Oct 21 - 27, 2002

All the amendments suggested by the Securities and Exchange Commission of Pakistan (SECP) in the Companies Ordinance, 1984, with a view to update the law and remove practical difficulties have been approved by the cabinet. Briefing newsmen on the amendments, Commissioner, SECP Mr. Abdul Rehman Qureshi said that the SECP had undertaken a comprehensive review of the Companies Ordinance, 1984, which was long over due as it was found deficient in many respects to meet the current problems in the corporate sector in the changed scenario. For this purpose, the SEC appointed a committee in January 2001, which reviewed the 1984 Ordinance thoroughly. The committee made an objective study of the said law and submitted its report wherein a number of amendments in the Ordinance, were recommended.

The proposed amendments were widely circulated, inviting suggestions from professional accounting bodies, trade organizations, stock exchanges and legal experts. The proposals were also placed on the Commission's website and released to the press. A roundtable conference of the corporate experts, professionals, businessmen and representatives of stock exchanges and trade organizations was also held in Lahore for seeking their point of view about the proposed amendments. The comments received from the professional bodies, legal experts and other relevant quarters were considered and appropriate changes were made in the draft law.

The suggested amendments mainly relate to introduction of the concept of single members of private companies and reduced number of directors of public companies, providing right of appeal against refusal of transfer of shares by the directors, empowering the SEC to rectify the register of mortgage to be maintained by the registrar and companies, reduction in period to present annual audited accounts in annual general meetings of companies, providing copies of minutes of meetings to the directors, appointment of qualified company secretary by listed companies, streamlining and simplifying the provisions relating to investment in associated companies, quorum of listed companies, winding up of the companies, removal of auditors, preparation of accounts of subsidiaries of listed companies and consolidation of accounts to bring it in conformity with International Accounting Standards. The amendments would help in smooth working of the Commission, development of corporate sector, stabilizing the stock market, protection of interest of investors and removing certain abnormalities.

The salient features of the proposed amendments include the following:

Incorporation of single member company 'SMC'. Presently for the formation of a private company, at least two persons are needed. Now, as a result of an amendment, a new concept of single member private company 'SMC' has been introduced to admit the entry of individual businessman in the corporate sector. According to it, an individual trader or manufacturer would be able to form a company having its own separate entity enjoying the privilege of limited liability. This new concept would not only be beneficial to the investors but would also go a long way in the expansion of a disciplined corporate sector. The concept of single member companies is working successfully in European countries.

At present all companies were required to prepare and lay before the members-in annual general meetings their audited accounts and statement of income and expenditure within a period of six months of the close of their accounts. They may seek a further extension of three months, it means nine months were available to companies for the finalization and presentation of their accounts in the annual general meetings. Now a period of four months has been provided to the companies for presentation of audited accounts before shareholders. This can easily be completed in this era of information technology.

The private companies which convert into public companies after one year of their incorporation have been exempted to hold their statutory meetings.

It was also observed that the conditions and restrictions relating to the investment in associate undertakings imposed under the existing provisions were too harsh, causing negative impact on the business of sister concerns. While liberalizing the provisions, the maximum limit of thirty per cent of the paid up capital plus free reserves of the investing company has been removed and the role of the regulator to grant waiver to certain companies has been done away with. Members of a company may now be able to make final decision through special resolution, after having full disclosure of the investments.

According to the existing provisions of the Companies Ordinance 1984, the promoters who want to establish a public company were facing difficulties in associating other persons as promoters and directors just to complete the requirement of having minimum seven. The amendment would enable the promoters to establish a public company with a minimum number of three members/directors.

A person who has been declared as defaulter in repayment of loan to a financial institution exceeding such amount as may be notified by the Commission from time to time has been made ineligible to become director of a listed company. Likewise a member of a stock exchange or his spouse would not be able to become director of a listed company.

It was also considered that mostly the liquidators cause extraordinary delays in finalizing the winding up proceedings and they with a view to keep them under the discipline and to complete the process within the prescribed period, a provision has been inserted that no individual may be assigned the liquidation of more than three companies at a time and their remuneration may be stopped on the expiry of prescribed period of one year.

Although the companies are bounds to register transfer of shares within 45 days after the receipt of application for registration of transfer of shares, yet the directors can refuse transfer of shares within 30 days on some valid grounds. As no remedy is available in case shares are not transferred within the prescribed period or without any valid reason, an amendment has been made providing a right of appeal before the Commission against such refusal to transfer of shares or delay in transfer of shares.

Besides, in case of delay in filing of documents with the registrar for the registration, modifications and satisfaction of a mortgage or charge created by companies in favour of banks and financial institutions, the extension in time is required to be obtained from the High Court. In order to facilitate the companies donor agencies and the banks etc for earlier registration of the mortgages or charges, the powers of granting extension are proposed to be transferred to the Commission.

Keeping in view various complaints from members of the Board of Directors of companies that minutes of the meetings are not recorded timely and copies thereof are not provided to them, suitable amendments has been incorporated making it compulsory that copies of such minutes will be provided to every director within 14 days of the date of such meetings.

An elaborate procedure of election of directors of companies having share capital is provided in the Companies Ordinance, 1984 but no procedure and system exists for the election of directors of companies not having share capital. Now a specific procedure for election of director of the companies not having capital is required to be provided in the articles of such companies.

Appointment of a whole time qualified company secretary by a listed company has been made mandatory for efficient corporate compliance. A single member company has also been made liable to appoint a secretary.

Presently removal of auditors during the period of one AGM to the next AGM has remained disputed and question has always been raised as to whether an auditor can be removed or not. Now specific provisions for removal of auditors has been provided through which a company may remove its auditors through special resolution (by the majority of 3/4 members). However, appointment of auditors in place of removed auditors will be made with the approval of the Commission.

The quantum of penalty for non-compliance to the provisions relating to audit has been increased from two thousand rupees to one hundred thousand rupees.

Quorum of a general meeting of a public listed company has been increased from three members to ten members present in person representing not less than 25% of total voting power.

Since the subsidiary companies of the listed companies are equally important for the shareholders of listed companies and public interest is indirectly involved therein, the private and non- listed public companies which are subsidiaries of listed companies has also been made liable to prepare their accounts in accordance with requirements of Fourth Schedule to the Companies Ordinance.

The existing provision of Companies Ordinance, 1984 provides that holding company shall annex accounts of its subsidiaries with its accounts and no provision exists about consolidation of accounts of holding and subsidiary companies. However, relevant International Accounting Standard provides for consolidation of such accounts, which has been accordingly inserted in the Ordinance.