ISLAMABAD: Member Securities and Exchange Commission of Pakistan (SECP) Policy Board Khalid Mirza has stated that the amendments introduced in the Companies Act 2017, through a recently promulgated Ordinance, were made after due professional consideration by the SECP and its Policy Board over a period of more than a year.

In a statement issued here on Sunday, former Chairman SECP Policy Board said, "I have observed the somewhat shrill criticism regarding the recently promulgated ordinance to amend the Companies Act 2017, and I understand that in response the Government may be backtracking with respect to some of these amendments - the proverbial 'U-turn'! I am a little dismayed that the amendments in question which had been proposed after due professional consideration by the SECP and its Policy Board over a period of more than a year may now be sacrificed, perhaps at the alter of political expediency."

He said that the current deleterious situation faced by the capital market has three aspects: firstly, a securities regulator that is in great need of revamping and capacity building (an aspect its current leadership is actively pursuing); secondly, the lack of genuine competition in the capital market in all its facets and levels (including the absence of alternative trading modalities); and thirdly, the need to free the market from the load of onerous regulations and appalling laws that were recently enacted, such as the Securities Act 2016 and the Companies Act 2017, to replace adequate legislation already extant, in other words, a foul attempt to fix something that ';ain't broke'! While I would have much preferred to have substantially restored the erstwhile Companies Ordinance, 1984 (a world class law) with the Companies Act 2017 being repealed and cast away, this was considered too radical a move, and it was decided to simply try to bring the existing legislation as far as possible in line with globally recognised principles of corporate law and governance practices.

First, corporate legislation in some jurisdictions, including Pakistan, provide for certain matters to be determined by the Government. In this connection, the amendment ordinance has been criticised for substituting the words 'Federal Government' in place of the words previously used in the law, which were 'Minister-in-Charge of the Federal Government'.

The latter formulation is an aberration, and is likely to be shot down in court since there is not, in fact, any such concept as Minister-in-Charge under our constitutional scheme - ministers are part of a collective called the Cabinet and merely have oversight over particular departments.

In any case, the amendment replaces the possible whim of one political person by the probable more balanced decision-making at the cabinet level.

It is thus best to retain the words, 'Federal Government' as per the amendment ordinance even though this means, as alleged, burdening an already overloaded cabinet. The alternative is to make necessary changes so as to permit the Policy Board or the Commission itself to decide such matters rather than the Federal Government. That would be perfectly acceptable as well.

Second, under the amended Section 172 a person who has entered into a plea bargain agreement with a law enforcement agency cannot be 'disqualified' by the Commission from holding a corporate directorship albeit under Section 153 a person convicted of an offence involving moral turpitude by a court of law is not 'eligible' to become a corporate director.

As to whether a plea bargain agreement (whether or not an admission of guilt is involved) can be deemed to be a conviction depends on the circumstances, the situation, and the manner in which it was secured.

In many countries, there is evidence - not merely anecdotal - that point to the extraordinary measures used to extort a plea bargain agreement. Therefore, it would not be reasonable to regard such an agreement as equivalent to a conviction; and, unless this can be established on the basis of judicial precedent (i.e. due application of 'stare decisis'), it is my considered opinion (and, I believe, also that of the Policy Board) that the Commission must not regard it as a basis to disqualify a person from holding a board seat.

This is duly reflected in the amendment and it would be a sad day if this was reversed allowing injustice to prevail and the corporate sector to be adversely affected, Khalid Mirza said.

Third, the right of the Government to nominate independent directors in companies in which the Government is a major shareholder has been withdrawn. This has been challenged on the ground that as a majority shareholder the Government should have the right to nominate independent directors.

However, there seems to be some misunderstanding since the amendment does not take away any shareholder rights conferred upon the Government under the law, and it simply seeks to ensure that all shareholders, including the Government, exercise their rights equitably in accordance with their shareholding.

The usual practice is for the Board to nominate or co-opt independent directors and since the Government has a commanding position with a majority of Board seats reflecting its share ownership, it follows that the Government would have a predominant role to play in the appointment of independent directors.

Giving the Government the right to supplant the Board and nominate independent directors outside the normal functioning of the Board is an incongruity. It violates corporate governance principles and fosters a negativity that would have adverse implications for the company as well as the corporate sector as a whole.

Fourth, Section 452 of the Companies Act 2017 requires each "substantial shareholder" and "officer" of a company who is a citizen or a dual national to declare his/her shareholding or interest in foreign companies (to be updated annually) enabling the Commission to maintain a global register of such beneficial interests.

This has been amended to the effect that only shareholdings exceeding 10 percent of a foreign company need be disclosed, and the amendment has been roundly criticised as a dilution of the laudable principle of full disclosure.

In fact, in my considered opinion, Section 452 in its entirety, is an eccentric provision; it is an oddity that does not serve any purpose in corporate regulation whatsoever. This section must be fully repealed and excised out of the law. This was, and is, the recommendation of the Policy Board, and the 10 percent minimum - which does not make any sense - was certainly not a Policy Board proposal.

I am not aware of any credible corporate law in any jurisdiction that has a provision such as Section 452 which must go! Whatever tax or other purpose Section 452 seeks to achieve should be addressed comprehensively elsewhere so as to cover all citizens, and this special love shown for shareholders or corporate officers is wholly misplaced! Certainly, company legislation must not be tainted with such an anomaly if the Government is serious about developing the corporate sector.

Fifth, Sections 186 and 187 have been amended to remove power of the Government to nominate the Chief Executive of a public sector company and this has been criticised as a hindrance in the way of the Government ensuring that the company is well-managed, and also that perhaps this would promote the interests of disingenuous elements outside the Government.

I think this is wholly misunderstood since in a public sector company, the Board would automatically comprise a majority of directors representing the Government's equity stake, and the Chief Executive necessarily would be the Government's choice. All the amendment does is to align the law with recognised corporate governance principles.

Any over-riding power of the Government beyond established governance norms is unnecessary; besides, this could raise questions regarding the company's commercial orientation which could, inter alia, negatively impact the company's ability to raise debt and equity capital.

While the amendments recently promulgated substantially improve the law, I feel another lot of amendments would be needed to achieve the ultimate objective of making the law simple and rational, and in accord with generally accepted global standards (as was the case with the Companies Ordinance, 1984), he added.

Copyright Business Recorder, 2020

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