The Securities and Exchange Commission of Pakistan (SECP) will make it mandatory for the directors of investing company to present a special resolution for making investment in an associated company and certify that due diligence has been carried out for the proposed investment. The SECP has issued draft Companies (Investment in Associated Companies or Associated Undertakings) Regulations, 2017 here on Friday.
It said that the directors of the investing company while presenting the special resolution for making investment in an associated company or associated undertaking shall certify to the members of the investing company that they have carried out necessary due diligence for the proposed investment before recommending it for members' approval and in case of investment through loans, advances, etc, shall further certify that the financial health of the associated company or associated undertaking is such that it has the ability to repay the loans, advances, etc, as per the agreement.
Unless otherwise specifically authorized by the members in the general meeting the special resolution authorizing investment in an associated company or associated undertaking shall be valid for a period of twelve months and shall stand lapsed after such period, it said. These Regulations shall apply to all companies except and to the extent those specifically exempted by the Commission through notification under clause (a) of sub-section (3) of section 199 of the Companies Act, 2017.
The company shall disclose following information in the statement annexed to the notice, pursuant to sub-section (3) of section 134 of the Act, of a general meeting called for considering investment under Section 199 of the Act:
Firstly, general disclosures regarding associated company or associated undertaking in case of all investments: Name of associated company or associated undertaking and basis of relationship; purpose, benefits likely to accrue to the investing company and its members from such investment and period of investment; earnings per share for the last three years; break-up value per share, based on latest audited financial statements; sources of funds to be utilized for investment and where the investment is intended to be made using borrowed funds; justification for investment through borrowings detail of collateral, guarantees provided and assets pledged for obtaining such funds and cost benefit analysis.
In case of investment in securities in relation to a project of associated company or associated undertaking that has not commenced operations, in addition to the information referred to, following further information shall be provided: Description of the project and its history since conceptualization; starting date and expected date of completion of work; time by which such project shall become commercially operational; expected time by which the project shall start paying return on investment; and funds invested or to be invested by the promoters, sponsors, associated company or associated undertaking distinguishing between cash and non-cash amounts and any other important details necessary for the members to understand the transaction.
A listed company shall simultaneously dispatch a copy of aforesaid notice and the statement of material facts to the head office of the Securities and Exchange Commission of Pakistan through fax/email and courier service on the same day it is dispatched to the shareholders, it said.
The duly signed recommendations of the due diligence report shall be made available to the members for inspection in the general meeting called for approval of the special resolution for investment pursuant to section 199 of the Act.
Other information to be disclosed to the members: If the associated company or associated undertaking or any of its sponsors or directors is also a member of the investing company, the information about interest of the associated company or associated undertaking and its sponsors and directors in the investing company shall be disclosed in the notice of general meeting called for seeking members' approval pursuant to section 199 of the Act.
In case any decision to make investment under the authority of a resolution passed pursuant to provisions of section 199 of the Act is not fully implemented in line with the approval of members till the holding of subsequent general meeting, the status of the decision must be explained to the members through a statement.
Restrictions and Conditions applicable to a company making investment: Where investment is being made in unlisted equity securities of an associated company or associated undertaking, the fair value for such securities shall be determined by a person having such qualifications and experience and registered as a valuer in such manner, on such terms and conditions as may be specified by the Commission pursuant to section 460 of the Act.
Where approval is granted by the members for investment in any securities of an associated company or associated undertaking up to a certain limit, such approved limit shall stand exhausted upon the investment reaching that limit on a cumulative basis, whether such investment is made as a whole or on a piecemeal basis and such approval shall not be valid for any recurring investment even after divestment of the securities acquired by it in pursuance of the aforesaid approval.
The rate of return on loans, advances and debts securities, etc, shall not be less than Karachi Inter-Bank Offered Rate (KIBOR) for the relevant period or the borrowing cost of the investing company, whichever is higher:
Provided that where a company opts for Shariah compliant mode of financing, the transactions shall be structured in such a way that the rate of return on such facilities is not less than that earned by Islamic banks or Islamic financial institutions in Pakistan on similar facilities during the corresponding time period or the borrowing cost of the investing company, whichever is higher.
In case of unfunded facilities (for example a guarantee, letter of indemnity, etc,) the rate of return to be charged shall be determined based on the rate of interest, mark-up, profit, fees or commission, etc, as the case may be, charged by commercial banks or Islamic banks and financial institutions on similar unfunded facilities;
Interest, mark-up, profit, fees or commission, as the case may be, shall be recovered periodically by the investing company in line with the terms and conditions approved by the shareholders and the company shall not extend to an associated company or associated undertaking any loan or advance as running finance, revolving line of credit or any other similar facility for a period beyond one year provided that members may approve renewal of such loan or advance pursuant to section 199 of the Act.
In addition to any records maintained by an investing company under the provisions of any law, rules or regulations, such company shall maintain a register in the specified form annexed to these regulations and shall enter therein the particulars of its investments in associated company or associated undertakings. The entries in the register shall be made instantly, whenever there is a cause to make entry, in chronological order and shall be authenticated through signatures by the company secretary or by any other person authorized by the board in this behalf.
The register shall be maintained at the registered office of the company under the custody of the company secretary or any other officer authorized by the board in this behalf and shall be preserved permanently.