Eyebrows rose on Nov 4 when Finance Minister Ishaq Dar presented the Companies Bill 2016 to the National Assembly.
“The president of Pakistan is pleased to promulgate the Companies Ordinance, 2016, on Nov 11 in order to replace the Companies Ordinance, 1984,” the minister announced.
There were murmurs of disagreement: “Why did the government skip a thorough discussion of the document in the parliament and avoid putting it forth as an Act, instead of enforcing the new law through an Ordinance?”
After looking into all the benefits one is tempted to dig deeper in search of surprises
Mr Dar had an unconvincing answer: “So that the corporate sector may immediately benefit from the reforms”.
Corporate watchers thought that the urgency represented the government’s anxiety to extract greater details from foreign companies, details of their beneficial owners and their investments, either inside or outside Pakistan.
“All in the wake of the crisis created by the Panama leaks”, suggested several knowledgeable persons, their argument built on the fact that the repealed Companies Ordinance, 1984 did not require disclosure of such information.
By contrast, the Ordinance 2016 directs the SECP to maintain a ‘Companies Global Register of Beneficial Ownership’. According to the relevant provision, every ‘substantial shareholder of a company, having 10pc or more shares in a foreign company’ is required to report (to the company) beneficial ownership.
In turn, the company has to submit all such information along with the annual returns.
The Regulator has also been empowered to investigate and conduct joint investigations to ensure adequate measures against fraud, money laundering and terrorist financing.
After looking into all the benefits of the Companies Ordinance 2016, one is tempted to dig deeper in search of surprises.
For many a greatly objectionable schedule is to give the government, when it holds a 51pc stake in any public sector company, the ‘overriding power’ to convert loans that the company has obtained from the government into more shares in the company.
Also, the old Companies Act, 1984 placed restrains on companies for extending a loan to ‘any firm in which a director of the company was a partner or to any private company of which any such director was a director or member’. That clause has been done away with.
Loans to a director of the company or its holding company or any of his relatives can now be provided by public companies. This is in case of listed companies and with a resolution of the members in a general body meeting.
But to seek an approval in a general body meeting is considered to be nothing but a formality, for when have the dissenting minority shareholders ever prevailed? By contrast, India has reformed its company law by putting a ban on companies from lending to directors.
The newly enacted Companies Ordinance 2016 now provides independent and non-executive directors greater leeway.
In addition to the compensation that such a director gets for attending board meetings, he would only be held liable in such acts of omission or commission by a listed company, ‘which had occurred with his knowledge’. Independent directors can, thus, claim ignorance of company misdoings to avoid repercussions.
All companies are required to make a series of related party transactions ‘at arm’s length’ if majority of the board members are interested. Those issues include selling or buying property. There is no clear mention of prevention of ‘conflict of interest’ of directors in such transactions.
The Indian provisions are much more effective in such instances for they require directors who have an interest in the transaction to not vote in such a meeting.
According to a source familiar with the matters, the first draft of the Ordinance 2016, had incorporated those provisions, but were removed from the final draft of April 2016.
But the Ordinance, 2016 also puts forth some sound amendments.
With regard to public companies, the directors’ report must also state the principal risks and uncertainties facing the company.
Seemingly in line with the prevalent ‘Serious Fraud Office’ legislation in the US, the concept of ‘Serious Fraud Investigation’ has been introduced.
A serious fraud would include ‘falsification, forgery, false statement, fraud and deception’.
The Commission has been empowered to request the concerned Minister in Charge to form a Joint Investigation Team (JIT). But a detractor mocked: “With no time frame, it would then rest with the concerned Minister to form a JIT at leisure or to sweep the matter under the carpet?”
The authors of the Companies Ordinance, 2016 could have incorporated some other finer points of other jurisdictions, such as a compulsory financial year similar for all companies and the concept of ‘Class Action Suits’ (against companies).
There was also the need to place limits on the remuneration of both the CEO and directors.