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Amendments in the companies ordinance

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From Shamim Ahmed Rizvi, Islamabad

Feb 07 - 13, 2000

A number of amendments have been made and new provision inserted in the companies ordinance, 1984 during the year 1999 in order to improve the relevent laws making them effective to meet the requirements of a sound regulatory system—an exercise efficiently undertaken by the Securities and Exchange Commission during the first year of its operation.

Abdur Rehman Qureshi, Commissioner Company Law told this correspondent that corporate laws structure has been greatly improved by making far-reaching amendments in the companies ordinance with a view to improving monitoring of the affairs of the companies with a view to making them accountable. Mr. Qureshi disclosed that the following amendments have been made in the corporate laws during the year 1999.

Through Finance Act. 1999

A Companies Ordinance, 1984:

i) Section 86:

Provisions have been made to allocate a certain percentage of further issue for the employees of the companies under "Employees Stock Option Scheme". This has been done to provide an incentive to employees for participation in the affairs of the companies.

ii) Section 90:

Previously there used to be only one kind of share capital which was ordinary share capital. Amendment has been made so as to provide that a company may have different kinds of share capital and classes therein as provided by their Memorandum and Articles. The amendment lays down that for the purposes of different rights and privileges in relation of different classes of shares, Commission may make rules. Necessary rules are under process.

iii) Section 95:

Listed companies have been allowed to purchase their own shares.

iv) Section 95A:

Detailed provisions have been made regarding the restrictions and conditions applicable to listed companies intending to buy back their own shares. The amendment was made to improve the condition of the stock market and to stabilize the prices of shares in the market.

v) Section 197A:

The 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.

2. Through the Companies (Amendment) Act, 1999

i) Section 14:

The restriction on partnership firms to convert their business into the form of a company if number of their partners exceed twenty, has been removed in the case of lawyers and accountants or any other profession where practice as a limited liability company is not permitted.

ii) Section 53:

Companies have been allowed to publish abridged form of prospectus instead of full text so as to save the expenditure.

iii) Section 236:

Directors' report has been made more elaborate and transparent, by prescribing more disclosures.

iv) Section 245:

The penalty which was in the form of imprisonment in the case of any default in circulation of half yearly accounts, has been changed to penalty in the form of fine. This has been done on the general demand of the business community.

v) Section 254:

Previously there was no qualification prescribed for auditors of private companies. Now, the private companies having paid up capital to the extent of three million rupees or more will be required to get their accounts audited by a chartered accountant.

B. Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980.

i) Section 2:

Consequent upon the establishment of the Securities and Exchange Commission of Pakistan, the term "Commission" has been inserted and defined.

ii) Sections 19,20 and 22:

In line with the provisions of the Securities and Exchange Commission of Pakistan Act, 1997, the role of the Federal Government has been assigned to the Commission.

iii) Section 32:

Provision has been made for the right of appeal to the aggrieved parties against the orders of the Registrar Modaraba.

C. The Securities and Exchange Commission of Pakistan Act,1997

i) Section 20(4):

In the relevant section 20 relating to the powers and functions of the Commission, the role of the Commission has been specified in matters falling under the Securities and Exchange Ordinance, 1969 and Modaraba Companies and Modaraba (Flotation and Control) Ordinance, 1980.

ii) Section 20(7):

Speciflc powers have been given to the Commission for calling for any information/document from the companies, in the interest of the investors.

iii) Section 23:

Sources of "Fund" of the Commission have been specified so as to remove any ambiguity in the existing provisions.

Important Notifications issued under the Companies Ordinance, 1984

8. NOTIFICATIONS

(1) By Notification SRO No. 777(I)/99, dated June 24, 1999, the Commission in exercise of the powers conferred by sub-section (3) of section 1 of the Companies Ordinance, 1984 appointed the 24th day of June, 1999 the day on which section 296 of the said Ordinance come into force.

(2) By Notification SRO No. 778(I)/99, dated June 24, 1999, the Commission in pursuance of sub-section (2) of section 296 of the Companies Ordinance, 1984 constituted and set up a Task Force to be called "Task Force for Revival of Sick Industrial Units" for the purposes of the said section 296 and to draw plans for the rehabilitation, reconstruction and reorganization of companies owning sick industrial units.

(3) By Notification SRO No. 781(I)/99, dated June 25, 1999, the Commission in exercise of the powers conferred by section 296, read with section 506 of the Companies Ordinance, 1984 published the draft of the Companies (Rehabilitation of Sick Industrial Units) Rules, 1999 for eliciting public opinion.

(4) By Notification SRO No. 889(I)/99, dated July 30, 1999, the Commission in exercise of the powers conferred by section 95A, read with section 506 of the Companies Ordinance, 1984 published the draft of the Companies (Buyback of Shares) Rules,1999 for eliciting public opinion.

(5) By Notification SRO No. 897(I)/99, dated August 3, 1999, the Commission in exercise of the powers conferred by section 296, read with section 506 of the Companies Ordinance, 1984 framed the rules, namely the Companies (Rehabilitation of Sick Industrial Units) Rules, 1999. The Rules mainly prescribed that:

1. Only such companies shall be eligible to buy back their shares which meet the following conditions:

(i) These are solvent and have sufficient distributable profit;

(ii) have debt equity ratio of 60:40 and current ratio of 1: 1; and

(iii) have sufficient cash balance.

2.The procedure for the buy-back would be as under:

(i) The proposal of buy-back shall be approved by shareholders through special resolution;

(ii) purchase shall be through tender notice. In case, offers received exceed the requisite purchase, the acceptance shall be on pro-rata basis; and

(iii) full disclosure about the proposed purchase shall be made in the notice of the meeting.

(6) By Notification SRO No. 1319(I)/99, dated December 6, 1999, in exercise of the powers conferred by section 506 of the Companies Ordinance, 1984, the Commission published the draft of certain amendments in the Companies (General Provisions and Forms) Rules,1985 for eliciting public opinion.

(7) By Notification SRO No. 1337(I)/99, dated December 14, 1999, the Commission in exercise of the powers conferred by section 95A, read with section 506 of the Companies Ordinance, 1984 framed the rules, namely the Companies (Buy-back of Shares) Rules, 1999. The main features of the Rules are:

(8) By Notification SRO No. 1338(I)/99, dated December 14, 1999, the Commission in exercise of the powers conferred by section 506 of the Companies Ordinance, 1984, read with clause (b) of section 43 of the Securities and Exchange Commission of Pakistan Act, 1997, framed the rules, namely the Companies (Asset Backed Securitization) Rules, 1999. These Rules provide an opportunity to companies to mobilize resources against their receivables. Assets capable of being securitized include financial and operating lease, credit card receivables and trade receivables. The Rules comprehensively provide for treatment and obligations of Special Purpose Vehicle (SPV) which is envisaged to be public limited company. The SPV would be responsible for securitizing the receivables and to issue Term Finance Certificates. The income of the SPV has already been exempted from income tax under the Finance Act, 1999. The process of securitization would provide an additional mode of mobilization of resources to companies and other corporate entities. It could also lead to lowering the cost of funding and allowing even sub investment grade companies to access the capital market. The process of securitization would also lead to development of debt market in Pakistan as SPV would be allowed exemption from income tax only if they make public offering against the securitized assets.

Notifications issued under the Securities and Exchange Commission of Pakistan Act,1997

(I) By Notification SRO No. 76(KE)/99, dated March 25, 1999, in exercise of the powers conferred by section 33 of the Securities and Exchange Commission of Pakistan Act, 1997, the Commission constituted three Appellate Benches, namely:

1. Appellate Bench No. 1.- Comprising Commissioner (Company Law) and Commissioner (Securities Market) to hear appeal against an order of Commissioner (Enforcement and Monitoring) and Commissioner (Specialized Companies).

2. Appellate Bench No. 2.- Comprising Commissioner (Securities Market ) and Commissioner (Specialized Companies) to hear appeal' against an order of Commissioner (Company Law ).

3. Appellate Bench No. 3.- Comprising Commissioner (Company Law) and Commissioner (Enforcement and Monitoring) to hear appeal against an order of Commissioner (Securities Market).

(2) By Notification SRO No. 77(KE)/99, dated March 25, 1999, in exercise of the powers conferred by section 10 of the Securities and Exchange Commission of Pakistan Act, 1997, read with section 20(4)(o) thereof, the Commission delegated its powers and functions under the Companies Ordinance, 1984 to its Commissioners.

(3) By Notification SRO No. 779(I)/99, dated June 25, 1999, in exercise of the powers conferred by section 40 of the Securities and Exchange Commission of Pakistan Act, 1997, as required by sub-section (2) of the said section, the Commission published the draft "Members' Agents and Traders (Eligibility Standards) Regulations, l999" for eliciting public opinion.