8. Other Developments

Corporate governance was a key area of reform during the year under review. In March 2002, the first Code of Corporate Governance for Pakistan was finalized by the Commission, which was subsequently included in the listing regulations of the stock exchanges. The Code has been issued by the Commission after an extensive consultative process and is the result of joint efforts of the Commission and ICAP. The initiative to develop a framework of good governance, which addresses the objective circumstances in Pakistan, was taken in December 1998 at the Fifth All Pakistan Chartered Accountants' Conference. The draft Code was developed by a Committee comprising representatives of ICAP, ICMAP, stock exchanges and the Commission. Seminars were held in Karachi, Lahore and Islamabad to elicit opinion on the provisions of the Code. In addition, the draft Code was placed on the websites of ICAP and the Commission. Based on the recommendations received from various quarters, the Code was finalized and made a part of the listing regulations of the three stock ex changes. It is now applicable to all public listed companies.

The Code primarily aims to establish a system whereby a company is directed and controlled by its directors in compliance with best practices so as to safeguard the interests of a diverse range of stakeholders. It proposes to restructure the composition of board of directors to introduce representation by minority shareholders. The Code emphasizes openness and transparency in corporate affairs and decision-making process. It also requires directors to discharge their fiduciary responsibilities in the larger interest of all stakeholders in a transparent, informed, diligent, and timely manner. The salient features of the Code are as follows:

(i) The Code encourages representation of independent non-executive directors and those representing minority interests on the boards of directors of listed companies.

(ii) It lays down the qualification and eligibility criteria for directors of listed companies.

(iii) While reinforcing the powers, responsibilities and functions of the board of directors, the Code formalizes the corporate decision making process and requires adequate documentation of policies and decisions of directors.

(iv) It seeks to strengthen corporate working, internal control system and external audit requirements of listed companies.

(v) Corporate and financial reporting framework has been re-defined to foster better disclosure.

(vi) Audit Committees and internal audit functions are required to be established by all listed companies.

(vii) A statement of compliance with the Code is required to be published by companies to set out the extent of compliance with the Code. The statutory auditors of listed companies have been made responsible for reviewing and certifying this statement. Pursuant to implementation of the Code, the Commission has designed a program to promote good governance practices in the corporate sector in collaboration with the United Nations Development Program (UNDP). Under this program, the Commission will focus on seeking participation of various stakeholders and professionals in the effective enforcement of the Code and broadening the understanding of stakeholders on different aspects of corporate governance. The program will also be instrumental in building the regulatory capacity of the Commission for efficient enforcement of good corporate governance practices. It will also help in keeping pace with international developments on the topic as well as participating in interchange of views on prioritized issues.

In an effort to sustain the impetus for achieving a fair, transparent and efficient regulatory environment, the Commission has been actively engaged in the development of its in-house legal expertise. In this regard, a Legal Wing, headed by an Executive Director designated General Counsel, has been set up under the direct supervision and guidance of the Chairman. Drawing upon the successful experience in other Divisions where induction of professionals from the private sector has contributed to improving the quality of work and level of services provided, the Commission has engaged the services of qualified lawyers from the private sector in the Legal Wing as well.

The Legal Wing is primarily involved in assisting various Divisions on legal issues. It works in close association with the Appellate Bench of the Commission, providing extensive research assistance, analyzing and interpreting provisions of law and resolving issues of procedural as well as technical nature. The Wing is currently in the process of finalizing the Appellate Bench Rules, which aim at providing guidelines to contesting parties for expeditious disposal of cases. The Wing also recommends appointment of counsel to represent the Commission in court cases and lends technical as well as substantive support to enable the legal counsel to better represent the interests of the Commission.

The Legal Wing has been entrusted with the role of updating the Commission with respect to contemporary corporate and securities legislation as well as similar new initiatives in other jurisdictions, including the USA and the United Kingdom. At present, the Wing is carrying out a comparative study of securities legislation in certain developing jurisdictions for the purpose of recommending amendments to the Securities and Exchange Ordinance, 1969. This study focuses on the probable effects of legislative amendments and steps to be taken to protect the interests of investors, companies and the securities market. Often, the Legal Wing is called upon to provide assistance to relevant Ministries in reviewing other laws impacting the securities market or the corporate sector and, in the process, facilitates integration of views amongst relevant Governmental agencies.

The IT revolution has had a profound impact on organizations in developing countries and continues to have significant implications on business development. Realizing the immense possibilities and challenges presented by the rapid spread of IT, the Commission restructured its IT Wing. The IT Wing is engaged in providing efficient services and solutions for boosting the overall efficiency of the various Divisions. Gradual exposure to state-of-the-art technology at the Commission along with step-by-step training has paved the way for general acceptance of IT, which is essential for effective implementation of IT-related action plans.

The IT Wing provides a range of services for various management support functions, including specialized applications, MIS applications and managed workstation services. There is a conscious effort on the part of IT Wing to work in close collaboration with the Divisions of the Commission and CROs to meet the needs of a variety of users.

The IT Wing is conscious of the growth of Internet-enabled applications, which have brought about a new challenge to Information System (IS) designs that must accept input and tacit knowledge from a broad range of users. In addition, it is also understood

that IS must now accept and manage dynamic and often unstructured information. The IT Wing is working on appropriate procedures to address these issues.

The following software systems have been, or are being, developed to automate various functions at the Commission.

The CRS is pivotal to all other software systems at the Commission. It facilitates registration of companies and development of their database. A database of over 43,000 companies has been compiled and put on the central database server in Islamabad with online access to CROs. The system is in place since November 2001.

This system is designed to facilitate management of information contained in statutory returns, i.e. Forms A, 3,10,16,17 and 29. It is now being integrated with CRS.

This system is meant to automate the diary register and to track handling of documents within the Commission so as to ensure timely communication and correspondence.

The system is used to keep track of investor complaints and to identify actions taken in respect of each complaint.

This system is being developed to monitor submission of various returns filed by specialized companies, i.e. leasing companies, modarabas and mutual funds.

(vi) MSS

The MSS would provide support to MSW for monitoring of trading at the stock exchanges. At present, this system is under development.

This system is intended to keep a record of beneficial owners of public companies to monitor corporate compliance and insider trading.

It forms the MIS component to maintain accounts of the Commission in an efficient manner.

The Payroll System is used to process salaries of employees of the Commission and to provide other facilities, like automatic tax computation and deduction, loans, generation of statements relating to salary payments, etc.

This system helps to maintain relevant employee records by the Human Resource Wing. It is also an important MIS component with facilities for generation of various management reports.

This system is designed to keep a record of fixed assets of the Commission and assist in automatic calculation of periodic depreciation.

The website of the Commission is regularly updated to ensure access to accurate and useful information to all concerned. Efforts are also underway to re-engineer the site in order to give it a better appearance and to reorganize the available information in a user-friendly manner. At present, information available on the website includes important corporate and security market regulations; corporate laws; notifications and directives issued by the Commission; orders of the Commission and Appellate Benches; annual reports; and job vacancies within the Commission. An interface of the CRS has been provided on the website for company name search facility, company registration guidelines and prescribed forms. There is also a provision for online registration of investor complaints.

The IT Wing's technical and developmental role includes: designing the Local Area Network (LAN), Wide Area Network (WAN) and external connections such as Internet, Intranet, e-mail and website development; ensuring appropriate and carefully designed changes to the IT operating environment; investigating system failures requiring software modification; and analyzing cost effective uses of IT. The Commission deployed an extensive LAN at its Headquarters, spanning 10 floors of the building, in November 2001. WAN connectivity is being set up using DXX between the Headquarters, major CROs and the stock exchanges. The IT Wing maintains a variety of servers in order to support the wide-ranging sets of applications. A number of central services have back-up support, including central e-mail system through Microsoft Exchange Server, backup of user data on File Server and Internet surfing facility through a proxy server. The IT Wing contemplates increasing the bandwidth for increasing the speed of external connectivity.

The IT Wing offers an array of support services to users located in the Headquarters in Islamabad as well as in all CROs. The support staff of the IT Wing creates computing accounts for new staff, offers informal training services, troubleshoots problems and keeps the Commission's computing infrastructure on the cutting edge. Individual personal computers have been linked to a centrally managed files store and software base. Each registered user has a unique User Identity for logging on to the system and has been provided a personal quota space on the network drive. A daily backup of drive is maintained. All preferences and Windows settings are stored on a per user basis which allows users to move to any other managed machine while retaining the personalized setup. The managed service setup makes it possible to recover from a range of common problems quickly and also helps to avoid the problem of data loss.

The Helpdesk is the primary point of contact within the IS for users and ensures person-to-person advice or help. It channels queries of users to relevant staff within the IT Wing, as required. The Helpdesk also acts as the fault-report point for the CROs throughout the country

The IT Wing seeks to improve the quality of work being done by the various Divisions of the Commission and the CROs through enhancing their ability to maneuver and use IT to the fullest extent possible. Capacity building is being accomplished through informal and formal training programs. During the year, the IT Wing conducted an in-house training program in Microsoft Office and Microsoft Outlook. The IT Wing also plans to organize a comprehensive training program for officers and staff of the Commission in collaboration with a reputed training institute.

During the year under review, the Commission, through its Vigilance Cell, continued to give top priority to issues pertaining to investors' complaints. The number of complaints registered with the Vigilance Cell exhibited a decline during the year owing to the enhanced institutional capacity and effectiveness of the Commission as a whole. One of the main factors contributing to reduced grievances and disputes between investors, brokers and companies was the introduction and enforcement of new laws and regulations that created a more transparent and efficient market.

As is evident in the table below, a total of 604 complaints, appeals and petitions were lodged with the Commission during the financial year 2002 as against 974 complaints, appeals and petitions received during the preceding year. In all, 585 complaints, appeals and petitions were disposed of during the year under review. Of these, only

64 were pending as of June 30, 2002. The average time taken for disposal of complains, petitions and appeals was considerably reduced due to strict vigilance of the Commission and the emphasis on resolving investor disputes.

TABLE 30 Performance of Vigilance Cell (July 1, 2001 - June 3D, 2D02)

The Commission is conscious of the need to maintain a participative approach for effective implementation of reforms in the financial market and the corporate sector. In this regard, it is essential to engage in regular dialogue with all stakeholders about the positive impact of the various reforms carried out or contemplated. As such, the Commission has always ensured that new rules and regulations are introduced after extensive discussion and consultation with the concerned industry representatives.

During the past two years, the supervisory role of the Commission has expanded manifold. Therefore, the role of external communication in opinion formation, education and minimizing information asymmetry has become the basis for all its initiatives. To focus on this area, a Wing dedicated to external communication was established within the Commission in March 2001. While the immediate task assigned to the Wing was to counter unfounded criticism that the Commission was facing as a result of its deep-rooted reforms, during the year under review, the Wing was also involved in various other activities, including stakeholder awareness and dissemination of timely and accurate information to media and the general public.

The media act as the eyes and ears of the general public and play a key role in disseminating information to a wide range of audiences. The Commission has ensured that a continuous liaison is maintained with the media so that a true and fair picture of measures taken by the Commission reaches the public and stakeholders. This has resulted in removing various misconceptions about the Commission as well highlighting the impact of reforms introduced in the capital market and the corporate sector.

Constructive criticism from the media continues to be a source of guidance for appropriate adjustments in regulations and policies of the Commission. During the course of the year, regular interaction with media professionals helped in enhancing overall understanding of critical issues. It also resulted in the media becoming generally supportive of the regulatory measures taken by the Commission.

During the year under review, significant activities of the Media Wing were as follows:

Press conferences of the Chairman of the Commission with media representatives were arranged in Islamabad, Karachi and Lahore. These interactive sessions helped to clear many ambiguities and unfounded criticism of the steps taken by the Commission, particularly with regard to the rationale behind these steps. Dissemination of correct information has also helped in bringing about in-depth understanding of the reforms.

The Wing provided assistance to eminent economic writers in preparing articles and facilitated them in gathering relevant and correct information from the industry.

During the year under review, there was extensive media coverage of financial sector regulations around the world, in general, and in Pakistan, in particular. While eminent journalists wrote articles on almost all aspects of the financial sector, a large number of articles were published on the performance of the capital market, regulatory changes, mergers and consolidation, corporate governance and the role of auditors. After the events of September 11, 2001, the insurance industry around the world was brought to center stage and Pakistan was no exception. In this regard, there was considerable debate in the media on the performance of the insurance industry and steps taken by the Commission to revive this sector.

Although improvement in every section of economic activity is a continuing process, yet the up-gradation in the management of the stock exchanges is a distinctive achievement of the SEC.
Business Recorder

With effective reforms introduced in the capital market, country's stock market has depicted ample improvement during the last two and a half years.

As a matter of policy, the Media Wing keeps track of developments in the various Divisions within the Commission and regularly sends handouts to the media to keep them updated with the

The upgrading of the corporate practices is, indeed, a macro-level national priority. It is no less important at micro level either. Global investors will not look twice at us unless the existing corporate practices are improved. Dawn

latest regulatory measures. Over the course of the year, the handouts have become a regular aspect of the Wing's activities and are greatly appreciated by the media.

Financial market developments cannot be analyzed in isolation and require a review of contemporary issues in global financial markets. For providing policy support to the Commission and to develop an insight into international regulatory developments, the Wing maintained continuous liaison with regulatory bodies, research institutes and international media on contemporary developments in financial markets.

The Commission has been involved in developing a series of publications for the assistance and guidance of investors. A quarterly newsletter was started in September 2001 that focuses on the activities of the Commission, related developments in the capital market as well as future trends. Three issues of the newsletter have so far been published.

In continuance of its investor awareness program, the Commission plans to bring out a series of guides relating to corporate governance and insurance.