Companies Act, 2017 - foreign corporate shareholding in listed companies and disclosure of beneficial ownership: A case of over/imprudent regulation

In this writer's earlier articles on Companies Act, 2017, he has applauded the constructive and timely action of the government in introducing the new corporate law. This legislation is closer to changed economic realities. He reiterates that it is a step in the right direction. In this article, he would like to emphasise on his assertion about certain disclosures to be made by 'listed companies', which are prone to be declared as unnecessary and imprudent over regulations. Such actions destroy the overall positive image of a constructive legislation. The case under consideration is an example of this approach.
Listed companies are most documented and regulated business organisations in any country. Our policy objectives, in right direction, should be: To bring more and more business entities within the ambit of listed companies; and Incentivize foreigners including expatriate and Pakistani diaspora to invest more in Pakistan through listed companies.
These two primary objectives cannot be compromised. This writer's earlier articles on the subject have highlighted that some provisions introduced in the Companies Act, 2017 have become impediment to achieving these two fundamental objectives. There are certain provisions which, directly or indirectly, Incentivize business to remain out of listed structures. Furthermore, some additional features are being added which may discourage investment by foreigners, including expatriate Pakistanis, in Pakistani companies.
One of such provisions is Requirement 7 of Part 1 of the Fourth Schedule to the Companies Act, 2017. Fourth Schedule is the list of disclosure and information to be contained mandatorily in the Financial Statements of a listed entity. This provision states as under:
"7. Particulars of major foreign shareholders, other than natural person, holding more than 5% of paid up capital in the company: (i) Names and address of beneficial owners and legal status along with the name of Chief Executive or Principal Officer or Authorised Agent; (ii) Name and particulars of Pakistani resident associated with such shareholder or entity, if any; and;
(iii) Details of conditions and compliance status thereof, imposed by regulatory authorities in Pakistan/foreign jurisdiction for foreign investments, if any."
This provision can be briefly summarized and analysed as under: (i) This requirement is applicable only to non-natural persons being a company, a trust, etc. being shareholder of a listed entity; (ii) This provision is applicable only on foreign non-natural persons owning shares in Pakistani listed entities;
(iii) Substantial holding has been placed at 5 percent of the paid up capital for the purposes of this provision. Any company owning more than 5 percent is required to provide its information to the investee, being a Pakistani listed company;
(iv) The term 'beneficial ownership' has not been defined in this regulation, therefore, definition applicable will be the one stated in Section 2(17) of the Act. Under Section 2(17),if the beneficial owner is a non-natural person then veil of incorporation cannot be crossed;
(v) Under this provision, there will be a disclosure of 'beneficial ownership' of foreign company in any listed company. In other words, if A Ltd, being a US entity owns 5 percent or more shares in OGDCL then OGDCL's accounts will disclose the beneficial ownership of A Ltd as a US Company. That US Company may have no other relationship with Pakistan;
(vi) In case, if a Pakistan resident is associated with that foreign entity that owns more than 5 percent shares in a Pakistani company then name of such person will also be required to be disclosed. This means that Pakistani resident's disclosure is not limited to ownership. Only an 'associated status' is enough for the mandatory disclosure;
(vii) Resident has not been defined in Companies Act, 2017. This would, under a prudent view will be the one being Pakistani citizen;
(viii) Association, has not been defined, therefore, provisions of Section 2(4) of the Act will be applicable; and;
(ix) In case if any condition has been imposed in Pakistan/foreign jurisdiction in respect of this investment.
These are very serious, non-implementable and cumbersome requirements which have to be properly deliberated before implementation. Similar provisions have been added to the Fifth Schedule relating to disclosure requirements for unlisted companies. This writer's comments with respect to listed companies are by and large applicable to unlisted entities, however this article stresses the subject from the viewpoint of listed companies as foreign company shareholding is more relevant in the case of listed entities.
The first and foremost issue is the 'possibility' of furnishing the said information. This raises the question of impracticality. In case, if for example, 'Microsoft Inc' or 'Coca-Cola Inc' of USA invests in a Pakistani listed company then are we asking to disclose the beneficial owner of Microsoft or Coke? Do we understand the layers and nature of ownership in such cases? There is no harm in obtaining such information. However, do we seriously believe that such information should be asked for? If the answer is 'yes' then are we serious that such companies will provide or should provide such information to Pakistan's corporate regulator only for the reason that their companies have decided to invest in Pakistani equities. One is unable to decipher the practical issues on this subject. This needs to be re-examined. We would have to see the comparative international best practice in this regard and other related aspects.
First question we have to ask ourselves is whether or not the foreign investors will like to divulge this information to our corporate regulators. Foreign investors have adequate and ample opportunities to invest in other emerging markets, with lesser risks and requirements. Accordingly, we would have to ask ourselves whether any such requirement is practically feasible and in the interest of promotion of investment. This writer's answer is emphatically in the negative.
It is, therefore, considered that this requirement be kept in abeyance and appropriate legislation be introduced to delete the same.
Now, we come to the other aspect of the matter. In the post 'Panama Leak' scenario, there is a very strong wave to identify 'beneficial ownership' in all commercial transactions and ownership. There can be negative or positive assertions in augmenting that approach; however, the foremost pre-requisite will be the ascertainment of objective for seeking beneficial ownership of foreign companies which own more than 5 percent shares in a Pakistani listed company. Is it a corporate law purpose? Or are we over-enthusiastic in a wrong direction?
The term 'associated companies' is well defined in the Act and disclosure relating to associated companies and transactions with them are appropriately laid down in other parts of the disclosure requirements. Now, crossing the veil of incorporation and seeking beneficial ownership of associated company is a novel concept. Again, the question is whether it is a subject of corporate law?
We would have to first ascertain whether information relating to a person, his/her ownership, etc., is a subject of taxation laws or a corporate law. In the wake of seeking information and disclosure about foreign companies and foreign entities, termed as 'offshore companies' in our jargon, we are crossing the line of demarcation between corporate law and personal wealth statements.
Primary and fundamental objective of corporate law is to ensure regulation of the corporate soul. At the same time in the developing world, there is an additional role of firstly promoting incorporation and then listing of such incorporated entities. In case, if the objective of regulating personal affairs of the owners of the company is mixed up with that primary role then there would be no tangible benefit and process of incorporation will come to halt. These lines should not be crossed. It appears that this legislation and some others in the Companies Act, 2017 have crossed this line.
If we analyze the second requirement of the disclosure, as referred above, then we can decipher the underlying objective. In that provision, there is special emphasis in identifying the Pakistani resident associate of a company having more than 5 percent shares in a Pakistani listed company. This amply clarifies that the objective of this provision is to identify whether any Pakistani resident has association with a Pakistani listed company through a foreign corporate entity. In other words, we want to know the ownership of asset of that Pakistani.
This subject raises a fundamental question for businesses. The undesirable question is whether having a Pakistani residence is a 'liability' or an 'asset' for the Pakistanis, especially those living abroad or Pakistan diaspora. Such provisions will make Pakistani residence a 'liability' in comparison to people who have decided to leave such status. Despite leaving their Pakistani status, they are allowed and welcomed as foreign investors. We all know that many Pakistanis have adopted the status of non-resident for tax purposes in order to avoid disclosure of their offshore wealth. This writer is proponent of such disclosure in income tax laws and correction in fiscal provisions which are being abused. However, it appears that correction in income tax laws is being avoided and unnecessary provisions are being made in corporate laws. This may imply negatively that documented, organised sector is being discriminated. This is not the objective; however, perception to this effect cannot be ignored.
It is repeatedly stressed that under the present phase of economic development 'incorporation' should not be made a burden. Furthermore, requirements for listed companies should be such that more and more Pakistanis and foreigner invest in Pakistani companies, directly or indirectly.
Every action by a regulator should have a purpose and that objective should ultimately translate into a tangible action for economic benefits if required. Under this regulation, all the listed companies will have to disclose their shareholders being foreign companies/entities and their beneficial interest and Pakistani associates (even if not an owner) in the financial statements of that listed company. For example, it will have to be disclosed that X Ltd of UK, owned by Mr. A is the owner of 5 percent shares of OGDCL. If a Pakistani, say, Mr. B is associated with A Ltd not being the owner then disclosure of Mr B will also be required to be made. In case if both the disclosures are made then a common shareholder has the right to ask the benefit of such disclosure in relation to management or operation of OGDCL. It is always better to have more and more disclosure; however, the secondary objective is the use of that disclosure for the benefit of the company. This writer has yet to find a reason for having such disclosure.
If we study the matter in depth then it transpires that regulators and legislators are interested in identifying Pakistani origin or Pakistan resident shareholders in listed companies to identify perceived undeclared assets. It is so for the reason that it has been revealed especially after the Panama Leaks that there are substantial holding of Pakistani owned foreign companies, directly or indirectly, in Pakistani listed entities. This writer has written four detailed articles on this subject which have not been compiled in a book 'Panama Leaks-A Blessing in Disguise- Offshore Assets of Pakistanis' in 2016. There are reasons and causes of accumulation of such assets outside Pakistan. Furthermore, for all purposes, it is a subject of income and wealth taxation having no direct relation with the corporate laws. A substantial part of such assets has been accumulated through 'legal' means and is the result of relaxed tax regime, which was identified by this writer in his article 'Unholy trinity' published, in this daily, on August 7, 2017. Lastly, there are issues with laws relating to 'time limitation', even if the matter is not free from doubt under the taxation laws with regard to source of income. As identified earlier, in this situation, seeking disclosure in the listed company accounts on the matter which requires resolution is a totally premature step. In short, this income tax subject should not be taken up in the corporate laws at this stage.
In the light of the aforesaid discussion, it is my view that Regulation 7 of Part 1 of the Fourth Schedule requires a disclosure that is, in principle, undesirable and non-practical. It is strongly suggested that this provision be kept in abeyance till the time such regulation is removed from the legislature.