Money Matters

Reading the law

Money Matters
By Abdul Rehman Qureshi
Mon, 07, 20

The Securities and Exchange Commission of Pakistan, the apex regulator of the capital market and the corporate sector while introducing certain amendments in the Companies Act, 2017 which repealed the Companies Ordinance, 1984 projected it as a necessity and a revolutionary step towards ease of doing business in Pakistan. Unfortunately, the local press, investors, professionals and the companies did not absorb it in good taste.

The Securities and Exchange Commission of Pakistan, the apex regulator of the capital market and the corporate sector while introducing certain amendments in the Companies Act, 2017 which repealed the Companies Ordinance, 1984 projected it as a necessity and a revolutionary step towards ease of doing business in Pakistan. Unfortunately, the local press, investors, professionals and the companies did not absorb it in good taste.

Mainly their frustration appears to be the result of unnecessary haste adopted in bringing the revolution and that too through a Presidential Ordinance. It seems that the SECP and its policy board did not realise the need of thorough debate and public consultation as indicative from the previous process history of the Company Law in Pakistan.

The amendments made can be placed into four categories. (i) Additions and deletions to rectify the innocuous omissions and errors, which were not causing any hindrance to the proper application of the Act; (ii) those meant to improve the working of the Act, but did not warrant the need of implementing any Ordinance therefore; (iii) omission of few sections pertaining to registration and valuation by valuers, fixation of special service quota, to control acceptance of advances by real estate companies, mediation and conciliation panel which did not relate to the subject matter of company law but were included without any demand or justification; and (iv) certain major amendments to bring some improvement, but these are also patently unjustified and against the spirit of the company law.

My concern is the fourth category of amendments inserted in the act through the ordinance. This article briefly discusses the concerning sections.

Foremost is Section 17(4) Effect of memorandum and articles. It relates to penal action for violation of this section. The words “violations of direction given by the registrar” have been added through the ordinance, whereas the role of registrar to give direction vide proviso to sub-section (2) stands deleted. The insertion of such phrase was unwarranted and is ultra vires.

Section 23 too is problematic, as this section which required the companies to have a ‘common seal’ has been omitted. The common seal of companies is a very important instrument and withdrawal of such legal support to the companies, is not justified. Further, via Section 31, the time tested requirement of providing essential particulars of the subscribers to the memorandum has been deleted.

Further, according to the amendment (Section 32), a company now has to seek approval of the SECP through a petition when it needs to change address. This appears to be ridiculous.

Under Section 43, effect of revocation of license, allowing transfer of assets of a company regulated by the SECP in a professional manner to any other entity which may not be subject to strict regulation like societies or trusts is neither justified nor advisable.

Similarly, the deletion of authentication of shares certificate through common seal is not understandable and uncalled for in Section 62. It may result into issue of duplicate certificates causing serious complications and leading to unending litigation where even superior courts may not be in a position to settle disputes of ownerships. The same can be said of Section 70, as the declaration of CEO in substitution of an auditors’ report would not serve the purpose.

The SECP via Section 132 now has the power to shorten the notice period of 21 days for the annual general meeting of listed companies, with no minimum limit. The commission must avoid usurping the basic powers and rights of members in the name of facilitation.

The commission has also tinkered with the provision about the government’s representation at meetings of companies under Section 139. The specific mention of provincial government has been ousted from the scheme of law. The Company Law being a federal law, from the term government, it would be taken as the federal government. Therefore, the existing provision should not have been disturbed.

SECP has also reduced the number of members must to move a resolution in the general meeting from 10 percent to five percent in Section 140. The time honoured, and democratic principle of majority rule, should not have been compromised.

Amendment in Section 149, which removed the maximum limit of fifty in the case of public companies cannot be justified for any reason either. The amendment is not proper being prejudicial to the interest of the company and its members.

Through the ordinance in question, under Section 172, the following three circumstances have been omitted which means that a person cannot be disqualified, even he has entered into a plea bargain arrangement with NAB: (i) the affairs of the company of which he is a director have been conducted in a manner which have deprived the shareholders thereof of a reasonable return. (ii) the person has entered into a plea bargain arrangement with the NAB or any other regulatory body. (iii) that it is expedient in the public interest to do so. The exclusion of the grounds in (i) and (iii) are quite justified, but the ground at serial number (ii) is being criticised by the press and in electronic media talks which is cogent to some extent. It must be kept in mind that disqualification under the circumstances mentioned in section 172 are up to a period of five years as such there may be an argument that why one should be disqualified/deprived to do any business or to become member of a company throughout his life time as it will be unjustified.

Again, in Section 179 the existing section provided that a resolution in writing signed by all directors or the committee of directors for the time being shall be a valid resolution whereas after the amendment through the ordinance it provides that a resolution in writing approved by all the directors shall be a valid resolution. In my view there is no material impact as a record of grant of approval will have to be maintained and preserved in the same manner as provided earlier.

Following sections 181, 186, 187, and 244, also are a cause for concern.

Amendment to Section 181 takes away the protection to independent and non-executive directors. One might ask here why competent persons would accept responsibility to improve the quality of management without remuneration, if they would have to face prosecution proceedings for minor defaults and lapses.

Discussing Sections 186 and 187, which are to do with government(s) power to appointment of Chief Executive is important here too. The omission of sub-section (4) which gives powers to the government to nominate chief executive in a public sector company, is not justified. The insertion of sub-section (4) was a well thought out provision which based upon practical experience in the case of nominee chief executives/ managing directors appointed by the government in the past, whether they were appointed by the federal government or provincial governments as chief executives of public sector companies but at the expiry of their tenure, few nominee persons in connivance with the other nominee directors refused to quit which resulted in prolonged litigation. It is, however, questionable as to who was interested in recommending the deletion of such a provision, which was inserted to safeguard the interest of the government and to avoid any subsequent embarrassment.

Also, in my view, the earlier as well as new arrangements under Section 244 are unjustified. To confiscate private property, may it be in the kind of shares or cash is unlawful and unconstitutional because shares allotted to the members and declared dividend by the companies is always property of the investors and the company’s management must ensure the protection of the members’ rights.

There are genuine reasons to urge that the Companies (Amendment) Ordinance, 2020 is withdrawn forthwith and if the government and the SECP are serious to remove the anomalies, to bring further improvement.

In this regard, a committee needs to be formed comprising professionals who possess the requisite knowledge, experience and expertise of bringing the corporate laws in consonance with the international level and standards but during the exercise, ground realities must be kept in view.

The writer is the former commissioner of SECP