Corporate Advance

Companies (Issue of Capital) Rules 1996 These Rules are in addition to Provisions given in Companies Ordinance, 1984. APLICATION OF RULES These Rules shall apply to: • •

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The companies purposing to offer share capital to the General Public. Listed companies purposing to increase their capital through issue of Right and Bonus shares. • All companies purposing to issue capital for consideration otherwise than in cash. Certain persons offering shares for sale to the public.

POLICY FOR ISSUE OF CAPITAL (First Offer) A company which owns a Loan Based Project or Equity Based Project and proposes to raise capital through public offer for the first time shall comply with the following conditions: 1. LOAN BASED PROJECT •

Size of capital to be issued shall be in accordance with the financial plan approved by the Institution financing the project. • The auditor shall certify that the Sponsor’s subscription has been received in full and at least 80% utilized in the project. • Stock Exchange shall certify that at least 30% of plant & machinery has been installed and last consignment of plant & machinery has been shipped. • The Sponsors shall all the time retain at least 25% of the capital of the Company.

2. EQUITY BASED PROJECT • • •

The fixed capital expenditure shall be entirely financed by Equity. The project must be appraised by a Financial Institution or a Commercial Bank or an Investment Bank. The appraisal report shall be accompanied by a certificate from the auditor conforming that: i.

Capital allocated to the Sponsors, Foreign and Local investors have been fully paid.

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ii.

•

•

The land for the project have been acquired L/C’s has been established and shipment schedule for plant & machinery with the supplier has been finalized.

The issue shall be fully under written and the Under Writers (Not being Associated Co.) shall include atleast two financial institution including Commercial Banks and Investment Banks. The Under Writers shall evaluate the project and their independent Due Diligence Report. The Sponsors shall retain atleast 25% of the capital of the Company for the period of 5 years from the date of public subscription.

ISSUE OF SHARES ON PREMIUM A Company may issue shares to the public on premium subject to the following conditions: • • • • • • •

It shall have profitable operation record of at least one year. The premium on public offer shall not exceed the amount of premium charged on placement. The issue shall be fully under written. The Under Writers shall give justification of premium in Due Diligence Report. The Due Diligence Report shall form the part of material contract. Full justification of the premium shall be disclosed in prospectus. The employees getting preferring allocation shall be charged premium at the same rate as to the public. The shares allocated to the any person on account of preferential allocation at Par shall not be saleable for the period of two years. These persons shall be issued Jumbo Certificate with the marking “Not saleable for two years”. After the expiry of prescribed period the shares would be splitted into Marketable Lots

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ISSUE OF RIGHT SHARES BY A LISTED COMPANY • •

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The company shall not make a right issue within one year of the first issue of capital to the public or further issue of capital through right issue. The company while announcing right issue shall clearly state the purpose of right issue, benefits to the company, use of funds and financial projection for three years. The financial projection shall be signed by all the directors who were present in the meeting in which the right issue was approved. The decision of the company to issue right shares shall be communicated to the SECP and the respective stock exchange on the day of decision. The company may charge premium on the right shares up to free reserves per share as certified by the company’s auditor, provided where a company purposes to charge premium on right issue above the free reserves per share shall be required to fulfill additional conditions: 1. At least 40% share holders undertake to subscribe their portion of right at such premium. 2. The remaining right issue shall be fully under written and the under writers shall give the full justification of premium in Due Diligence Report.

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The right issue of a loss making company or a company whose market share price during preceding six months has remained below than par value, shall fully and firmly under written. Book closure shall be made within 45 days of the announcement of the right issue. Payment and renunciation date once announced shall not be extended except under special circumstances with the permission of respective stock exchange. If announcement of bonus and right issue is made simultaneously the resolution of the Board shall specify whether the bonus shares covered by the announcement qualify for right entitlement.

ISSUE OF BONUS SHARES BY A LISTED COMPANY • • • •

The decision of directors regarding bonus issue shall be communicated to stock exchange & SECP on the date of decision. The free reserves shall be sufficient in issue of bonus shares after retaining in reserve account 25% of the capital as increased by issue of bonus shares. The auditor shall issue a certificate regarding reserve. All contingent liabilities shall be deducted by calculating minimum residual 25% reserve.

FREE RESERVES Free reserves includes any amount which has been set aside out of reserves or other surplus after adjustment of all intangibles or fictitious assets and is free that it is not 3

retained to meet any specific liability, diminution in value of asset contingencies and commitments. But does not include the followings: • • • • • • •

Reserve for revaluation of assets Goodwill reserve Depreciation reserve Development allowance reserve Worker’s Welfare Fund Provision for taxation deferred/current Capital redemption reserve

ISSUE OF SHARES AGAINST CONSIDERATION OTHERWISE THAN IN CASH Every company issuing shares for consideration otherwise than in cash has to fulfill following conditions: • • • •

Value of assets shall be determined by consulting valuer registered with Pakistan Engineering Council and have on the penal of atleast two financial institutions as valuer. Value of assets taken over shall be reduced by depreciation charged on consistent basis. Goodwill and intangible assets shall be excluded from the consideration. A certificate from a praticising CA shall be obtained, that the above conditions have been complied with.

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OFFER OF SALE OF SHARES BY CERTAIN PERSONS A person who holds more than 10% of shares of the company may offer such shares for sale to general public subject to following conditions: • • • • •

Size of capital be offered to the public shall be not less than 100,000,000 or 25% of the capital which ever is less. No premium shall be charged unless the company has profitable operations of one year. In case the premium is charged the offer shall be under written and the under writers shall give justification in due diligence report. Full justification of premium shall also be disclosed in offer for sale. Due diligence report is also make part of material contracts.

OFFER FOR SALE BY A PRIVATIZED COMPANY Where a company has been privatized by the Federal Govt. or the Provincial Govt. the new management shall not offer shares to the public for a period of 3 years from the date of privatization at a price higher than a purchased price per share. Adjusted by right or bonus shares or similar distribution made out of pre acquisition reserves.

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COMPANIES SHARE CAPITAL (variation in rights & privileges) RULES 2000 KINDS & CLASSES OF CAPITAL A company limited by shares may have more than one kind of share capital and may have different classes of share under each kind. Where a company intends to have different kinds of share capital it shall specifically so provide in its memorandum & articles. NATURE OF RIGHT & PRIVILEGES •

Different voting rights   

•

Different right of entitlement of:    

•

Voting right disproportionate to the paid up value of shares Voting right for specific purpose No voting right

Dividend Right shares Bonus shares Receiving of notices of meeting and to attend those meetings

Right & Privileges for period:  

Indefinite period Definite period

SPECIAL RESOLUTION The company has to pass to pass special resolution if it intends to issue different kinds of capital

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OTHER CONDITIONS  

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No company shall issue further capital of any kind except with the approval of SECP Offer of further capital of any kind shall be made to each existing share holder proportionately without any discrimination. If any of the existing share holder decline to accept the offer of further capitals the share so declined shall be disposed off by the directors in such manner as may be provided in the articles or special resolution. If the capital of different kind is offered to general public this fact shall be distinctly mentioned in offering documents together with respective rights & privileges.

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SECURITY & EXCHANGE ORDINANCE, 1969 SECURITY & EXCHANGE RULES, 1971 There are two parts of this Ordinance. 1) Listing of securities. (Part of our Syllabus) 2) Stock Exchange Regulations. (Not Part of our Syllabus) LISTING OF SECURITIES (Section 9) • • • •

• • •

Any Issuer (Company) who intends to get its securities listed on the Stock Exchange shall submit an application in a prescribed form to the Stock Exchange and a copy to SECP. On receipt of the listing application the Stock Exchange if satisfied may list the securities for dealing on the Stock Exchange. If the Stock Exchange refuses to list the securities then company can file petition with the SECP. And the SECP through an Order may direct the Stock Exchange to list the securities. Where after listing of the security the SECP or the SE find that the application is deficient in any material respect or the issuer (Co.) has failed to comply with any prescribed conditions or rules and that the continued listing of the security would not be in public interest, the SECP or the SE may by a order to require the issuer to correct the deficiency or comply with the prescribed conditions or revoke the listing. A listed security may de-listed on the application of issuer. The SE may deny or grant the de-listing for the protection of investor. Where SE refuses to de-list a security the SECP on the petition of issuer may direct the SE to de-list the security. The SECP or the SE, if thinks appropriate may suspend the trading of any listed security for a period of 60 days and the suspension period and the suspension period may be extended for another 60 days.

SECTION 15(A) Prohibition of deal on Stock Exchange by Insider No person who is or has been at any time during preceding six months associated with a company shall directly or the indirectly deal on a SE in any listed security or cause any other person to deal in the security if he has the information which:

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1. Is not generally available 2. Relates to a company 3. Would if become available it is likely to materially effect the price of that security. SECTION 15(B) Liability for contravention of Section 15(A) ♦ ♦

Where a person contravenes the provision of Sec-15(A) the SECP shall issue a show cause notice. If the person to whom the notice has been issued satisfied the SECP that: a) Any dealing on SE or any information communicated was not made with the intention of making any profit or causing a loss to a person. b) The dealing on the SE or any information was communicated in good faith in discharge of legal responsibilities, then the SECP withdraw the notice.

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If SECP is not satisfied with the explanation of person, it may direct him to pay any other who suffered loss for any contravention of Sec-15(A) compensation to pay which shall not less than the amount of loss sustained by the other person. Where the loss is not determined the amount of compensation equal to gain approved or loss avoided by a person shall be payable to SECP as arrears of Land Revenue. In addition to the compensation a person shall be punishable to imprisonment for a term which may extend to 3 years or with a five which may extend to 3 times of the gain approved or loss avoided or both.

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LISTED COMPANIES (PROHIBITION OF INSIDER’S TRADING) (GUIDELINES 2000) ISSUED BY SECP CONNECTED PERSONS It means ant person who is a director or occupies the position as an Officer or an Employee of the company or holds a position involving a professional or business relationship with a company and who may be reasonably expected to have an access to the unpublished price sensitive information in relation to the company. UNPUBLISHED PRICE SENSITIVE INFORMATION (UPSI) UPSI means any information which relates to the following matter relating to the company and which is not generally knowing or published but if it is published or it likely materially affects the price of securities of that company in the market. 1. 2. 3. 4. 5. 6. 7. 8.

Financial results of the company. (Interim or Final) Intended declaration of dividend. (Interim or Final) Issue of Bonus or Right Shares. Any major expansion plan. Any amalgamation, Merger or Takeover. Disposal of major part of undertaking. Any other information which may affect EPS. Any change in policies, plans, and operations.

PERSONS DEEMED TO BE CONNECTED 1. Companies under the same management or groups. 2. Members of stock exchange. 3. Banks 4. Mutual funds 5. Employees of self regulatory organization. e.g. Tax Department, Statement. 6. Relatives of aforesaid persons. INSIDERS • •

Connected Deemed to be connected

Means Directors, Chief Executive, Managing Agent, Chief Accountant, Company Secretary or Auditor of a listed company or a beneficial owner of not less than 10% shares in a listed company or A person who is or was connected or is deemed to have been connected with a company and who is reasonably expected to have access to UPSI by virtue of his connection. 10

PROHIBITION ON DEALING, COMMUNICATION AND COUNCELLING REGARDING INSIDER’S TRADING OR UPSI No person who is or has been at any time during the preceding six months associated with a company shall: • • •

Either on his own behalf or on behalf of any other person deal in security of a listed company on a SE on the basis of UPSI. Communicate any UPSI to any person with or without his request. Counsel any other person to deal in the security on the basis of UPSI.

VOILATION OF PROVISIONS RELATING TO INSIDER’S TRADING A person who deals, communicates or counsel in contravention of above provisions shall be liable to Pinal action under section 15-B of the SECP Ordinance 1969. INVESTIGATION BY SECP Where SECP is opinion that it is necessary to investigate and inspect the records of an insider it may appoint an inquiry officer. The inquiry officer shall furnish a inquiry report to SECP and SECP shall communicate the findings in the report to the insider who shall be provided an opportunity of hearing. On receipt of explanation from the insider the SECP may call upon the insider to take such measures as the SECP may deem fit to protect the interest of investor. DIRECTION BY SECP The SECP may without prejudice to its right to initiate criminal prosecution under section 15-B of the Ordinance, gives such directions as it may deem fit which includes the followings: • • •

Directing the insider not to deal in securities in any particular manner. Prohibiting the insider from disposing off the securities acquired in violation of these regulations. Restraining the insider to communicate or counsel any person to deal in the securities.

TREASURY STOCK Buy their own shares by the company in Pakistan. Only listed company can buy its own shares under certain conditions. POWER OF THE COMPANY TO PURCHASE ITS OWN SHARES (SEC-95 (A) 1. A listed company may purchase its own shares. 11

2. The purchase shall be authorized by special resolution which shall indicate the maximum number of shares to be purchased, maximum purchase price and the period within which it is to be made. 3. The notice of meting in which special resolution to be passed shall accompanied by an explanatory statement containing all material facts including the following: • • • •

Justification of purchase. Source of funding. Effect on financial position of the company. Nature and extent of interest of directors.

4. The purchase shall always be in cash and shall be out of distributable profit. 5. The majority of Directors including Chief Executive shall make a declaration verified by Affidavit that they have made full inquiry into the affairs of the company and they have framed an opinion that the company will continue to operate as going concern and it shall capable of meeting its liabilities in the next financial year. 6. The company shall prescribe Debt Equity Ratio and Current Ratio. 7. If the purchases made at premium the amount of premium shall be charged to share premium account and if there is no balance in this account it will be charged to distributable profit. 8. If the purchase is made at discount the difference shall be credited to “Capital Repurchase Reserve Account” this account may be used for issuance of Bonus Shares. The provision relating to reduction of share capital applied as if Capital Repurchase Reserve Account was part of paidup capital of the company. 9. The purchase shall be through tender system. 10. Where a company purchased its own shares it shall maintain a register of purchase and following entries shall be made: • • • •

No. of shares purchased. Consideration paid. Mode of purchase. Date of cancellation of shares.

11. The shares purchased under this section shall not be resold and shall be cancelled forthwith. 12. The company shall file a return about the shares purchased with the SECP and registrar within 30 days of purchase.

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THE COMPANIES (BUY BACK OF SHARES) RULES 1999 Financial Ratios Debt Equity Ratios 75:25 Current Ratio 1:1. The above ratios shall be disclosed in the explanatory statement annexed with the notice of meeting. Purchase Procedure 1. The Directors of the company shall take decision of purchase in this meeting and purchase price and number of shares to be purchased and they shall fix a date for General Meeting of the company to pass Special Resolution. 2. The decision of the Directors shall be communicated to the SECP and SE on the date of decision. 3. The tender notice shall contain the following information:    

Maximum No. of shares to be purchased. The manner in which offer to be communicated. The last date by which the offer to sell shall be made by the shareholder. The names and addresses of the designated branches of the authorized banks.

4. A shareholder interested to sell his share to the company in response of the tender notice shall make offer to sell in writing to the designated branches of the authorized banks providing following information:        

Name of the shareholder Father name / Husband name NIC No Address No. of shares offered Shares distinctive number (in case the shares are not in CDS) Folio number (in case the shares are not in CDS) If the shares are in CDS then the account number

5. The company shall take a decision within 10 days of the closing date. 6. In case the offer exceeds the required purchase the acceptance shall be made by the company on pro-rata basis in lots of 500. 7. The acceptance of the offer shall be communicated to the shareholder within seven days of the decision. 8. The shareholder whose offer has been accepted shall submit to the bank share certificates along with verified transfer deed within seven days of the receipt of the acceptance of the company.

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9. Where the shares are in CDS a confirmation from the CDC about the availability of shares along with authorization to transfer the shares to the designated bank. 10. In case the company bank (Designated) does not receipt the shares within seven days the acceptance of the company shall be deemed to have been revoked. 11. Company pays the price of shares purchased within seven days of the receipt of shares. 12. The purchase shall be disclosed in the Balance Sheet as reduction of capital and necessary details would be provided in the Notes to the Account.

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CENTRAL DEPOSITORY ACT, 1997 Central Depository System an Overview The CDS is an electronic book entry system to record the transfer of securities. Central Depository Company (CDC) has implemented it. This system changes the ownership of securities without any physical movement of certificates or execution of transfer deed. Securities will be deposited in CDS and transaction would be completed electronically, thereby, removing the difficulties of counting, verification, storage and transportation of certificates including settlement on the stock exchange. Stock market in Pakistan during the last several years has registered exceptional growth especially induction of new companies in financial sector, power and cement sector coupled with entry of foreign investors in Pakistan market. The trading volume in capital market has increased many folds and is likely to further increase many Government units have also been privatized and their sector have been listed on SE without automation and dematerialization of script/certificates the delivery and settlement has become unmanageable and risky there is also lengthy delays risk of damage / loss forgery and duplication. The CDS has overcome this problem and has also assisted in development of capital market. The issuer, shareholder, brokerage banks, custodians, and banks etc. all have benefits from CDC. BASIC OPERATIONS OF CDS      

Deposit of existing securities into CDS Withdrawal of security from system Free transfer or book entry transfer without physical movement Pledge and de-pledge of securities DVP delivery vs. payment facility Various corporate actions under Companies Ordinance, 1984

Elements of CDC  Account Holder  Participant  Issuer  Eligible pledge  DVP (Delivery Verses Payment) A/c Holder

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Account Structure  Main Account  House Account  Sub Account  Group Client Account (Omnibus Account)  Cash Account / DVP Account  DVP Account Main Account Each participant in the CDS is allocated a main Account by virtue of being participant in system .This account is mainly used as transit account for movement of securities and settlement of deliveries by the participant. CDC makes it mandatory that all transfer whether Inter participant or intra –participant will be directed through main account. House Account It is used for securities beneficiary owned by the participant Sub Account (Client Account) It is used for keeping the securities belonging to the client of the participant. A participant is allowed to open any number of sub-accounts Group Client Account Group Accounts are used by the clients who are not utilizing the facility of sub-accounts. Each group account contains securities owned by the group of clients. The detailed break up of securities held by each member is maintained outside CDS Cash Accounts The participants who opts DVP facility are required to deposit a rolling settlement fund tp be used for settlement of DVP obligations

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CORPORATE ACTIONS Notice of meeting and attendance at the meeting the CDS will provide a list of beneficial owners to enable the issuer to issue notices of general meetings under the Companies Ordinance, 1984. When shares are in CDS the beneficial owner has to produce original NIC or passport while attending the meeting when proxies are appointed the form of proxy shall be witnessed and enclosed by attested copies NIC or passport of the both appointer and the proxy. The proxy by attending the meeting shall produce his original NIC or the passport the form of proxy shall also contain the CDC A/c No. of the appointer. DIVIDEND The CDC will prepare a list of beneficial owners who are entitled to receive the dividend on the date of book closure. This list contain necessary information like particulars, no. of shares, face value of shares, gross dividend, income tax, Zakat and net dividend etc. The company and the issuer or registrar will prepare dividend warrant on the basis of above information and dispatch to beneficial owners. BONUS SHARES In case of bonus shares the CDC, on receipt of intimation from the company shall increase the holding of each beneficial owner with the bonus shares. RIGHT SHARES The CDC shall provide list of beneficial owners to the company together with right entitlement. The company shall prepare letter of right and dispatch to the beneficial owner. The CDC accounts of beneficial owners shall be credited after subscription of right money. CONSOLIDATION AND SUB DIVISION OF CAPITAL In case of sub-division and consolidation of capital the CDC will calculate new share balance on the basis of existing share holding. A program will run which will replace the old balances with the new balances.

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ESTABLISHMENT OF CDC 1. Eligibility for Registration • •

Company must be Public Company The company must have entered into technical collaboration agreement for equity participation with international institution. • Atleast one stock exchange must be a shareholder of CDC. • Director’s criteria Directors shall fulfill prescribed criteria and the promoters must be person of means and integrity and have special knowledge of the matters which the company has to deal. 2. Registration A company meeting the above criteria and eligibility conditions shall make an application on prescribe form to SECP. Application fee is Rs. 500,000. If the SECP is satisfied from the information and applicant is eligible for registration it would be in the interest of capital market it shall grant registration certificate. The registration is valid for one year and renewable on payment of fee of 100,000.

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LISTING REGULATIONS STOCK EXCHANGE

OF

KARACHI

DEFINATIONS ♦ Central Depository System It is a system established by Central Depository Company Pakistan Limited. ♦ Eligible Security It means a security which the CDC has declared to be eligible for deposit with the CDS ♦ Defaulter Counter It means a separate counter setup by the SE for trading of listed securities who have committed irregularities in respect of listing regulations. ♦ Listed Security Any Share, Scrip, Debenture, PTC’s, Modaraba Certificates, Musharika Certificates, TFC’s, Bonds, or such other instrument has the Federal Govt. may by notification specified and which is accepted for listing on the SE. ♦ Listed Company A company which has listed on the SE. whose securities has listed on the SE and includes a provisionally listed company. ♦ Credit Information Bureau (CIB) It is department in state Bank that provide information about the loan given to different companies

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Listing Of Companies & Securities •

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No dealing in the securities of company shall be allowed on the SE either on ready quotations board or future counter unless the company and the securities have been listed and permission for such dealing has been granted in accordance with listing regulations. The above permission shall be granted upon an application made by the company in prescribe form. The SE in granting such permission will considered among other things, sufficiency of public interest in the company or security. Following is the list of information and documents which are required to be submitted alongwith listing application.

Under Taking The company shall undertake that: • Securities shall be quoted at the discretion of SE • SE shall have right to suspend or remove any security. • Such provision in the articles of association of company not deemed to be inconformity with the listing regulation shall be amended and until such time. These amendments are made the provision of listing regulations shall supersede the articles of association.

Offer of Capital by Companies and Modarabas to the Public • •

The capital is upto Rs. 500,000,000 atleast 50% shall be offered to public If the capital beyond 500,000,000 public offer shall be atleast 250,000,000 or 25% of the capital which ever is higher. • Allocation of capital to overseas Pakistani shall not exceed 5% of public offer. • Allocation of capital to employee shall not exceed 5% of the public offer. • In case of Modaraba applying for listing 30% of the capital of the Modaraba shall be subscribed by Modaraba Company, sponsors, friends, relatives and associates. Balance 70% shall be offer to the public as per Modaraba Rules. Modaraba Company has to subscribe 20% of the Modaraba capital. • The allocation of capital to: a) Sponsors in excess of 25% b) Allocation of shares under pre-IPO placement including employees Shall not be saleable for a period of six months from the date of public subscription.

Prospectus, Allotment, Issue and Transfer of Shares 1. No company will be listed unless it is public company and has a minimum capital of Rs. 200 Million. 2. Company registered in AJK or in the Northern areas of Pakistan shall be eligible for listing and will be treated at par with the company registered in Pakistan. 20

3. Despite receiving application for listing no company shall be listed unless the public issue has been subscribed by not less than 500 applicants. 4. Company may make public offer of security to be the eligible security in CDS. 5. The application for shares shall be accepted only through Bankers to the Issue. 6. The directors shall not participate in the public subscription. 7. Company shall inform the SE about the subscription receipt with in three working days of the closing of the subscription list. 8. The company shall take decision about the accepted within 10 days of the closure of the subscription list. 9. The company shall refund application money to the unsuccessful applicants within 10 days of above decision. 10. In case over subscription the company immediately files ballot register with the SE. 11. The company shall dispatch share certificates with in 30 days of the subscription list. 12. If the security is eligible security the CDC procedure will be followed. 13. The company shall verify signature of the share holder within 45 days of the receipt of application. 14. The company shall verify signature of the shareholder within 48 hours of the request. 15. The company shall complete the transfer receipt immediately on receiving the share for transfer. 16. The company shall give minimum of 21 days notice to the SE prior to the closure of share transfer book. Company shall provide a period of minimum 7 days but not exceeding 15 days at a time for closure of transfer book and not exceeding 45 days in a year as the whole.

Dividend & Entitlement It is applied on only listed companies. a) The company shall advice to the SE regarding decision of the directors relating to the announcement of dividend, bonus issue, right issue, and other entitlement. b) Intimation to the SE shall be sent atleast 21 days before the book closure. c) Interim dividend warrant shall be dispatched within 45 days from the date of commencement of book closure. d) Final dividend warrants are dispatched to the shareholder within 45 days from the date of AGM at which it has approved. e) Dividend warrants are dispatched through registered post. f) The company shall inform the SE as soon as dividend warrants are posted to the share holders. g) All dividend warrants, in addition to the registered office of the company shall be encashable at Karachi, Faisalabad, Islamabad, Rawalpindi and Peshawar for the period of 3 months from the date of issue. h) The company shall send to the SE its quarterly and annually financial results as soon as these are approved by the directors. (P & L in content form)

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i) Every company shall send to the SE 300 copies of annual report and interim report as soon as these are send to the share holders.

Annual General Meeting (Chapter VI) a) Company shall hold its AGM within four months of close of its financial year. b) The Modaraba holds its ARM (Annual Review Meeting) within four months of close of its financial year. c) The period holding of AGM may be extended for a period of maximum 60 days with SE approval. SE shall give that approval on production of similar approval from SECP. d) The company shall obtain prior approval from the SE in respect of time and date of AGM. e) Company shall furnish copies of minutes of AGM and every EOGM to the SE within 60 days of the meetings.

Increase in capital and related matters a) The directors shall advice the SE regarding all decisions taken by the BOD for issuance of right & bonus shares. b) Company shall issue right letters in marketable lots within 30 days from the date of reopening of share transfer register. c) Company shall issue bonus shares within 45 days from the date of reopening of share transfer register.

Listing of Subsidiary Company and Other Matters (Chapter VIII) a) A listed company distributing shares of its unlisted subsidiary company in the form of specie (in kind) shall get such company listed on the SE. b) Company shall immediately notify to the SE regarding any change in the BOD. c) Listed company shall obtain prior approval of the SE for any amendment in the Mamorandom and Articles of Association.

De-listing, Suspension and defaulter counter A company may be de-listed, suspended or placed on the defaulter counter for any of the following reasons:

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a) If the shares of a company are quoted below 50% of the face value for a continues period of 3 years. b) If the company has failed to declare dividend or bonus: • • • c) d) e) f)

For five years from the declaration of last dividend and bonus. In case of manufacturing company, for five years from the date of commencement of production. For five years from the date of commencement of business in all other case.

If the company has failed to holds its AGM for continues period of three years. If the company has failed to pay annual listing fee for two years. If the company has failed to comply with the listing regulations. If the company refuse to join CDS.

Voluntary De-Listing a) A company intending to seek voluntary de-listing shall intimate to the SE immediately regarding intention of the majority shareholders/sponsors to purchase all the shares from other shareholders with the purpose to de-list the company. The company shall also advise to the SE reasons of voluntary delisting and also the minimum price at which the shares are proposed to be purchased. b) The minimum purchase price proposed by the sponsors will be the highest of benchmark price based upon any of the following: • • • •

Current market price Average market price (Annualized Average) Breakup value based historical cost whereas Breakup value = Equity/no. of shares Earning multiplier approach

Fair value of shares = Estimated Earning * price earning ratio Whereas Estimated Earning = Average price per share of last 3 years. Price Earning Ratio = MP per share/EPS •

The maximum price at which the sponsors had purchased shares from the market during the 12 months

c) The final minimum purchase price shall be fixed for the approval of SE shall determine the minimum percentage of shares to be purchased by the sponsors to qualify for de-listing.

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d) In case of disagreement of the sponsors on minimum percentage of shares to be purchased. The sponsors shall file an appeal with the SECP within 10 days of the decision of the SE. The decision of the SECP shall be final and binding. e) The sponsors cannot withdraw their offer to purchase their shares if such proposal has been approved by the company in a general meting by not less than ¾ majorities through a special resolution. f) The SE may for any reasons refuse to accept the proposal of the company. g) The copy of the special resolution passed by the company for voluntary delisting send to SE immediately alongwith complete list of the shareholders. h) Together with the application of de-listing the company shall submit an undertaking from a purchase agent who may be commercial bank, investment bank or a member of SE. i) The offer to purchase at the relevant price from the other shareholders shall remain open atleast for a period of 60 days. The application for voluntary delisting shall be accompanied with the consent of purchase agent. j) The company after passing special resolution shall convey to all the shareholders the decision of the majority shareholders through a register post alongwith copy of special resolution. A notice in this regard shall also be published in two widely circulated news papers including one in Karachi. k) On completion of purchase, the company shall submit the following information. • • • • •

Total no. of shares issued Shares owned by majority shareholders before the offer Shares purchased under the offer Total shares currently owned by the majority shareholders Shares still outstanding with minority shareholders

l) Regarding shares still outstanding with the minority, the sponsors shall continue to remain obliged to purchase the shares from them at relevant price for a period of 12 months from the expiry of initial pay back period. m) The company once de-listed under listing regulation shall not be allowed to relisting for a period of 5 years.

CODE OF CORPORATE GOVERNANCE (Chapter 11) 1.

2.

The listed companies shall encourage effective representation of independent non-executive directors including directors representing minority interest on the BOD, so that, the board as a group includes core competence relevant to each listed company. Executive directors are working whole time director and non-executive director, on the other hand include independent person who give outside view point to the BOD of the company and do not devote their whole working time to the company.

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3. 4. 5. 6.

7.

8.

9.

10. 11. 12. 13. 14. 15.

The guiding factor in distinguishing between executive and non-executive director is the extent of their involvement in the management of the company. An executive director can not be categorically defined as a “paid director” and a non executive director as who is “not paid director” The payment of remuneration to directors is at the discretion of the company. Independent director means a director who is not connected with the listed company or its promoters or directors on the basis of family relation, for other relations and connection with the associated company and related party. Test of independence is taken from the fact whether a person can be reasonably perceived to exercise independent business judgment without being subservient and undue influence. Minority share holders as a class or facilitated to contest election of directors by obtaining proxies. The company shall annex to the notice of general meting at which director election are to be held, a statement by the candidate from the minority share holders who seeks to contest election of the BOD. This statement shall include the profile of that candidate. The directors of the listed company shall also include atleast one independent director representing institutional equity interest of a banking company, BFI, NBFI, modarabas, leasing companies, investment bank, mutual funds or insurance company. No minimum investment has been prescribed in the board. No action can be taken for the time being in case an institutional investor fails to nominate a director on the board of Investee Company. Executive director i.e. whole time working director shall not be more than 75% of the elected directors including chief executive, provided that this provision shall not be applicable to banking company which is required by prudential regulations not to have more than 25% directors as paid executive directors. The directors of listed company at the time of filing of their consent shall give a declaration that they are aware of their duties and powers under the relevant clause of Memorandum & Articles of Association and listing regulations. A company shall not have a person a director who is a director of ten other listed companies. The director shall be the registered tax payer. The director shall not be convicted as a defaulter of any bank. The listed company shall endeavor that no person is elected as a director if he or his spouse is engaged in business of stock brokerage unless specifically permitted by the SECP. The tenure of the director shall be three years any casual vacancy in the board of directors shall be filed by the directors within 30 days. Every listed company shall ensure that a “statement of ethics and business practices” is prepared and circulated annually by the directors to establish a standard of conduct for the director and employee. This statement shall be signed by each director and employees in acknowledgment of their understanding and acceptance of the code of conduct. The director shall adopt of vision and mission statement and overall corporate strategy for the company and also formulate significant policies, which may include risk management, human resource management, procurement of goods and services, marketing,

25

determination of terms of credit and discount to customers, right off bad debts, acquisition and disposal of fixed assets, investments, borrowings, donations and charities, delegation of financial powers, transactions with associated companies and related parties, health safety and environment. 16. A complete record of the significant policies alongwith dates on which they were approved or amended by the directors shall be maintained. 17. The directors shall establish a system of sound internal control which is effectively implemented. 18. The following powers shall be exercised by the BOD documented by a resolution passed at a meting of the board. • • • •

Investment and dis-investment of funds, where, maturity period is 6 months or more Determination of nature of loans and advances Right off of bad debts Right off of inventories and other assets

19. Appointment remuneration and terms and conditions of the employment of chief executive officer and other executive directors of the company shall be determined and approved by the BOD. 20. The chairman of the listed company shall preferably be elected from the nonexecutive directors. The BOD shall clearly define roles and responsibilities of chairman and chief executive, whether or not these offices are be held by separate individual or same individual. 21. The chairman will ensure that the minutes of meeting of the board are properly recorded and circulated to the directors and officers who entitled to attend meeting within 14 days of the meeting. 22. In case the director of the company is of the view that his decending notes have not been appropriately recorded in the minutes he may refer to the company secretary to require him to append his decending notes with minutes of meeting. If company secretary fails to do so he may file an objection with the SECP. The following matters and significant issues shall be placed for information consideration and approval by the BOD: • • • • • • • •

Annual business plan Cash flow projections and other forecasts Budgets alongwith variance analysis Quarterly operating activities Internal audit report, including cases of fraud and irregularity Management letter issued by external auditor Details of joint ventures and agreements with distributors and agents Promulgation or amendment of any law rules regulations accounting standard which may affect the listed company 26

• • • • • • •

Status and implication of law suits by and against the company Any showcause notice demands etc. from revenue regulatory authorities Default in payment of loans Failure to recover material amounts Significant accident, dangerous occurrence and instances of pollution involved in the listed company Dispute with the labour Payment of goodwill or brand

Chief Financial Officer and Company Secretary Appointment The appointment and remuneration and terms and conditions of the employment of the CFO and CS and the head of internal audit shall be determined by CEO with the approval of the board. They shall not be removed except by the CEO with the approval of the board. Qualification CFO • •

Member of recognized body of professional accountant OR Graduate from recognized university having atleast 5 years experience of financial and corporate affairs of a listed company or a bank or a financial institution.

Company Secretary • • •

Member of recognized body of professional accountants Member of recognized body of corporate chartered secretary MBA, M.COM, LLB having atleast two years of relevant experience

Attendance in the Board Meeting

27

•

The CFO and company secretary shall attend the meeting of BOD and would not be deemed to be directors and cast vote at the meeting

Responsibility of Financial Reporting and Corporate Compliance •

•

No listed company can circulate its financial statements unless the CFO and CEO present the financial statement duly endorsed by their signature for consideration and approval of the directors. The directors after consideration and approval shall authorize the signing of financial statement for circulation and issuance. The company secretary shall furnish a secretariat compliance certificate in a prescribed form as part of annual return file with the registrar of company to satisfy that secretariat and corporate requirement of the Companies Ordinance 1984 has been complied with.

CORPORATE AND FINANCIAL REPORTING FRAMEWORK Director’s Report (Sec-236) 1. The director shall include their statement to the following effect in the director’s report prepared under section 236 of the Companies Ordinance, 1984 • • • • • • •

The financial statement prepared by the management of the listed company, present fairly its state of affairs the results of operations, cash flow and changes in equity. Proper books of account have been maintained here. Appropriate accounting policies have been consistently applied in preparation of financial statement and accounting estimates are based on reasonable and prudent judgment. International accounting standard as applicable in Pakistan have been followed in preparation of financial statement and any departure there from have been adequately disclosed. Internal control is sound and effectively implemented. There is no significantly doubt on the ability of company to continue or going concern. There is no material departure from the best practices of the corporate governance.

2. The following matters shall be disclosed in the director’s report: • • •

If the company is not considered to be going concern the reason shall be disclosed. Significant deviation from last year operating results along with reasons. Keep operating and financial data of last six years in summarized form.

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• • • • • •

•

If the company has no declared dividend or issue bonus shares, the reason shall be given. Where any statutory payments (Taxes & Duties) are outstanding the reason shall be disclosed. Significant plans and decisions like corporate restructuring, business expansion and discontinuance of operations shall be given along with future prospects risks and uncertainty. Statement on the value of investment of provident fund, gratuity and pension fund shall be disclosed. Number of board’s meeting held during the year and attendance by each director shall be disclosed. The pattern of share holding shall contain the aggregate no. of shares (name wise detail) held by: o Associated companies and related parties (name wise) o NIT and ICP o Directors and their spouse o Chief executive o Public sector company (Government owned) o Banks, DIFI, NBFI, insurance companies, modarabas and mutual funds o Share holders holding 10% or more voting rights All trades in the shares of the listed company by the directors, CFO, CEO, company secretary and their spouses and minor children.

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Audit Committee Composition 1. 2. 3. 4.

The director shall establish an audit committee which shall comprise not less than three members. Majority of members shall be from Non-Executive directors (NED). Chairman of the committee shall be preferably from NED. The names of the members of audit committee shall be given in the annual report.

Frequency of Meetings 1. 2. 3.

The audit committee shall meet atleast once every quarter of the financial year. These meetings shall be held prior to approval of interim results of the company and before and after the completion of external audit. A meeting of the audit committee shall also be held if requested by external auditor or the head of internal audit.

Attendance at Meetings 1. 2. 3.

The CFO and the head of internal audit and a representative of external audit shall attend meetings of the audit committee at which issues relating to the accounts and audit are discussed. Provided, that atleast once a year the audit committee shall meet the external auditor without presence of CFO and head of internal audit. Provided further, that atleast once a year the audit committee shall meet the head of internal audit without presence of CFO and external auditor.

Terms of Reference of Audit Committee 1.

2. 3. 4. 5.

The BOD of the company shall determine the terms of reference of audit committee which shall inter alia be responsible for recommending to the BOD, the appointment of external auditor and shall consider any question of resignation or removal of external auditor, audit fee and other services. The terms of reference also includes the following: Determination of appropriate measures to safe guard company’s assets Review of preliminary announcement of results prior to publication Review of quarterly and annual financial statement prior to approval of BOD, focusing on: • Major judgment areas • Significant adjustment resulting from the audit • Going concern assumption • Changes in accounting policies

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6. 7. 8. 9. 10. 11. 12. 13. 14.

• Application of accounting standards • Other statutory requirement Facilitating the external auditor and discussion with internal auditor on their observation Review of management letter issued by external auditor and management response Ensuring coordination between internal and external auditor Review of internal audit function Consideration of major finding of the internal investigation Ascertaining that the internal control system including financial and operational controls and accounting system and reporting structure are adequate and effective Monitoring compliance with the best practices of the code of corporate governance Any other matter as may be assigned by the BOD Audit committee shall appoint a secretary, who shall circulate minutes of the meetings of audit committee to all the members of committee, directors and CFO with fortnight

Reporting Procedure Audit committee shall appoint a secretary who shall circulate the minutes of the meeting to the members of committee, directors and CFO within the fortnight. External Auditor 1) No listed company shall appoint as external auditor who is not been given satisfactory dating under the QCR program under ICAP. 2) The external auditor shall be compliant with IFAC guidelines on code of ethics as adopted by ICAP. 3) The board of directors of listed company shall recommend the appointment of external auditors for one year as suggested by audit committee. The recommendations shall be included in the director report. 4) No listed company shall appoint auditor to provide services in addition to audit except in accordance with the IFAC guidelines. 5) All listed company in the financial sector shall change their external auditor every five years. Financial sector include Banks, NBFC, Modarbas and Insurance companies. 6) All listed companies other than these financial sector companies shall at minimum rotate the engagement partners every 5 years. 7) No listed company shall appoint as CEO, CPO, Internal auditor or director who was the partner of the firm of external auditor (or an employee who is involved in the audit of the company) at any time during the preceding 2 years or the close of relation of such partner or employee. 8) The company shall acquire the external auditor to furnish the management letter to its board of directors not later than 30 days of audit report.

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9) Every listed company require a partner of the firm of auditor to attend the AGM. Compliance with the Codes The listed company shall publish in the annual reports status of compliance with the best practice of the code of corporate governance. This statement shall be reviewed by the external auditors. Transfer Pricing 1. No listed company used a price other than arm’s length price except in rare circumstances where subject to approval of the board of directors and to with the reasons to be recorded in writing, it is in the trust of the company to do so. 2. The directors shall approve transfer pricing policies for related party’s transactions. 3. For each related party, the company shall prepare a statement to record the methods for determining transfer price of various transactions with such party 4. The company shall maintain the record of related party transactions as follows; • Name of related party • Nature of transaction • Amount of transaction • Terms and conditions of transaction • Basis, methods, assumptions and underlying the computation of transfer price • A statement whether in management opinion the consideration is an arm’s length price. 5. The record of all related party shall be placed before audit committee and also before the board of directors. The transaction which has not been executed as arm’s length transaction shall be separately placed. 6. The record of related party transaction shall also be presented to statutory auditor. 7. The company shall publish in the annual report status of compliance with the best practice of transfer pricing. This statement shall be reviewed by the statutory auditor.

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Listed Companies (Substantial Acquisition of Voting Shares & Takeover) Ordinance, 2000 Purpose To provide for a fair and equal treatment to all the investors as well as a transparent and efficient system for substantial acquisition of voting shares and takeover of listed companies. Definitions 1. Acquirer Any person who directly and indirectly acquires or has proceeded to acquire voting shares in the target company, or control of the target company either by himself or through any person acting in concern. 2. Control Includes the right to appoint majority of directors or to control management or policy decisions whether by virtue of shareholding, management right, shareholder agreement or voting agreement. 3. Target Company A listed company whose voting shares or control is directly or indirectly acquired or intended to be acquired. 4. Public Offer It means public offer for acquisition of voting shares of a target company and includes any competitive bid. 5. Public Announcement It means public announcement of public offer for acquisition of voting shares and includes public announcement of competitive bid. 6. Persons acting in concern Means a person who cooperates with the acquirer to acquired voting shares or control of target company.

This Ordinance not to be applied to certain transactions  Shares issued under pre-IPO’s  Right issue  Shares allocated under writing arrangements.  Acquisition of shares by financial institution as enforcement of securities.  Acquisition of shares by succession inheritance.

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Acquisition of more than 10% of voting shares of company 

 

Any acquirer who acquires voting shares (taken together with existing shares), which would entitled to acquires more than 10% voting shares in a listed company shall disclosed the aggregate of his shareholding to the stock exchange. The above disclosure shall be made within 2 working days of the acquisition. Any acquirer may acquire additional voting shares in any period of 12 months after the first acquisition without making disclosure in case of aggregate/total acquisition does not exceed 25%.

Substantial acquisition of voting share and acquisition of control of a listed company Additional acquisition 1. No person shall directly or indirectly acquired 2. Voting shares(taken together with existing shares) which would entitled such person to more than 25% of voting shares in a listed company or 3. Control of a listed company. 4. Unless such person makes a public announcement of the offer to acquire voting shares or control of listed company. 5. Before making public announcement the person shall make necessity disclosure to the Target Company and stock exchange. Consolidation of shareholding: No acquirer (who has acquired more than 25% but less than 50% of the voting shares or control) shall acquired additional voting shares or control unless such persons makes a public announcement of the offer. Provided such acquire shall not be required to make a fresh public announcement of the offer within period of 12 months from the previous announcement. Public announcement 1. The announcement shall be published at least in one Urdu and one English newspaper. 2. The public announcement shall contain prescribed information. 3. The announcement shall also be sent to all stock exchange where company has registered. 4. The announcement shall also sent to target company. General obligation of acquirer 1. Within 2 working days of public announcement, the acquirer shall send to the target company, a copy of proposed offer letter along with copy to SECP. The

34

acquirer shall ensure that the offer letter is sent to all the shareholders of Target Company. 2. The acquirers shall ensure that the period within 30 days from the date of closure of public offer to complete all the procedures including the payment to shareholders who had accepted the public offer. General Obligations of the vote of target company 1. 2. 3. 4. 5. 6. 7.

The board of directors shall not during the offer period: Sell or transfer undertaking of company Encumber the assets of company or its subsidiary Issue any right or bonus shares Enter into material contract The target company shall furnish to the acquirer a list of its shareholders. During the offer period, the board of directors shall not appoint additional directors or fill any casual vacancy. 8. The target company shall allow such changes in the board of directors of the target company to give proportionate representation, however, the acquirer who has acquired 30% of voting shares shall be entitled to the proportionate representation on the board of directors. The acquirer shall serve a notice to the target company, the copy which shall be sent to stock exchange. On the receipt of notice, the board of directors of Target Company shall cause a meeting of board of directors within 14 days. The board of directors of Target Company fills the casual vacancy created by the resignation of one or more existing directors to accommodate the acquirer. 9. In case the acquirer does not get proportionate representation on the board of Target Company or the number of casual vacancies created is not sufficient, he may serve a notice to target company for holding fresh director’s election and a copy to SECP. 10. The BOD of Target Company shall hold the election within 30 days of the receipt of above notice. 11. The BOD so elected shall hold the office during the remainder period of outgoing directors. 12. Any irregularity in the election of directors may be brought to the notice of SECP within 7 days of such election. 13. The SECP may declare the election null & void and order for fresh election under supervision of SECP.

Inquiry & Action by SECP 1.

Inquiry o SECP may appoint inquiry officer to undertake an inquiry for following purposes: o To inquire into the complaints received from investors holding not less than 10% of the total voting power in the Target company, on any matter having 35

a bearing on the allegation of substantial acquisition of voting shares and control of the listed company. o To inquire suo moto (upon its own knowledge) or information in the best interest of security market for any breach of the provision of this Ordinance. o To ascertain whether the provision of this Ordinance is complied with. The inquiry officer as soon as possible shall submit a report to SECP and SECP shall communicate the findings to the acquirer, seller the Target Company and manger to the offer. On receipt of reply from the respective parties, SECP may pass appropriate directions and take appropriate measures in the best interest of security market.

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2.

Directions    

3.

Directing the persons concern not to further deal in the securities Prohibiting the concerned person from disposing off the securities acquired in violation of provisions of this Ordinance. Directing the concerned person to sell the securities acquired in violation of provisions of this Ordinance. Taking any other action.

Penalties ♦ If any person contravenes the provision of this ordinance he may debarred as acquirer for next three years. ♦ In case the BOD or management of Target Company contravenes any provision of this Ordinance the directors, chief executive and company secretary shall stand disqualify to hold such offices in a listed company for next two years. ♦ Any person who fails to comply with the any provision of this Ordinance or who refuse to comply with any order or directions of SECP and such contravention was willful, SECP may impose penalty which may extends to Rs. 1,000,000 and incase of continuing default then additional penalty @ Rs. 10,000 per default day.

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NON BANKING FINANCE COMPANIES Provision as to establishment of Non-Banking Finance Companies (Part VIII(A) of the Companies Ordinance, 1984. Section 282-(A)

(Application of this Part)

This part is applicable on following: 1. An NBFC, which includes companies licensed by SECP to carry out any one or more of the following forms of the business: a) Investment Finance Services (Investment Banks) IFC b) To perform a business of Leasing Service c) Housing Finance Service d) Venture Capital Investment (Project Investment, Risky Investment) e) Discounting Services f) Investment Advisory Services g) Asset Management Services 2. Such other companies as the Federal Government may notify for this purpose. Section 282-(C)

(Incorporation of NBFC)

1) NBFC shall not be incorporated with prior approval by the SECP. 2) NBFC shall not carry on any business unless it holds a license from SECP for that business. 3) NBFC shall not commence business unless it has minimum prescribed capital for each form of business. Section 282-(D)

(Power to issue Directions)

The SECP may issue directions from time to time where it is satisfied to do so in the public interest and to prevent the affaires of NBFC being conducted in a manner detrimental to the interest of shareholders on the persons having interest in the NBFC. NBFC shall be bound to comply with such directions.

38

Section 282-(E)

(Powers to remove)

Where SECP satisfied that Association of any chairman, director, chief executive or any other officer of the NBFC is detrimental to the interest of NBFC, its shareholders or the person interested, the SECP by make an order remove such person from their office. Section 282-(F)

(Power to supercede BOD)

Where the SECP satisfied that Association of BOD with the NBFC is detrimental to its interest it may supercede the BOD for such period as it may specify. The supercesion period shall not exceed three years. Section 282-(H)

(Special Audit)

SECP shall monitor the general financial conditions of NBFC and may order for special audit carry out detail scrutiny of affairs of NBFC. Section 282-(I)

(Inquiry by Commission)

SECP may call an inquiry or inspection by persons appointed by it. The inquiry officer may call any information inspect and cease books of account and documents of NBFC. All the directors, managers and officers and related persons shall furnish necessary information to the inquiry officer. Section 282-(L)

(Procedure for amalgamation of NBFC)

i.

NBFCs may be amalgamated with each other provided a scheme containing the terms of such amalgamation has been placed in draft before the shareholders of each NBFC separately and it is approved by a resolution passed by a majority of 2/3.

ii.

Notice of above general meeting shall be given to each share holder and this notice shall also be published atleast once a week for three consecutive weeks in not less than two newspapers.

iii.

Any share holder who has voted against the scheme and decend from the scheme of amalgamation shall be entitled to claim from NBFC in respect the shares held by him. The decision of SECP on the value of shares shall be final for all purposes.

iv.

Once the scheme for amalgamation is approved by the requisite majority of shareholders, it shall be submitted to the SECP for sanction.

v.

If the scheme is sanctioned by SECP it shall become binding on the concerned NBFC and all their shareholders.

vi.

After the scheme is sanctioned by SECP, remaining/surviving entity shall transmit a copy of the sanctioning order of the SECP to the registrar of the companies. 39

vii.

On receipt of sanction order the registrar shall strike off the name NBFC which has been amalgamated and it will cease to function.

viii.

On sanctioning of scheme the property and liability of the amalgamated NBFC shall be transferred to and vest in resulting/surviving entity. The business and undertaking amalgamated NBFC shall also become the business of resulting entity.

40

NBFC’S RULES 2003 (ESTABLISHMENT & REGULATION) Eligibility Conditions for establishment of NBFC An NBFC may be established if each of its sponsors, proposed directors, chief executive and chairman of the board fulfills following conditions: i.

He has not been associated with any illegal banking activity, deposit taking or financial dealing.

ii.

He and his associated companies have no overdue loans towards any financial institution.

iii.

He and his associated companies have no defaulted in payment of taxes.

iv.

He has not been sponsor, director or chief executive of a defaulting co-operative finance society.

v.

He has never been convicted of frauds or breach of trust or an offence involving moral turpitude, or removed from the service for misconduct.

vi.

He has neither been adjudged as insolvent nor suspended payment of his debts and compounded with the creditor.

vii.

His net worth as per wealth statement should not be less than twice the amount to be subscribed by him personally.

Permission to form NBFC The person desirous to form NBFC should make an application to SECP on prescribed form-I plus annexure along with non-refundable fee of Rs. 100,000. Contents of application (form-I): i.

Particulars of proposed directors, chairman and chief executive.

ii.

Names and address of associated companies.

iii.

Financial standing, education & professional qualification and experienced of above persons along with documentary evidence.

iv.

Capital to be subscribed by each sponsor.

v.

Feasibility report of NBFC.

vi.

Evidence of payment of taxes for a period of previous five years.

vii.

Net worth certificate of each sponsor along with copy of the latest

viii.

Names of bankers of the sponsors along with their account numbers.

ix.

Draft MOA & AOA of NBFC.

x.

Affidavit of each person in respect of eligibility. 41

If the SECP satisfied that the persons seeking permission have fulfilled the terms & conditions, it shall grant necessary permission to establish an NBFC. The permission is valid for six months and during the validity period, the promoters shall incorporate an NBFC as a Public Limited Company. Conditions for grant of License An NBFC shall not commence its business unless it is licensed by SECP to undertake different forms of businesses and application made to SECP for license on prescribed form along with non refundable fee of Rs. 100,000. If the SECP is satisfied that the company has fulfilled the conditions and the promoters are the person of means and integrity having special knowledge of the matters which the company has to deal, it shall grant the necessary license under the following terms & conditions: i.

The company shall have separate minimum capital requirement for each form of business. Form of Business Minimum Capital Investment finance services Leasing Venture Capital Investment Discounting Service Investment Advisory & Asset Management Service Housing Finance Service

ii. iii.

iv. v. vi.

Rs. 300 Million Rs. 200 Million Rs. 5 Million Rs. 200 Million 30 Million Rs. 100 Million

The company has allocated atleast 15% of the capital to the sponsors/promoters The promoters & director of the company shall give an undertaking that they shall not dispose off their shares for a period of three years except with the prior approval of SECP The chief executive shall not held any similar position in any other company The company shall give undertaking that no change will be made in MOA & AOA and the BOD with the prior approval of SECP The license granted by the SECP shall be valid for one year and is renewable annually on payment of Rs. 25,000.

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Conditions Applicable to NBFC NBFC shall: i. ii. iii.

maintain proper books of account and preserved them not less than ten years prepare its accounts according to IAS appoints its Chief/Financial Accounting Officer who is a: •

CA

•

ACMA

•

M. Com

•

MBA (Finance) Having atleast 5 years senior level management experience in a bank, development finance institution modaraba or NBFC

iv. v.

disclosed all the facilities exceeding 20% of its equity in its accounts appoint atleast one director who has senior level management experience, in the financial sector, of five years

NBFC shall not: i. ii. iii. iv.

appoint more than 25% of its directors from the same family transfer ownership of controlling shares, merge with, acquire or takeover any other company without SECP approval make any investment in unquoted shares without SECP approval offer any of its security against consideration otherwise than in cash

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ASSET MANAGEMENT SERVICES Definitions 1. Assets Means properties all kind including shares, securities, deposit, right and bonus shares, cash and bank, profit, dividend, fees, commission, receivables or license & privileges etc. the beneficial ownership of which vest in the share holder of an investment company, or certificate holder of closed end scheme or unit holder of open end scheme. 2. Net Assets It means the excess of assets over liabilities and such excess is computed in a prescribed manner. 3. Assets Management Company It means a company which has been licensed by SECP to offer investment schemes under trust deed and to issue redeemable securities. 4. Assets Management Services It means services provided for management of open end scheme and includes offering of investment schemes under trust deed and issue of redeemable securities. 5. Open End Scheme It means a unit trust scheme constituted by way of a trust deed which continuously offers for sale a security which entitles the holder of such security on demand to receive his proportionate share of the net asset of the scheme. 6. Constituted Document It means the principal document governing the formation of a closed end scheme or open end scheme and all related material agreements. 7. Trustee It means a company as a trustee and includes a commercial bank or a trust company which is subsidiary of such bank or a central depository company or a NBFC carrying out investment finance services.

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Terms & Conditions to Under Take Asset Management Services (Management Co. for open end scheme) No AMC (Asset Management Company) shall: i.

Merge with, acquire or take over any other AMC or scheme unless it has obtained prior approval of SECP.

ii.

Pledge any of the securities beneficially owned by the scheme except for the benefit of the scheme.

iii.

Accept any deposit from the scheme.

iv.

Apply any part of the assets to real state business.

v.

Make any investment with the purpose of having the effect of vesting the management or control in the scheme.

Obligations of Asset Management Company i.

Be obliged to manage assets of scheme in the interest of unit holders in good faith and to the best of its ability with out getting any benefit.

ii.

Account to the trustee for loss in the value of the assets of the scheme where such loss has been caused by its negligence.

iii.

Maintain proper books of account of scheme and prepares and transmit annual and interim accounts.

iv.

Maintain register if unit holders.

v.

Appoint with the consent of trustees, auditor of the scheme, who shall be independent of the auditor of the AMC and trustee. The auditor shall not be appointed for more than three consecutive years.

Remuneration of Asset Management Company During first five year of the scheme: Not exceeding 3% of the annual average net asset of the scheme There after: Not exceeding 2% of such assets For the purpose of this rule the word average mean, the average of net asset calculated during the year for announcing the price of unit.

45

Authorization of Scheme No unit trust scheme shall be offered to general public unless it is authorized by SECP, an application shall be made on prescribed form, together with following documents: 1. 2. 3. 4. 5. 6.

Constitution document of the scheme Latest audited accounts of AMC Latest audited accounts of trustee Application fee of Rs. 1,000,000 Consent of trustee Under taking from AMC that it will invest or arrange the investment of Rs. 250 million for a minimum period of two years.

De-Authorization of Scheme The SECP on the three month notice from the NBFC may allow de-authorization of the scheme. This notice shall be given to unit holders. SECP if considers that further continuation of the scheme will not be in the interest of unit holders, SECP will give three month notice to unit holders about the SECP’s intention not to maintain the scheme. In case of de-authorization the management company shall be required to wind up the scheme and refund the proceeds of assets to the unit holders. INVESTMENT POLICY OF SCHEME 1. Investment policy shall be stated in offering document. 2. A scheme shall invest not less than 50% of its assets in listed securities. 3. Investment of a scheme in any company shall not at any time exceed an amount equal to 10% of the net assets value of the scheme or 10% of the issued capital of the investee company. 4. No scheme shall invest more than 25% of its net assets value in security of one sector as per classification. 5. No scheme shall affect short sale in any security. APPOINTMENT OF TRUSTEE 1. The scheme shall appoint trustee with the approval of SECP 2. Following are the obligations of trustee A trustee shall:

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i. ii. iii.

iv. v.

Take into custody and control all the property of scheme and hold it I trust for the unit holder Ensure that the sale and repurchase of the units are carried out in accordance with the provision of constitutive document Ensure that the methods adopted by the management company in calculating the value of unit are adequate and in accordance with the constitutive document Carry out the instruction of AMC I respect of investment unless these are contrary to the provision of constitutive document Issue a report to be included in the annual report of the scheme that the AMC has in all material aspects manage the scheme in accordance with the provision of constitutive document of the scheme

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INVESTMENT ADVISORY SERVICES Definitions i.

Close End Fund It means an investment company or a close end scheme

ii.

Close End Scheme It means a scheme constituted by way of trust to raise funds through issue of certificates to the public for investing in securities including money market instruments but which does not continuously offer certificates which entitles the holder of such certificates to receive on demand his proportionate share of the net assets of the close end scheme.

iii.

Investment Company It means a company registered with SECP under these rules to engage principally or wholly in buying and selling securities of other company and includes a company (not being a holding company) the investment of which in share capital of other company is equal to 80% of its equity. But does not include a bank, or a insurance company or a company which is a member of the stock exchange.

iv.

Investment Advisory Services It means the services provided for management of close end funds and includes business of advising other as to value of securities or as to advisability of purchasing & selling of securities for remuneration. Investment advisor means a company licensed by SECP to undertake Investment Advisory Services.

Terms And Conditions To Operate As Investment Advisor Of Close End Fund The NBFC licensed by SECP to undertake investment advisory services shall provide an undertaking that it shall all the time: •

Maintain a net capital balance which is not less than 1.5 of the paid up capital (For Liquidity)

48

•

Hold or beneficially owned paid up capital of close end fund an amount which is neither less than 10% nor more than 20% of the paid up capital of close end fund.

Obligations of Investment Advisor of Close End Scheme •

Be obliged to manage assets of scheme in the interest of certificate holders in good faith and to the best of its ability with out getting any benefit.

•

Account to the trustee for loss in the value of the assets of the scheme where such loss has been caused by its negligence.

•

Maintain proper books of account of scheme and prepares and transmit annual and interim accounts.

•

Maintain register if certificate holders.

•

Appoint with the consent of trustees, auditor of the scheme, who shall be independent of the auditor of the Investment Advisor and trustee. The auditor shall not be appointed for more than three consecutive years.

Regulation For The Business Of Investment Company (Close End Scheme) No company shall commence or continue business as Investment Company unless it is duly registered with the SECP Following are the eligibility conditions for registration: i.

The company must be public company under the Companies Ordinance, 1984.

ii.

It is to function as close end fund with minimum equity of Rs. 100 million

iii.

Director’s eligibility (same as demanded by SECP)

iv.

A company which is eligible for registration shall make an application to SECP in prescribed form (form-X) along with prescribed fee. The application shall be accompanied with following documents: •

MOA & AOA

•

Investment advisory contract

•

Custodian agreement

•

Underwriting agreement

If the SECP satisfied that the persons seeking permission have fulfilled the terms & conditions, it shall grant registration.

49

APPOINTMENT OF INVESTMENT ADVISOR i.

No investment company shall appointment any NBFC as an investment advisor except by a contract in writing a copy of such contract is filled with the SECP.

ii.

The contract shall be valid for a period not exceeding 10 years and shall not be renewed or modified without authority of share holders of Investment Company in general meeting and approved by SECP.

iii.

If the contract (initial or renewed) is terminated within first five years of the contract, compensation for the unexpired period shall be paid to investment advisor at the rate of 1/4th of his annual average remuneration during the expired period of the contract.

iv.

The contract shall among other things provide that the investment advisor shall bear all expenditures in respect of secretariat and office space of the company and professional management including all administrative, accounting, professional and legal services and the fee payable to the auditor, custodian, income taxes of the company, brokerage and stamp duty and other expenses connected with the sale and purchase of security shall be payable by the investment company.

CUSTODY OF SECURITY The investment company shall place and maintain all assets owned by it with the custodian appointed with the prior approval of SECP. If any release of security from the custody is contrary to the rule. AUTHORIZATION OF CLOSE END SCHEME No close end scheme shall be offer to the public unless the same is authorize by SECP and application shall be made to the SECP on prescribe form accompanied with following documents: •

Scheme’s constitutive document

•

Latest audited accounts of investment advisor

•

Latest audited accounts of trustee

•

Consent letter of trustee

•

Undertaking from investment advisor with respect to minimum investment (10%20%) Application fee of Rs. 25,000

•

50

De-Authorization of Scheme The SECP on the three month notice from the NBFC may allow de-authorization of the scheme. This notice shall be given to unit holders. SECP if considers that further continuation of the scheme will not be in the interest of unit holders, SECP will give three month notice to unit holders about the SECP’s intention not to maintain the scheme. In case of de-authorization the management company shall be required to wind up the scheme and refund the proceeds of assets to the unit holders. APPOINTMENT OF TRUSTEE 1. The scheme shall appoint trustee with the approval of SECP 2. Following are the obligations of trustee A trustee shall: • • •

• •

Take into custody and control all the property of scheme and hold it I trust for the unit holder Ensure that the sale and repurchase of the units are carried out in accordance with the provision of constitutive document Ensure that the methods adopted by the management company in calculating the value of unit are adequate and in accordance with the constitutive document Carry out the instruction of AMC I respect of investment unless these are contrary to the provision of constitutive document Issue a report to be included in the annual report of the scheme that the AMC has in all material aspects manage the scheme in accordance with the provision of constitutive document of the scheme

INVESTMENT POLICY 1. Investment policy will be stated in MOA & AOA, constitutive document, prospectus and the offering document. 2. A close end fund shall not enter into any transaction in any security which is not listed on the stock exchange, provided the close end fund may invest upto 20% of its investment port folio in unlisted Govt. Security and secure debt (TFC) 3. The investment of close end fund in any other company shall not exceeding 10% of the paid up capital of close end fund or an amount sufficient to acquire 10% of the issued capital of that other company which ever is lower. 4. No scheme shall invest more than 25% of its net assets value in securities of one sector as per classification of SE. 51

PUBLIC ISSUE OF SEURITIES AND ITS COST 1. The capital of the close end fund shall not be offered to the public: • •

Until the investment advisor has made required investment in the fund Unless the offer has been underwritten

2. The close end fund shall not sell any security for any consideration otherwise than in cash 3. All expenses in connection with establishment of close end fund and public offer of security shall be borne by the investment advisor and shall be reimbursed by the fund equal amount paid annually over the period not less than five years Remuneration of Investment Advisor During first five year of the scheme: Not exceeding 3% of the annual average net asset of the scheme There after: Not exceeding 2% of such assets For the purpose of this rule the word average mean, the average of net asset calculated on monthly basis during the year for announcing the price of certificate. CONVERSION OF CLOSE END FUND A close end fund may be converted with the approval of SECP in open end fund or to roll over the fund for another maturity or term.

52

VENTURE CAPITAL INVESTMENT Definitions Venture Capital Company (VCC) Means a company licensed by SECP to invest in venture projects through equity or other instruments whether convertible into equity or not and provides managerial and technical expertise to the venture project or acts as management company for the management of venture capital fund. Venture Capital Fund (VCF) Means a fund licensed by SECP to make venture capital investment. Venture Capital Investment (VCI) Means financing of any venture project by a NBFC (VCC) or by a venture capital fund through equity or other instruments whether convertible into equity or not. Venture Project Means a project which is: 1. In the start up phase of its business or commercial operations or 2. Under going expansion or 3. Engaged in a service, manufacturing or production activity based on a new process, service or technology or 4. Located in a remote or under developed area of a country and 5. Financed by the VCC or VCF and includes A wholly owned subsidiary of VCC, provided, invest in the project having the above said characteristics. Provided That the share of the venture project shall not listed on the SE in Pakistan at the time of investment by the VCC or the VCF. The project shall not engage in following business activities: •

Arms & ammunitions

53

•

High explosive

•

Radio active substance

•

Security printing, currency and mint

•

Manufacturing of alcoholic beverages

•

Environmentally hazardous projects

•

Gold financing

•

Real estate

•

A NBFC

Terms & Conditions for Operating as VCC The VCC shall: • •

Not expose more than 40% of its equity to any single person or group of companies Disclose in its accounts all investments exceeding 10% of its equity

VENTURE CAPITAL FUND Eligibility Conditions • •

A VCF shall not be granted licensed by SECP unless it fulfills the following conditions: It is incorporated as a company under the Companies Ordinance, 1984.

•

It is not engage in any business other than investment in venture projects

•

It has minimum equity of 50 million raised through private placements (not listed)

•

For the purpose of managing its entire business it has entered into a contract with VCC and a copy of which filed with a SECP.

Terms and Conditions to Operate as VCF • •

Not expose more than 40% of its equity to any single person or group of companies. Disclose in its accounts all investments exceeding 10% of its equity.

•

Not accept any investment from any investor which is less than 1,000,000.

54

LEASING 1. The NBFC shall: i) ii)

Invest at least 70% of its assets in the business of leasing. Provide facilities amounting to at least 5% of its fund based facility to the small borrowers. Small borrower/entrepreneur: means individuals firms and companies having fixed assets excluding land and building which is not more than 20 Million and includes software houses and information technology companies.

iii) 2

Acquire membership and LAP(leasing association of Pakistan) followed the code of conduct of that association.

The NBFC shall not i)

Hold or deal in real state

ii)

Engage in leasing operations pertaining to:

iii)

•

open land

•

Buildings other land, factory building, warehouses, hospitals, educational institutions, office building and residential undertakings located in or outside factory premises to be exclusively used by lessee may be leased out subject to maximum of 120 sq per employee provided such investment does not exceed 20% of the overall lease port folio of the company.

•

Furniture and furnishing of any type provided the NBFC may lease hard furniture excluding carpets and curtains upto 5% of the lease port folio. Fix the period of lease for less than 3 years in case of finance lease agreement except for the computers and other equipments in IT.

55

Investment Finance Services (IFS) Terms and conditions for undertaking (IFS) a) Money Market Activities i.

Issue of certificate of deposits or

ii.

Certificate of investment of not less than 30 days maturity

iii.

Trading in commercial papers issued by client

iv.

Govt. securities

b) Capital Market Activities i.

Trading in listed securities

ii.

Providing professional analysis of securities to investors

iii.

Underwriting of stocks and shares and other securities

iv.

Port folio management

v.

Providing margin loans

c) Project Financing Activities Making investment in the projects through shares, long term participations, issuance of guarantees, documentary credit including LCS, balancing and mordnization and replacements. d) Corporate Finance Services i.

Acting as advisors and financial agent for obtaining direct bank loans, syndicate loans, export credits and leases.

ii.

Assisting companies in private placements.

iii.

Acting as advisor to the companies for corporate or financial restructuring, merger and acquisition.

iv.

Preparation of feasibility studies and corporate appraisals.

v.

Acting as custodians.

56

Housing Finance Services (HFS) Terms and conditions for HFS A NBFC having license of HFS may under take the following activities: i.

Provide long term finance for the purpose of constructing, purchasing or making any addition, alteration or improvement in any property.

ii.

Leased and rent on hire purchase basis, building for residential and commercial purposes.

iii.

Establish and manage housing schemes without engaging in real state business.

iv.

Carry out service and valuation of land and properties.

v.

Making loans for house building and mortgage loans.

Limit on Exposure of HFS NBFC may extend loans upto 60% of the total cost of the project. Issue of certificates of investment and certificates of Deposits The respective NBFC may apply to SECP for permission to issue COD/COI which fulfills the following conditions; i.

The company has been actively engaged in investment finance services or leasing or HFS for a period of 2 years.

ii.

The corporate and fiduciary conduct of the company and its directors has been satisfactory.

iii.

The company has obtained credit rating of minimum investment grade and such rating shall be updated at east once every year. The rating shall be published in each financial statement, advertisement and broacher. If during the tenor of COD/COI, the credit rating of the NBFC falls below the investment grade, the permission shall be cancelled by SECP and NBFC shall neither issue any new COD/COI nor rule over them. The existing COD/COI shall be enchased as and when they become due. Subsequently, if the rating improved to a minimum investment grade, the NBFC may again apply to SECP for a fresh permission.

iv.

The NBFC shall issuing COD/COI shall observe the following conditions:

57

•

The certificates shall be registered in the name of whom it is issued.

•

The maturity period of COI shall not be less than 3 months while the maturity period of COD shall not be less than 30 days.

•

No less than 15% of the resources raised through COI/COD shall be invested in Govt securities or the listed securities.

58

MODARABAS COMPANIES AND MODARABA (Floatation & Control) ORDINANCE, 1980

Modaraba Means a business in which a person participates with his money and another with his efforts or skills or both his efforts and skills and includes unit trusts and mutual funds by whatever name called. Modaraba Fund Means a fund raised through floatation of Modaraba. Modaraba certificate Means a certificate of definite denomination issued to the subscriber of the modaraba acknowledging receipt of money subscribe by him. Modaraba Company Means a company engaged in the business of floating and managing modaraba. Registrar Means the Registrar of modaraba and Modaraba Company appointed by the Federal Govt. for the purpose of modaraba. Religious Board The Federal Govt. has constituted a religious board which consists of three members one of whom is chairman and two members are religious scholars and chairman shall be a person who is to be qualified for a Judge of High Court.

59

Registration of Modaraba Company No company shall operate as Modaraba Company with out registration to Registrar (Modaraba) Eligibility for Registration 1. Company must be incorporated 2. Minimum capital requirement: •

If the company is only engaged in floatation and management of Modaraba, not less than 2.5 million

•

If the company is engaged in other business, atleast Rs. 7.5 million of which Rs. 2.5 million must be set aside for modaraba management.

3. The directors and officers must fulfill the following conditions: •

Normal criteria (as mentioned in Companies Ordinance, 1984)

•

The promoters and directors should be in the opinion of Registrar persons of means and integrity and have special knowledge of the matters which the modaraba company has to deal.

Registration A company which is eligible for registration as Modaraba Company may make an application on prescribes form to registrar. (Form IX) Contents of Application (Form IX) 1. Particulars of the company: •

Name

•

Status

•

Date & placement of registration

•

Address

•

Authorized and Paid up Capital

60

•

Details of persons or group controlling the company

•

Names of subsidiary, holding and associated companies

•

Description and place of business

2. Particulars of Directors and Officers •

General particulars

•

Names of associated company and the company where they have directors in the past

•

Financial standing

•

Professional qualification

•

Experience along with supported documents

•

Affidavit of each person

3. Documents to be attached The application shall be accompanied by following documents: •

Five copies of MOA & AOA

•

Five copies of certificate of incorporation

•

Five copies of latest audited accounts

•

Precise description of business being done

•

The undertaking that any change the company shall make in the MOA & AOA and the BOD as may be required by the Registrar

If the Registrar is satisfied that the applicant shall be eligible for registration and it is in the public interest to do so, it may grant registration. Types of Modaraba Specific Purpose Modaraba A modaraba having one specific purpose or objective Multi Purpose Modaraba A modaraba having more than one specific purpose or objectives A modaraba may be either for a fixed period or for an indefinite period.

61

Business Objects of Modaraba The business objects of modaraba must not be opposed to the injunction of Islam. The Registrar shall not permit the floatation of modaraba unless the Religious Board has certified in writing that the modaraba is not a business opposed to the injunction of Islam. The business objects of modaraba are contained in prospectus and being not a company it has not any MOA & AOA. Modaraba to be Legal Person Modaraba shall sue and to be sued in its own name but through the modaraba company. The assets and liabilities of each modaraba shall be separate and distinct from another modaraba and also from the modaraba company. Capital of Modaraba The capital of modaraba shall be called certificate capital. There is no provision in the Modaraba Ordinance for the minimum capital required, however, modaraba is to be listed on SE it has to follow the Listing Regulations in this regard. (200 million) As per Modaraba Rules the modaraba company must subscribe 10% of the modaraba fund, however, through subsequent guideline the Registrar of modaraba has increase this requirement to 20%. Further more listing requirement has provided that 30% of the modaraba fund shall subscribe by Modaraba Company, directors, sponsors, friends and relatives etc. The modaraba certificates do not carrying any voting rights and these are transferable like share through transfer deed. Floatation and Authorization of Modaraba A modaraba company registered under the Modaraba Ordinance can apply to the Registrar for obtaining permission to floating modaraba. It shall submit an application on prescribe form-I. Contents of Form-I •

Name and address of Modaraba Company and its registration number 62

•

Name and type of modaraba indicating exact purpose objectives and duration of modaraba

•

Description of business operations, organizational set up, plans and prospects along with feasibility report

•

Details showing how the business and operation shall be conducted and how the operation will no be opposed to the Principals of Islam

•

Amount of modaraba fund to be floated, its division and conditions

•

Amount to be subscribe by Modaraba Company and amount to be set aside for modaraba management

•

Form of modaraba certificate

The following documents shall be annexed with the application: •

Certified copy of the registration certificate of the modaraba company

•

Five copies of prospectus signed by all directors

•

Five copies of the latest audited accounts of the company

The registrar after obtaining a certificate from the Religious Board and after being satisfied that it is in the public interest shall grant a certificate to the modaraba company authorizing it to float a modaraba. Listing on the Stock Exchange After getting authorization from Registrar Modaraba the Modaraba Company shall take necessary steps for listing of Modaraba on SE inviting general public to subscribe to the modaraba certificate. (Listing procedure is same) Prospectus of Modaraba •

The disclosure requirement of the prospectus of modaraba are more or less the same as provided in the Companies Ordinance, 1984, however, the Modaraba Ordinance and Rules prescribe independent disclosure of the prospectus of Modaraba which are given in the forth schedule to the Modaraba Rules.

•

The prospectus is signed by all the directors of Modaraba Company.

•

The copy of the prospectus is filed with registrar of Modaraba for registration. 63

•

The business operation of Modaraba are provided in the prospectus which vetted by the religious code.

•

The Modaraba must be floated within 12 months of the date of authorization.

Conditions Applicable to Modaraba Company and Modaraba •

A Modaraba Company shall not carry on any business which is carried on by Modaraba floated by it.

•

Neither the Modaraba Company nor any of its director/officer shall obtain any loan or advance from modaraba fund.

•

No allotment of modaraba certificate is made unless a prospectus approved by Registrar has been issued and the minimum subscription has been received.

•

All money received from the applicants of modaraba fund shall be deposited in a separate bank account.

•

Modaraba Company shall issue modaraba certificate within 30 days of allotment.

•

Modaraba Company shall maintain register of certificate holders.

•

Modaraba Company shall maintain separate bank account, fund ,assets and liabilities of each Modaraba.

Remuneration of Modaraba Company The remuneration of Modaraba Company shall be not more than 10% of the annual net profit of the modaraba on the basis of audited accounts

Accounts and Audit Accounts A Modaraba Company is responsible to ensure that proper books of accounts are kept for each Modaraba at the registered office of the Company. Modaraba Company shall be responsible to prepare, circulate and file accounts of Modaraba in a prescribe manner. (Accounts are maintained like listed companies, IAS are applicable, Disclosures are prepared according to 3rd schedule to the Modaraba Rules) Authentication of Accounts

64

The accounts of Modaraba are authenticated by the chief executive and two directors of the Modaraba Company. Audit Qualification of Auditor Same as provided in Companies Ordinance, 1984. Appointment of Auditor The appointment of auditor of Modaraba is made by a Modaraba Company with the approval of Registrar. The auditor of Modaraba shall be independent of the auditor of the Modaraba Company. The terms of appointment of the auditor of Modaraba and including fee etc. shall be approved by the Registrar annually. Removal of Auditor A Modaraba Company seeking to appoint auditor other than the existing auditor, must inform the existing auditor in writing given reasons of change and copy to Registrar. The Registrar, if he desires and after obtaining necessary clarifications and explanations from the existing auditor shall take the decision, which shall be final. An auditor may resign from his appointment with the approval of Registrar. Profit Distribution of Modaraba A Modaraba may distribute profit in cash or issue of bonus certificates out of capitalize reserves or profit. Dividend may be interim or final. (Same in case of Companies Ordinance, 1984) If 90% of profit is distributed to the modaraba certificate holders, the income of the modaraba shall be exempt from tax. The Modaraba Company before declaring the dividend may set aside necessary reserves to comply with Prudential Regulation for Modaraba. Return of Allotment

65

Whenever the company makes any allotment of modaraba certificates it must file with the Registrar a return of allotment within one month of allotment. Annual List of Certificate Holders Every Modaraba Company shall in respect of Modaraba prepares and file with the Registrar a list of certificate holders & summary in the following manner: •

Within 18 months from modaraba floatation and

•

Thereafter, once atleast in every year

The above list is prepared on the date of reopening of the register of the certificate holders relating to final dividend and if there is no such date, 31st December of the year. The list is filed with the Registrar within 30 days of the respective date. Mortgage & Charges All the charges created on the assets of Modaraba are to be registered with the registrar within 21 days of the creation of the charge. (procedure is same as in Companies Ordinance, 1984) Increasing the Modaraba Fund A Modaraba Company may under the authority of a board resolution decide to increase the modaraba fund. The fund shall be increased after alteration of prospectus with the approval of Registrar. Before giving approval the registrar at the expense of Modaraba shall issue a notice in news paper for the proposed increase for knowing the opinion of modaraba certificate holders and others within the period not less than 14 days. After getting permission from Registrar Modaraba company shall be authorize to increase the authorize fund/nominal fund. Further Issue of Modaraba Certificates in the Form of Right Same as in case of Companies Ordinance, 1984

66

Annual Review Meeting of Modaraba (ARM) •

Each Modaraba shall hold an ARM of its certificate holders in the town in which the registered office of the Modaraba Company is situated.

•

The purpose of meeting is to review the performance of Modaraba during the year. It is held within the 4 months of the close of financial year of Modaraba.

•

There is no voting right of certificate holders in the meeting.

•

For the purpose of notice of the meeting the provision of Companies Ordinance, 1984 is applicable mutatis mutandis.

Winding up of Modaraba Circumstances in which Modaraba may be wound up Voluntarily i.

A Modaraba may be wound up voluntarily under the following conditions: •

Time period for which the Modaraba was formed has been expired

•

The specific purpose for which the Modaraba was formed has been achieved

ii.

All the directors of Modaraba Company shall make a declaration that they have made full inquiry about the affairs of Modaraba and they have formed an opinion that Modaraba shall be able to discharge its liabilities and pay the amount of modaraba fund in full within the period of 12 months.

iii.

The above declaration shall be supported by auditor certificate and it shall have no effect unless it is filed with the Registrar within 90 days expiry of period for which Modaraba has formed or accomplishing the purpose of Modaraba.

Circumstances in which Modaraba may be wound up by Modaraba Tribunal A Modaraba shall be wound up by the Tribunal on an application made by the Registrar if: i.

In case of voluntary winding up the required declaration has not been filed

ii.

In case the registrar has declared that:

67

iii.

•

Modaraba has unable to pay its liabilities

•

Accumulated losses of the Modaraba exceeds 50% of the paid up fund

•

Business of the Modaraba has been conducted for a fraudulent purpose

The Tribunal of the opinion that it is just and equitable that Modaraba should be wound up.

68

COMPANIES (APPOINTMENT OF LEGAL ADVISOR) ACT, 1974 RULES 1975 1. A company whose capital is 500,000 or more shall appoint legal advisor 2. The purpose of appointment is to advise the company in the performance of its functions and discharge its duties in accordance with the law 3. No person other than advocate or registered firm of advocates shall be appointed as legal advisor 4. The appointment shall be on retainership basis, which is not less than Rs. 1,500 per month 5. Company shall not appoint an advocate or firm of advocates to be the legal advisor, if at the time of appointment, the number of companies of which such advocate or firm is legal advisor, will exceed: •

In case of advocate

3

•

In case of firm

product of 3 and number of partners

6. If a company contravenes the above provisions the responsible person of the company shall be punishable with simple imprisonment for a term which may extends to 3 months or fine or both 7. Every company shall obtain certificate from legal advisor once a year that he or they are not engage in more than 3 companies as legal advisor 8. The company within 15 days of appointment of legal advisor furnish to the Registrar particulars of legal advisor (Just like form 29)

69

BANKING COMPANIES ORDINANCE, 1962 (BCO) Preparation of Accounts 1. The provisions of BCO relating to preparation of accounts are applicable to following: •

Every banking company incorporated in Pakistan

•

Every banking company incorporated outside Pakistan in respect of business transacted through branches in Pakistan

2. The accounts are prepared on the expiry of every calendar year 3. The accounts are signed in the following manner: In case of banking company incorporated in Pakistan •

Manager or principal officer and where there are more than 3 directors by atleast 3 directors and where there are number of directors are not more than 3 then by manager or principal officer and all directors

In case of banking company incorporated outside Pakistan •

Manager or principal officer in Pakistan and by another officer next in seniority

4. The accounts are also published in the prescribed manner in news paper 5. The requirement of Companies Ordinance, 1984 in respect of preparation, transmission and filling of accounts are also applicable 6. Audited accounts of every banking company are to be filed with SBP within 3 months 7. Every banking company incorporated outside Pakistan is required to display at a prominent place in the principal office and in every branch in Pakistan, copy of latest accounts. These accounts remain displayed until replaced by subsequent accounts. 8. Audit is conducted as per direction of SBP

70

INSURANCE ORDINANCE, 2000 1. Every insurer in respect of all insurance business and in case of insurer incorporated outside Pakistan in respect of insurance business transacted in Pakistan, shall maintain proper books of accounts 2. The accounts shall be signed in the following manner: Insurer incorporated in Pakistan •

Chairman plus 2 directors plus principal officers with names

Insurer incorporated outside Pakistan •

Principal Officer in Pakistan plus two directors or closest comparable officer equivalent thereto.

71

MONOLOLIES & RESTRICTIVE TRADE PRACTICES (Control & Preventive) ORDINANCE, 1970 Purpose Undue concentration of economic power, growth of unreasonable monopoly power and unreasonable restrictive trade practice are injurious to the economic well being and development of Pakistan. Therefore, it is expedient to provide for measures against above factors. Monopoly Power and Unreasonable Monopoly Power Monopoly Power means ability of one or more sellers in a market to set non competitive prices or restrict the output without using a substantial share of the market or to exclude others from the market. Following are the circumstances constituting unreasonable monopoly power: 1. There has been created or maintain any such relationship between two or more undertakings which make them associated undertaking, where they are competitors in the same market and together produce, supply, distribute or provide not less than 1/3 of the total goods or services in such market. 2. There has been an acquisition or any merger where the effect of such acquisition or merger is likely to create monopoly or to lesson the competition in the market. 3. Any loan is granted by bank to any of its associated company of greater amount or on favorable terms or a parking loan. Unreasonable Restrictive Trade Practices Trade Means any business industry, profession or occupation relating to production, supply or distribution of goods or provision of any service. Trade Practice Means any act or practice relating to carrying on of any trade or business 72

Unreasonable Restrictive Trade Practices Means trade practices which have the effect of unreasonably preventing (restraining) or lessoning competition in any manner. Following are the circumstances of continuation of any unreasonable restrictive trade practices: There is any agreement between competitors for the purpose of: •

Fixing the purchase or sale price or imposing restrictive trading conditions

•

Dividing or sharing the market

•

Limiting the quantity or means of production

•

Limiting technical development on investment regarding production and distribution of goods and services

Undue Concentration of Economic Power There shall be no undue concentration of economic power. Following are the circumstances constitution undue concentration of economic power: 1. There is an undertaking, the total value of whose assets is not less than 300 million and which is: •

Not owned by a public company or

•

Is owned by a public company in which any individual holds or controls shares carrying not less than 50% of the total voting power of the undertaking.

2. There are any dealings between the associated undertakings which have the effect of unfairly benefiting the share holders of one undertaking to the prejudice of the share holders of the other associated undertaking. Monopoly Control Authority For the purpose of this Ordinance, the Government has constituted a Monopoly Control Authority, which performs following functions: 1. To register undertakings, individuals and agreements

73

2. To conduct inquiries into the general economic conditions with particular reference to undue concentration of economic power, existence of monopoly power and restrictive trade practices 3. To conduct inquiry into the affairs of any undertaking 4. To make recommendations to the Government for suitable actions to eliminate: •

Undue concentration of economic power

•

Unreasonable monopoly power

•

Unreasonable restrictive trade practices

5. To make appropriate orders to do all things for the purpose of this Ordinance. Registration with Monopoly Control Authority (MCA) With reference to the undue concentration of economic power. In order, that information is available to MCA, the following undertakings, individuals and undertakings shall be registered: 1. An undertaking which is not owned by a public company and total value of assets is not less than 300 million 2. An individual who holds shares carrying not less than 50% of the voting power in an undertaking owned by a public company, the total value of assets of which is not less than 300 million 3. Associated undertakings The application for registration shall be made by the undertaking or by the individual or by the parties to the agreement as the case may be, along with reasons of registration. Actions by the Authority With reference to the undue concentration of economic power. The MCA may pass appropriate orders in the public interest, which may be the followings: Requires the companies not being public companies to be converted into the public companies Requires the controlling share holders of public limited company to offer part of the shares to the general public or to NIT or any other investment institution

74

Prescribe the circumstances in which the associated company may deal with each other Supply of Information An undertaking the total value of the assets of which is not less than 300 million shall furnish to the MCA every year within four months of the closing of the financial year the following information: 1. Particulars of the share holders who own or control shares not les than 50% of voting powers 2. Particulars of share holders who obtained or gave proxies to other share holders for exercising influence over a company management or policies 3. Three copies of annual report and audited accounts 4. List of directors 5. List of particulars of persons who hold or control shares carry not less than 30% of the voting power

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FOREIGN EXCHANGE REGULATION ACT, 1947 (FERA) Security (Sec-2) It includes shares, stock, bonds, debentures, Government securities, deposit receipt for securities and units, but does not includes bills of exchange and pro-note other than Government pro-note Foreign Security Means a security issued else where than in Pakistan or interest is payable in foreign currency For the purpose of section 13 of FERA security also includes copans, or warrants representing dividend or interest and life endowment policies Non Resident/A Person Resident outside Pakistan For the purpose of section 13 the term a person resident outside Pakistan includes a foreign national a Pakistani holding dual nationality. It also includes a company registered in Pakistan which is controlled by a person resident outside Pakistan. Section-13 of FERA Provision relating to transfer of securities to Non-Resident. This section has imposed general restrictions that no person shall except with general or special permission form SBP: Take or send any security to any place outside Pakistan Transfer any security in favour of a non-resident Issue any security, whether in Pakistan or else where, which is registered in Pakistan, to non-resident. Import of Security There is no restriction on import of any security into Pakistan, whether Pakistani or foreign. 76

Export of Security Foreign The persons who wish to send their security abroad to the banks, brokers or agents for the purpose of transfer or sale etc. are required to apply to the SBP. The application shall be made through an authorize dealer or necessary license permission will be granted by SBP on following grounds: Securities are exported through authorize dealer The authorize dealer shall give an undertaking that securities will be received back in Pakistan after a specified period and in case of sale, the sale proceed in foreign currency will be repatriated in Pakistan Pakistani Pakistani nationals and non-residents holding Pakistani securities who are desirous to export such securities are prohibited to do so except with permission SBP (general or Special terms) General Permission/Exemption of Export of Pakistani Security to Non-Resident on Repatriation basis 1. Issue of shares out of new public issue (IPO) or transfer of shares quoted on the SE. Conditions •

Price in foreign currency

•

Remittance through normal banking channel or out of foreign currency account in Pakistan

•

Price must be certified by stock broker

•

If the price is negotiated privately, it shall not be less than quoted price on the date of finalization of deal.

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General Exemptions 2. General exemption is also applicable to private placements of new shares with foreign investors by manufacturing concerns which is either public or private companies. Conditions Provided The prices made in foreign currency Through supply of Plant & Machinery This exemption is also available for transfer of shares to non-resident by manufacturing concerns, provided, price paid in foreign currency again which is not less than break up value of shares as certified by CA. 3. With the announcement of investment policy, 1997 by Government of Pakistan the foreign investment has been allowed on repatriation basis in the agriculture, services, infra-structure and social sector. The foreign investors have simply to register the company with SECP and to inform SBP. Agriculture Sector Land development reclamation of deserts and hilly areas for agriculture purpose, Reclamation of water areas Crops Fruits & Vegetables Flower farming Irrigation facility Services Services relating to telecommunication which includes e-mail, internet, data communication, network services, cellular mobile fone services, voice mail services, card pay fone services, international satellite services, paging and vehicle tracking etc.

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Infra-Structure Development of industrial zones Social Sector and others Tourism, housing and construction, medical and diagnostic services Once the shares have been issued to non-residents in compliance with the above regulations, the shares certificates and securities can be exported to non-residents share holders and they can repatriate dividend, capital gain and disinvestment proceeds.

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WINDING UP Imposition of Restriction on Transfer of Shares Where it appears to SECP in connection with any investigation that there is good reason to find out relevant facts about any shares and such facts cannot be found unless the restriction are imposed on issue and transfer of shares, the SECP may by an order impose such restriction for a period not exceeding one year. So long as any shares are subject to restriction: • • • • •

Any transfer of shares shall be void Where shares are to be issued, these shall not be issued No voting rights shall be exercisable No right issue shall be offered No change shall be made in the directors, chief executive or the managing agent

Where SECP has reasonable grounds that transfer of shares is likely to take place as a result of which a change in directors will follow and SECP is of the opinion that such change would be prejudicial to the public interest, it may by an order prohibit any transfer of shares for a period not exceeding one year. Investigation not to be Effected by Winding Up An investigation or inspection may be initiated even company has gone into winding up. Prevention of Oppression and Mis-Management Application to Court If the members holding not less than 20% of the issued capital or the creditors having interest in the company equal to not less than 20% paid up capital of the company complaints or registrar is of the opinion that: The affairs of the company are being conducted in an unlawful manners or a fraudulent manner or a manner not provided in the memorandum or in a manner oppressive to the members or the creditors or in a manner prejudicial to the public interest. Such member, creditor or the registrar may make an application to the court U/S 290. If the court is of the opinion that: • •

Company’s affairs are being conducted as aforesaid To wind up the company unfairly prejudice to the members or creditors

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The court with a view to bringing to an end the matters complained of, may make such orders as it thinks fit, whether for regulating the affairs of company in, or for the purchase of shares of any member by another member or by the company and in case the shares are purchased by company, the reduction in share capital accordingly. If the order of the court makes any alteration in memorandum or articles the company shall not have the power with out the permission of court to make any further alteration which is inconsistent with the order of the court. A copy of the order shall be attached to the MOA and AOA of the company and shall be delivered to the Registrar of the company within 14 days. Without prejudice to the generality powers of the court, the order may provide for: • • •

Termination, setting aside or modification of any agreement Setting aside of any transfer, delivery of goods, payments, execution or other transaction made or done by or against the company within 3 months before the date of application Any other manner including change in the management

Management by Administrator If at any time a creditor or creditors having interest in company equal to or not less than 60% of the paid up capital of the company, represents to SECP that: • • •

Affairs of the company have been conducted in a manner prejudicial to the interest of the company, members or creditors or with the intention to defraud the creditors or members or for unlawful purpose etc. Affairs of the company have been conducted has to deprive members of reasonable return Any industrial project or unit has not been completed or has not commenced operations or has not been operating smoothly or its performance so deteriorated that: 1. The market value of the share or the net worth of the shares has fallen by more than 75% of its par value 2. Debt equity ratio has gone beyond 90 : 10 3. Current ratio has gone beyond 0.5 : 1

• •

Any industrial unit is not in operation for over the period of two years Accumulated loss of the company exceed 60% of the paid up capital

And request the SECP to take action and appoint administrator to manage the affairs of the company, and SECP may appoint administrator by an order from the penal maintained by SECP by recommendation of SBP.

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From the date of appointment of administrator the management of the company vests with him and he shall exercise all the powers of directors and management persons and such persons shall stand diverted of the management and cease to function. If at any time, it appears to SECP that the purpose of appointing the administrator has been fulfilled, it may permit the company to appoint directors and on appointment of directors the administrator shall cease to hold the office. Rehabilitation of Companies Owning Sick Units U/S 296 The federal Government may declare a company owning industrial unit which is facing financial or operational problems as a sick company. After a company declares as sick, the Government shall appoint any institutional authority or committee to draw a plan for rehabilitation, reconstruction and reorganization of company. Without prejudice to the generality of above provisions, rehabilitation plan may include: • • • • • • • •

Reduction of capital or reconstruction, compromise or enter into compromise, amalgamation or any other arrangement. Alteration of capital and variation in rights and obligation of share holders or any class of share holders Alteration of loan structure, debt rescheduling or conversion of debt into equity Acquisition or transfer of shares of the persons who have been sponsors and managing the affairs of the company Issue of further capital including class capital Removal and appointment of directors, chief executive or other officers of the company Amendment modification or cancellation of any contract Alteration of MOA & AOA and changes in the accounting policies / procedures

The rehabilitation plan shall be submitted to the Government for approval. The Federal Government shall also publish in official gazette for entertaining views of the share holders, creditors and other concerns, which will be taken in consideration before approving the plan. On approval of plan with modification as directed by the Government, it shall be final and take effect and be implemented and shall be final. Any provision in the memorandum, articles, agreement, documents or resolution which is repugnant to the above provision of the companies ordinance or rehabilitation plan shall become void. PROVISION FOR FACILITATING RECONSTRUCTION AMALGAMATION OF COMPANIES (Section-287)

AND

Where application is made to the court for sanctioning of an arrangement and it is shown to the court that the arrangement has been proposed for reconstruction of any company or companies or the amalgamation of any two or more companies or division of any

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company into two or more companies under the scheme, the undertaking, property and the liabilities of one company (transferor company) are to be transferred to another company (transferee company). The court may order to sanction such arrangement or by any subsequent order make provisions on any of the following matters: • • • • • •

Transfer to the Transferee Company, undertaking, property and liabilities of Transferor Company. Allotment by the transferee company of shares or debentures in that company which are to be allotted under the scheme of arrangement to the share holders or debenture holders of the transferor company. Continuation by or against the Transferee Company or Transferor Company, any legal proceeding. Dissolution of Transferor Company without winding up. Provision for the persons who have given their dissent from the arrangement. Such incidental, consequential and supplemental as a necessarily, so that the scheme is fully and effectively carried out.

WINDING UP OF COMPANIES The winding up of companies is a legal process by which company’s affairs are wound up, its rights and liabilities are ascertained, claims of creditors are paid off out of the proceeds of the assets of the company and surplus is distributed among the contributories in proportion to their right.

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New Liability On Winding Up When a company is being wound up, the liability of members under goes a legal charge and a new liability comes into the existence. Before winding up they are liable as member or share holder, but after winding up they become contributories with a liability to contribute to the assets of the company an amount sufficient to pay the company’s debts and cost of winding up. But in no case the liability shall never exceed the amount remaining unpaid to the shares or guarantee amount. Every member who is a member on the date of winding up shall be contributory, however this liability is also extend the member within one year of the winding up. (Past contributory) Extent of Liability of Contributory 1. A past member shall not be liable to contribute, if he has ceased to be a member for one year before the commencement of winding up. 2. A past member shall not be liable to contribute in respect of the debt of the company contracted by a company after he ceases to be a member. 3. A past member shall not be liable to contribute unless it appears that existing members are unable to satisfy the contribution 4. In case of a company limited by shares, no contribution shall be required from any member exceeding the amount, if any unpaid on the shares held by him 5. In case of a company limited by guarantee, no contribution shall be required from the members present or past exceeding the amount undertaken by them to contribute towards the assets of the company in case of winding up 6. In case of company limited by guarantee having share capital, the members shall be liable for in respect of shares and guarantee Liability of Directors Who’s Liability is Unlimited On winding up the liability of a director (past or present) whose liability is unlimited shall be as follow: To contribute as an ordinary member Further contribution in respect of unlimited liability (with permission of court). The liability of such director is subject to following conditions: • • •

A past director shall not be liable for further contribution, if he cease to hold office for a year before commencement of winding up A past director shall not be liable to make further contribution in respect of any debt or liability of a company contracted after he ceases to hold the office Such director shall not be liable to make contribution unless the court deems it necessary to require that contribution

Contributories Defines in Companies Ordinance, 1984

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Contributories means every person who is liable to contribute to the assets of the event of winding up and includes the holder of any share or the deemed contributory or the alleged contributory. The liability of a contributory shall create a debt accruing to the company from him. If contributory dies his legal representative shall be liable in due course as contributories. In case of insolvency assignee shall be liable.

CONSEQUENCIES OF WINDING UP As Regards company Winding up doesn’t means that the company cease to exist, the company exist as a corporate entity with all its rights and liabilities, only the management and administration is carried through liquidator. As Regards Share Holders A new statutory liability comes into existence as contributory. Transfer of shares and alteration in the statutes of share holder shall be void unless approved by the share holders. As Regards Management On appointment of liquidator all powers of the directors, chief executive and other officers shall cease except for the purpose of giving notice of resolution to winding up, appointment of liquidator and filling of consent of liquidator etc. As Regards Creditors • • •

They cannot files or continue suits against the company except with the leave of court They cannot proceeds with the execution of decrees already obtained They must lodged their claims and prove their debt before the liquidator

]

VOLUNTARY WINDING UP Circumstances for Voluntary Winding Up A company may wound up voluntarily: • • •

When the period, if any, fixed for the duration of company by articles, expires When the event occurs provided in the articles When the company resolves by special resolution that the company be wound up voluntarily

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Commencement of Winding Up The winding up is deemed to commence from the time the resolution for voluntary winding up is passed. Notice of Resolution for Voluntary Winding Up Notice of resolution must be given to the company within 10 days of passing of the same in the following manner: • • • •

By advertisement in the official gazette By advertisement in the news paper circulating in the province where the registered office of the company is situated In case of listed company notice shall also be circulated through English or Urdu news paper having circulation in the province where the registered office of the company is situated The copy of the notice is also sent to registrar immediately

Declaration of Solvency The directors of the company and in case of company has more than three directors, majority of directors including the chief executive at a meeting shall make a declaration of solvency verified by an affidavit that they have make full inquiry into the affairs of the company and they have formed an opinion that the company has no debts or it will b able to pay its all debts within period of 12 months from the commencement of winding up. The above declaration shall not be effective unless: • • •

It is made within 5 weeks immediately preceding the date of passing of resolution A copy has to be delivered to registrar before passing of resolution It is accompanied by a report of the auditor of the company on the accounts

Appointment of Liquidator The company in general meeting shall appoint one or more liquidator whose written consent has been received in advance The liquidator shall be entitled to remuneration as the company in general meeting decides. If a vacancy occurs by death, resignation or otherwise in the office of liquidator, the company in general meeting may fill the vacancy The company shall give notice to the registrar within 10 days of the appointment of liquidator Calling of General Meeting by the Liquidator

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•

• •

If winding up continue for more than one year, the liquidator shall summon a meeting of company at the end of the year and lay before the meeting an audited accounts of receipts and payments and dealing of winding up, giving reasons for delaying finalization of winding up and steps taken by the liquidator to expedite it and further time required. The liquidator shall forward through post, to every contributory a copy of statement, accounts together with auditor’s report and notice of meeting atleast 10 days before meeting. A return of conveying the meeting together with the copy of notice, accounts and statement as aforesaid, shall be filled by the liquidator with the registrar within 10 days of meeting.

Final Meeting of Contributory and Winding Up As soon as the affairs of the company are fully wound up, the liquidator shall make up a report and accounts of winding up showing that the winding up has been conducted and the assets of the company disposed off and call a general meeting of the company for the purpose of lying such report and accounts giving necessary explanation, the accounts shall be audited and sent to every contributory through post atleast 10 days before meeting. The notice of final meting shall be published atleast 10 days before the meeting in the manner of (notice for resolution – referred to notice of resolution). After the meeting, within one week the liquidator shall sent to registrar a copy of his accounts, report, convening of meeting and minutes of meeting. If the quorum is not present, the liquidator shall make a return that the meeting was summoned and there was no quorum. The registrar on receiving the above accounts report and return shall scrutinize the same and on expiry of three months from the registration of documents the company shall deemed to dissolve. Provided: If on his scrutiny he considers that the affairs of winding up have been in a manner prejudice to the interest of company or to the interest of members or creditors and any actionable irregularities has been committed, the registrar shall take action in the manner provided in Companies Ordinance, 1984. That the court on the application of liquidator or any person interested, the court may make an order, deferring that date of resolution for such time as court may think fit.

CREDITORS VOLUNTARY WINDING UP Calling of Creditor’s Meeting •

The company shall cause the meeting of the creditors of the company to be held for the day or the day next following the day on which general meeting of the company is to be held to pass the resolution for voluntary winding up.

•

Notice of creditor’s meeting shall be sent by post to every creditor simultaneously with the sending of notice of general meeting of the company. 87

•

Notice of creditor’s meeting shall be advertise in the same manner (specified for notice of resolution)

•

The directors and chief executive of company shall cause a full statement of company position, assets and liabilities, list of creditors to be laid before the meeting of creditors

•

They shall also appoint one of the directors to preside over the meeting of creditors and such director must preside over the meeting

•

Notice of resolution passed at the creditors meting shall be given to the registrar of companies within 10 days of its passing

Appointment of Liquidator •

Both the company and the creditors at their respective meetings shall nominate a person as liquidator, who shall given his consent

•

If the company and the creditors nominate different persons, the creditor’s nominee shall be the liquidator

•

If the creditors do not nominate a person, company’s nominee shall be the liquidator

Appointment of Committee of Inspection •

The creditors at their meeting may appoint a committee of inspection, consisting of not more than five persons

•

The company either at the general meeting at which winding up resolution is to be passed or subsequently appoint not more than five persons as the member of the committee

•

The creditors, however, may resolve that all or any of the five persons shall not act on the committee, if the creditors do so, the said persons shall not act as the member of committee unless the Court directs otherwise

•

The Court on the application of the company, may appoint other persons as member of the committee in place of the persons rejected by the creditors

Calling of Meeting of Creditors by the Liquidator •

If winding up continue for more than one year, the liquidator shall summon a meeting of company at the end of the year and lay before the meeting an audited accounts of receipts and payments and dealing of winding up, giving reasons for delaying finalization of winding up and steps taken by the liquidator to expedite it and further time required.

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• • •

The liquidator shall forward through post, to every contributory a copy of statement, accounts together with auditor’s report and notice of meeting atleast 10 days before meeting. A return of conveying the meeting together with the copy of notice, accounts and statement as aforesaid, shall be filled by the liquidator with the registrar within 10 days of meeting. A meeting of creditor shall also convened simultaneously with the general meeting of the company

Dissolution and Final Meeting of Creditors As soon as the affairs of the company are fully wound up, the liquidator shall make up a report and accounts of winding up showing that the winding up has been conducted and the assets of the company disposed off and call a general meeting of the company for the purpose of lying such report and accounts giving necessary explanation, the accounts shall be audited and sent to every contributory through post atleast 10 days before meeting. The notice of final meting shall be published atleast 10 days before the meeting in the manner of (notice for resolution – referred to notice of resolution). After the meeting, within one week the liquidator shall sent to registrar a copy of his accounts, report, convening of meeting and minutes of meeting. If the quorum is not present, the liquidator shall make a return that the meeting was summoned and there was no quorum. The registrar on receiving the above accounts report and return shall scrutinize the same and on expiry of three months from the registration of documents the company shall deemed to dissolve. Provided: If on his scrutiny he considers that the affairs of winding up have been in a manner prejudice to the interest of company or to the interest of members or creditors and any actionable irregularities has been committed, the registrar shall take action in the manner provided in Companies Ordinance, 1984. That the court on the application of liquidator or any person interested, the court may make an order, deferring that date of resolution for such time as court may think fit.

WINDING UP UNDER THE SUPERVISION OF COURT Ordinarily, when a company is wound up, the court has little to do with the winding up, however, the contributory, creditors or the liquidator may apply to the Court to bring a voluntary winding up under the supervision of the Court and the Court shall pass a supervisory order. The supervision order is nothing but for continuation of voluntary winding up subject to supervision of Court. Note: (Winding up under the supervision of Court differs from the compulsory winding up by the Court)

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when a company has passed a resolution for winding up the Court may of its own motion or on the application of any person entitled to apply, make an order that the voluntary winding up shall continue, but subject to such supervision of the Court as it thinks just and with such liberty for creditors and contributories as it thinks just and equitable. Where the order is made for supervision of the Court, it may appoint an Official Liquidator (OL) who shall be subject to same obligation as if had been appointed by the company. When an order of supervision is made the OL, subject to restriction imposed by the Court, may exercise all the powers without the intervention of Court in the same manner as, if the company is being wound up altogether voluntarily.

Compulsory Winding Up by Court Circumstances A company may wound up by Court: • • • •

•

•

If company by special resolution resolve so If the default is made, in delivering statutory report to the registrar or holding of statutory meeting or in holding of any two consecutive AGM If the company does not commence business within a year from incorporation or suspends business for a whole year If the number of members is reduced below the minimum no. prescribed i.e. Private: 2 Public: 3 Listed: 7 If the company unable to pay the debts Explanation: A company is deemed to be unable to pay the debts, if the creditors to whom the company is entitled/owes a sum exceeding 1% of its paid up capital or rupees 50,000 which ever is less and who has serve a demand notice on the company requiring the company to pay the amount and the company has for 30 days thereafter neglected to pay the amount or to secure it or to compound for it to the reasonable satisfaction of the creditor. If the company is: a) b) c) d)

Carrying on unlawful or fraudulent activity Carrying on unauthorized business Conducting its business in a manner oppressive to any of the member Run and managed by persons fail to maintain proper accounts or commits fraud e) Managed by the persons who refuse to act according to the requirements of memorandum and articles, Companies Ordinance, 1984, directions of SECP, Court or Registrar

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• •

If being a listed company it ceases to have a member If the court is of the opinion that it is just and equitable that the company should be wound up Just and Equitable a) Complete dead lock in the management b) Company cannot run except losses c) If the objects of the company is failed or substratum has gone d) It is in public interest to do so

Jurisdiction of the Court The jurisdiction for winding up of a company lies in the High Court Winding Up Petition A winding up petition may be presented to the Court by any of the following: • • • • •

By company itself By any creditor By any contributory By Registrar (with sanction of SECP) By SECP

Commencement of Winding Up Winding by the Court shall be deemed to commence at the time of presentation of the petition for winding up Power of Court • •

Hearing of petition Granting injunction. The Court before making an order of winding up may restrain any proceeding against the company.

Dismissal of Petition On hearing of winding up petition, the Court may dismiss it or adjourn the hearing or make any other interim order. Passing of Winding Up Order The Court may on hearing a winding up petition pass an order for winding of the company.

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Refuse to Wind Up Where the petition is presented in Court on the ground that it is just and equitable that the company should be wound up, the Court may refuse to make an order of winding up, if it is of the opinion that some other remedies are available to the petitioner or the or the petitioner is acting unfairly etc. where the petition is presented on the ground that the company has made default in delivering of statutory report or holding of statutory meeting or holding of two consecutive AGM, the Court may instead making winding up order, directs that statutory report should be filed or the meeting should be held. Copy of Order to be Filed with Registrar Within 15 days from the date of making of winding up order, the petitioner shall filed a certified copy of Court’s order with the Registrar and the Registrar should notify the same in official gazette Official Liquidator (OL) The Court maintains a penal of the persons to be appointed as liquidator as per recommendation of SECP. The Court shall appoint one or more person from the penal act as OL. The OL shall not resign or quit its office before conclusion of winding up except for the reasons of personal disability to the satisfaction of the Court. However, the Court may remove any OL after recording the reasons in writing, of removal. Any casual vacancy in the office of OL shall be filled by the Court. Statement of Affairs to be made to the Liquidator Where the winding up order has been made by the Court, there shall be submitted to him (OL) verified with an affidavit, containing following particulars: • • • • • • •

Assets of the company Debts and liabilities of the company Names and addresses of the creditors together with the amount of credit Debts due to the company and names and addresses of the persons from whom such amount is due Where the property of company is not in its custody the place where and the person in whose possession of such property is Full addresses of the places where business of the company was conducted during last six months and the names and particular of the persons in charge Such other particulars as may be prescribed by the Court in the official gazette

The above statement should be submitted by the following:

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• • • •

Persons who at the relevant date were director, CE, secretary or other responsible persons Persons who were directors, CE or officers of the company, within one year from the relevant date Persona who are taken a part in the formation of the company at the time within one year of relevant date Persons who were in the employment of company within one year

Report by Official Liquidator (OL) As soon as practicable, after receipt of statement under section 328 (above) the OL shall submit a preliminary report to the Court stating the following information: • • • • •

Capital issued, subscribed and paid up Estimated amount of assets and liabilities, cash at bank, negotiable securities, debts due to the contributories, debts due to the company with securities movable and immovable property and unpaid calls If the company has failed the causes of such failure Whether in his (OL) opinion further inquiry is desirable Certified copy of report shall also be sent to Registrar simultaneously while submitting to the Court

Power of Official Liquidator (OL) • • • • • • • • •

To institute or defend any suit on behalf of the company To carry on the business of the company for the purpose of winding up To make compromise/arrangement with creditors To sell movable and immovable property To do all acts and to execute all deeds, receipts, documents on behalf of the company and to fix company seal To draw, accept, make or endorse bill of exchange, promissory note To raise money on the securities of assets of the company To appoint agents to do any business, which the OL is unable to do himself To do all other acts as may be necessary for winding up

Report by the Official Liquidator (OL) Liquidator’s Account The OL shall not less than twice in each year, present to the Court and account of his receipts and payments and all dealing as OL, the accounts and information shall be in prescribed form and shall be made in duplicate and verified by an affidavit. The Court shall cause the accounts, books and papers of OL to be audited. When the accounts has been audited one copy of the auditor’s report shall be kept by the Court and other copy shall be delivered to the Registrar

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The OL shall sent copy of audited accounts and audit report by post to every creditor and contributory Dissolution of Company When the affairs of the company have been completely wound up or when the Court is of the opinion that the OL cannot proceeds with the winding up for want of funds or any other reason and it is just and equitable in the circumstances of the case that an order of dissolution of company shall made, the Court shall made the company be dissolved from the date of order and the company shall dissolved accordingly. Copy of order shall be filed with Registrar within 15 days. Preferential Payments in case of Winding Up In a winding up following payments shall be made in priority to all other debts: All revenues taxes and rates due from the company, payable within a period of twelve months All wages and salaries for the period not more than 4 months All amounts due to the employees from the provident fund, pension fund, gratuity fund and any other welfare fund Expenses of investigation Distribution by the Liquidator The OL, within 30 days of the receipt of any fund shall distribute among the creditor or contributories after providing for expenses of winding up and other preferential payments, provided, such portion of fund as may be required for meeting any claim which may be subjudice or pending adjudication shall not be distributed till the claim is finally settled. Such amounts shall be invested by OL in KDC’s and deposited with the court. Winding Up of Unregistered Company For the purpose of part xiii of the Companies Ordinance, 1984 unregistered company shall include any partnership, association or company consisting of more than 7 members. But shall not include a railway company incorporated by the Act of Parliament of UK or Pakistani Law. No unregistered company shall be wound up under this ordinance voluntarily or subject to supervision of Court. The circumstance in which an unregistered company may wound up is as follow: If the company is dissolved or has cease to carry on business If the company is unable to pay its debts (25,000) If the Court is of the opinion that it is just and equitable to wound up the company

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