The law Companies Act, 2017 (the 'Act') vide Section 452 'Companies' Global Register of Beneficial Ownership' introduced a new concept in corporate law, as no similar provision formed part of preceding corporate law. This writer's preliminary study of the corporate laws of Anglo-Saxon legal systems and jurisdictions including India, reveals that even internationally no such provision exists in any corporate law.
The text of the sub-section(1) of section 452 is re-produced below: "Every substantial shareholder or officer of a company incorporated under the Company law, who is citizen of Pakistan within the meaning of the Citizenship Act, 1951 (II of 1951) including dual citizenship holder whether residing in Pakistan or not having shareholding in a foreign company or body corporate shall report to the company his shareholding or any other interest as may be notified by the Commission, on a specified form within thirty days of holding such position or interest.
Explanation: For the purposes of this section the expression "foreign company" means a company or body corporate incorporated or registered in any form, outside Pakistan regardless of the fact that it has a place of business or conducts any business activity or has a liaison office in Pakistan or not." (emphasis is ours).
Securities and Exchange Commission of Pakistan (SECP) through SRO 546(I)/2017 dated June 21, 2017 has prescribed a form with respect to such information. The form is enclosed as Annexure A to this article. This annexure to a great extent exhibit the desired information under this law.
Analysis of the law
The aforesaid law is analyzed in detail below: This law is applicable on every 'substantial shareholder' in relation to a company, which is defined under explanation of sub-section(7)(d) of section 2 of the Act, as a person who has an interest in shares of a company, the nominal value of which is equal to or more than ten per cent of the issued share capital of the company; or which enables the person to exercise or control the exercise of ten per cent or more of the voting power at a general meeting of the company. In other words every 'natural person', not being a non-natural person such as corporate entity, is subject of this law. The original draft of the Act was effectively also applicable on non-natural persons being companies. However, the current Act is applicable on natural persons only. This change has been introduced by way of insertion of the term 'citizen' which is applicable to a natural person only. There is another dimension to this change. If the ownership in the Pakistani company is held by a Pakistani citizen through a foreign company, then this law will not be applicable the law is applicable only on natural persons being citizens of Pakistan. For example if Mr A, a citizen of Pakistan is a substantial shareholder in a Pakistani company then Section 452 is applicable. If, however, Mr A forms a wholly-owned company, being A Limited incorporated outside Pakistan (for instance, incorporated or registered in the UK or the British Virgin Island and A Limited becomes the shareholder of Pakistani company then Section 452 will not applicable though the substance of the matter will remain the same;
This law is applicable on all persons being 'citizens' of Pakistan as defined under the Citizenship Act, 1951. Any person having Pakistani citizenship will be subject to this provision of law. This law has no relation with 'place of residence' of that person. A person having Pakistani citizenship, irrespective of the fact that he/she has lived all his life abroad, will be subject to this disclosure. Accordingly, any person, whether living in Pakistan or otherwise, having citizenship of Pakistan, being a substantial shareholder in a Pakistani company will be required to comply with the provisions of Section 452 of the Act and declare his/her ownership in any foreign company. Persons having dual nationality will also be subject to this law.
Any person subject to this provision will have to disclose to the SECP his/her shareholding, irrespective of his/ her percentage holding in the foreign company or foreign body corporate. This means that there is no limit on the percentage holding of the foreign company or body corporate for that disclosure. Nevertheless, such disclosure is limited to foreign companies and body corporate, other forms of ownership such a beneficiary of a foreign 'trust' or a 'foundation', etc., are not effected by this law. Practically, this exclusion is vital, as substantial part of ownership in the foreign are held through trusts, etc. This aspect will be explained in details the following paragraphs:
Under the present law, only the 'shareholding', if any, has to be disclosed. 'Other interests' including beneficial ownership' are presently not required to be disclosed. However, SECP may, by special provisions, require to disclose the beneficial ownership. Section 452 and the form referred as Annexure A, are also not in consonance with the present provisions of law.
Apparent rationale for the introduction of this provision: Primary question on this matter is why this very special regulation has been placed in the company law when the same does not form part of corporate regulations in most of the jurisdictions. The apparent reason is that Pakistan wants to demonstrate that it is one of the few countries that have reacted, by amendments in financial laws after the revelation in the 'Panama Leaks' in 2016. This provision is apparently a consequence / a corrective measure in response to the Panama Leaks.
It is a known fact and an admitted position of the Government that Pakistani citizens hold substantial assets outside Pakistan which are not 'disclosed' in Pakistan. There is a need to refine disclosure requirements of such properties, in order to improve tax and foreign exchange compliance in this country. The aforesaid provision apparently seems to be an attempt to improve such disclosures in Pakistan. However, this raises the two fundamental issues:
What relation a substantial shareholder, in a particular company, say OGDCL or PPL, has with his ownership of shares in another foreign company? Is the contention of the law to identify related party transactions? To answer it, it is clear that this disclosure has nothing to do with related party transactions.
Availability of such information with the SECP, in relation to a particular company, does not, in any manner, assist the Government in other aspects, being the compliance of taxation, foreign exchange laws and anti-money laundering compliance by that person. Furthermore, it does not ensure completeness of information about such assets. In addition to the above, it also effects privacy as information furnished to SECP is a public information.
Resultantly, these two issues ultimately converge to one point, ie whether this information is required in relation to the 'shareholder' or it is required in relation to the 'company'? The obvious and apparent answer to this is that it is wholly related to the shareholder. If so, it raises many questions which have been discussed in the following paragraphs:
Disclosure requirement of foreign assets held by Pakistanis is legal under the present tax, corporate and fiscal laws, as it is an appropriate desire to ensure:
(i) that income from which such assets have been created has been appropriately taxed;
(ii) Funds for the acquisition of such assets had been transferred out of Pakistan through legal modes or were validly arranged outside Pakistan; and
(iii) The persons has not been involved in any anti-money laundering transaction in relation to asset so acquired.
At the outset, it can be concluded that the aforesaid purpose is not served by the provisions contained in Section 452 of the Act. The form introduced for this purpose through SRO 546(I)/2017 has made a half-hearted attempt as the disclosure of the cost of investment of such foreign shareholding does not, in any manner, fall within the scope of companies' law. This aspect has been discussed in detail in the following paragraphs. Nevertheless, it is reiterated that all the particulars required and objectives stated reveal that this provision has been introduced to seek the aforesaid information in relation a particular shareholder. If it is in relation to that company, and it appears to be so, then in my opinion, this section of the Companies Act, 2017 would have to pass a very tough test of validity of objective and rationale under the Constitution of Pakistan for reasons explained in the following paragraphs.
What is Company Law?
The objective and purpose of Company law is laid down in preamble to the Companies Act, 2017. It states as under:
"to reform and re-enact the law relating to companies and for matter concerned therewith
Whereas it is expedient to reform company law with the objective of facilitating corporatization and promoting development of corporate sector, encouraging use of technology and electronic means in conduct of business and regulation thereof, regulating corporate entities for protecting interests of shareholders, creditors, other stakeholders and general public, inculcating principles of good governance and safeguarding minority interests in corporate entities and providing an alternate mechanism for expeditious resolution of corporate disputes and matter arising out of and connected therewith;"
This law has a limited and restricted objective and purpose. It deals with the 'company' and the shareholder is discussed in relation to that company. Shareholder's actions, if any, are regulated or facilitated to the limited extend ie in relation to that company. The farthest provision in the corporate legislation, in relation to shareholders, is 'insider trading' by a shareholder but that too limits its scope to that particular company. It does not extend to shareholders action and activities outside that company.
The fundamental question is whether the Companies Act, 2017 or any other company law can extend its scope to the 'personal affairs' of the shareholders. In this regard, this writer would again refer to the provisions relating to related parties. The purpose of that information also emanate from the transactions by that particular company. If a shareholder has any interest in any company that has no transaction with a particular company then there cannot be action or enquiry with regard to 'related party'. It is obvious that company law is restricted to the activities and transactions of a particular company and the same should not and may not extend its scope to the actions of shareholders.
In this context, we would have to refer again to the preamble to the Act and state that there is no provision that allows seeking information relating to shareholders. In this respect, the extent of Section 452 is unique in nature. In fact the situation is reverse, there is an implied provision relating to 'shareholder's right' and secrecy and privacy of information is a right. Therefore, we can safely conclude that information relating to "shareholders' ownership" falls outside the scope of the Act, and unless appropriate change is made, provisions under this section may be tested at the touchstone of validity from other aspects.
Economic and commercial viability - effects on investments
Section 452 of the Act seeks 'personal' information about a substantial shareholder that has no relation with that company. This for reasons, elaborated in the following paragraphs, is essentially anti-investment and corporatization. This needs to be examined in the perspective of economic history and the culture of Pakistan.
In this flat world (as stated by Thomas Friedman), where movement and flow of capital is the norm, a very high number of Pakistani citizens, living in Pakistan and abroad, including those having dual nationalities, have substantial shareholding in Pakistani companies. These persons have investments in both Pakistani and foreign companies. Do we expect them to invest and pay taxes in Pakistan on it or divulge information about their investments abroad despite having no relation with Pakistan? Pakistani citizenship can only impose the requirement that is backed by economic rationale within defined boundaries.
In most of the cases, foreign investments have been acquired from earnings in Pakistan and abroad. If not, then the way to curb any abuse is an effective implementation of foreign exchange and fiscal law, not through over-regulating corporate law. The current legislation is totally anti-investment as Pakistani citizens, having assets outside Pakistan, in the form of shares in foreign companies especially those acquired from earnings outside Pakistan, will be highly hesitant and rightly so to disclose to Pakistan regulators their shareholding outside Pakistan. This will induce Pakistani citizens to keep their investment at less than 10 percent or avoid investment in Pakistan at all. It is all the more important in the sense that there is no other jurisdiction in the world that requires this kind of personal information. Therefore, ultimately Pakistan becomes a less attractive destination for investment only for regulatory reason.
Introduction of requirement in Section 452 reveals that there has to be a balance between regulators' desires for optimal information, whether required purposefully or otherwise; and maintaining the rights of privacy of shareholder and restriction to seek only relevant of personal information of a shareholder. Through this provision, we are indirectly penalizing the Pakistani citizens for acquiring substantial shareholding in Pakistani companies if they have investment in foreign entities. We understand that disclosure is not in the nature of penalty, however there may be or will be a clear case of discrimination, and for the reason such citizens would effectively be discriminated against others. There is dual discrimination as it is limited to particular assets and arises only on account of having substantial shareholding in companies.
Such regulations are also not consistent with other requirements prevalent in the country. For example, we have a provision in the Income Tax Ordinance, 2001 by way of Section 111(4) that provides permanent immunity from any enquiry for funds received from abroad. The remitter is absolutely free not to disclose any source of that money. This provision would effectively mean that investment from abroad which has immunity in acquiring any substantial shares in a Pakistani company would now be required to provide full information of his / her investments abroad. However, it leads to contradiction in two provisions of law. Further, it may lead to investment from abroad in unproductive areas instead of organized corporate sector.
Resultantly, Pakistani diaspora, a lot of whom are Pakistani citizens, will either renounce Pakistan citizenship or be hesitant to acquire shares in Pakistani companies.
At this stage it may be questioned why there is hesitation is disclosure of investment in foreign companies. The primary reason is privacy and confidentiality as investment in foreign companies may be sensitive information which a person, for various reason, may not be interested to disclose. It is more so for reason that disclosure under Section 452 of the Act will be public information.
Another question that can be raised in relation to this section is the limitation of such information to foreign companies only. Why the information about investment in local companies is not being sought? The obvious answer will be identification of the foreign assets of Pakistani citizens. If it is so, then it transpires that the said objective cannot be and should not be achieved by way of the operation of a provision in the corporate law. Secondly, Constitution of Pakistan does not allow discrimination in any sense especially with reference to furnishing of information or the right to seek such information.
Conclusion and the way forward
The aforesaid discussion leads to the following conclusions:
(i) Section 452 is unique in Pakistan;
(ii) Section 452 relates to information about the shareholders, not the company;
(iii) The scope of company law is limited to information about the company, therefore on legal plaint this section will have to pass through a test of discrimination under the Constitution;
(iv) Desired objective even if considered valid may be easily avoided. A Pakistani citizen can invest and acquire substantial holding, not directly but through a foreign company wholly owned by him. He/she may attain all the objectives however regulator will not achieve anything;
(v) The objective of seeking the information as identified above cannot be achieved through this section. The best place to obtain such information is wealth statement under the Income Tax Ordinance, 2001. The scope of wealth statement if required should be made compulsory for any substantial shareholder in Pakistani company;
(vi) This Section is in essence in conflict with Section 111(4) of the Income Tax Ordinance,2001;
(vii) This provision if introduced in the present form will be anti-investment as it would discourage investments by non-resident Pakistanis, with regard to investment in shares of Pakistani companies; and
(viii) Many potential Pakistani citizens settled outside Pakistan may leave Pakistani citizenship on account of this section which is highly undesirable.
The immediate solution is to keep the operation of Section 452 in abeyance and design an appropriate system if we have to achieve the objective of disclosure of foreign assets of Pakistani citizens. The present position is neither valid nor appropriate in economic sense.