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SECP launched to cleanse corporate sector

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Operation aimed at protecting the interest of minority shareholders, discouraging the system of family directors

From Shamim Ahmed Rizvi, Islamabad
July 19 - 25, 1999

The Securities and Exchange Commission of Pakistan (SECP) formerly known as Corporate Law Authority (CLA) which came into existence on January 1, 1999, has become fully operative. During the last few months it has taken a number of measures to cleanse the corporate sector and improve its performance. The operation of the Commission is aimed at making the SECP effective enough to ensure its presence in the concerned circles.

The Commission has launched a multipronged operation to make the working of the corporate sector more transparent, protect the interest of the minority shareholders, to discourage the system of family directors and to create an environment under which the declaration of dividend for the shareholders cannot be avoided by the limited companies on flimsy grounds. Steps have been taken to streamline the working Modarbas and leasing companies and making their operation transparent.

The Commission, during the last few months, has also made an exhaustive study of corporate laws being administered by it and has observed that lot of amendments are needed to help in smooth running of the SECP, stabilizing the stock market, protecting the interest of minority shareholders and removing anomalies in the existing laws. Some of the amendments were found to be of such an urgent nature that they were approved by the cabinet on top priority basis. These amendments have already been made part of Finance Bill 1999.

Various amendments, additions have been made in the Companies Ordinance 1984 to achieve the following objectives:

(i) Employees Stock Option Scheme

In line with the policy of the government that employees of the companies may be encouraged to become shareholders of the respective companies, an "Employees Stock Option Scheme" has been introduced by which companies will be in a position to allocate a certain percentage of capital to be allotted to their employees.

(ii) Classes and kinds of share capital

According to the existing provisions of the Companies Ordinance, there is only one kind of share capital i.e. Ordinary Share Capital. There may be various classes under one kind, wherein the rights as voters and receipt of dividend of shareholders shall be proportionate to the paid up value of shares of respective classes. This has been causing difficulties in mobilizing the financial resources for companies. Under the new arrangement, the investors will be provided opportunity in selecting the security of their choice. It will attract the foreign investors who are generally interested in the return on their investment and not in the management of the companies. The wide variety of share capital will also facilitate in promoting the bond market where the holders will be able to exercise their option to convert their debt into equity. Besides, it will also facilitate for the process of privatization of public sector units.

(iii) Power of companies to buy back their own shares

Presently, companies are prohibited under section 95 of the Companies Ordinance, 1984 to buy back their own shares. Proposals were received from the Karachi Stock Exchange and from their experts that the listed companies may be allowed to buy back their own shares subject to certain safeguards, particularly when their shares are being quoted below their break up value. The buy-back may improve the prices of shares, may cause higher rate of dividend, and also may improve the overall conditions of the stock market. The proposal was also supported by Corporate Law Commission set up under the chairmanship of Mr. Justice (Retd.) Shafi-ur-Rehman. Appropriate amendment has been made in section 95 of the Companies Ordinance, 1984 and a new section 95A has been inserted in the Ordinance for the purpose.

(iv) Prohibition of distribution of gifts to shareholders during the annual general meeting

It has been observed that the directors of the companies on the eve of annual general meeting try to please the shareholders by distributing gifts to them. The apparent objective of such practice is to avoid critical evaluation of the performance of the directors and in this way the main purpose of holding AGMs is negated. With a view to providing an opportunity to the shareholders to play their statutory role in the AGMs, distribution of gifts has been prohibited and a new section 197A is proposed to be inserted.

Amendment in the Modaraba companies and Modaraba (flotation and control) Ordinance, 1980.

(i) Role of SECP in the Modaraba ordinance

Presently, SECP has no statutory power in the Modaraba Ordinance despite the fact that it is responsible for regulating Modarabas.

It was proposed that SECP should have original jurisdiction in all matters relating to Modaraba companies and Modarabas instead of having the powers delegated to it by the Federal Government. Amendments in the relevant sections 19,20 and 22 of the Modaraba Ordinance have therefore, been made.

(ii) Right of appeal against the penal orders of the Registrar Modaraba

According to the existing provisions, aggrieved parties have not been given any right of appeal against the orders of Registrar Modaraba imposing fines etc. Such right has now been given by amending the section 32. The appellate authority in such a case shall be the SECP.

Employees stock option scheme

In line with the policy of the government that employees of the companies may be encouraged to become shareholders of the respective companies, an "Employees Stock Option Scheme" has been introduced by which companies will be in a position to allocate a certain percentage of capital to be allotted to their employees.