Election, duties of directors, other matters: Commissioner SMD asked to issue guidelines for corporate sector

An Appellate Bench of the Securities and Exchange Commission of Pakistan (SECP) has directed the Commissioner Securities Market Division (SMD) to issue detailed guidelines for the corporate sector on election, appointment, duties and responsibilities of executive, non-executive, nominee and independent directors along with consequences of violation in their respective role.
According to an order of the SECP Appellate Bench-I comprising Commissioner Zafar Abdullah and Commissioner CLD Tahir Mahmood, during the course of hearing the Bench felt that there is a need to issue a detailed guideline with respect to election, appointment, duties and responsibilities of executive, non-executive, nominee and independent directors along with consequences of violations in their respective role. By doing this, in future full compliance of laws and regulations may be ensured. Therefore, the bench has directed the respondent (Commissioner SMD SECP) to prepare and issue a guideline after approval of the Commission keeping in view the relevant laws, regulations, rules and the code.
The SECP Appellate Bench further directed to place the final guideline on Commission website at a conspicuous position and copy of such guideline may be delivered at the registered office of the public listed companies.
In view of the circumstances, it is undisputed fact that the Appellant (nominee director of the company) was a nominee director and has time and again asked the management of the Company to comply with legal requirements; however, they failed to comply with. Therefore, by considering Appellant partial compliance, the bench hereby allowed the appeal and set aside the Impugned Order to the extent of Appellant. The bench has further directed the Appellant to avoid similar non-compliance in future; otherwise strict action shall be taken in accordance with the law.
Details revealed that the order shall dispose of Appeal No. II filed against the order dated 05.04.2016 (the Impugned Order) passed by the Respondent under section 160 read with section 100 of the Securities Act, 2015 (the Act).
Brief facts of the case are that company was put on the defaulter counter of PSX on 03.01.2007 due to failure to hold Annual General Meetings (the AGMs), failure to pay two years annual listing fee and failure to join Central Depository System (CDS). In consequence, trading of Company shares was suspended on 16.02.2012. The Respondent (Commissioner SMD SECP) issued a direction on 01.09.2015 under section 100 of the Act to the Appellants to undo the afforested defaults however, directors of the company including Appellant failed to comply with the direction.
In view of failure to comply with the direction, a Show Cause Notice (the SCN) dated 16.10.2015 under Section 160 read with Section 100 of the Act was served on the directors of the Company as to why the penal action may not be taken against them under Section 159 of the Act. The case was fixed on 17.12.2015, 20.01.2016, 26.01.2016, 09.02.2016 and 03.03.2016 however, despite ample opportunities no one appeared on behalf of Appellant. In the circumstances, the Respondent imposed a penalty of Rs 500, 000 on the directors.
The Commissioner SMD SECP acknowledged in written comments that Appellant has made his efforts to ask the management of the Company to comply with the requirements of regulation and other laws and it is evident from the record that he has been raising his concerns with respect to affairs of the Company from 2009 to onward. The comments of the Respondent suggested that subject to satisfaction of Appellate Bench, relief may be granted to the Appellant.
The Appellant has built his case on a sole ground that being a nominee/non-executive director he had very limited role into the affairs of the Company and has raised his concerns through letters/dissenting notes whenever any irregularity or illegality with respect to the Company, came into his knowledge. Therefore, he cannot be held responsible for contravention of Section 100 of the Act or any other regulation.
The appellant bench have perused the relevant law and it states that directors of a company whether nominated or elected are responsible to ensure compliance with law. However, the role of a nominee director is more critical than executive director because he sits on Board of Directors (the BOD) to represent and safeguard the interest of the institution who nominated him. It is also settled position in law that a non-executive director has no active role in the day to day affairs of the company, however, he has the right to object non-compliance committed by the management of Company during BOD meetings through his dissenting note and if his concern is not addressed and noted in a required manner than he has to proceed in accordance with clause eight of Code of Corporate Governance (the Code).
The relevant part of clause eight of the Code is reproduced here for ready reference:
"In, the event that a director of a listed company is of the view that his dissenting note has not been satisfactorily recorded in the minutes of a meeting of the Board of Directors, he may refer the matter to the Company Secretary. The director may require the note to be appended to the minutes, failing which he may file an objection with the Securities and Exchange
Commission of Pakistan (SECP) in form of a statement to that effect. The objection may be filed with the SECP within 30 days of the date of the confirmation of the minutes of the meeting," it added.
In extra ordinary circumstance and where affairs of a company are being managed contrary to law, non-executive directors should have acted as a whistle blower to indicate violations committed by the company management. Firstly, Appellant was required to raise his concern through dissenting notes and thereafter if his concerns were not taken into the account, he was also required to intimate the violations of Company management to the Commission.
The documents annexed with the appeal including minutes of 182nd BOD meeting and letter dated 16.10.2009 reflects that the Appellant has only raised his concerns with the management of the Company. Appellant has partially complied with the requirements of aforesaid clause whereof an inference could be drawn that Appellant had no intention to violate the law, however, he failed to fully comply with the law in discharge of his duties as nominee director of the Company, the SECP Appellant Bench added.