December 17, 2001	Monday	Shawwal 1, 1422

The Securities and Exchange Commission of Pakistan (SEC) last month put up for public comments, the amendments that it has sought to make in as many as 90 sections of Companies Ordinance, 1984.

Those are now understood to have been passed on to the concerned government departments for ratification.

Corporate analysts believe that it would be for the first time in nearly ninety years that the anchor law governing companies, is to go into a radical change. Skeptics maintain that much of the current Companies Ordinance, 1984 is almost a replica of the Indian Companies Act, 1913, with some cosmetic changes made here and there.

The amendments now proposed to be made include those relating to the timing of the release of company accounts; investment in sister concerns; the number of sponsors to a new company; quickening the pace in case of liquidation of companies; quorum for shareholder meetings; accounts of subsidiary companies and matters pertaining to company boards.

Just as there are two opinions on the government’s decision to remove the amendment in the Income Tax law that imposed penalty on companies with reserves in excess of capital but omitting a dividend for shareholders, so are there on some of the proposed amendments to Companies Ordinance.

The suggested amendment that is likely to have met with much of the investors’ ire is the removal of restrictions of investment in associated companies, to a maximum of 30 percent of the paid- up capital plus free reserves of the investing company.

The corporate regulator argues that the law is too harsh, causing negative impact on the business of sister concerns incorporated by one individual group.

The power to decide how much a company can invest in associated companies would now be granted to the members of the company. This essentially would place such power in the hands of directors, who invariably hold the majority stake in companies and so the voting power.

Some analysts worry whether removal of the maximum ceiling would not encourage managements of listed companies to pass on more money to the sister concerns.

“Directors mostly being common in both companies, there could be the temptation on the part of some managements to siphon off funds”, these analysts argue.

Then, there are people in favour of the proposal to introduce single member private company, who content that it would be a major incentive for individual businessman to enter the corporate world.

The Corporate Regulator has taken the lead from UK where single member companies are already up and running.

An individual trader or industrialist would be able to convert his sole-proprietorship or partnership concerns into a company with a separate identity and limited liability.

While this would yield benefits to the sponsors of such companies it would also help in bringing unregulated businesses into the fold of a regulated corporate sector. It has also been proposed to reduce the minimum number of sponsors in public companies, from seven to three, thereby hastening the process of formation of such companies.

But those who oppose the above amendments, essentially fear that it would raise the spectre of abuse of public money by single member or family-oriented boards.

Amendments that would be greeted by almost a universal acclaim by the shareholders and users of financial statements of public companies would be those that facilitate a quicker presentation of accounts. Currently corporates are required to prepare and lay before the members in general meetings their annual audited report and accounts within a period of six months from the close of accounts.

A further extension of three months may also be obtained from the SECP.

Analysts say that six to nine months is almost eternity in the internet era. The draft amendments now seek to cut down the period for presentation of accounts and holding of annual meetings to four months.

Some analysts believe that 120 days also looks too long a period; albeit it is a welcome improvement over the earlier one.

The “not later than four months” for preparing and circulation of annual accounts, seem possibly to have been drawn by the SECP from the recommendations made by the Institute of Chartered Accountants of Pakistan (ICAP) in its ‘code of corporate governance’.

The preparation of quarterly accounts; steps to streamline board meetings and some other issues were also covered in the ICAP’s recommendations.

Companies would now be obliged also to prepare and present accounts of private and non-listed public companies that are subsidiaries of listed companies.

Listed companies would be required to prepare and present to the shareholders, consolidated financial statements for holding and subsidiary companies.

The amendments seek to raise the quorum of a general meetings in public listed companies from three to ten, representing not less than 25 per cent of the total voting power.

Effectively that should mean that directors would no longer be able to dispose of the agenda of annual meetings among themselves, without at least the minimum representation of small shareholders’ and institutional members.