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The need for good corporate governance in Pakistan is undisputed

From SHAMIM A. RIZVI
Islamabad
 Nov ,19 - 25, 2001

It has been universally proved that economies with more transparent corporate sector attract much more higher degree of private investment as compared to ones that do not manage higher level of governance.

This was observed by Mr. Khalid A. Mirza, Chairman, Securities and Exchange Commission of Pakistan (SECP) adding that the Commission was endeavouring hard to develop a new corporate culture in Pakistan which is both transparent and effective.

The Chairman, SEC was addressing the participants of the Seminar on Code of Corporate Governance organized by Overseas Investors Chamber of Commerce and Industry in Islamabad on Wednesday November 14, 2001. Other speakers included Mr. Moin Fudda, President OICCI, Mr. Ebrahim Sidat, Partner Sidat Hyder Qamar & Co., Mr. Masoud Ali Naqvi, President MAP, Mr. Mian Akram, Chairman, Islamabad Stock Exchange, Ms. Nausheen Ahmad, ICI Pakistan Ltd., Mr. F.W. Vellani, Director, Lever Brothers Pakistan Ltd. Mr. M.J. Jaffer, Sr. Partner, Orr Dignam, and Ms. Uzma Ahmad, Consultant Proxy Monitor, New York.

This seminar concluded the consultative process initiated by the SEC on the subject. Two seminars have been held in Karachi and Lahore in November 2000 and May 2001 respectively to elicit public opinion on the final set of recommendations. Finalization and implementation of this Code is just a first step towards bringing good corporate governance to organizations. Once implemented it would be essential to ensure that recommendations of the Code are followed, and compliance and enforcement in this regard is essential.

Corporate governance is the relationship of a company with its shareholders, and the objective of developing a Code is to establish a system whereby a company is directed and controlled by its directors in compliance with the best practices enunciated by the Code so as to safeguard the interest of diversified stakeholders. It has been empirically observed that countries with good corporate governance norms attract more capital and investor confidence is higher as compared to others with weak governance structures.

The need for good corporate governance in Pakistan is undisputed for the promotion of a healthy and competitive corporate sector and to attract foreign and local investment. Thus, this Code would help achieve transparency, institution building, incentives and accountability in the corporate sector, as its key features include, separation of management of public owned companies with ownership; enhanced disclosure and transparency in operations; quality control of audits; effective representation of minority shareholders and non-executive directors of companies; and it shall be applicable to listed companies, banking companies, Development Finance Corporations (DFIs), Non-Banking Financial Institutions (NBFIs), insurance companies, mutual funds, unit trusts, and companies/ corporations held or controlled by the Government.

The Code is a result of joint efforts by the SEC and Institute of Chartered Accountants of Pakistan (ICAP), and was initiated by ICAP in December 1998. The Code has been developed on similar lines as The Cadbury Committee Report, UK; The King's Report, South Africa; OECD Principles, Paris; Report on Corporate Governance in Netherlands; Report of Hong Kong Society of Accountants; and IFAC's code of ethics for professional accountants. However, it provides a more tailored framework for the corporate sector in Pakistan.

The other subject on which the SEC is focusing its attention is the insurance sector. Besides taking some immediate corrective measures of urgent nature, the SEC has appointed a task force headed by Mr. Kamal Afsar, Chairman, Pakistan Reinsurance Company Limited (PRCL) to have in depth study of the problems faced by the insurance industry in Pakistan, especially in the context of recent developments in the aftermath of September 11 events in the United States. The task force was asked to submit a workable plan of action by November 11 in the United States. It has asked for some more time for finalizing its report in view of the rapid changes in the scenario. The matter has, however, gained urgency, as the international reinsurers have stopped providing reinsurance cover to the insurance companies in case of loss/losses, caused on account of terrorist activities, riots and strikes. In addition, insurance rates, particularly in this region, have also been raised by the international reinsurers. The report of the task force is expected by the end of November.

In the meanwhile, however, SEC has taken numerous steps to strengthen the insurance industry in Pakistan. Responding positively to the repeated appeals from the Insurance Association of Pakistan (IAP), Khalid Mirza, Chairman SEC, has done well to ask the commercial banks to stop linking enlistment of insurance companies on their panels with deposits. And while so advising them, he drew their attention to the obligation of strictly abiding by the relevant provisions of the Insurance Ordinance 2000 in the best interest of the national economy.

A source in the SECP told this correspondent that the new Insurance Law i.e. Insurance Ordinance, 2000 promulgated in August, 2000, as a result of insurance sector reforms undertaken in collaboration with the Asian Development Bank empowered the SEC to regulate insurance business in the country. The new law, has been introduced to regulate the business of the insurance industry, with the prime objective of ensuring the protection of the interest of the policyholders. In this connection the foremost task in hand is to improve and strengthen the capital base of the general insurance companies operating in the country. These companies are required to enhance their paid up capital to Rs. 50 million by 31st December, 2002 and Rs. 80 million by 31st December, 2004. At present about thirty five non-life insurance companies are still maintaining paid up capital of less than Rs. 50 million. A detailed action plan is being prepared in collaboration with IAP as well as Institute of Chartered Accountants of Pakistan (ICAP) to facilitate these thirty five companies to comply with this pivotal statutory provision. Since it is envisaged that insurers who do not raise their paid up capital within the stipulated time frame, would either opt for a merger or make an orderly exist. The plan, therefore, hopes to address the three conceivable options of compliance, merger or exit.

Another important area is the complaints received in the Commission against non payment of claims by the insurance companies. Generally, on investigations, it is observed that company's unwillingness or inability to pay the claim, even in cases when the claim was assessed and declared payable by an independent insurance surveyor has been due to lack of sufficient/sound reinsurance arrangements. In some cases even the treaties obtained by the companies were found fake issued by the reinsurers who do not exist. In order to watch and protect the interest of the insured/policyholders in the country, efforts are being made by the SEC to enhance the capacity of the local insurance industry to honour the claims made on it. In this connection, the SEC has issued a directive to all insurance companies operating in Pakistan to make sound reinsurance arrangements, through international reinsurers, at least rated "A" class, by the reputable international rating agencies. The Commission is conscious of the fact that without credible reinsurance arrangements an insurance company's first line of defence, reinsurance is incomplete on a risk coverage mechanism. Under the new Insurance Law, insurance companies are required to furnish necessary details in respect of the reinsurance arrangements made by them to the Commission annually. These arrangements are other than the compulsory reinsurance arrangements which all general insurance companies are required to make, up to 15% as well as 35% of their business, to Pakistan Reinsurance Company Limited (PRCL). These compulsory cessions offers are in any case to be made to the PRCL which does not require any rating by the international rating agencies and therefore not fall within the latest directive issued by the SEC.