On 30th May 2017, the Companies Act, 2017 (the Act), which replaces the 33-year-old Companies Ordinance, 1984, was assented to by the President of the Islamic Republic of Pakistan.
The most significant legal reforms to bring the company law in Pakistan at par with current international standards are set out below:
Borrowing Powers: part of memorandum
Pursuant to Section 30, the memorandum and articles of a company empower it to enter into any arrangement for obtaining loans, advances, finances or credit. Previously, the companies were not entitled to borrow money because their object clause did not contain any borrowing power.
Mandatory NTN for directors of company
Pursuant to Section 153 (h), a person will not be eligible for appointment as a director of a company unless he holds National Tax Number (NTN) as per provisions of the Income Tax Ordinance, 2001. On 8 June 2017, Circular No. 15/2017 was issued by the Securities and Exchange Commission of Pakistan (SECP), providing for general exemption for two years to all Small Sized Companies (SCCs) including Agriculture Promotion Companies from the requirement of NTN. To qualify for a company to be an SCC, its paid-up capital must not be greater than PKR 10 million; its turnover not exceeding PKR 100 million; and its number of employee should not be more than 250.
Attendance of general meeting through video link
The companies may allow one or more members to attend and participate in a general meeting through a video link. Previously, this wasn’t available to the shareholders.
Record of beneficial owners
Pursuant to Section 452 of the Act, every substantial shareholder or officer of a Pakistani company will have to report to his company any of his shareholding in a foreign company or body corporate. Subsequently, the company will have to report such information to the registrar along with annual return.
The Securities and Exchange Commission of Pakistan (SECP) will keep record of the beneficial ownership of the shareholders and officers in the Companies’ Global Register of Beneficial Owners and will provide copies of the records to the Federal Board of Revenue (FBR) or any other agency pursuant to Section 452 (8).
Anti-money laundering measures
The officials of all companies will be bound to check commission of fraud, money-laundering, including predicated offences, under the Anti-Money Laundering Act, 2010 pursuant to Section 453. The SECP will conduct joint investigation in serious cases like fraud, pursuant to Section 258. The SECP may revoke the license of the companies registered with charitable and not-for-profit object, if found to be run and managed by persons involved in terrorist-financing or money-laundering pursuant to Section 42(5).
Regulation of real estate sector
All companies that launch any real estate projects and that invite advances from public for such projects will have to obtain approval and permission of the SECP at different stages of development of the projects, including: (a) before announcement of any real estate project; (b) before making any publication or advertisement of real estate projects; (c) before accepting any advances or deposits against any booking; (d) before inviting persons to purchase any land, apartment or building; and (e) before accepting a sum against purchase of the apartment, plot or building.
Shariah compliant companies
No company will be entitled to claim to be a Shariah compliant and no security, listed or unlisted, will be Shariah compliant unless it is authenticated by the SECP pursuant to Section 451. The companies will not be allowed to appoint or engage any person for Shariah compliance, Shariah advisory or Shariah audit unless that person meets the fit and proper criteria laid down by the SECP.
Pursuant to Section 424, any company that is already inactive or that has no significant accounting transaction, may apply to the registrar to obtain the formal status of an inactive company.
Dissolution of defunct companies
The Act provides an easy exit to a defunct company. On receiving application for dissolution from a defunct company, the registrar will dissolve that company by striking its name off the register of companies after 90 days of publication of notice in the Official Gazette, pursuant to Section 426.
Previously, mergers between two or more companies, de-mergers and approvals of scheme of arrangements were to be approved by the High Court. The schemes take a long time for approval due to overwork in the High Courts. Under the Act, no formal approval is required from the High Court or the SECP for mergers between holding company and its wholly-owned company and companies owned by the same person. The merger of two companies can be effected after approval from the board only. For other mergers, it is the SECP not the High Court that is the sanctioning authority for all mergers, de-mergers and schemes of arrangements.
Reporting of change in shareholding
All companies have to inform the SECP about any change of more than 25% in their shareholding, pursuant to Section 465.
Quota for disabled employees
It is mandatory for the large public interest companies to reserve 2% special quota for employment of disabled persons pursuant to Section 459. The Act also encourages public interest companies to have female representation on their board.
Dispute resolution through Mediation and Conciliation Panel
Under the Act, any company, its management or its members or its creditors may refer a dispute between them to the Mediation and Conciliation Panel set up by the SECP for resolution.
The Act provides three slabs of penalties for each day of default of non-compliance or non-filing: PKR 500, PKR 1,000 and PKR 500,000 with the aggregate penalty in each case of default stated to be a maximum of PKR 25,000, PKR 500,000 and PKR 1,000,000 pursuant to Section 479.