Pakistan Business Council (PBC) has recommended Securities and Exchange Policy Board of the Securities and Exchange Commission of Pakistan (SECP) to entirely delete section 452 (global registry) from the Companies Act 2017.
Recently, the PBC has taken up the issue with the SECP Policy Board on section 452 (provision relating to global register of beneficial ownership of shareholding in foreign companies) of the Companies Act 2017.
The PBC has proposed amendments and clarifications in the Companies Act 2017.
Primarily therefore as a matter of principle, but also of practicality, the PBC recommends that Section 452 (global registry) be deleted entirely from the Companies Act 2017. Pending this, the SECP should issue a notification suspending the filing of declarations under this section, the PBC added.
According to the Pakistan Business Council's observations and suggestions, the PBC believes that tax and foreign exchange regulations covering the reporting of shareholding in companies abroad should be strengthened and streamlined instead of misusing the Companies Law to encumber investors, officers and directors associated with generally well-regulated and tax-compliant corporates in the formal sector with further reporting responsibilities. The optics of criminalising a section of the company law is neither conducive to developing a robust capital market nor encourages incorporation and formalisation of the economy. Indeed, it does the opposite by encouraging businesses to remain in the informal and unincorporated sector. At the same time, it also makes it more difficult to do business. Discriminating against the corporate sector cannot (and should not) be the government's objective. Jobs, exports and tax revenues are generated predominantly by the corporate sector, which PBC strongly believes deserves more trust, support and empowerment.
The PBC said that there is a separate Section 208 of the Companies Act covering related party transactions. The argument that declarations under Section 452 would be useful in revealing related party shareholdings abroad is therefore not valid. Also, declarations filed under Section 452 with the SECP are merely forwarded to the FBR. They are not disclosed in the Annual Reports and therefore do not add to the knowledge of current or prospective investors. It is also relevant to mention that no section of the Companies Act 2017 requires substantial shareholders, officers and directors to declare their shareholdings in Pakistani companies, unless there is a conflict of interest or if there are related party transactions. Thus Section 208 is available for both local and overseas shareholdings to be reported, where there are related party transactions. There is therefore no reason to retain Section 452 separately to cover related party shareholdings in foreign companies.
The PBC also cannot find any precedence in the more progressive jurisdictions, including members of the OECD, of the existence of a global registry, as sought by Section 452. Moreover, Pakistan has recently signed and ratified the OECD convention on exchange of information on cross border holdings. This should enable the FBR to obtain the information from signatory jurisdictions, which clearly appears to be the intent of Section 452. It is also logical to assume that the OECD Convention is the reason why OECD members and other progressive countries have not moved to establish global registries within their corporate laws. As for obtaining information from offshore centers not presently covered by the OECD Convention, the opaqueness and multiple layering of shareholding structures in such centers defeats the objective of gaining meaningful and verifiable information of beneficial interests. SECP will not be able to verify the accuracy of returns and become merely a depositary of unverifiable data and a post box for the FBR and SBP.
The Foreign Assets Declaration and Repatriation Act 2018 (FADRA) has superseded the CA2017 and all previous laws with respect to reporting and maintaining of confidentiality of such reports. Since the primary purpose of Section 452, namely transparency of shareholding in companies abroad is now served through FADRA and the OECD convention, there is no remaining justification of retaining Section 452. Moreover, under section 462 anyone, upon paying a nominal fee, any member of the public, can sight all returns filed by companies with the SECP, including those under section 452. Therefore, confidentiality of returns under section 452 will, in contravention of FADRA, not be ensured, the PBC said.
Primarily therefore as a matter of principle, but also of practicality, the PBC recommends that Section 452 (global registry) be deleted entirely from the Companies Act 2017. Pending this, the SECP should issue a notification suspending the filing of declarations under this section.
The outcome of PBC discussions with the SECP revealed that the SECP agrees that there is no global precedence of using corporate law to unveil assets held abroad and that Section 452 was inserted with the primary aim to discover such holdings for the benefit of the FBR. Further, that the intent of section 452 was not to reveal related parties. A separate section (208) covers that. It also confirms that public access to information under Section 462 is available to anyone, thus confidentiality of declarations under Section 452 cannot be ensured.
The PBC had requested the SECP to refer the legality of this section post the promulgation of FADRA to the Ministry of Law and Justice. This is pending. SECP had offered to restrict the reporting under Section 452 to material holdings (10%+) in foreign companies. PBC maintains that Section 452 is unwarranted and should be withdrawn in its entirety. As Section 452 was never intended to strengthen corporate law, the decision to withdraw it is a political matter.
The present government wishes to empower and support the corporate sector, rather than treat it with suspicion and encumber it with reporting requirements that serves no meaningful purpose.
The PBC has the support of the OICCI and the Institute of Chartered Accountants of Pakistan for the withdrawal of section 452, PBC added.
Primarily therefore as a matter of principle, but also of practicality, the PBC recommends that Section 452 (global registry) be deleted entirely from the Companies Act 2017. Pending this, the SECP should issue a notification suspending the filing of declarations under this section.
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