Budget Briefing 2008 - VI

Companies Ordinance 6. Power to require to furnish information, etc regarding non-baking finance companies - Section 282, Sub-section (G)(2), (J)(2), (K)(1) & (M)(1). Amendments have been proposed to be made in the above Sections by inserting the word "regulations", besides the rules to enable the SECP the facilitates and thus empowering it to formulate appropriate regulations as may be warranted in relevant circumstances of the Non-Banking Finance Companies.
1. INCREASE IN ANNUAL SUPERVISION FEE PAYABLE TO THE SECP SECTION 11(3)(A):The annual supervision fee payable to the SECP has been increased from the existing limit of Rs 100,000 or Re.1 per Rs 1,000 of gross direct premium written in Pakistan which ever is higher to Rs 500,000 or Re.1 per Rs 1,000 of gross direct premium written in Pakistan.
2. POWER OF THE SECP TO PRESCRIBE MAXIMUM LEVELS OF ACQUISITION COSTS AND MAXIMUM LEVELS OF MANAGEMENT EXPENSES SECTION 66(4): The above referred powers of the SECP which expired in December 2006 have been extended for an indefinite period.
3. APPLICATION OF CERTAIN RULES AND RESTRICTIONS TO REINSURANCE BROKERS SECTION 94 AND 102(1): Certain provisions of the law which were previously applicable only to direct insurance intermediaries, such as brokers, have now been made applicable to the reinsurance brokers also.
KEY REQUIREMENTS INCLUDE:
a) Current insurance broker's license issued by the SECP
b) Prohibition (on insurer and directors of the insurer) of holding any direct or indirect ownership interest in an insurance broker
c) Obligation on the insurance broker to disclose its relationship with the insurer to the policy holder
d) Certain restrictions on the basis for payment of commission to the insurance broker will also apply (such as the commission should not be variable based on the number of contracts arranged, total amount of premiums paid under such contracts and total amount of sum insured)
e) Annual report (including audited accounts) to be filed with the SECP.
1. DEFINITION OF COMMODITY FUTURES CONTRACTS ENLARGED SECTION 2, SUB-SECTION (1)(CD): The Bill seeks to enlarge the scope of the existing Section of the SE Ordinance by inserting the words "or settlement" to include transactions of contracts that are cash settled at the outset.
2. PROVISIONS TO CURB INSIDER TRADING RE-ENACTED SECTION 15A: The Bill seeks to substitute the existing Section 15A which was enacted by the Finance Act 1995 and since then no amendment whatsoever was made in the said Section. After almost a lapse of over a decade, the SECP as the apex securities market regulator has attempted to recognise the importance of oversight functions in respect of dealing in securities which are publicly traded. Appropriate and effective provisions have become imperative, particularly in recent times in the wake of various allegations of market abuse and alleged security irregularities.
Accordingly, recognising the potential growth in capital market activities, a new Section 15A has been proposed, which comprehensively defines insider trading. In terms of the proposed new Section, a person shall be deemed to be an insider, if he has knowledge of inside information of listed securities or based on such information induces others to transact in listed securities, or disclose or passes on such information to other persons to transact in listed securities or directly or indirectly deals in listed securities based on inside information possessed by him.
The new Section also stipulates that a transaction, pursuant to an agreement shall be deemed to be out of the purview of insider trading if it was concluded before having access to inside information.
3. INSIDE INFORMATION DEFINED SECTION 15B: An important aspect of the insider trading which was not earlier addressed comprehensively is to define what is "inside information". Accordingly, this proposed Section seeks to replace the entire existing Section 15B and seeks to define "inside information" which is wide in scope and implication compared to the provision it now seeks to replace.
As defined, information which has not been made public relating directly or indirectly with regard to listed securities, price sensitive information which if made public may impact the prices of relevant listed securities, derivatives on commodities and information conveyed to a person responsible for the execution of orders of concerning listed securities shall fall within the ambit of "inside information".
4. WHO SHALL BE CONSIDERED AS INSIDER SECTION 15C: The Bill seeks to introduce a new Section 15C, whereby it stipulates who shall be considered as an insider. The parameters provided therein are wide enough to ascertain whether a person or persons are insiders or not within the ambit of the proposed Section.
Amongst those who shall be deemed to be an insider include sponsors, executive officers, directors of an issuer of listed securities and their spouses or who holds shares or voting rights, directly or indirectly in partnership or unincorporated association of 20% or more or engaged in the placement of the listed securities or public offer of securities and marketing of such securities. It also includes a person who is a sponsor, executive officers, directors and partners of a legal person or unincorporated business association, holding 10% or more shares of an issuer or one who obtains inside information through unlawful means.
5. LISTED COMPANIES OBLIGED TO DISCLOSE INSIDE INFORMATION SECTION 15D: This is again a very vital and an important addition proposed by the Bill. Never before listed companies were required, obliged or directed to provide to the regulator information pertaining to inside information. The proposed section requires listed companies to disclose to the public, inside information related to listed securities in the manner as may be specified by the SECP in terms of this section.
Under the proposed section, listed companies are obliged to maintain and regularly update a list of persons employed permanently or on contract or otherwise who have access to inside information and provide a copy thereof to the SECP, if so directed. The proposed section further requires that persons working closely with managerial personnel shall notify the SECP regarding transactions, if any, conducted on their own account in securities of such listed companies.
Under the proposed section, stock exchanges are obliged to adopt effective operating procedures and surveillance techniques to detect and prevent insider trading as well as market abuse practices within such time as may be specified by the SECP pursuant to the regulations.
6. LIABILITY FOR CONTRAVENTION SECTION 15E: This section specifies the penal consequences entailing monetary compensation for loss, tendering of gain made by having indulged in prohibited activities as envisaged in sub-section 1 of Section 15A. The SECP may remove from office a person guilty of insider trading offence if he is an executive officer, director, auditor, advisor or a consultant of a listed company. The SECP is also empowered to debar an auditor from auditing any listed company for a period upto three years.
7. POWER TO MAKE REGULATIONS SECTION 15F: A new clause 15F has been proposed to be inserted keeping in view the potential growth in capital market activities in the country by further empowering the SECP to make appropriate regulations to curb, detect and enforce insider trading as envisaged in Section 1 of Section 15A in respect of persons engaged in providing or disseminating market research report on listed securities.
8. ENLARGEMENT OF POWER OF ENQUIRIES, PENALTIES, ORDERS AND APPEALS SECTION 21, SUB-SECTION (2): The Bill proposes to enlarge the scope of sub-section (2) of this Section, whereby in addition to exchanges, enquiries may also be initiated against any other person who may be found involved in dealing with such exchange or with the directors, managers or officers thereof against whom representation has been made before the Federal Government.
9. ENLARGEMENT OF POWERS TO MAKE RULES AND REGULATIONS SECTION 32E, SUB-SECTION (1A): A new Sub-section (1A) has been proposed to be inserted in this Section 32E to enlarge the scope of the existing provisions of this Section. The proposed amendments require that the rules made in pursuance to this Section may inter alia provide for the matters ancillary and connected with the corporatisation, demutualization and integration of the stock exchanges in Pakistan and as stipulated in the proposed Sub-section (1A). The back ground of the proposed insertion is that the Government of Pakistan is reportedly considering to corporatise, demutualize and integrate the stock exchanges in Pakistan. In view of this impending initiative, relevant regulations applicable in Pakistan may need to be amended in due course to monitor and regulate the proposed demutualisation and integration of the stock exchanges.
1. TERM OF OFFICE OF THE COMMISSIONERS SECTION 7, SUB-SECTION (2) & (3): The Bill seeks to amend Sub-section (2) of the above Section for the purpose of regulating the term of office of the Commissioners of the SECP whereby the term of office of a Commissioner appointed to fill in a casual vacancy shall be reckoned from the date of his appointment and not from the date on which a casual vacancy filled by him was caused. Additionally, a new Sub-section (3) is proposed to be added, so as to regulate the matter of appointment and retirement of Commissioner of SECP. The proposed amendment is of administrative nature.
2. THE SECURITIES AND EXCHANGE POLICY BOARD SECTION 12, SUB-SECTION (1),(2) & (7): These amendment are also of administrative nature the main one being the designation of one of the members to be Chairman of the Policy Board by the Federal Government and the provision of casting vote in the event of a tie.
3. POWERS AND FUNCTIONS OF THE COMMISSION EXTENDED SECTION 20, SUB-SECTION (4)(H), (I), (JB) & (W): The Bill seeks to introduce a new Sub-clause (ha) to enlarge the scope of this existing Section. By virtue of this amendment, the SECP is also proposed to be empowered inter alia to conduct hearing and decide investor complaints pertaining to person involved in brokerage business for violation of securities laws, rules, regulations, directives, codes, etc, issued by the SECP from time to time. The Bill also proposes amendment in Sub-clause (i) of this Section by substituting the word "prosecuting" with the words "initiating action against the", offenders so as to empower the SECP to initiate necessary action against the offenders.
The Bill further seeks to introduce a new Sub-clause (jb), whereby the SECP is proposed to have the power to maintain a panel of auditors from which companies may appoint auditors and also to approve audit firms for financial institutions, listed companies and NBFIs (ie NBFCs to be correct) . A new Sub-clause (w) is proposed to be inserted , whereby powers and functions of the Commission are proposed to be further expanded for promoting and regulating any scheme funds (such a pension, gratuity, provident) established by various companies and corporation for the retirement benefits of their employees.
4. POWER TO CALL FOR EXAMINATION SECTION 32, SUB-SECTION (5) CLAUSE (D) & SECTION 32A: The Bill seeks to enlarge the powers of the SECP, whereby the Commission may take necessary action in the event a person wilfully refuses to obey or disregard any lawful order passed under this Act or any other law administered by the Commission. The Bill seeks to add a new Section 32A , whereby the Commission is proposed to be empowered to issue such directions as it may deem necessary or expedient to implement its orders or to prevent abuse of its process. In this regard, the SECP may seek assistance of local administration or police to implement its order.
5. APPEAL TO THE APPELLATE BENCH OF THE COMMISSION SECTION 33, SUB-SECTION (1) CLAUSE (C): The Bill seeks to amend the existing Sub-section (1), Clause (c) by deleting the words "in a court of law". By virtue of this amendment, a decision made by a Commissioner or an officer of the Commission may be appealed against in legal proceedings which may not necessarily be initiated before a court of law.
1. DEFINITION OF "PRESCRIBED" EXTENDED TO REGULATIONS SECTION 2, SUB-SECTION (1)CLAUSE (K) AND (L): The Bill seeks to amend the existing Clause (k) and (l) of Sub-section (1) of this Section by inserting the words "or regulations" beside the word "rules" so as to enable the SECP to formulate appropriate regulations as may be necessary to be formulated . The Bill further proposes to omit clause (1) of this Section wherein the word "promoters" was defined for the purpose of the Take-over Ordinance. In the context of the Take-over Ordinance, the definition of the word "promoters" seems to be inappropriate and irrelevant and hence sought to be deleted.
2. ENLARGEMENT OF THE SCOPE OF CERTAIN TRANSACTIONS SECTION 3, SUB-SECTION (1): The Bill seeks to amend the existing Sub-section 1(b) by inserting the words "except voting shares allotted and issued under Sub-section (7) of Section 86 of the CO" , so as to restrict the exemption available under this Section. This is an important amendment whereby if the whole or any part of the shares offered under Sub-section (1) of Section 86 of CO is declined or not subscribed, the directors may allot and issue such shares in such manner as they may deem fit. However, the acquisition of such shares from a right issue shall not be considered to be exempt from the purview of this Section.
The Bill further proposes to omit the existing Clause (f) of Sub-sections (1) of this Section so as to bring the existing provisions of this Section under the purview of this Ordinance which hitherto was except under this Section.
It is also proposed to enlarge the scope of this Section by inserting new Clauses (m) to (q) therein so as to facilitate certain acquirers of voting shares in the target company.
These further proposed to be included in the exempted category are in transfer of voting shares to a person's relatives without monitory consideration, acquisition by CFS financiers, a scheme of rehabilitation of a company approved by the SECP, certain transfer of shares by sponsors of a holding company, acquisition by a strategic investor of shares of a stock exchange pursuant to demutualization process. The Bill also seeks to insert a new Sub-section (2) whereby the acquirer even if exempt under this Section shall, upon acquisition of voting shares be obliged to make a disclosure of such transactions in the manner to be prescribed.
3. SECP MAY PRESCRIBED PERCENTAGE OF SHARES TO BE ACQUIRED SECTION 12, SUB-SECTION (1): By inserting the words "Commission may prescribe" in place of words "acquirer may decide" the power shall be available to the SECP to determine the extent of a public offer to be made. Accordingly, for the purpose of take-over transactions, the SECP will regulate and decide the percentage of voting shares to be acquired by an acquirer. This amendment has been proposed apparently to safeguard the interest of the minority shareholders of the target company.
4. ENLARGEMENT OF SCOPE OF OBLIGATION OF THE ACQUIRER SECTION 13, SUB-SECTION (5): Through the proposed insertion of the words "whether incorporated in Pakistan or outside Pakistan", the scope of the said Sub-section has been further expanded. The purpose of the aforesaid insertion is to specifically include in the purview of the said Section the companies incorporated outside Pakistan as well in its capacity as an acquirer. The amendment further requires that any director who desires not to take responsibilities for the information disclosed in such offering documents, such directors shall issue a statement to that effect together with reason thereof in the public announcement of offer of voting shares.
5. REDUCTION OF THE OBLIGATIONS OF THE MANAGER TO THE OFFER SECTION 15, SUB-SECTION (1) CLAUSE (F), (H), (I) AND (J): The Bill seeks to omit Clauses (f), (h), (i) and (j) of this Section so as to reduce the existing obligation of the manager to the offer who is required to be appointed to supervise the process of acquisition of voting shares of a target company by the acquirer. The Bill also proposes to insert a new Sub-section (2) in this Section whereby the scope of the existing Section has been further enlarged in respect of certain further obligations of the manager to the offer.
6. INCREASE IN PENALTIES FOR NON COMPLIANCE SECTION 26, SUB-SECTION (3): The proposed amendments in this Section seeks to increase the amount of penalties for contravention of the provisions of the Take-over Ordinance.
7. EMPOWERMENT OF THE COMMISSION TO MAKE REGULATIONS SECTION 29A: The Bill proposes to insert a new Section 29A so as to empower the SECP to make regulations as may be necessary to carry out the purposes of the Take-over Ordinance and matters incidental to and connected therewith.
8. EMPOWERMENT OF THE COMMISSION TO ISSUE DIRECTIVES, CIRCULARS, ETC. SECTION 29B: The Bill proposes to insert a new Section 29B so as to empower the SECP to issue such directive, circulars, guidelines, etc, as may be necessary to carry out the purposes of this Take-over Ordinance and regulations and rules made thereunder.
(To be continued)