Aiming at better regulation and greater transparency to bolster investor confidence making the capital market mare attractive.

From Shamim Ahmed Razvi, Islamabad
Nov 03 - 09, 1997

The Corporate Law Authority (CLA) will soon be converted into an autonomous body and renamed as Securities Exchange and Corporate Affairs Commission of Pakistan. The draft bill which has already been approved by the Federal Cabinet is being vetted by the Law Division for presentation before the National Assembly in its forthcoming session. Most likely the commission will become fully operative by the beginning of next year. The new law which will replace the Securities and Exchange Ordinance, 1969, and Companies Ordinance, 1984 and will go a long way towards improvement in the capital market, safeguarding of investor's interests and strengthening of accountability of the corporate sector.

The Securities Exchange Commission of Pakistan (SECP) which will have full financial, administrative and operational autonomy would comprise five commissioners including the chairman. The commissioners will be appointed by the government and would be responsible for different divisions like securities exchange, investment, company law and, more importantly enforcement. Each commissioner will have a tenure of three years. Out of five, three, including the chairman, will be from the private sectors while two will be government servants.

However, this autonomy will be tempered by a Policy Board comprising three members each from the government and the private sector which will oversee the functioning of SECP and also pass its budget. Members and chairmen of both the bodies will be appointed by the government.

A source stated that the proposed changes in the two laws go for beyond the package proposed by the Asian Development Bank under its $250 million programme loan, because of the government's keenness to bring the Pakistani financial market at par with other countries in terms of regulation and operation.

SECP, it is learnt, would submit an annual report to the parliament on its activities. This report would be open to public scrutiny as well. While it is expected that the staff of SECP would have to be expanded substantially in view of its increased work as a regulator under both the securities exchange, and companies law, it has also been decided that a powerful Enforcement Department would be established within SECP to guard against violation of the rules by various operators in the capital market.

The amendments in the two laws—the securities and exchange and Companies Ordinances—have been proposed in the light of the recommendations made by a Commission headed by Justice (Retd) Shafiur Rehman to review corporate law. Amendments proposed in the Companies Ordinance, 1984 are as follows.

  1. Partnerships carrying on practice as solicitors, lawyers and accountants may be exempted from the obligation of conversion into a company in case the number of partners exceeds (Section 14).

  2. The companies making public offering of shares will have the option to publish only an abridged version of prospects for offering shares to the public. This would curtail the publication cost, Besides preventing confusion amongst the prospective investors. However, they would have to make available full prospectus at the registered office of the company, the stock exchanges and bankers to the issue (New section 53(a).

  3. With a view to making the director's report more meaningful, following additional information may be provided in the report which is part of the annual report of the company to the shareholders: (a) Earning per share: (b) Reasons for incurring loss and a reasonable indication of future prospects of profits, if any: (c) Information about defaults in payment of debts, if any, and reason thereof: and (4) any other matters specified by the Authority (Section 236).

  4. Exemption to private companies from filing copies of annual accounts with the registrar of companies may be withdrawn so that information about accounts of such companies should become available to the public (Section 242). This would also make it difficult for the companies to maintain double accounts, the source explained.

  5. The Authority may grant extension upto 10 days for filing copies of half-yearly accounts. At present,. there is no room for extension in case of failure to submit such accounts within two months of close of the first of their year of accounts. Besides, under the proposed amendment, in case of delay upto 30 days the penalty would be in the form of fine. The provision about one year imprisonment would apply only after that period (Section 245).

  6. Companies with paid-up capital of three million rupees or more would have to be audited by a qualified auditor who may either be a chartered accountant or a cost and management accountant. The proposed amendment would take care of the interests of shareholders having investment in private companies of substantial size (Section 254),

Amendments proposed in the Securities and Exchange Ordinance, 1969, are as follows.

  1. Since 1981, most of the powers and functions of the federal government are delegated to the authority. This arrangement is proposed to be formalised through replacement of the words "Federal Government" with the word "Authority". However, the power to constitute the Advisory Committee for carrying out the purposes of the Ordinance, delegation of further powers to other persons and grant of exemptions shall continue to remain with the federal government (Sections 27,28 and 29).

  2. Registration of stock brokers and agents will be compulsory for engaging in the business of securities. New Section 5A).

  3. For the protection of investors, ensuring fair dealings and good administration of stock exchanges, a provision is being made for suspension of any director, officer or member of the stock exchange. The ordinance already provides for their removal from office (Section 7).

  4. At present, trading in any listed security can be suspended in the public interest for a period of 60 days which is extendable for a further period not exceeding 60 days at any time. The initial period of 60 days is being lowered to serve the purpose of trade suspension for a lesser period of time if warranted by circumstances (Section 9).

  5. By an amendment proposed in Section 21, the number of members who can demand enquiry into the affairs of a stock exchanges is being reduced from one-fifth to one-tenth of members.

  6. The existing quantum of penalty not exceeding Rs. 30,000 for willful refusal or contravention of lawful orders was fixed in 1980. This amount is proposed to be raised to Rs. 100,000 and the penalty for continuing defaults to be enhanced from Rs. 1,000 to Rs. 2,000 per day.

  7. A person found guilty of fraudulent acts is now punishable with imprisonment for up to three years and fine up to Rs. 30,000. The amount of fines may be raised to Rs. 500,000 (Section 24).

  8. Enabling powers are proposed to be provided for regulation of the business of share transfer agents, balloters, underwriters and sub-underwriters, consultants to public issue and other ancillary activities relating to the stock market. For this purpose, rules will be framed to prescribe the manner of such regulation (New Section 32 C).

The proposed amendments are based on the recommendations of a Commission headed by Justice (Retd) Shafiur Rehman which extensively reviewed the various provisions of both the ordinances and prepared its recommendations for removal of loopholes and deficiencies which it identified in the existing laws. The elevation of the CLA to an autonomous commission with full financial, supervisory and operational powers to oversee and regulate the entire corporate sector of the country and the working of the stock exchanges, is a step in the right direction.

This would ensure that not only the trading activity in the domestic stock exchanges has lately been growing briskly, thanks to participation from the foreign portfolio investors, but also the corporate sector would be overseen closely for its expansion and development on modern lines. Also the image of the country would be enhanced for attracting foreign entrepreneurs to participate in the process of investment and capital formation in Pakistan. The country would have to move in step with the healthy and transparent standards of corporate management. This is the only way to convince the prospective foreign investors about the country's healthy corporate practices.