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MONITORING OF MODARABAS
Since the modaraba concept does not provide for participation of modaraba certificate holders in the management of their modarabas, Registrar (Modaraba) has been vested with effective powers under the Modaraba Ordinance to look after the interests of the modaraba certificate holders. The Registrar is empowered to cancel the registration of a modaraba company, order a change in management and appoint an administrator. He also has the power to conduct an enquiry into the affairs of a modaraba and take penal action in case of defaults.

MAJOR ACTIONS TAKEN BY THE REGISTRAR MODARABA
While monitoring the performance of modarabas and their management companies during the period under review, Registrar (Modaraba) noted a number of violations, some of which are mentioned below:-

q  Appointment of auditors without the approval of Registrar Modaraba.
q Investment of funds of modarabas in the shares of associated undertakings having effect of unfairly benefiting the directors of modarabas and their relatives
q  Charging of remuneration by the Modaraba Company in excess of the limit prescribed under section 18 of the Modaraba Ordinance.
q Non-recovery of outstanding trade debts, like morabaha and musharika finances.
q Heavy losses resulting in erosion of reserves/equity.
q Unnecessary and unjustified administrative and operating expenses.
q Non-declaration of dividend.

Exercising powers under the Modaraba Ordinance, Registrar imposed penalties on two modaraba companies for violating the provisions of sections 15 and 18 of the Modaraba Ordinance. The Registrar also took action against a modaraba company, which purchased shares of an associated company at a manipulated price by using funds of the modaraba. After a thorough enquiry, it was held that the subject transaction was motivated by consideration of giving undue benefit to the persons holding shares in the associated company at the cost of the modaraba. On the intervention of the Registrar (Modaraba), the modaraba company reversed the transaction and a penalty of Rs.360,000/- was imposed.

The Registrar (Modaraba) filed the following four cases with the Modaraba Tribunal, Karachi which are in process:-

OTHER DEVELOPMENTS MERGERS OF MODARABAS
M/s. Al-Ata Management Services (Pvt) Ltd. filed an application before the Lahore High Court for merger of M/s. Al-Ata Management Services (Pvt) Ltd. and Al-Ata Leasing Modaraba with and into M/s. Crescent Business Management (Pvt) Ltd. and First Crescent Modaraba respectively which has been allowed by the honorable court

CHANGE OF MANAGEMENT
M/s. Dawood Leasing Company had applied for takeover of the management of two modarabas. Change of managerial control of Guardian Leasing Modaraba and First General Leasing Modaraba were allowed by the Commission. In two other cases, change and transfer of management of Al-Ata Leasing Modaraba and First Confidence Modaraba to M/s. Crescent Business Management (Pvt) Ltd. was also allowed.

The auditors of Unicap Modaraba managed by M/s. Chartered Management Services (Pvt) Ltd while qualifying their report on the annual accounts of the Modaraba for the year ended 30th June, 1999 indicated grave mis-appropriation of the modaraba funds. The Registrar (Modaraba) cancelled the registration of M/s Chartered Management Services (Pvt) Ltd in the public interest vide order dated 3rd May, 2000 and removed it from the management of Unicap Modaraba. The Registrar allowed M/s. Al-Zamin Modaraba Management (Pvt) Ltd to take over the management of Unicap Modaraba. This was the first time that action was taken against a modaraba company under section 19 of the Modaraba Companies and Modaraba (Floatation & Control) Ordinance, 1980, since the inception of modarabas in Pakistan.

As a result of action taken by the State Bank of Pakistan against Bankers Equity Limited (BEL) and consequent change of management of BEL, an associated undertaking of Long Term Venture Capital (LTVC) Modaraba, an investigation into the transactions of LTVC Modaraba with BEL since takeover of BEL by the LTVC Modaraba was carried out. The Inspectors in this report indicated violations of law by the modaraba and its management company. Consequently, the management of this modaraba has been changed.

REGISTRATION OF A NEW MODARABA COMPANY
After a period of about five years, a new modaraba management company under the name of M/s. Markaz Tajjarat-e-Islami was registered on 25th October, 1999 under the Modaraba Ordinance, 1980. The modaraba company is sponsored by a religious scholar and a chartered accountant.

CONSTITUTION OF RELIGIOUS BOARD.
For the purposes of ensuring that the business of modarabas conforms to the injunctions of Islam, a Religious Board, consisting of a Judge of the High Court and two religious scholars, examines the prospectus and instruments employed by the modarabas. The current Religious Board constituted by the Federal Government for a term of three years vide notification dated 1st May, 1999, consists of the following:-

q  Mr. Justice Kh. Muhammad Sharif Chairmanii) Prof. Dr. Sayyid Tahir Member
q  Mufti Muhammad Rafi Usmani Member

CONSTITUTION OF MODARABA TRIBUNALS.
The following Modaraba Tribunals were constituted in terms of the provisions of section 24 of the Modaraba Companies and Modarabas (Floatation & Control) Ordinance, 1980. These tribunals exercise powers under sections 25 to 27 of the Modaraba Ordinance.

Name of Tribunal Province Place of Term of 3 years sitting starting from

1. Judge
Banking Court- I Sind Karachi 27.05.2000

2. Judge,
Banking Court-II, Punjab Lahore 18.06.2000 Lahore.

3. Judge,
NWFP Peshawar 27.05.2000 Banking Court, Peshawar.

REGULATORY INITIATIVES
Prudential Regulations
The Federal Government amended the Banking Companies Ordinance, 1962 in 1997 and as a result, monitoring the business of modarabas under the Prudential Regulations for NBFI's was transferred from the State Bank of Pakistan to the Commission. Considering the fact that Prudential Regulations were not institution-specific, the Commission issued Prudential Regulations for Modarabas as an additional condition to Modaraba Authorization Certificate. The new regulations were issued and circulated on 24th April, 2000. All modarabas were required to bring their affairs and business operations in full conformity with these Regulations by 30th June, 2000.

q  Circulars Issued
Circular No. 6/99, dated 31st March, 1999 rendering Arbitration optional Clause in the Modaraba Agreements used by the modarabas for business purposes.

Circulars No. 11/99, dated 6th May, 1999 regarding compliance of instructions issued for appointment of directors/chief executive in modaraba companies.

Circular No.7/2000, dated 25th May 2000 directing modaraba companies to furnish complete applications for approval of change in directorship along with complete particulars on newly devised form-I/II for approval of the Registrar Modaraba.

LEASING COMPANIES
As a result of amendments in the Banking Companies Ordinance, 1962 effected in 1997, regulation of leasing companies was assigned to Corporate Law Authority. This function is now being carried out by the Commission.

STATISTICAL DATA OF LEASING COMPANIES
At present, 33 leasing companies are registered under the Companies Ordinance, 1984 and with the exception of one, all are listed companies. At the end of June 2000, total equity of leasing companies was Rs. 9,396.07 million with paid up capital of Rs. 4,738.46 million and reserves of Rs.4,657.61 million. Total investment in leasing business was Rs. 31.02 billion, which constitutes 76% of the total assets of these companies. Total liabilities of leasing companies are Rs. 29,836.80 million while total assets are Rs.39, 232.87 million. 19 leasing companies have issued Certificates of Investments (COIs) aggregating Rs. 8.53 billion. All leasing companies proposing to issue COIs are required to have the instruments rated by a recognized credit rating agency.

DEPOSITS RAISED THROUGH COIs

*Permission for COIs has been withdrawn

CREDIT RATING OF LEASING COMPANIES THAT HAVE ISSUED COIs

MONITORING AND REGULATION
Registrar (Leasing) in SCD monitors and regulates leasing companies in terms of the Leasing Companies (Establishment and Regulation) Rules, 1996 framed under section 506 of the Companies Ordinance, 1984. Under these Rules, leasing companies require permission of the Commission for change of chief executive and directors, for opening new branches and for issuance of COIs. Advertisements are also required to be approved by the Commission. In addition to compliance with the requirements stipulated in the Leasing Rules, the Registrar (Leasing) also ensures that the requirements of NBFIs Rules issued by the State Bank of Pakistan as well as requirements of IAS-12 and 17 are duly observed. SCD monitors periodical reports received from leasing companies, which provide information on:

q  Liquidity position.
q  Equity and liabilities
q  Equity and contingent liabilities.
q  Distribution of deposits/COIs by maturity.
q  Source of borrowings and maturity.
q  Analysis of advances.

REGULATORY ACTIONS
During the period under review major regulatory actions taken were:

q  Annual accounts for the year ended June 30, 1999 were received from all leasing companies. In the case of one company, ‘separation benefits’ granted to a firm’s chief executive of the company were reversed.

q  All leasing companies have been directed to have an additional audit in respect of compliance with Prudential Regulations.

q  In the case of one leasing company, a special audit was assigned to a firm of Chartered Accountants on the advice of the State Bank of Pakistan. The report of the auditors was sent to the State Bank.

q  Permission was given to nine leasing companies for transfer of shares by the sponsoring directors/promoters.

q  One leasing company was directed to change its Chief Executive, as he was not found to be fit for the assignment. In the case of another leasing company, permission to induct a new director was not allowed due to a poor Credit Information Bureau report.

q Eight companies were directed to comply with the requirements of investment of minimum of 70% of their assets in leasing business.

q  Eleven companies were directed to extend credit facilities to small entrepreneurs upto the prescribed level of the 5% of the leasing facility.

q  Three companies were directed to fulfil the requirement of investing upto 14% of the prescribed liabilities in government/listed securities.

OTHER ISSUES
New leasing companies are required to have minimum capital of Rs. 200 million under the Leasing Companies (Establishment and Regulation) Rules, 1996. However, at present, only nine companies have paid up capital in excess of Rs. 200 million. Although existing companies were directed to raise their capital upto Rs. 200 million by 6th November 1999, 24 leasing companies have yet to raise their capital upto the required amount. These companies have attributed their default to market conditions, which did not encourage issuance of right shares.

q  A number of investment banks have applied for permission to do leasing business. After hearing both the representatives of investment banks and leasing companies as well as other stakeholders, the Commission took the following decisions:

"(i) In order to allow the investment banks to engage in leasing business, the investment banks in question will have to meet the same criteria as applicable to leasing companies. For investment banks desiring to expand into the leasing business, the preferred course will be to set up adequately capitalized subsidiaries in accordance with the leasing rules. (ii) Should an investment bank prefer to conduct lease financing within its own doors, then it will have to satisfy the Commission that it is fully equipped to do so and fulfil the requirements prescribed in this regard. It would, therefore, be necessary for such an investment bank to raise and/or allocate capital for a minimum of Rs. 200 million for the purpose of leasing activity. The remaining capital after this allocation should meet the minimum prescribed capital requirement for an investment bank. Also, the investment bank in question will have to satisfy the Commission that it has the staff resources and necessary specialized expertise to carry out leasing business. For this purpose, it would be required to set up a separate department headed by a Chief Operating Officer with the requisite qualifications as well as substantial experience relevant to lease finance. The loan funds raised by an investment bank may only be utilized for leasing in proportion to the capital allocated by it for lease finance.

i Investment banks and NBFIs which have already been given permission by the Commission to undertake leasing business will also have to comply with these conditions by June 30, 2001.

ii The above prescription does not restrict an investment bank from using the form of lease instrument to engage in its usual project financing activities and it would be within the scope of its business to finance a complete industrial unit or plant (whether green-field or by way of an additional plant) through use of the leasing modality either entirely by itself or in consortium with other financial institutions (including leasing companies)."

q  The Commission has notified for public opinion new rules to be called Leasing Companies (Establishment and Regulation) Rules, 2000 in substitution of the existing Rules with the aim of providing a comprehensive regulatory framework for the lease finance sector. The new Rules combine both the establishment of leasing companies as well as prudential regulations for the conduct of leasing business.

CREDIT RATING AGENCIES
The Commission is responsible for licensing and regulating credit rating agencies in the country. Two credit rating agencies have been established under the Credit Rating Companies Rules, 1995. The first company, PACRA, was established in Lahore in 1996 as a joint venture of IFC, IBCA and the LSE. The second credit rating company established in 1997, in Karachi, is DCR-VIS Credit Rating Agency, which had Duff and Phelps as technical partner. The presence of credit rating agencies has facilitated the development of a fixed income securities market in the country. The Commission has directed that all instruments of deposit from the public by companies in whatever form should be rated by a registered credit rating agency and the rating should be disclosed to potential investors. The Commission monitors the rating process and seeks clarification on any particular rating issue from the credit rating agency concerned.

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