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ISLAMABAD: The Securities and Exchange Commission of Pakistan (SECP) Saturday proposed to adopt an enhanced disclosure-based regime for the issuance of right shares by the listed companies to increase investor protection.

In this connection, the SECP, in a bid to improve and ensure transparency in the process of capital formation has recommended a revamp of Companies (Further Issue of Shares) Regulations, 2020.

A concept paper, suggesting new modes and mechanics through which companies can raise capital, has been placed on SECP’s website for public comments. The concept paper, in accordance with international best practices, has proposed to adopt an enhanced disclosure-based regime for the issuance of the right shares by the listed companies.

In this regime, the focus is increased to providing sufficient information to investors, enabling them to make informed decisions, increase investor protection. The proposed disclosure-based regiment will include, the preparation of the offering documents with enhanced disclosures; seeking public comments of the Apex and Front-line regulator, and publishing the final offering document after incorporating the same, leading to the completion of the right issue.

In many countries like Malaysia, Thailand, Singapore, and India, a disclosure-based regime is now considered at the core of any capital raising activity by listed companies.

The paper also includes a few considerations with regard to the issuance of shares by listed companies by way of other than rights including Employee Stock Option Schemes (ESOS).

In the case of right issues by Listed Companies, the following new concepts are proposed to be introduced: a) Minimum threshold in terms of amount and percentage w.r.t size of right issue; b) Disclosure-based right issue regime in line with the international best practices; and c) Additional requirement – irrespective of the issue size. The SECP has observed that in Pakistan the right issue sizes are unusually high to the extent of 1000 percent with minimal and incomplete risk disclosures that are insufficient to enable the investors to make informed decisions. The right issue once announced cannot be canceled, withdrawn, varied, or postponed. In case the issue is not subscribed, underwriters fail to subscribe to the unsubscribed portion and Board fails to allot the shares, then there is no remedy available in the regulatory framework and apparently, it remains open for an unlimited period of time.

In case other than right issues, regarding issuance of further capital by way of other than right for non-cash consideration, the contents of valuation reports do not provide sufficient details/clarity about the value of the non-cash asset under consideration.

Regarding issuance of further capital by way of other than right for non-cash consideration, the contents of valuation reports do not provide sufficient details/clarity about the value of the non-cash asset under consideration, SECP maintained.

In the case of Employee Stock Option Scheme (ESOS) a) Subsequent to the insertion of section 83 A (specifically dealing with employee stock option schemes (ESOS), now the companies are at liberty to announce ESOS in line with the Articles of Association & with the consent of shareholders. However, there is no clarity in law pertaining to the validity period of the special resolution for the ESOS as well as there are no limits on Entitlement Pool per year and through the life of ESOS, SECP added.

There is both positive and negative impact of the SECP’s proposals on the capital issue regime:

Positive Impact: a) Enhanced disclosure: Globally, the regulatory regime has shifted towards a disclosure-based regulation, where companies are required to disclose all the material and relevant information related to the particular issue of securities. In Malaysia, an enhanced disclosure regime is applicable on the right issue size exceeding 10% of the paid-up capital of the issuer whereas, in India, it is Rs50 crores or more. b) Informed decisions: A disclosure-based regime would allow the investors to make an informed decisions regarding their investment in listed companies. Currently, the information provided to the prospective investors is insufficient to help them make an informed decision. c) Effective utilization of proceeds: Statutory auditor’s responsibility of acting as monitoring agent till 95% of the issue proceeds are utilized would ensure that issue proceeds are effectively utilized and accounted for in the books of the issuer.

Adverse Impact: a) Time lag between announcement by the board and the placement of the final offer document on the PSX /company’s website in case of the right issuance exceeding the specified threshold will increase the completion time of the right issue by 60-70 days, as compared to the timeline of approximately 84 days is applicable in case of right issuance, SECP added.

Copyright Business Recorder, 2022

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