SECP to bar companies from issuing certain negotiable instruments

The Securities and Exchange Commission of Pakistan (SECP) has decided to prohibit companies from issuing certain negotiable instruments, ie, bearer shares, bearer share warrants, and similar equity or debt securities of bearer nature.

Sources told Business Recorder here on Wednesday that the SECP had proposed a new Section 60A in the Companies Act 2017 for prohibition on issuance of bearer shares or bearer share warrants, etc. The SECP is also introducing proposed regulatory framework for obtaining, maintaining and updating information about the ultimate beneficial owners, and providing the same to the commission, is aimed to ensure compliance with the recommendations issued by the Financial Action Task Force (FATF) to enhance transparency of companies.

An ultimate beneficial owner exercises ownership or control rights over a company indirectly through multiple layers of corporate entities or other legal persons or arrangements.

A threshold of a minimum of 25 percent of ownership or control rights of the ultimate beneficial owner in the reporting company through the multiple layers of intermediate holding companies has been proposed to be specified through the relevant regulations, they added.

According to the rationale behind the SECP's proposal, the provisions relating to, the prohibition on issuance of bearer shares, bearer share warrants and similar equity or debt securities of bearer nature; and the manner of registration and cancellation in case any such bearer securities such as units issued by the assets management companies (AMCs) were being introduced in order to prevent the misuse of companies from money laundering or terrorist financing abuses in line with the recommendations issued by the FATF.

The bearer securities are vulnerable to misuse because they can effectively obscure the ownership of a corporate entity, thereby providing maximum anonymity and making such corporate vehicles more susceptible to misuse for illicit purposes, including money laundering.

The proposed amendment would entail corresponding amendments to the Companies (General Provisions and Forms) Regulations, 2018, the sources said. Pakistan's Mutual Evaluation Report issued in October 2019 by the Asia Pacific Group on Money Laundering also highlighted certain deficiencies in the regulatory framework relating to the misuse of bearer shares and bearer share warrants, etc.

Although bearer securities do not exist, an explicit prohibition is being provided through the proposed amendment, sources added. The proposed amendment in the Companies Act 2017 said, "Notwithstanding anything contained in any other law for the time being in force, any allotment, issue, sale, transfer, assignment or other disposition of any bearer shares or bearer share warrants or any other equity or debt security of a bearer nature, by whatever named called, shall be void. Provided that the commission may specify the manner in which any equity or debt security of a bearer nature, if issued, before the date this provision comes into force, may be registered or cancelled. Explanation: For the purpose of this section, the term bearer shares or bearer share warrants means a negotiable instrument that accords ownership in a company to the person who possesses such instrument and includes any other equity or debt security of a bearer nature, the amendment added.