, the Companies Bill as amended by the Senate was re-passed by the National Assembly on May 24, 2017. Incidentally, the Companies Act 2017 is the largest piece of legislation passed in the parliamentary history of Pakistan, comprising 513 sections and eight schedules, replacing a 33-year-old Companies Ordinance (1984).
The purpose of outlining in detail the consultative process adopted for the legislation of the Companies Act 2017 is to share with readers the exhaustive exercise undertaken by the PML-N government in this regard, as well as the full participation of all stakeholders and political parties, including the PTI.
Ironically, some highly objectionable amendments have been introduced in this law by the PTI government through presidential ordinance on April 30, 2020 without any consultation with lawmakers, stakeholders or opposition political parties. Laws are always open for improvements but reversing hard earned recent past reforms through abrupt changes without any just rationale is an act that may not be welcomed, particularly when many amendments appear to have been introduced to appease certain lobbies.
A few of the controversial amendments made by the PTI government through the presidential ordinance are: to provide a strong deterrent against fraudulent activities of directors of companies including oppression of minority shareholders, Section 172 of the Companies Act, 2017 was introduced that empowered SECP to pass a disqualification order against (i) directors who have entered into plea bargain with NAB and any other regulatory body, (ii) persons responsible for conducting affairs of a company in a manner that has deprived the shareholders of a reasonable return and (iii) where it is expedient in the public interest to do so. This section has been deleted.
Section 461 was introduced to provide for security clearance of any director and shareholder to mitigate the risk to the security and sovereignty of Pakistan. This section has been deleted.
Reportedly, an aggregate amount of nearly Rs18 billion remained unclaimed with the listed companies for decades. In line with the requirement imposed on the banks that unclaimed deposits for 10 years are required to be transferred to State Bank of Pakistan, Section 244 was introduced requiring transfer of unclaimed shares, modaraba certificates and dividends to a specific account with the State Bank of Pakistan. This provision has been amended implying that the companies will continue to enjoy the use and pilferage of these unclaimed cash/shares.
Section 452 was introduced for declaration by the shareholders or officer of a company to report shareholding in a foreign/offshore company which has been amended to make it applicable only in case where the investment in foreign/offshore company exceeds 10 percent of the share capital of investee company. This will facilitate money laundering and tax evasion, as a person can now stash huge illegal money in foreign/offshore jurisdictions. Imagine what 9.9 percent shares of Microsoft would mean in PKR as it would now go unreported.
Keeping in view the painful history of fraudulent activities by persons and companies engaged in real estate business, depriving poor investors of their lifelong savings, it was considered necessary to introduce transparency in the affairs of companies engaged in real estate business through introduction of Section 465 which provided a comprehensive regulatory framework so that the deposits made with the real estate companies by investors are protected from pilferages. This section has been deleted.
Siphoning of funds to associated companies has always remained a concern in the case of public interest companies. In order to provide a deterrent to such activities, Section 199 was introduced which made it a personal liability of directors in case of failure to recover the return on investment in associated companies. This section has been deleted.
Section 181 was introduced to protect independent and non-executive directors from acts, omissions and commission which occurred without their knowledge or consent. This section has been deleted which will discourage eminent professionals to serve on boards of public interest companies.
Section 496 which provided that knowingly making false statements, falsification, forgery, fraud and deception shall attract criminal proceedings involving imprisonment has now been amended to imposition of monetary fine(s) only.
In order to enhance the reliability of financial statements of companies, an Audit Oversight Board was established by PML-N government for oversight of the profession of audit in Pakistan in line with international best practices. Accordingly, every person who has a professional practicing certificate from the Institute of Chartered Accountants of Pakistan falls under the scrutiny of Audit Oversight Board. It was provided in Section 247 that the audit of companies with paid-up capital of Rs3 million or above would be audited only by the auditors regulated by Audit Oversight Board. This section has been amended to enhance the paid-up capital requirement to Rs10 million which means thousands of companies with paid up capital less than Rs10 million may now appoint any person not having adequate experience, knowledge, training and oversight required previously for an auditor. This will reduce the reliability and creditability of the financial statements of such companies.
Section 424 which provided that a company with no significant accounting transactions may temporarily obtain status of an “inactive company” by filing an application with SECP, has been deleted. This will adversely affect ease of doing business in Pakistan and discourage corporatisation as the only option now available for the sponsors of such inactive companies is to either continue filing different returns and paying regulatory fees or to wind up such companies.
Section 460 was introduced to regulate the profession of “valuers” that has remained unregulated in the past and has caused significant losses to the financial institutions and stakeholders of corporate sector. This section has been deleted which will adversely affect the transparency in the valuation of assets.
Section 459 was introduced to provide for two percent employment quota by public interest companies for persons with disabilities as a social responsibility. It has now been deleted.
Section 155 was introduced to prohibit holding office as director of more than seven companies and requiring compliance with this Section within one year from the enforcement of the Companies Act 2017. This section has been practically annulled by amending it to authorise SECP to specify the number and classes of companies to which this Section will apply.
Authority of SECP under Section 280 to approve compromises, reconstruction and amalgamation of companies has been transferred to the courts which would delay the very process of reconstruction and amalgamation, especially of small entities, in view of the time generally taken in the legal process.
Section 186 which authorised the government to nominate chief executive officer of a company wherein government had majority has been deleted. This will result in compromise of the control, management and governance of such companies.
The aforesaid are some core amendments made in haste by the PTI government without any plausible justification or parliamentary process through promulgation of a midnight presidential ordinance on April 30, 2020. This scribe, through a public message, raised his voice against this clandestine coup on the corporate sector governance legislation.
PM Imran Niazi has reportedly taken notice, pretending as if he didn’t know what happened, of the undesirable reversal of corporate reforms by his government and directed the concerned to undo within a month the wrong amendments made through said ordinance. Can anyone ask him why all this remained unnoticed at the time of approving these amendments by the cabinet which is chaired by him?
The author is former finance minister of Pakistan and fellow member of the Institute of Chartered Accountants in England and Wales. He can be reached on Twitter: @MIshaqDar50
Prior to general elections 2013, Pakistan was facing serious macroeconomic instability, an imminent sovereign default, high fiscal deficit, low GDP growth, high inflation, marginal increase in taxes collection, low forex reserves, fragile capital market and rising poverty in addition to 20-hour load-shedding daily. It was in FATF’s black list.
After winning the general election and taking office in June 2013, the PML-N economic team was mandated by Prime Minister Nawaz Sharif and the cabinet to deal with the above mentioned issues to save the country from predicted sovereign default and to implement an economic roadmap promised to the nation through the PML-N’s election manifesto. The team worked diligently and within the first 18 months, the economic direction began to change positively: macroeconomic indicators improved, Pakistan launched its euro bond successfully and got in FATF’s grey list from its black list.
Keeping in view the PML-N’s goals to achieve 6-7 percent GDP growth to create jobs and reduce poverty with low single-digit inflation and interest rates, corporate sector and capital market-related reforms were essential within next two years. It was with this objective in mind, this scribe along with the finance division engaged SECP Chairman Zafar Hijazi and his team. Together, we finalised in December 2014 the future roadmap with time lines to replace out-dated corporate legislations in Pakistan, to strictly implement the Stock Exchanges Corporatization, Demutualization and Integration Act 2012 (which was vehemently resisted by the three stock exchanges) and to implement required reforms to achieve maximum compliance of requirements of International Organisation of Securities Commission (IOSCO) to make our capital markets more transparent with an ultimate goal to regain status of Emerging Market in MSCI index. All these targets were achieved by mid-2017.
Companies Act 2017 is the largest piece of legislation passed in the parliamentary history of Pakistan, comprising 513 sections and eight schedules, replacing a 33-year-old Companies Ordinance (1984)
On the corporate legislation front, the targets achieved include passage of the Securities Act 2015 (replacing 46-year-old Securities and Exchange Ordinance 1969), the Future Market Act 2016, the Securities and Exchange Commission of Pakistan (Amendment) Act 2016, the Limited Liability Partnership Act 2016, and above all, the primary law governing the corporate sector, the Companies Act 2017 a brief history of which need to be placed on record.
At the time of Independence, the Companies Act 1913 was adopted which was later replaced with the Companies Ordinance 1984. In the following years, patch works were done in 1984 Ordinance but a comprehensive corporate law in line with international requirements and trends was missing. In this backdrop, SECP in 2005 constituted the Corporate Laws Review Commission (CLRC), headed by the former chief justice Ajmal Mian, which invited suggestions from professional bodies, law firms, stock exchanges, Bar Associations and Chambers of Commerce and Industry. The CLRC recommended that a new companies bill be drafted rather than improving through changes in the Companies Ordinance 1984. The CLRC was reconstituted in 2012 but the work on the new company law could not be advanced.
The goal decided with the SECP in December 2014 was successfully achieved when the first draft of the companies bill was in hand within a year after a series of meetings between SECP and the Finance Division, chaired by this scribe. It was decided to solicit public views and suggestions on the draft bill by placing it on the SECP’s website in December 2015 and the SECP to hold simultaneously consultative sessions with major stakeholders, including professional bodies like ICAP/ICMA and Chambers of Commerce and Industries in Lahore, Faisalabad, Multan, Karachi, Islamabad, Peshawar and Quetta.
These sessions were attended by eminent experts and representative bodies of corporate and financial sector. I chaired two of these seminars held in Islamabad and Karachi in March/September 2016. The draft Companies Bill was amended accordingly in the light of suggestions received and was placed again on SECP’s website to finally seek suggestions from national/international organisations, corporate sector and professionals. Consultative sessions were again held throughout Pakistan and advertisements in the press were given to solicit further public comments.
Finally, the draft Companies Bill, duly vetted by the Law Ministry and approved by the cabinet was introduced in the National Assembly on November 18, 2016. The House referred it to the Standing Committee on Finance. Numerous meetings were held with the NA Standing Committee and its sub-committee which included main opposition parties’ members - PPPP (Syed Naveed Qamar) and PTI (Asad Umer). After the bill, as amended in National Assembly, was passed, it was introduced in the Senate on February 17, 2017. The Senate, after due process, passed the Bill with further amendments on May 15, 2017.
Consequently, the Companies Bill as amended by the Senate was re-passed by the National Assembly on May 24, 2017. Incidentally, the Companies Act 2017 is the largest piece of legislation passed in the parliamentary history of Pakistan, comprising 513 sections and eight schedules, replacing a 33-year-old Companies Ordinance (1984).
The purpose of outlining in detail the consultative process adopted for the legislation of the Companies Act 2017 is to share with readers the exhaustive exercise undertaken by the PML-N government in this regard, as well as the full participation of all stakeholders and political parties, including the PTI.
Ironically, some highly objectionable amendments have been introduced in this law by the PTI government through presidential ordinance on April 30, 2020 without any consultation with lawmakers, stakeholders or opposition political parties. Laws are always open for improvements but reversing hard earned recent past reforms through abrupt changes without any just rationale is an act that may not be welcomed, particularly when many amendments appear to have been introduced to appease certain lobbies.
A few of the controversial amendments made by the PTI government through the presidential ordinance are: to provide a strong deterrent against fraudulent activities of directors of companies including oppression of minority shareholders, Section 172 of the Companies Act, 2017 was introduced that empowered SECP to pass a disqualification order against (i) directors who have entered into plea bargain with NAB and any other regulatory body, (ii) persons responsible for conducting affairs of a company in a manner that has deprived the shareholders of a reasonable return and (iii) where it is expedient in the public interest to do so. This section has been deleted.
Section 461 was introduced to provide for security clearance of any director and shareholder to mitigate the risk to the security and sovereignty of Pakistan. This section has been deleted.
Reportedly, an aggregate amount of nearly Rs18 billion remained unclaimed with the listed companies for decades. In line with the requirement imposed on the banks that unclaimed deposits for 10 years are required to be transferred to State Bank of Pakistan, Section 244 was introduced requiring transfer of unclaimed shares, modaraba certificates and dividends to a specific account with the State Bank of Pakistan. This provision has been amended implying that the companies will continue to enjoy the use and pilferage of these unclaimed cash/shares.
Section 452 was introduced for declaration by the shareholders or officer of a company to report shareholding in a foreign/offshore company which has been amended to make it applicable only in case where the investment in foreign/offshore company exceeds 10 percent of the share capital of investee company. This will facilitate money laundering and tax evasion, as a person can now stash huge illegal money in foreign/offshore jurisdictions. Imagine what 9.9 percent shares of Microsoft would mean in PKR as it would now go unreported.
Keeping in view the painful history of fraudulent activities by persons and companies engaged in real estate business, depriving poor investors of their lifelong savings, it was considered necessary to introduce transparency in the affairs of companies engaged in real estate business through introduction of Section 465 which provided a comprehensive regulatory framework so that the deposits made with the real estate companies by investors are protected from pilferages. This section has been deleted.
Siphoning of funds to associated companies has always remained a concern in the case of public interest companies. In order to provide a deterrent to such activities, Section 199 was introduced which made it a personal liability of directors in case of failure to recover the return on investment in associated companies. This section has been deleted.
Section 181 was introduced to protect independent and non-executive directors from acts, omissions and commission which occurred without their knowledge or consent. This section has been deleted which will discourage eminent professionals to serve on boards of public interest companies.
Section 496 which provided that knowingly making false statements, falsification, forgery, fraud and deception shall attract criminal proceedings involving imprisonment has now been amended to imposition of monetary fine(s) only.
In order to enhance the reliability of financial statements of companies, an Audit Oversight Board was established by PML-N government for oversight of the profession of audit in Pakistan in line with international best practices. Accordingly, every person who has a professional practicing certificate from the Institute of Chartered Accountants of Pakistan falls under the scrutiny of Audit Oversight Board. It was provided in Section 247 that the audit of companies with paid-up capital of Rs3 million or above would be audited only by the auditors regulated by Audit Oversight Board. This section has been amended to enhance the paid-up capital requirement to Rs10 million which means thousands of companies with paid up capital less than Rs10 million may now appoint any person not having adequate experience, knowledge, training and oversight required previously for an auditor. This will reduce the reliability and creditability of the financial statements of such companies.
Section 424 which provided that a company with no significant accounting transactions may temporarily obtain status of an “inactive company” by filing an application with SECP, has been deleted. This will adversely affect ease of doing business in Pakistan and discourage corporatisation as the only option now available for the sponsors of such inactive companies is to either continue filing different returns and paying regulatory fees or to wind up such companies.
Section 460 was introduced to regulate the profession of “valuers” that has remained unregulated in the past and has caused significant losses to the financial institutions and stakeholders of corporate sector. This section has been deleted which will adversely affect the transparency in the valuation of assets.
Section 459 was introduced to provide for two percent employment quota by public interest companies for persons with disabilities as a social responsibility. It has now been deleted.
Section 155 was introduced to prohibit holding office as director of more than seven companies and requiring compliance with this Section within one year from the enforcement of the Companies Act 2017. This section has been practically annulled by amending it to authorise SECP to specify the number and classes of companies to which this Section will apply.
Authority of SECP under Section 280 to approve compromises, reconstruction and amalgamation of companies has been transferred to the courts which would delay the very process of reconstruction and amalgamation, especially of small entities, in view of the time generally taken in the legal process.
Section 186 which authorised the government to nominate chief executive officer of a company wherein government had majority has been deleted. This will result in compromise of the control, management and governance of such companies.
The aforesaid are some core amendments made in haste by the PTI government without any plausible justification or parliamentary process through promulgation of a midnight presidential ordinance on April 30, 2020. This scribe, through a public message, raised his voice against this clandestine coup on the corporate sector governance legislation.
PM Imran Niazi has reportedly taken notice, pretending as if he didn’t know what happened, of the undesirable reversal of corporate reforms by his government and directed the concerned to undo within a month the wrong amendments made through said ordinance. Can anyone ask him why all this remained unnoticed at the time of approving these amendments by the cabinet which is chaired by him?
The author is former finance minister of Pakistan and fellow member of the Institute of Chartered Accountants in England and Wales. He can be reached on Twitter: @MIshaqDar50