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iii. DEVELOPMENTS IN LEGAL FRAMEWORK
During the period under review, a number of significant amendments in corporate laws were made with the objective of not only updating these laws to keep pace with developments in the corporate sector but also introducing new financial instruments. The amendments followed exhaustive work and consultations with all stakeholders, professionals in the relevant areas, legal experts and the general public. Amendments in the Companies Ordinance, 1984 were made through the Finance Act, 1999 as well as through an amending legislation, i.e., Companies (Amendments) Act, 1999. The main amendments made during the period under review and some draft rules prepared for public consultation are discussed below:
COMPANIES ORDINANCE, 1984
q Section 14:
The restriction on partnership firms to convert themselves into incorporated entities, in
case the number of their partners exceeds twenty, has been removed in the case of lawyers
and accountants or any other profession, which does not allow practice by a body
corporate. The amendment enables establishment of large firms of professionals and
merger of such firms.
q Section 53:
Companies have been allowed to publish abridged form of prospectus instead of full text.
The amendment has helped in reducing the cost of public offerings both for equity issues
and fixed income securities.
q Section 86:
Provision has been made to allow the allocation of a certain percentage of share capital
for the employees of companies under the “Employees Stock Option Scheme”.
This enables employee participation in the affairs of companies.
q Section 90:
Previously, company law allowed only one kind of share capital which was ordinary share
capital. Amendment has been made so as to enable a company to issue different kinds
and classes of share capital as provided in their Memorandum and Articles. The amendment
requires the Commission to prescribe varying rights of shareholders through rules.
q Sections 95 and 95-A:
Listed companies have been allowed to purchase their own shares subject to certain
restrictions and conditions. The amendment was made as a measure to improve the condition
of the stock market and to stabilize share prices. An enabling provision has been made
under section 95 and a new section 95-A has been inserted to allow listed companies to
buy-back their own shares. These new legal provisions while allowing listed companies to
re-purchase their shares, provide adequate safeguards against any possibility of
manipulation. The decision by the company in this respect would require shareholder
approval through special resolution and the purchase shall have to be made only in cash
out of distributable profits.
q Section 197-A:
Companies have been prohibited to distribute gifts to their members on the occasion of
annual general meetings. The amendment was made to discourage the malpractice of
distribution of gifts and to encourage meaningful discussions in the general meetings.
q Section 236:
Directors’ report has been made more elaborate and transparent, by prescribing
disclosure requirements. The amendment requires the directors of the public company
to make comprehensive disclosure about the affairs of the company including analysis of
losses, if any, sustained by the company.
q Section 245:
The penalty in the form of imprisonment in the case of any default in circulation of half
yearly accounts, has been changed to a penalty in the form of fine so as to bring the
penal provisions within the scope of the Commission.
q Section 254:
Previously, there was no qualification prescribed for auditors of private companies. Now,
private companies that have paid up capital of Rs. 3 million or more will be required to
have their annual accounts audited by a chartered accountant.
MODARABA COMPANIES AND MODARABA (FLOATATION AND CONTROL) ORDINANCE, 1980
q Section 2:
Consequent upon the establishment of the Securities and Exchange Commission of Pakistan,
the term “Commission” has been inserted and defined.
q Sections 19, 20 and 22:
In line with the provisions of the Act, the role of the Federal Government has been
assigned to the Commission.
q Section 32:
Provision has been made to grant the right of appeal to aggrieved parties against the
orders of the Registrar Modaraba.
THE SECURITIES AND EXCHANGE COMMISSION OF PAKISTAN ACT, 1997
q Section 20(4):
In section 20, which relates to the powers and functions of the Commission, the role of
the Commission has been specified with respect to matters falling under the Securities and
Exchange Ordinance, 1969 and the Modaraba Companies and Modaraba (Floatation and Control)
Ordinance, 1980.
q Section 20(7):
Specific powers have been given to the Commission for obtaining any information/document
from companies, in the interest of the investors.
q Section 23:
Sources of the Fund of the Commission have been specified so as to remove any ambiguity in
existing provisions.
NEW RULES FRAMED
In addition to amendments in laws, a number of
new rules have been framed during this period to facilitate the administration of relevant
laws. These are:
q Amendments in Investment Companies and Investment Advisers Rules, 1971 (SRO.
29(9)/99 dated 14.1.1999)
The amendments made through above notification include –
§ raising the minimum paid up capital of investment companies from twenty
million to one hundred million rupees;
§ minimum paid up capital of investment advisor was prescribed as Rs. 20
million;
§ mutual funds were permitted to invest in unlisted securities (10%) and fixed
income securities (20%);
§ to enable investment advisors to manage more than one mutual fund,
requirements of 10% investment in each mutual fund has been relaxed; and
§ time frame for circulation of periodical reports to shareholders and a condition
for minimum paid up capital of twenty million rupees for an investment adviser has been
prescribed.
Disclosure requirements as per Second Schedule to the above Rules have also been enhanced.
q The Companies (Rehabilitation of Sick Industrial Units) Rules, 2000 (SRO.
897(9)/99 dated 03.8.1999)
These rules have been prescribed under section 296 of the Companies Ordinance, 1984 which
pertains to rehabilitation of companies owning sick industrial units. The rules
provide for the constitution of a Task Force to be entrusted the responsibility of
declaring a company as “sick” and to prepare and implement a rehabilitation plan
under the supervision of the Commission.
q The Companies (Buy-back of Shares) Rules, 1999 (SRO 1337 (9)/99 dated
14.12.1999)
These rules prescribed under section 95A of Companies Ordinance, 1984, provide for
conditions under which listed companies may buy back their shares and the procedure for
purchase. The return to be filed with the Registrar of Companies has also been
prescribed under these rules.
q The Companies (Asset Backed Securitization) Rules, 1999 (SRO 1338(9)/99 dated
14.12.1999)
These rules have been prescribed under section 506 of Companies Ordinance, 1984 read with
section 43 of the Act. The rules introduce and provide for
"securitization" which would help companies in raising funds through issue of
asset backed debt securities. The rules stipulate eligibility criteria for
registration of special purpose vehicles (SPVs), their mode of registration and conditions
for their operation.
q Draft Leasing Companies (Establishment and Regulation) Rules, 2000 (SRO.
70(9)/2000 dated 17.2.2000)
The Commission notified for public opinion new rules to be called 'Leasing Companies
(Establishment and Regulation) Rules, 2000' in substitution of the Leasing Companies
(Establishment and Regulation) Rules, 1996. Prudential Regulations for Leasing
Companies have been incorporated in the new rules. The framing of these new rules
was necessitated by the transfer of regulatory control over leasing companies from the
State Bank of Pakistan (SBP) to this Commission.
q Draft Companies' Share Capital (Variation in Rights and Privileges) Rules,
2000 (SRO. 90(9)/2000 dated 24.2.2000)
These draft rules have been notified under section 90 of the Companies Ordinance, 1984 for
eliciting public opinion. The rules propose to prescribe different voting rights and
privileges of shareholders under various kinds of share capital and also the conditions
for the issue of shares carrying different voting rights like entitlement of dividend,
right shares or bonus shares.
q Amendment in the Asset Management Companies Rules, 1995 (SRO.
23(9)/2000 dated 27.4.2000)
Following amendments were made to facilitate registration of existing asset management
companies:
§ the requirement to give an undertaking to invest or arrange investment of
Rs. 250 million for a minimum period of two years can be dispensed with by the Commission
in the case of existing asset management companies.
§ prescribed limits of exposure to one sector or one company can be relaxed in
the case of existing schemes.
§ restriction on investment in companies in which directors or officers of the
management company have invested a minimum of 5% in individual capacity or 10%
collectively can be relaxed by the Commission in the case of existing schemes.
q Draft Public Companies (Employees Stock Option Scheme) Rules, 2000
The above draft rules have been framed and notified for eliciting public opinion.
The proposed rules provide for the operation of employees stock option schemes introduced
under section 86(1) of the Companies Ordinance, 1984. These rules would enable
employees to become shareholders of companies employing them.
q Draft Listed Companies (Prohibition of Insider Trading) Regulations, 2000
The above draft regulations have been framed under section 40 of the Act, and published in
newspapers for eliciting public opinion. The proposed regulations provide for
prohibition of insider trading in the securities of listed companies.
q Draft Stock Exchange Members' (Inspection of Books and Records) Regulations,
2000
The draft regulations have been framed under section 40 of the Act, and published in
newspapers for eliciting public opinion. The proposed regulations prescribe the
nature of records to be maintained by members of stock exchanges and if so required, made
available for inspection by a person authorized by the Commission.
q Draft Members, Agents and Traders (Eligibility Standards) Regulations, 2000
The above draft regulations have been framed under section 40 of the Act, and published in
the newspapers for eliciting public opinion. The proposed regulations provide for
eligibility standards for members, agents and traders in the stock exchanges and the
securities market.
q Prudential Regulations for Modaraba Companies and Modarabas (Circular No. 5/2000
dated 20th April, 2000)
Consequent upon the transfer of regulatory control over modaraba companies and modarabas
from the State Bank to the Commission, the Prudential Regulations for Modarabas as
originally prescribed by the State Bank were adopted by the Commission with appropriate
changes, in the form of additional conditions for the authorization of floatation of
modarabas.
q Draft Listed Companies (Substantial Acquisition of Shares and Takeovers)
Regulations, 2000
With a view to providing fair and equal treatment to all investors as well as ensuring a
transparent and efficient system for substantial acquisition of shares and takeovers of
listed companies, draft of a new law to be known as ‘Listed Companies (Substantial
Acquisition of Shares and Takeovers) Regulations, 2000' was prepared by the Commission in
consultation with the stock exchanges, professional bodies, portfolio managers and legal
experts. The draft ordinance contains detailed provisions regarding disclosure of
shareholding in a listed company and conditions and mode for substantial acquisition of
shares in a listed company.
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