Draft Companies Bill 2016: beneficial owners of shares of company to report investments: SECP

In the wake of recent developments concerning offshore investments across the globe, the draft Companies Bill, 2016 introduced a provision whereby beneficial owners of shares of a local company shall report to the company their investments whether local or abroad and the company shall file the same with the Securities and Exchange Commission of Pakistan (SECP).
Analyzing the draft Companies Bill, 2016, experts said on Thursday that the Securities and Exchange Commission of Pakistan (SECP) has introduced new concepts/significant changes through the draft Companies Bill, 2016 having substantial impact on the corporate sector including real estate companies and measures to prevent offences relating to fraud and money laundering.
The draft Bill contains a new provision whereby the officers and beneficial owners of shares of a local company shall report to the company their investments whether local or abroad and the company shall file the same with the Commission through annual return. All such information shall be recorded by the Commission in a register to be known as the "Companies' Global Register of Beneficial Ownership, they said.
Experts said on Thursday that a new provision has been added to the draft bill whereby certain requirements are being prescribed for the companies intending or engaged in the business of real estate in order to regulate the matters relating to advances and deposit collected buy such companies.
The main feature of the provision specified that principal line of business to be mentioned in the Memorandum of Association shall be the "development of real estate projects. Another feature is restriction on accepting any advances or monies in any form whatsoever, against any booking to sell or offer to sell unless the company has obtained necessary permission/approval/NOC from the concerned authority (CDA/LDA, etc). The condition of written agreement shall be mandatory before accepting any money against sale/purchase of any apartment, plot or building as an advance payment and restriction on publication of advertisement of the services that are not intended to be offered.
Another provision revealed the restriction on advertisement for any real estate project without the approval of the Commission and NOC of the concerned authority. All the monies received from the allottees' shall be deposited in a separate ESCROW account to be opened in the name of the project. The ESCRO account shall be dedicated exclusively for carrying out the project and no encumbrance shall be imposed on the payment of such ESCROW account for the benefit of creditors of the company.
In order to encourage the compliance of law and to ensure adequate measures against fraud and money laundering, the officers of a company are obligated to take adequate measures to curb such violations and in case of failure and to deter such practices, heavy penalties including punishment of imprisonment for a term which may extend to three years have been provided, they said.
For agriculture promotion company, an enabling provision has been added to facilitate the agriculture sector. Such company shall be formed by the farmers and classified into two classes of companies ie producer company and collateral management company. The producer company shall primarily, deal with the produce of its members. The Collateral Management Company shall be engaged in the activity of managing produce as collateral, including warehousing and facilitation of commodity financing. The detail parameters for such companies shall be provided through regulations. Such companies shall be exempt from mandatory conversion of shares into book-entry form.
In order to facilitate an individual intending to manage personal properties through a company and derive income therefrom, a new provision has been added whereby the information of such companies shall not be publicly available with the exception of tax authorities or order of the court and if any information or record is required to be provided under any international obligation or commitment to which the government is subjected.
The concept of "Free Zone Company" is being introduced in the draft Bill after evaluating the benefits and recognition given under the Export Processing Zones Authority Ordinance (IV of 1980). The information of such companies as well as the companies in EPZs shall not be publicly available with the exception of tax authorities or order of the court or if any information or record is requirement to be provided under any international obligation or commitment to which the government is subjected.
Experts further elaborated that the Companies Ordinance, 1984 at present had variation in the threshold of filing of applications or taking legal actions against the company by the shareholders. The draft Bill has made the threshold with respect to all contentious matters to a uniform figure of ten percent.
A new concept of "Inactive Company" has been introduced in the draft Bill through which a company which is formed for a future project or to hold an asset or intellectual property and has no significant accounting transaction or a company which is not in operation or is not functional, can avail the status of an inactive company upon submitting an application to the Registrar. An inactive company has been allowed certain exemptions and minimum requirements of filing.
Since use of technology has become inevitable and quantum of dispute of shareholding in the physical shares in case of private limited companies has considerably increased over the time, the Commission while realizing the need of the day, has introduced a new concept in the draft Bill which empowers the Commission to direct conversion of shares of companies into book-entry form as envisaged in the Central Depositories Act, 1997, within four years of enactment of the draft Bill, further extendable up to two years if deemed appropriate by the Commission.
The new companies shall also be obligated to issue shares in book-entry form from a date notified by the Commission.
After consulting the international best practices and in order to facilitate the corporate sector, the Commission has proposed that all lawful businesses, except the restricted businesses (banking, NBFC, Modaraba, stock brokerage), shall be deemed as a part of the memorandum of association. Memorandum of association of a company shall be a simple one pager. The companies shall only be required to mention their principal line of business. "Principal line of business" has been defined as "the business in which, the substantial assets are held or substantial revenue is earned, by a company, whichever is higher, experts analyzed companies bill.
Since all lawful (except restricted) businesses shall be deemed to be part of object clause, there will be no need to alter the memorandum by companies for engaging in any venture. Alteration would be required only on conversion of a normal company into a specialized company. The requirement of filing certified copy of the order of the Commission by the company has been abolished.
Besides mortgage and charge, the requirement to register a pledge has also been introduced in the draft Bill which will ensure security to the creditors and give the prospective creditor and investor a well-informed opportunity while dealing with any company.
A new concept has been introduced under the draft Bill whereby all documents required to be sent by a company to its members shall only be sent electronically. However, if a member requires physical copy of any document, the expense of the same shall be borne by the shareholder.
The concept of secret ballot in the general meetings of the company is being introduced in order to have poll on matters which may be taken as classified or which if disclosed may lead to unnecessary implications.
Previously the Companies Ordinance, 1984 did not provide for a situation where fresh elections could be conducted upon the acquisition of requisite shareholding by any person in case of a private and unlisted public company. A new concept has been incorporated in the draft Bill which shall enable the acquirer to demand fresh elections if he has sufficient shareholding to get elected on the board.
Keeping in view the portfolio of independent and non-executive directors and to ensure their safeguard, certain measures have been introduced in the draft Bill through which such directors shall have protection against mismanagement or violation of law undertaken by rest of the board to which they are not privy.
Considering the importance of information with respect to the title of securities and the consequences thereof, the Commission has been empowered under the draft Bill to call information from any person as may be required with respect to securities held by him in his own capacity or upon instructions of any other person.
In certain cases the shares of companies are held by individuals who do not provide necessary information to the company due to suspicious reasons or are holding the shares as Benami holders. In order to curb such practices, the draft Bill has given powers to the Commission to specify conditions for payment of dividend and the company has been empowered to withhold dividends if the directions of the Commission are not complied-with by the members.
Experts further highlighted that the current legal regime did not cater for the treatment of unclaimed dividend except in the matter of winding up. In addition to the dividend unclaimed in the event of winding up, the draft Bill provides for a complete mechanism for the dividend unclaimed for five years and for deposit of the same to the credit of the Federal government in an account to be maintained in the State Bank or National Bank of Pakistan under the name and style of "Companies Unclaimed Dividend and Insurance Benefits and Investors Education Account". Any person having a claim with respect to an unclaimed dividend shall file the claim with the Commission and the same shall be processed after due verification in the manner to be specified.
Since the treatment of unclaimed dividend has been provided in the draft Bill and the deposit of the same shall be made in a bank account, therefore establishment of a Fund has been envisaged in the draft Bill which shall provide for investor education and protection measures. One of the sources of funding for the Fund has been specified as the income derived from the account of unclaimed dividend, they said.
In view of the recent developments taken place with respect to the offshore investments by companies and keeping in view the importance of information concerning beneficial ownership in foreign companies operating in Pakistan, the draft Bill empowers the Commission to call upon a foreign company and any of its directors, officers and shareholders to provide information concerning the shareholding of such company, they explained.
In order to promote the Islamic finance in the country, the concept of Shariah model business for companies has been provided in the draft Bill along with the certification of Shariah compliant securities. The provisioning of the concept and the parameters of the regime shall be made through regulations by the Commission.
The Commission as a matter of procedure and due to certain policy measures is required to get clearance of certain individuals from the respective security agencies; however there was no provision in the law to address such practice by the Commission. The draft Bill authorizes the Commission to undertake such exercise.
Due to the fact that electronic records have been recognized under the law and since these are more effective when it comes to storage and access, therefore the draft Bill provides for the destruction of physical record submitted by the companies and for transformation of the same into electronic form.
Each director of a company has a fiduciary responsibility towards the company and the members. However, as a practice some directors reach late for meetings or are in the habit of attending meetings for a while and then leaving. In order to curb such practices, the meeting fee to be paid to a director has been linked with his complete participation in the meeting.
A new provision is being added whereby a company shall be deemed to be a company with public interest if its ordinary shares are owned by such number of persons as may be specified and whose assets exceed the value specified. The company shall be required to comply with such disclosure and reporting requirements as may be specified by the Commission.
The Commission shall have the power to notify any institute, body or association, having expertise in creation and maintenance of data bank of independent directors and post on their website the particulars of independent directors for the use by the company making the appointment of such directors to be appointed under any law, rules, regulations or code. This will facilitate the listed companies to select the independent directors.
Keeping in view the significance of the designation and role of chairman of the board, the draft Bill specifies that the chairman in case of a listed company shall be appointed within fifteen days from among the non-executive directors. The chairman and chief executive (by whatever name called) shall not be the same individuals.
The concept of a private company is based on the principle that the transfer of its shares shall be subject to restrictions. Keeping in view this principle and the definition provided in the existing law as well as the draft Bill, a mechanism has been introduced for the disposal and transfer of shares in a private company by any of its members.
Deposit taking by companies under the draft Bill has been prohibited in order to ensure that no member of the public is misled or deceived by a company. Exception has only been provided to a banking company.
The regime of valuation is one of the most important feature which was earlier neglected in the relevant laws. The draft Bill has introduced the concept of registered valuers in order to regulate the discipline and ensure efficiency and transparency.
Previously there have been instances where companies and/or the directors have been engaged in such transactions which were other than cash and which resulted in loss to the company in one way or the other. The draft Bill has restricted any such transactions unless approved by general meeting of the respective company.
The Companies Ordinance, 1984 does not provide for investigation in cases which are of serious nature and has impact on the public at large. In order to cater for such situations the draft Bill has empowered the Commission to initiate investigation in particular circumstances.
Generally the concept of mediation is well recognized and adopted internationally in company matters. The draft Bill introduces the concept in order to have an efficient and swift resolution of disputes.
Since the concept of mediation has been introduced in the draft Bill, therefore the Commission has been empowered to maintain a panel of experts for the purpose.
Considering the expertise of Commission and the time ordinarily taken in the cases of amalgamations by the Court, the jurisdiction with respect to amalgamations has been shifted to the Commission for swift disposal of the matters.
A new concept has been introduced whereby in case of amalgamation of wholly owned subsidiaries amongst each other or into its holding company would not require any approval of the Commission. The Board of the company shall be authorized to sanction the amalgamation.
Additional grounds for winding up have been stated in the draft Bill which adequately addresses the practical problems faced by the Commission in filing of winding up petitions. Ground concerning illegal activities by a company and acting against the sovereignty of Pakistan has also been included.
The draft Bill empowers the Commission to maintain a panel of provisional manager and official liquidator having such expertise as the Commission shall provide through regulations.
Presently the Commission as a policy introduces schemes to facilitate companies which are not in operation and has no assets and liabilities to get themselves off the register of companies; however this power was not specifically provided in the law. Henceforth the concept has been incorporated in the draft Bill.
Having considered the electronic literacy in Pakistan and the inability to use computers and the absence of IT infrastructure at small companies, the concept of intermediaries has been introduced which shall cater for the needs of the companies and management having no IT infrastructure. The intermediary shall have such qualifications as the Commission may provide through regulations and shall be registered with the Commission.
Considering the recognition of electronic documents and the difficulties with physical filing of documents, the draft Bill envisages the concept of electronic filing, experts said.
To take full advantage of the technology and by adopting efficient means of communications, the Commission has been empowered to notify a date from which all communications by the company with its members shall be made electronically through e-mail and similar modes.
Annual filing of documents and the slackness of companies in compliance is a very common regulatory aspect. Considering the frequency of non-compliances and the difficulties faced regarding regularization, the draft Bill introduces the concept of late filing fee. This will enable the companies to have the filing regularized through payment of additional fees. Moreover, no penalty or adjudication shall be initiated against the late filers, they added.