Date: 20/05/2012
Module-E: CORPORATE LAWS [Mr. Rizwan Manai]
ANALYSIS OF SECTIONS
100 Marks
1) COMPANIES
ORDINANCE, 1984 (70
MARKS)
2) SECRETARIAL PRACTICES –
Performance of a Company
Secretary (15 MARKS)
40 MARKS
30 MARKS
Companies
Ordinance, 1984
Rules issued under
Companies
Ordinance, 1984
+
2nd Schedule
+
Companies General
Provisions and
Forms Rules, 1984
+
SROs + Circulars
(Up to 31.12.2012)
3) OTHER LAWS
(15 MARKS)
(1) Banking
Companies
Ordinance,
1962
(2) Takeover
Ordinance,
2002
(3) Foreign
Exchange
Regulation
Act, 1947
(i) Buy-Back
Rules, 1999
(ii) Companies
Share Capital
(Variation of
Rights and
Privileges
Rules, 2000
(iii) NBFC Rules,
2003 + NBFC
Regular,
2008
NOTE: Read once from Companies Ordinance, 1984.
1
SROs vs. Circulars
SRO (Statutory Rules and Orders)
SRO
Circular
=
Extension of Law
=
To replace “as may be provided” in any section
=
Explanation of Law
=
e.g. Circular 1 / 2008
(Also called “General Orders”)
Reasoning over requirement of
publication of notice of meeting
in Urdu newspaper
ORDINANCE vs. ACT
President’s announcement
of enforced law
For example, Sales
Tax Act, 1990
Where parliament is not in session
Bill prepared (Draft law)
and approved by
parliament
(Senate + National Assembly +
Provincial Assembly)
Note: “Assent” means ‘after obtaining approval’.
2
Types of Enforcement of Law
(i) At once: The entire law will be effective on a single date.
(ii) Piecemeal: Ordinance or Act will come into force on such date(s) as may be prescribed.
Various sections will become applicable on various dates. [Section 1 (3)]. Companies
Ordinance, 1984, is a type of “PIECEMEAL ENFORCEMENT”.
Act 1984 to April 1997
Jurisdiction of Companies Ordinance [Section 1 (2)]
It extends to the whole of Pakistan. However, the following are not to be considered as part of
Pakistan for enforcing any law of Pakistan:
(i) FATA – Federally Administered Tribal Areas;
(ii) PATA – Provincially Administered Tribal Areas; and
(iii) AJK – Azad Jammu & Kashmir.
These voluntarily adopted
Companies Ordinance, 1984.
PREAMBLE
Companies Ordinance, 1984, is:
An Ordinance to:
- Consolidate and
- Amend the law, i.e. the Companies Act, 1913 (Repealed law).
It relates to:
(i) Companies [Section 2 (1) (7)]; and
(ii) Certain other associations [Section 14 + Section 503 + Section 452]
3
COMPANY [SECTION 2 (1) (7)]
Existing Company
Company financed and registered under
the Companies Ordinance, 1984
CERTAIN OTHER ASSOCIATIONS (IMPORTANT)
SECTION 14
SECTION 452
SECTION 503 (2)
Group of persons
exceeding 20
Foreign Companies
Corporations =
formed under
parliament –
special
enactment
+
Company
incorporated
outside Pakistan,
but having branches
in Pakistan [e.g.
Barclays Bank].
Carrying on
business
+
To earn profit
If security of
corporation is
listed on any
Stock Exchange.
+
Branch = subject to
Companies
Ordinance, 1984, as
Foreign Companies.
Not covered
under exclusion
of Section 14.
NEXT CLASS:
Day
Date
Time
Tuesday
22/05/2012
6:15 pm – 8:15 pm
4
Date: 22/05/2012
WAYS TO ACQUIRE CORPORATE STATUS IN PAKISTAN (Separate Personality)
Companies
Ordinance, 1984
Parliament Special
Enactment
Companies’ Ordinance applicability
S-503 (i)
It is similar to formation
law – the governing law
for these matters is
solely the Companies
Ordinance, 1984
Company is such
Other Company
where ‘other law’
No separate governing statute, like:
is applicable for
- Textile Mills
governing the company.
– Pharmaceutical
Securities
Listed
E.g. Pakistan
National Shipping
Corporation (PNSC)
Companies Ordinance, 1984
Securities not
listed (outside
the scope of
the
Companies
Ordinance)
E.g. State
Life
Insurance
(i) Insurance Company
= Insurance Ordinance, 2000
Companies Ordinance,
1984, for governing
matters, applicable to
extent, not contradicting
with separate governing
statute.
(governing law of Insurance Company),
e.g. EFU General Insurance Company, Limited
(ii) Banking Company
= Banking Companies Ordinance, 1962
To the extent of the
following sections of
the Companies
Ordinance:
- Section 156;
- Section 158;
- Section 230 to 247;
(governing law for Banking Companies in Pakistan),
- Section 254 to 274;
e.g. Soneri Bank Limited
- Section 277; and
- Section 278.
5
APPLICABILITY OF COMPANIES ORDINANCE, 1984, OF CERTAIN OTHER ASSOCIATIONS
(1) Foreign Companies [Section 452] - To the extent of:
a. Matters provided in between Sections 452 to 465; OR
b. Sections referred in between Sections 452 to 465.
(2) Group of more than 20 members [Section 14 and Section 444] – Applicability of Ordinance
to such extent as to enable the Court to order for compulsory winding up in registered
company.
STRATEGY TO DECIDE TO COME IN THE ORDINANCE
Compulsory
Opt In
Compulsory
Opt Out
[Section 4]
(i) Foreign Incorporated Company,
deciding to have a place of business
in Pakistan (Branches) – Section 452.
Foreign
Company
Certain
Other
Associations
(ii) Corporation with listed securities –
Section 503 (2).
(iii) Doing of certain businesses,
requiring to take the shape under
the Companies Ordinance, like:
(a) Insurance Company;
Other laws
(b) Banking Company;
(c) Modaraba Company; and
(d) Asset Management Company.
(iv) Group of more than 20 members –
Section 14 + Business + Profitmaking.
(i) University [e.g. Karachi
University and NED University
of Engineering & Technology.
(ii) Co-operative society.
(iii) Trading Corporation, owned
and controlled by a province
and carrying on business
within that province.
Note: The above are
“Provincial Subjects”, whereas
the Companies Ordinance,
1984, is a “Federal Subject”.
Voluntary Opt
In
Due to the following
benefits:
(i) Separate Entity of
Companies – Veil
of Incorporation
[Section 32].
(ii) Limited Liability of
members [Section
300 to 303].
(iii) Perpetual
Succession.
(Details of the above
are on the next page)
6
Voluntary Opt In (continued)
(1) VEIL OF INCORPORATION:
Incorporation certificate acts as a veil between directors and officers.
(a) Business management + Owners / Members
and
(b) Outsiders
Tax Authorities
Creditors
Customers
Thereby, faults and achievements of business managers will be considered [of the company, not the
managers?]
There are 13 places in the Companies Ordinance, 1984 that are defined as situations in case of “Lifting of Veil
of Incorporation”.
(2) LIMITED LIABILITY:
(i) All liabilities of the company will be paid out of the assets of the company.
(ii) Members (or owners) will not be required to contribute, except a specified amount
(depending upon the structure of the company) to enable the company to pay off its
liabilities.
(iii) Thereby, the risk to put a charge on personal assets of the members will be avoided.
(3) PERPETUAL SUCCESSION:
Incorporation certificates result in perpetual succession of corporatized business till winding up,
e.g. Bonanza, Tullo Ghee (both 3rd Generation).
NEXT CLASS:
Day
Date
Time
Sunday
27/05/2012
8:00 am – 9:45 am
7
DATE: 29/05/2012
SECTION 1:
1)
2)
3)
4)
OBJECTIVE OF COMPANIES ORDINANCE, 1984
Healthy growth of corporate enterprise.
Protection of investors and creditors.
Promotion of investment.
Development of economy.
Companies Ordinance, 1984, extends to all provinces and federally administered area (i.e.
Islamabad) of Pakistan. It does not extend to Azad Jammu and Kashmir (AJK), FATA (i.e.
Federally Administered Tribal Areas) and PATA (i.e. Provincially Administered Tribal Areas), as
the said areas are not the part of Pakistan according to the constitution of Pakistan.
Note: Section 2 and Section 3 relate to definitions of terms specified in the Companies
Ordinance, 1984. [Refer to the Companies Ordinance, 1984, for the definitions].
Target of SECP
There
would be no
self study.
Functioning of SECP under S-12 + SECP Act, 1997
Still, Companies Ordinance, 1984, applies to companies incorporated in Azad Jammu and
Kashmir (AJK).
Why = Voluntary adopted in 1989.
Non-Trading Corporation (Tourism, Service Provider) with Provincial Objective = Yes, as it is
not covered under Section 4.
Because of Provincial Object
Section 4
Section 4 – Ordinance not to apply to certain corporations: (1) Trading corporation owned or
controlled by province and carrying business within that province; (2) co-operative society; and
(3) university.
They are provincial object.
Peculiarity of Section 5 is applicable = Ordinary objective = Target of SECP.
So, target government of Province, or Provincial Government.
Power of Federal government instead of SECP
= Due to Reg. of Constitution
8
Section 5 – Application of Ordinance to non-trading companies with purely provincial objects:
Power of the Federal Government and the SECP = Powers of Provincial Government.
Directional Documents During the Life of a Company
(1)
(2)
(3)
(4)
(5)
Memorandum of Association (MOA) [Subordinate to Companies Ordinance, 1984].
Articles of Association (AOA) [Subordinate to MOA and Companies Ordinance, 1984].
Agent is Contract – Subordinate to AOA + MOA + Companies Ordinance, 1984.
Resolution – Subordinate to Agents + AOA + MOA + Companies Ordinance, 1984.
Prospectus (for Public Limited Company) – All the above.
Providing therein is not in line with Companies Ordinance.
1984
Law amended, but
document not amended.
Lack of care for
preparation of documents.
6 months or 9 months limit of AGM
4 months limit applicable
4 months limit of AGM
Direction documents can be applied
only to the extent, when their
applicability does not result in violation
of Companies Ordinance, 1984.
Directional document’s provision is not in line with the Companies Ordinance, 1984.
Status of Documents
But, contradicting provision
= Considered void
Document still
valid
9
Requirement to continuously update the documents with changed law
Section 6 provides automatic mechanism to update the documents with changed law without going
into any legal formality for the purpose.
However, companies may proceed to change and update the documents as a matter of Corporate
Responsibilities.
Section 6 – Ordinance to override memorandum, articles, etc.:
The provisions of this Ordinance shall have effect notwithstanding anything contained in the MOA,
AOA, contract, agreement or resolution.
Any provision in above which is repugnant to the aforesaid provisions of this Ordinance, shall
become or be void, as the case may be.
COURTS UNDER COMPANIES ORDINANCE, 1984 [SECTION 7 TO SECTION 10]
High Court
For certain
matters of the
Companies
Ordinance,
1984, which can
be taken only by
the Court.
Like to
challenge
the
directors’
election.
Petition for
winding up
of
companies.
For certain
matters, necessity
arises to take up,
but matter is such
as which is outside
the power of SECP.
Dispute
over title
of
shares.
Supreme Court
Certain decisions of
SECP under
Ordinance.
Like Completion of
Management of Adamjee
Insurance about hostile
takeover of the company
by Mansha Group.
10
are provided as Final:
S-30 = If certificate of
incorporation applied
but refusal by SECP –
Decision of SECP is
final, e.g. A petition on
1.1.2012 – Registered
office is in Sindh, which
has moved from
Punjab w.e.f 1.12.2011
Are not provided as
Final: Decision of SECP
over complaint about
delayed transfer of
shares – Section 78A.
Yes, it can be taken up
with High Court.
Appeal against
order of High
Court
Relevant Court =?
1) Establish
preceding 6
months of date of
filing of petition of
1.7.2011 to
31.12.2011.
2) Provinces of
Registered office
in above period,
i.e. 1.7.2011 30.11.2011 –
Punjab; 1.12.2011
-31.12.2011 –
Sindh.
Note:
Section 305: Grounds in which application can be made to request the Court to wind up the
company.
Punjab has longest been the province of Registered Office during the preceding 6 months of filing
date of petition = Punjab High Court
JURISDICTION OF COURTS [section 7 to 10] (Notes from Book)
Section 7 – Jurisdiction of Courts: High Court having jurisdiction in the place at which registered
office of the company is situated. However, civil court may be empowered by the Federal
Government.
For the purpose of jurisdiction to wind up companies, the expression “registered office” means the
place which has longest been the registered office during the 6 months immediately preceding the
presentation of the petition for winding up.
Section 8 – Constitution of Company Benches: One or more to be constituted by chief justice of the
High Court to exercise the jurisdiction vested in the High Court under section 7.
Section 9 – Procedure of the Courts: Notwithstanding anything contained in any other law, all
matters coming before the Court under this Ordinance shall be disposed of, and the judgment
pronounced as expeditiously as possible, but not later than 90 days from the date of presentation
of the petition / application, except in extraordinary circumstances and on grounds to be recorded,
the Court shall hear the case from day to day.
Adjournment (or Suspension): 14 days at any one time or 30 days in all, or for sufficient cause to be
recorded in writing – mentioned in court diary.
Section 10 – Appeal against Court Orders:
(1) Notwithstanding anything contained in any other law, an appeal against any order, decision or
judgment of the Court shall lie to the Supreme Court where the company ordered to be wound
up has a paid up share capital of not less than Rs. 1 million; and
Where the company ordered to be wound up has a paid up capital of less than Rs. 1 million, or
has no share capital, such appeal shall lie only if the Supreme Court grants leave to appeal.
(2) Save as provided in sub-section (1), an appeal from any order made, or decision given, by the
Court shall lie in the same manner in which and subject to the same conditions under which
appeals lie from any order or decision of the Court.
(3) An appeal preferred under sub-section (2) shall be finally disposed of by the Court hearing the
appeal within 90 days of the submission of the appeal.
11
COURTS UNDER COMPANIES ORDINANCE (SECTION 10)
High Court
(see previous
notes)
Supreme Court
(Court of Appeal
against order of
the Court)
Appeal can be
filed without
seeking any
prior
permission
If the paid up
capital of the
company is Rs. 1
million, or mote
than Rs. 1 million
* High Court’s
order in relation
to compulsory
winding up of a
company due to
circumstances
of Section 305
If the paid up
capital is less than
Rs. 1 million, or
there is no paid
up capital
* High Court’s
other order
Like order of
the Court for
resolving
dispute over
title of shares
On the basis
Correct procedure to submit
appeal will be established.
Initially, file an appeal with
the Supreme Court to seek
possibility of filing an appeal
Bifurcation as
such is the
requirement of
Section 10.
* = Note
* Besides, the point of prior permission of the Supreme Court.
Rest of the formalities for filing of appeal – same for each of the categories.
Formalities – as applicable for ANY CASE under other laws.
Section 14 – Sub-section (3): Exceptions to the Requirement
Exception 1: - Society, body or association other than a partnership, formed or incorporated under
any other Pakistan law.
12
Building Association = Not supposed to be registered on – although there are more than 20
members.
Not carrying on
business
Motive = Not to
earn profit
Example:
1) Alamgir Welfare Trust
= Having more than 20 trustees + Carrying on business + With the aim of making a profit
Although there are 3 conditions applicable, they are not required to be registered as they have
formed themselves under the law of the country.
2) XYZ & Co. – having 22 members (Partnership)
Registered under
Partnership Act
(1) Including 20 members.
(2) With the objective of
carrying on business.
(3) With the objective of making
a profit.
(4) Exception – Not Applicable
(as they have not taken
shape under any other law).
Not Registered under
Partnership Act
SAME
(4) Although they have taken
status under partnership law,
but the Partnership Law is not
valid to claim the exception.
Exception 2: - A joint family carrying on joint family business; OR
Exception 3: - A partnership of 2 or more joint families, where the total number of members of
such families, excluding the minor members, does not exceed 20.
13
Joint Family A
Joint Family B
Yarn Manufacturer
Fabric Manufacturer
24 members
22 members
[11 members]
[8 members]
Not subject to the Companies Ordinance, 1984
SAME
as it is a Joint Family business.
Entered into partnership arrangement = New registration requirements would be applicable.
The concept of Joint Family is no longer applicable as it has a number of members exceeding 20.
Exception 4: - Partnership of lawyers, accountants or any other profession where practice as a
limited liability company is not permitted under the relevant laws / regulations of such practice.
Notes from Handbook:
INCORPORATION OF COMPANIES & MATTERS INCIDENTAL THERETO
SECTION 14: Obligation to register certain associations, partnerships, etc., as companies:
Sub-section (1): This section is applicable to:



Partnership;
Association; and
Company
- Consisting of more than 20 persons
- With the Purpose of Carrying on any business
- With the Object of the Acquisition of gain.
Sub-section (2): Consequences of Non-Registration:
For every person who is a member:
 Fine = Rs. 5,000;
 Personally liable for all liabilities incurred in such business.
14
Sub-section (3): Exceptions to the Requirement:
 Society, body, or association, other than a partnership, formed or incorporated under any
other Pakistan law; OR
 A joint family carrying on joint family business; OR
 A partnership of 2 or more joint families, where the total number of members of such
families, excluding the minor members, does not exceed 20; OR
 Partnership of lawyers, accountants or any other profession where the practice as a limited
liability company is not permitted under relevant laws / regulations of such practice.
MEMORANDUM OF ASSOCIATION [SECTIONS 15-25]
Company – defined in Section 2 (1) (7)
Company:
(i) Formed under Section 15 of the Companies Ordinance; and
(ii) Registered under Sections 30 and 32.
Under Companies Ordinance, 1984 + Existing Company
Limited by
shares
Private Company = 1 or more members
If it has 1 member only – then it is termed
as a “Single Member Company” (SMC)
If it has more than 1 member – then it is
termed as “Other Private Company”
PREREQUISITES FOR FORMATION OF A COMPANY
(1) Minimum number of members (desired type).
(2) Lawful purpose (the objective of the company as provided in the form of activities under the
Object Clause of the Memorandum of Association (MOA) – is not repugnant to any applicable
law of the Court.
(3) Subscribing of the MOA by the minimum number of members as above, who have agreed to
form a company.
Section 19: - What is the meaning of “subscriber” in the Memorandum of Association” (MOA)?
(i) Writing down the name, address, Computerized National Identity Card (CNIC) / Passport No.
and other particulars;
(ii) Statement to form a company (and agree to fulfill all the responsibilities under the
Companies Ordinance, 1984);
15
(iii) If the company has Share Capital, each subscriber shall write the number of shares that they
are willing to take; at least 1 share shall be taken – Qualification share to become
subscriber.
(iv) If the company is a Guarantee Limited Company, the amount of guarantee to be undertaken
for the purpose of winding up has to be mentioned.
Whether a Company can be a Subscriber to the MOA of any Other Company
Yes, a company can be a subscriber to the MOA of any other company, according to Rule 2A of the
Companies Provisions & Forms Rules, 1985, by the following procedures:
(i) By appointing any “authorized representative” [who can be any person] – with the privilege to
act as such.
(ii) The authorized representative so appointed should add his particulars and will provide the
statement on behalf of persons to whom he is representing.
Voting Rights
Voting rights = Shares and other securities [Instrument to influence decision of a meeting].
Other rights [Notice of meetings, attendance at meetings and surplus in winding up]
= Shares or other securities
Debentures
[Section 2 (1) (12)
Share Capital
[Section 2 (1) (30A)
Section 114: Voting rights can be assigned for the purpose of members meeting, or for the
debenture holders … whose debentures are convertible into shares.
Procedure to Assign Voting Rights of Convertible Debenture Holders
The procedure is to obtain the maximum votes to the extent of votes that are available on shares of
equivalent face value.
16
MEMORANDUM OF ASSOCIATION [SECTIONS 15-25]
SECTION 15: Mode of Forming a Company:
Any of the following:



3 or more persons (i.e. a “Public company”);
1 or more persons (i.e. a “Private company”); or
1 person (i.e. a “Single Member Company” – SMC)
may form a company for lawful purpose by subscribing their names to a MOA and by complying
with the requirements of registration. The company formed may be:
Company limited by shares {Section 2 (1) (8)};
Company limited by guarantee {Section 2 (1) (9)}; and
Unlimited company
Explanatory Notes:
1. Definition of Memorandum of Association (MOA):
“Memorandum of Association” (MOA) is a document which sets out the constitution of a
company and, as such, it is the foundation on which the structure of the company is based. It
defines its relations with the outside world and the scope of its activities.
2. Requirement of MOA:
Company cannot be formed unless MOA is subscribed by the minimum number of members, as
laid out in Section 15(1).
3. Definition of Articles of Association (AOA):
“Articles of Association” (AOA) is a document which sets out the regulations for the company –
Section 26(1).
4. Requirement of AOA:
AOA duly signed by subscribers of MOA is required to be registered along with MOA in order to
form a company {Section 26(1)}.
Exception for registration requirement of AOA is in the case of “Company Limited by Shares”,
wherein if the AOA is not registered, then “Table A in the First Schedule” shall be deemed as
AOA {Section 26(5)}.
Section 26: Registration of Articles:
Since the AOA sets out the manner in which the company is to be governed, therefore no
mandatory contents are prescribed. However, under sub-section (2):
17
“Articles of Association” (AOA) may adopt all or any of the regulations of Table A”.
Under Sub-section (3), in case of company limited by guarantee and an unlimited company, AOA
shall state:
 If the company has share capital = Amount of share capital – proposed to be registered.
 If the company has no share capital = Number of members – proposed to be registered.
Under Sub-section (6):
“AOA shall be explicit and without ambiguity and shall list and enumerate the voting and other
rights attached to the different classes of shares and other securities, if any, issued or to be issued”.
Status of Table A {Section 26(5)}:
In case of a company limited by shares, if the AOA are:
 Not registered, OR
 Registered and do not exclude or modify the regulations in Table A,
those regulations shall, so far as applicable, be the regulations of the company in the same manner
and to the same extent as if they were contained in duly registered AOA.
Note:
Next class is on Tuesday, June 5th, 2012, from 6:15 pm to 8:15 pm.
18
DATE: 05/06/2012
Corporate Laws
STATUS OF TABLE A
= Limited by Shares
Deemed Articles of
Association (AOA) where
company has not
prepared its own AOA.
Where the company
has prepared its AOA
To the extent
applicable
Not Excluded
OR
Modified
By own Articles of Association
Article 46 – Table A:
If borrowings of the company exceed paid up capital, then the excess borrowing requires member
approval
Otherwise, Board of Directors (BOD) approval of borrowing is sufficient.
Example:
ABC Ltd. (Limited by Shares)
Table A will not
be applicable as it
has been
excluded through
own AOA.
AOA registered with the Registrar
(Say) Article 22 = Provides that:
Applicability
of Table A
on the
Registered
Company
Table A will not
be applied as it
has been
modified through
own AOA.
If borrowing level
exceeds twice of
paid up capital,
then excess
borrowing requires
member approval.
19
Article 46 of
OR A is not
Table
applicable to
us.
COMPANIES ORDINANCE, 1984
(Sections 1 to 14)
S. No.
1.
Situation
Solution
ABC Ltd. is a company formed and
registered under the Companies Act, 1913.
Mr. Kamal is holding 1,000 shares of Rs. 10
each, for which he has duly paid Rs. 5 per
share. Under the provisions of AOA,
management was allowed to call unpaid
amount on shares under any circumstances
which BOD, through their resolution,
decides as fit for the purpose. Accordingly,
BOD passed the resolution and asked Mr.
Kamal to pay Rs. 5,000, being unpaid
amount on the shares. Mr. Kamal
contended that the company is a separate
entity and therefore, shareholders can’t be
compelled to pay for needs of the company
except in winding up. Comment on the
contention of Mr. Kamal.
(1) Members may still be required to contribute specified
amounts (depending upon the structure of the
company – as required to be provided in MOA) in the
assets of the company, despite it being declared as a
separate entity under Section 32.
(2) The above requirement to contribute is due to the
applicability of concept of “Limited Liability”.
(3) The timings to contribute above specified amounts also
depends upon the “structure of the company”, keeping
in view the definition of:
(i) company limited by shares; and
(ii) company limited by guarantee.
(4) In case of company limited by shares (as given in
question), timing to call can be:
(i) In the course of winding up; and
(ii) Even in the situation of going concern.
Conclusion: On the basis of the above:
 Mr. Kamal’s contention is tenable about the
company as a separate entity.
 But, the contention over the matter of timing of
outstanding calls is not workable only in the case
of winding up.
S.
Situation Provision Provision Applicability
No.
/Matter
in AOA
in CO,
1984
i) AGM –
6 months 4 months * 4 months
Time
Limit
ii) Deadline 45 days
30 days
* 30 days
– for
dispatch
of
divided
warrants
* Application of AOA for above purpose would result in
violation of the Companies Ordinance, 1984.
* For such type of situation, Section 6 of the Companies
Ordinance, 1984, has provided supremacy of the Ordinance
for Corporate Law matters in such a way that the
Ordinance has overriding effect over inter alia AOA.
(1) With respect to Corporate Laws, the situation of
merger may result in the number of partners exceeding
20. Furthermore, it is always valid to assume that the
partnership is formed for:
i) Carrying on the business; and
ii) Above business intends to earn profits of members
(partners).
2.
AOA of Alpha Ltd., provides inter alia as
follows:
i) AGM will be held within 6 months of
close of accounting year, whereas the
Companies Ordinance, 1984, under
section 158 provides for 4 months for
the purpose.
ii) Dividend warrants shall be dispatched
within 45 days of declaration, whereas
the Companies Ordinance, 1984, under
section 248 provides for 30 days for
the purpose.
Comment over the appropriateness of the
above situation and the necessary course
of action that is required for the purpose.
3.
A & Co. and B & Co. are two partnership
firms, carrying on spare parts business
separately. Both the firms are considering a
proposal of merger of two firms whereby
each of the partners of existing firms will be
partner of new merged firm. Comment
over the suitability of the proposal.
20
4.
Company is a voluntary association of
persons for common objective, recognized
under the law as a separate person. Discuss
the exceptions of the said “voluntary
association of persons”.
5.
Every company must have registered office
under Section 142 of the Companies
Ordinance, 1984. Which purpose will be
served due to this requirement?
(2) Due to above, the status of partnership will not be
workable; rather, the business will require registration
under the Companies Ordinance, 1984, to become
corporatized entity.
(3) Generally, having the status under other laws results in
the escape (i.e. abolishment) of the requirement of
registration under the Companies Ordinance, 1984, but
the said other laws shall be other than partnership law.
(1) Compulsory opt in;
(2) Foreign company;
(3) Company with listed securities;
(4) Doing certain business required to take shape under
the Companies Ordinance, 1984; and
(5) Group of persons exceeding 20 members.
(1) Section 7: To establish the jurisdiction of relevant High
Court for Corporate Law matters for any company.
(2) Section 48: All correspondence with the company or
any officer of the company shall be addressed at the
Registered Office… otherwise, it will be considered
invalid.
21
DATE: 10/06/2012
Section 27: Printing, Signature, etc. of Articles of Association:
The Articles of Association need to be:
(1)
(2)
(3)
(4)
Printed;
In paragraphs numbered consecutively;
Signed by each subscriber with particulars; and
Dated.
PROMOTERS GUIDE
PERMISSION BE OBTAINED PRIOR TO INCORPORATION
1
Banking Company
2
Non-Banking Finance Institution (NBFC)
3
4
5
6
Security service providing Company
Corporate brokerage house
Money Exchange Company
Association not for profit u/s 42
7
Trade organization u/s 42
(i) Ministry of Finance; and
(ii) State Bank of Finance (SBP)
Securities & Exchange Commission of
Pakistan (SECP)
Interior division – i.e. Ministry of Interior
Stock Exchange (transfer of Card)
State Bank of Pakistan (SBP)
License from SECP: e.g.
(1) Chambers of Commerce;
(2) Institute of Corporate Governance;
and
(3) Hotel Association.
License from Ministry of Commerce
Not for Profit Organization
This is an organization that deals with certain specified industry matters. This is also known as a
“Trade Organization”.
(i) In the case of Insurance Association of Pakistan - Only insurance companies can become a
member.
(ii) In the case of Chambers of Commerce of Pakistan – It is not a trade organization as textiles,
insurance, Pharma, etc., so everyone can become a member.
22
PROMOTERS GUIDE - DOCUMENTS FOR REGISTRATION OF A LIMITED COMPANY
1. First step is to seek, from Registrar, the availability of name (Rule 5 of the Companies General Provisions
& Forms Rules, 1985).
Rule 5: Application of seeking availability of particular name with the Registrar + Prescribed fee:
Rule 5 specifies that the Registrar will confirm the availability of the particular name, chosen by the
company, within 2 days.
Note: The requirement to pay stamp duty through adhesive stamp is no longer applicable through
provincial law.
2. Copy of:
(i) National Identity Card (NIC); OR
(ii) Passport, in case of foreigner.
For each of the above, you have to do the following:
(1) Subscribe; and
(2) There have to be witness(es) to the Memorandum of Association (MOA) and the Articles of
Association (AOA).
3. Four printed copies of the MOA / AOA and one with adhesive stamps under stamp Act, 1899. Each
subscriber has to sign in the presence of one witness, i.e. Each copy of the MOA / AOA has to be signed
along with certain statements.
4. Form I – Prescribed Form for Seeking Certificate of Incorporation.
5. Registration / Filing Fee.
Certificate of
availability of name
Registrar, head of CRO
Certificate of
incorporation
[Company Registration Office]
Various other filings
under the Ordinance
Hierarchy of Company Registration Office (CRO)
SECP
Registered Headquarters Islamabad
CRO
CRO
As decided
by Federal
Government
CRO
6. Authorization of sponsor in favour of a person to make good the deficiencies, if any in MOA & AOA, as
may be pointed out by the Registrar concerned and to collect certificate of incorporation.
23
COMPANY REGISTRATION OFFICES (CROs)
[Section 466 & 467]
Constitution:
Federal Government may constitute CROs, at such places, as it thinks fit for (this is the discretionary
power of Federal Government for number of CROs):
o Registration of company; and
o Other work under this Ordinance
Application for seeking certificate of incorporation on F-1 can be filed with any CRO. Although
the company may be the one which has proposed to have registered office in the province of
Punjab as duly provided in “Place Clause” of AOA, but the application can be filed with the CRO,
Karachi.
Once the application for certificate of incorporation has been issued by a CRO, then the said CRO
will be called as concerned CRO for exercising the jurisdiction over the company for which it has
issued the certificate of incorporation.
It is not binding on the company to file 5 documents in the city of registered office. Documents can
be filed with any CRO, i.e. documents for registration of a limited company.
Hierarchy of CRO:
In each CRO, Federal Government may appoint, as it thinks necessary:
 Registrar;
 Additional Registrar;
 Joint Registrar;
 Deputy Registrar; and
 Assistant Registrar.
And in the above, Registrar shall be the head of the organization which will ultimately report to the
Registrar Headquarters, Islamabad.
Use of Seal:
The CRO will use the seal for the following purposes:
 Authentication of documents; and
 For use on certificate of incorporation.
To assess the genuineness of the documents from the Register – Seal on document.
24
Documents with Registrar made Public:
Registrar maintains the following record in relation to every company:





Certificate of incorporation.
Certificate of commencement of business.
Various documents and forms filed with the Registrar by the companies.
Register of companies.
Register of mortgages and charges.
Any person may inspect the above documents and may require a certified copy on payment of the
fees specified in the Sixth Schedule. The certified true copy of the documents shall be considered as
equivalent to the original document, during the course of all legal proceedings.
Documents with Registrar made Public
Every document filed by any company with the Registrar has been declared as a public document
under section 466 (6), because it is binding on the Registrar to provide a certified copy of every
document upon request of any person on payment of the prescribed fee.
Doctrine of Constructive Notice under Corporate Laws
Everyone dealing with the company will be assumed to have prior knowledge about the powers and
affairs of the company (Memorandum of Association, Articles of Association and Accounts, etc. of
the company, because every document which is concerned with:
(i) powers; and
(ii) affairs of the company,
has been declared as a public document under the law, as per S-466 (6) of the Companies
Ordinance, 1984.
25
Sections 16-18: Section 16: Contents of a Memorandum of a Company Limited by Shares
+ Section 17: Contents of a Memorandum of a Company Limited by Guarantee
Section 19
+ Section 18: Contents of a Memorandum of an Unlimited Company:
Memorandum shall provide
(nothing less, nothing more
than provided under the law):
Company Limited by Shares (S16)
Company Limited by
Guarantee (S-17)
Unlimited Company
(S-18)
Public Limited Company =
Limited/Ltd.; and Private
Limited Company = (Pvt.) Ltd. –
as the last words of its name
√
(Guarantee) Limited
√
Only name
√
√
√
√
√
√
√
√ (See note later on)
√ (Only where the
company has share
capital)
√
×
√
(i) Name
(ii) Province of Registered
Office (Practically, name
of city and exact address is
also mentioned)
(iii) Objects (Activities of the
Company – in Pakistan
and abroad
(iv) Liability
(v) Share Capital
√
(vi) Association & Subscriber
Clause
√
×
√
only for those companies having share capital
Notes on the Above:
Sections 16-18: Section 16: Contents of a Memorandum of a Company Limited by Shares
+ Section 17: Contents of a Memorandum of a Company Limited by Guarantee
+ Section 18: Contents of a Memorandum of an Unlimited Company:
(1) Name: Every company shall have, as the last word of its name, as the following:
Section 16: Company Limited by Shares: “Limited” in the case of a Public Limited Company
(PLC); with parenthesis and the words “(Pvt) Ltd” in the case of a Private Limited Company.
Section 17: Company Limited by Guarantee: “(Guarantee) Limited.
Section 18: Unlimited Company: Only the name of the company.
Example: In the case of a company, ABC:
(1) Limited by Shares:
(i) ABC (SMC – Pvt) Ltd [as per SMC Rules, 2003];
(ii)Private (Pvt) – ABC (Pvt) Ltd; and
(iii) Public (PLC) – ABC Ltd
26
(2) Limited by Guarantee:
ABC (Guarantee) Ltd
(3) Unlimited Company:
ABC Company Ltd (i.e. no “Ltd”, or “Limited” as the last words of its name)
(2) Province of Registered Office: The province or the part of Pakistan not forming part of a
province, as the case may be, in which the registered office of the company is to be situated.
(3) Objects: Objects of the company and except in the case of a trading corporation, the territories
to which they extend.
1) Act, transaction, or business from
Section 496 - Importance of Object Clause:
the company’s point of view – Not
Act, Transaction, Business – outside the object clause
binding on the company
= ULTRA VIRES to the Company
OR
2) But, the third party is still
protected as the law has provided the
ULTRA VIRES the Memorandum of Association
concerned director, or officer, who
Note: Transaction of the company – it is binding for payment on the
concerned
director, oretc.,
officer
executed
the transaction,
to be=
“Lifting of Veil of Incorporation”.
personally responsible + Rs. 5,000
penalty.
(4) Share Capital: The amount of Share Capital with which the company proposes to be
registered and the amount divisible thereof into shares of fixed amounts (Note: this is not
applicable for a guarantee limited company without share capital and an unlimited
company).
Share Capital in Memorandum of Association (MOA) = Authorized Capital (the capital which
is yet to be ‘issued’)
Number of shares * Fixed Amount per share
Authorized Capital = 10,000 * 10 = 100,000
Par Value
Face Value
Nominal Value
(5) Liability:
(i) Company Limited by Shares: Liability of members is limited; and
27
(ii) Company Limited by Guarantee: Each member undertakes to contribute their asset(s) at
the time of winding up while he is a member, or within 1 year afterwards, for the payments
of debts and liabilities of the company contracted before he ceases to be a member and of
the costs, charges and expenses of winding up.
Note: In the case of a (Guarantee) Limited company, according to Section 298 (1) (iii) of the
Companies Ordinance, 1984:
The Criteria to Establish the Liability of Past Members:
a. Winding up must have been commenced 1 year on ceasing the membership.
b. Guaranteed amount is being enforced for payment of liabilities, or payment of cost of
winding up.
c. If guarantee is being enforced for the payment of liabilities, the liabilities must be those
which have been contracted at the time prior to cessation of membership.
d. Present members are not able to contribute.
e. This will be the case if the Court so orders.
(6) Association & Subscription Clause:
No subscriber shall take less than one share and shall write, opposite to his name, the
number of shares he takes.
DATE: 12/06/2012
Example:
Non Pak – Ltd.
Shares: In case of shares, irrespective of availability of voting rights
designated as a member.
He will always be
Non-Voting Preference Shares:
Take, for example, Mr. A. He acquires 5,000 shares in the capacity of allottee.
designated as a member.
So, he is
Acquisition of shares, whether voting or non-voting, through the process of:
(i) Subscribing the Memorandum of Association (MOA);
(ii) Allotment; and
(iii) ‘Transfer in’ for existing members.
It would also result in designating the acquirer as MEMBER Section 147 – Provided the fact must
have been provided in the “Register of Members”.
28
Debentures:
In relation to acquisition of security other than shares, e.g. debentures, the acquirer would be
designated as member only when the security is with the voting rights.
Besides being shares, voting rights (for members meeting) can be assigned, through providing in
the Articles of Association (AOA), in relation to convertible debentures, in the manner provided in
Section 114.
Case Study in relation to Ultra Vires to the Company
1) M/s. A, B and C has signed the MOA & AOA of ABC Ltd. (unlisted public limited company), in the
capacity of subscriber. They also become the directors of the company and took the entire
share capital of the company and the debentures. The share capital of the company comprises
of:
 100,000 ordinary shares of Rs. 100 each.
 100,000, 9% non-voting preference shares of Rs. 10 each.
Furthermore, the debentures are issued in the form of 1,000 TFCs of Rs. 5,000 each.
Required: Which of the following instrument can results in designating the holder as member?
(i) Ordinary shares
(ii) Non-voting preference shares
(iii) Debentures
Solution:
(i) Ordinary shares: Yes, ordinary shares can result in designating the holder as member.
In case of shares, irrespective of availability of voting rights
as a member.
He will always be designated
(ii) Non-voting preference shares: Yes, non-voting preference shares can result in designating the
holder as member. Acquisition of shares, whether voting or non-voting, through the process of:
(a) Subscribing the Memorandum of Association (MOA);
(b) Allotment; and
(c) ‘Transfer in’ for existing members, designates the holder as member.
It would also result in designating the acquirer as MEMBER Section 147 – Provided the fact must
have been provided in the “Register of Members”.
29
(iii) Debentures: No, debentures will not result in designating the holder as member, because in
relation to acquisition of security other than shares (i.e. debentures in this case), the acquirer
would be designated as member only when the security is with the voting rights.
In relation to acquisition of security other than shares, e.g. debentures, the acquirer would be
designated as member only when the security is with the voting rights.
Besides being shares, voting rights (for members meeting) can be assigned, through providing in
the Articles of Association (AOA), in relation to convertible debentures, in the manner provided in
Section 114.
2) The above company is formed with the object of construction and sale of housing schemes and
the ancillary activities in relation to the business of housing schemes.
Required:
(i) Which document is relevant in order to identify the objects of the company?
(ii) If the law has set out the purpose of the company as “Lawful Purpose” u/s 15 of the Ordinance,
then which purpose will be served through providing in object clause of MOA.
Solution:
(i) The Memorandum of Association (MOA) is the document that is relevant in order to identify the
objects of the company.
(ii) Object clause is designed with the purpose to provide the ACTIVITIES, which a company is
allowed to undertake during its life.
3) Due to attractive incentives announced by government for launch of schemes of commercial
projects, Mr. A announced the scheme of commercial projects, in the capacity of executive
director, where the rest of non-executive director was not aware over the situation. As a result
of the said announcement, Mr. A took the deposits of Rs. 1 million each for the launch of 100
projects. Subsequent to the launch of the scheme and taking up the deposits, the government
reverted back to the decision. Furthermore, rest of the directors did not agree with the
proposal for proceeding over the projects of commercial schemes and therefore, the situation
of refund to depositors arises who had also claimed the damages.
Required:
(i) The company refused to pay the principal and the damages thereon to the depositors. What is
that concept on the basis of which the said refusal will be forwarded to the depositors?
30
Solution:
The concept on the basis of which the said refusal is forwarded to the depositors:
1) From the data given, it appears that the launch of commercial project is outside the object
clause of MOA. An Act, Transaction, or Business, outside the object clause is in fact ULTRA VIRES
to the company within the meaning of S-496.
2) Above section [i.e. S-496] renders the act, transaction, or business, so done, as ‘VOID’.
Therefore, the company is legally entitled to refuse the repayment.
(ii) Course of action for depositors to recover the amount.
Solution:
Course of action for depositors to recover the amount:
In the situation of Ultra Vires to the company, the law has made the concerned director / officer (in
this case, Mr. A) responsible to refund the security deposit along with damages.
(iii) Remedy available to the depositors where MOA was not provided to the depositors by the
director in order to screen out the permissibility for the company to launch the commercial
projects scheme.
Solution:
S-466 has made all documents filed with the Registrar, including MOA and AOA as public
documents. Thereby, any person can have certified copies of the same upon payment of the
prescribed fee.
Because of the above declaration of public documents, it is assumed that every person dealing with
the company has knowledge about the company, including the knowledge in relation to the MOA
due to the applicability of the concept of “DOCTRINE OF CONSTRUCTIVE NOTICE”.
(iv) The concept on the basis of which depositors can still not be able to be held responsible, the
company where they have not gone through with object clause of MOA.
31
Solution:
Refer to answer to part (iii) of this question.
DEFINITION OF MEMBER (OF A COMPANY)
S. 2 (1) (21)
Means
Company having
Share Capital
Company not having
Share Capital
(a) Subscriber to the MOA.
(b) Every person to whom any of the following securities is allotted:
(i) Share;
(ii) Scrip or other security which gives him a voting right in the company.
(c) Every person who becomes the holder of:
(i) Share;
(ii) Scrip or other security which gives him a voting right in the company.
Any person who has
agreed to become a
member of the
company and whose
name is so entered in
the register of
members.
And whose name is entered in the register of members.
Instrument to become member:
(i) Share; or
(ii) Other securities with voting rights.
Ways to become member (company having share capital):
(i) Subscribing of MOA;
(ii) Allottee of:
(a) Share; or
(b) Other security with voting rights.
(iii) “Transfer in” of:
(a) Share; or
(b) Other security with voting rights. Subject to fulfillment of formalities for having entry in register of members.
Ways to become member (company not having share capital):
Agreement with the company to become member and therefore, the manner of which will be governed with reference to
AOA. In case of transfer of membership, formalities for entry in the register of members will be required to be fulfilled.
32
CASE STUDY IN RELATION TO COMPANY LIMITED BY GUARANTEE
1) M/s. A, B and C are intending to form a company, limited by guarantee, for a particular form of
business, in order to earn profit for maximization of shareholders wealth. It is further proposed
that the company will take the type of private limited company and will have a share capital.
Your advice is sought in relation to the following matters:
(i) Is there any possibility to skip the formality to prepare AOA and for what purpose could
reliance be placed on any model as provided under the Ordinance?
(ii) Situation in which the territories of operation for attainments of objects under the object
clause of MOA are required to be defined.
(iii) The procedure to define the type of the company and how the type so defined shall be
indicative during the life of the company.
Solution:
(i) Since it is limited by guarantee, the company has to prepare, inter alia, Articles of
Association, in order to form a company. The facility to proceed over formation of a
company is to do with the concept of “deemed power under Articles of Association” (AOA)
as Table A is available for a company limited by shares only.
(ii) Every company has to define the territories of operation for attainments of objects under
the object clause of MOA, except for a trading corporation.
(iii) The “type of company” in this case means that the company can either be a:
(a) Private Limited Company; or
(b) Public Limited Company.
If the company has the following 3 restrictions in its Articles of Association, then it is termed as a
“private company”:
i) Transferability of shares, if any
RESTRICTIVE;
ii) Number of members = 50
LIMIT; and
iii) Invitation of subscription from public to subscribe for shares
PROHIBITION.
In the absence of the above restrictions in the Articles of Association, the company is a PUBLIC
COMPANY.
2) Based on your advice, they proceeded and for the purpose of preparation of MOA, each
subscriber is contemplating to take 100,000 shares of Rs. 10 each, fully paid and further
undertook the guarantee amount of Rs. 1 million. One of their common friends indicated that
the guarantee amount can even be enforced where a particular member has ceased the
33
membership. The said indication created concern for them and therefore your further advice
sought for following matters:
(i) Conditions, the satisfaction of which is required to be established in order to enforce the
guarantee amount, even after ceasing the membership.
(ii) The document on the basis of which the liability of past member(s) will be claimed.
Solution:
(i) Conditions which are required to be satisfied in order to enforce the guarantee amount
even after ceasing the membership:
1) Winding up has to commence within 1 year of cessation of membership.
2) During the above winding up, there is the point of ‘required amount’ for payment of:
(a) Liabilities;
(b) Expenses; and
(c) Costs and Charges of Winding Up.
3) Present members will be unable (not allowed) to contribute.
4) If the Court so orders.
(ii) The document on the basis of which the liability of past member(s) will be claimed:
The liability of past member(s) will be claimed based on the “Liability Clause” of the
Memorandum of Association.
3) After a few years of incorporation, the company had gone (or went) into liquidation. The
winding up commenced on 1st January 2011 and on this date, liabilities were calculated, as
follows:
(a) Total liability: Rs. 10 million
(b) Liabilities contracted and accrued during the last 12 months: Rs. 8 million
(c) Liabilities contracted and accrued for the period prior to last 12 months: Rs. 2 million
During the going concern, the shares of M/s. A and C transferred to M/s. X and Y in accordance
with the procedure, as provided in AOA of the company and thus M/s. X and Y became the
member of the company and the said members along with Mr. B are continuing since then till
the date of commencement of winding up, i.e. 1st January 2011. The membership of Mr. A was
transferred to Mr. X during the last 12 months, whereas the membership of Mr. C was
transferred to Mr. Z during the period prior to the said last 12 months.
Required:
(i) Which of the past members can be held responsible for the debts of the company?
(ii) The amount of debt for which the above past member can be held responsible.
(iii) Procedure to be followed in order to be held responsible by the past member.
34
Solution:
(i) The past member who can be held responsible for the debts of the company:
Mr. C
He can’t be held responsible as past member on time lag between:
Ceasing membership and Commencement of winding up
> 12 months
Therefore, Mr. A, only, can be held responsible as PAST MEMBER.
(ii) The amount of debt for which the above past member can be held responsible:
AMOUNT = Rs. 2 million (i.e. Liabilities contracted and accrued for the period prior to the last 12
months) + so much of the amount out of the Rs. 8 million (i.e. Liabilities contracted and accrued
during the last 12 months) which was contracted before the ceasing of membership.
(iii) Procedure to be followed in order to be held responsible by the past member:
First, the amount should be claimed in the presence of a member, etc…
Section 19: Printing, Signature, etc., of Memorandum of Association (MOA):
(1)
(2)
(3)
(4)
Printed;
Divided into paragraphs numbered consecutively;
Signed by each subscriber with particulars; and
Dated.
Deemed Power under MOA & AOA {S-19(2)}
Notwithstanding anything contained in:



Ordinance;
Any other law; and
Memorandum of Association (MOA) and Articles of Association (AOA).
The MOA and AOA shall be deemed to include the power to enter into any arrangement for
obtaining:
 Loans;
 Advances; and
 Credits
The lender is a bank, or a financial institution, as defined in the
Banking Companies Ordinance (BCO), 1962.
35
AND to issue other securities not based on interest [S-2 (1) (30A)] for raising resources from a
Scheduled Bank, or a Financial Institution.
Security not based on interest
Redeemable Capital
Clause 46, Table A: The outstanding amount of borrowing shall not at any time, without the
sanction of the company in general meeting, exceed the issued share capital of the company.
36
DATE: 19/06/2012
S-2 (1) (7)
Preparation of
Memorandum and
Articles
Minimum Number
of Subsidiaries
Company
Formed
+
Registered
S-30
Lawful Purpose
Under Companies Ordinance, 1984
+ Existing Company X
+
Filing of MOA
and AOA
Activities Required:
Normally, sign –
when promotion
outsourced
formation activity
Practicing Advocate
Declaration of
Compliance
with the
Requirement
of Formation
of a Company
[Form – I]
Duly signed by
Persons of Rule-4 of
the Companies
Rules, 1985
Practicing Chartered
Accountant or Cost and
Management
Accountant
37
Proposed
Director or
Officer named
in AOA
PROVISIONS WITH RESPECT TO REGISTRATION OF Memorandum of Association (MOA) / Articles
of Association (AOA)
Section 30: - Registration of Memorandum and Articles, etc.:
(1) MOA & AOA, if any, shall be filed with the Registrar.
(2) Declaration by such persons may be prescribed (Rule – 4) in this behalf, or by a person named in
the Articles as a director, or other officer of the company --- of compliance with all or any of
requirements of this Ordinance (Form – I) and the Registrar may accept such declaration as
sufficient evidence of such compliance.
(3) Registrar shall retain and register, if satisfied:
(i) The company should be formed and should work for a lawful purpose;
(ii) None of the objects stated in the MOA are / should be:
 Inappropriate; or
 Deceptive or insufficiently expressive.
(iii) All requirements of Ordinance and Rules are complied with.
Rule 4:
Following are the prescribed persons for filing of Form – I ---- Person engaged in the formation of
the company, who is:
(i) Advocate, who is entitled to appear before High Court or Supreme Court,
(ii) Member of ICAP / ICMAP, practicing in Pakistan, OR
(iii) Named in AOA as director / other officer.
The Registrar may require any of the following person to furnish information / clarification /
document.




Who makes declaration u/s 30 (2);
Promoter;
Director of proposed company; or
Witness to signature of subscribers to MOA.
REFUSAL {Section 30(4)}: If application for incorporation, refused by any of the Registrars or
subordinates (Deputy Registrar, Joint Registrar, Additional Registrar, or Assistant Registrar) supply
deficiency and remove defect OR appeal to the Registrar / SECP. Appeal may be filed within 30 days
of the order of refusal. Order of SECP shall be final and shall not be called in question before any
Court or other authority.
38
STRATEGY TO HANDLE WHERE FORM-I IS REFUSED
Supply
deficiency
Form I –
Refusal will
always be
accompanied
with reason.
Either Appeal
Order =
FINAL
Appeal
OR
(Provide missing
information in document)
Registration [Head of
Central Registration
Office – CRO]
AND / OR
Remove defect (Rectify
the information in
document already
submitted).
Where Refusal Order is from
Securities &
Exchange
Commission of
Pakistan (SECP)
Where Refusal Order is
from Registrar
Hierarchy within
any CRO
Assistant
Registrar
Deputy
Registrar
Joint
Registrar
Additional
Registrar
= Challenge the possibility of appeal order of Registrar or SECP.
Every member
Subsequent to subscription
of Memorandum of
Association (MOA) and
Articles of Association (AOA)
Subscriber to Memorandum
of Association (MOA) and
Articles of Association (AOA)
Provision of S-31
Subject to same -
S-19: Statement of Binding
o Privileges &
o Bindings
of MOA and AOA
39
Section 31: - Effect of Memorandum & Articles:
The Memorandum and Articles binds the company and its members to the same extent as if they
respectively had been signed by each member and contained a covenant on the part of each
member, his heirs and legal representative, to observe and be bound by all provisions of MOA &
AOA subject to Ordinance. {sub-section (1)}.
All money payable by any member under MOA or AOA shall be a debt due from him to the
company. {sub-section (2)}.
ABC (Guarantee) Limited
 Mr. Ajmal took guarantee in MOA = Rs. 1,000,000.
 Due to death = Membership transferred to Mr. Akram (the son of the deceased member).
 Company has gone into liquidation. Mr. Akram refused to honour the demand of liquidation of
guaranteed amount – with the reason that he didn’t personally undertake the amount.
Bindings and covenants of MOA are applicable, inter alia, to the legal heirs of deceased members as
the legal heirs had personally undertaken the bindings.
×
Date of Receipt of Certificate of Incorporation (Irrelevant date for calculation of S-32)
= 23/04/2012
√
Date of Incorporation as mentioned in Certificate of Incorporation
= 13/04/2012
Effects?
1)
2)
3)
4)
Separate person;
Availability of corporate powers;
Permissibility to use common seal; and
Perpetual succession.
(No interruption over constitution till winding up).
40
COMMON SEAL
= Official Seal
Same as common seal
+ Territory name
where official seal is
allowed to be used
English or Urdu –
[Section 213]
Name of the Company +
Engraved Form
Section 32: Effect of Registration:
On the registration of MOA, the Registrar shall certify that the company is incorporated and in case
of a limited company, that the company is limited by shares or guarantee, as the case may be.
From the date of incorporation as mentioned in the Certificate of Incorporation, the subscribers
together with such other persons as may from time to time become members of the company shall
be:



A body corporate by the name contains in MOA;
Capable forthwith of exercising all the functions of an incorporated company; and
Having perpetual succession and a common seal.
But with such liability of members to contribute to the assets of the company in the event of its
being wound up as is mentioned in the Ordinance.
COMMON SEAL
One of the privileges of incorporation that is assigned under the Ordinance is to have a common seal from
the date of incorporation as mentioned in the certificate of incorporation.
The above seal is required to be prepared in accordance with the manner as provided in the Ordinance
whereby the name of the company, in legible English or Urdu characters must be engraved on its seal. [This
is the manner in which to prepare the common seal – i.e. in engraved form].
A company means an artificial and legal person and, therefore, will have no body similar to natural person
and as such, it cannot sign documents for itself. It acts through natural persons, called directors and officers.
Under the Ordinance, following are empowered to authenticate the documents and proceedings on behalf
of the company [as per Section 51 of the Companies Ordinance, 1984]:
41




Chief Executive;
A Director;
Company Secretary; or
Other authorized officer, e.g. CIA [Certified Internal Auditor] and CFO [Chief Financial Officer] – They
must be authorized persons.
It is further provided that authentication by any of the above will render the completion of the matter at all
in this regard and common seal is not required unless the use of common seal is specifically provided for any
particular matter, under any provision of the Ordinance.
Following are the specific matters for which the use of common seal is mandatory:
On share certificates as prima facie evidence of the title of the member [Section 89].
On the form of proxy where the appointer is a body corporate [Section 162].
On the power of attorney, in favour of any person, to act as attorney of the company to execute the
deeds on behalf of the company. [Section 2 (2)].
On the letter of authority in favour of any person to use official seal, in lieu of common seal outside
Pakistan (official seal shall be facsimile of the common seal). [Section 2 (3)].
Consequence of use of common seal which is not prepared in accordance with the law:
If any officer of a limited company, or any person on its behalf, uses or authorizes the use of the seal
wherein his name is not engraved in English or Urdu, then the following are the consequences:
 Fine which may extend to Rs. 2,000.
 Personal liability for the liability arising under the document on which the seal is used. However, the
said personal liability will be absolved if the company has agreed to accept the liability. Normally, the
Articles of Association provides members resolution to accept the liability for the company which
otherwise has become void due to the reason that seal has been used, on any document, which is
not prepared in accordance with the above manner–Lifting of Veil of Incorporation [Section 144 (2)]
42
DATE: 24/06/2012
CORPORATE LAWS
Memorandum of Association (MOA) and Articles of Association (AOA)
MOA & AOA = Directional documents of the company
Essential for incorporation
During operation, the need may arise to
alter MOA & AOA in order to maintain
compatibility of operations with the
provision of the said documents.
MOA alteration
- various provisions being governed
through S-20
AOA alteration – S-28
MOA alteration:
Only those clauses can be altered, the possibility of which is provided under any provision of the
Ordinance.
(i) Place: Rule – 3 and Rule – 21;
(ii) Objective: Rule – 3 and Rule – 21;
(iii) Name: Rule – 5 and Rule – 39;
(iv) Liability: Rule – 34 and Rule – 111 and Rule – 112; and
(v) Share Capital: Rule – 92.
Note: Association & Subsidiary Clause cannot be altered.
For above alteration, procedure followed shall be that which is prescribed.
procedure.
Prescribed
Above procedure shall be applied within the boundaries defined for alteration
alteration.
Extent of
43
Question:
Which business of AGM, being ordinary business in AGM, is permitted to discuss cases in EOGM?
Answer:
The only (‘ordinary’) business of AGM, that is permitted to discuss cases in EOGM, is “Election of
directors”.
e.g. “Resolved that an account be opened with NIB Bank, I.I. Chundrigar Road Branch.”
Question:
Who is entitled to receive notice of BOD meeting?
Answer:
This is generally provided in AOA. Generally, all directors are declared as entitled. But, for old
companies, it may appear that directors not in Pakistan will not be entitled.
Resolution by Circulation
Signed By
A
Situation 1
Not in Pakistan – not
entitled to receive
Situation 2
Agreed
B
C
D
E
Not agreed
Agreed
Agreed
Agreed
Agreed
Agreed
Agreed
Agreed
As 100% approval is
required, it is not
satisfied.
100% - satisfied
Situation 3
Not in Pakistan, but
entitled to receive –
Not agreed
Not agreed
Not agreed
Agreed
Agreed
100% - not
satisfied
Matters for Which Resolution by Circulation Can’t be Proceeded
Matters for which BOD meeting is essential – S-196, e.g. approval of accounts, bonus to employees
and legal suit.
44
Board Resolution
Rule of Majority of Resolution
Rule of 100% Approved – For Resolution
BOD Resolution (more than 50%)
Resolution by Circulation (entitled to receive notice)
Members Resolution
Rule of Majority of Resolution
Rule of Specific Majority
Ordinary Resolution
Special Resolution
Bifurcation between Ordinary Resolution
or Special Resolution
It is already determined under
the Ordinance – based on the
nature of business.
Like
Alteration of MOA
Approval of Accounts
about Place Clause
= Special Resolution
Ordinary Resolution – Section 234(say) 90% approved
Ordinary resolution as a % of approval is irrelevant to conclude the requirements of Ordinary /
Special Resolution.
45
 In ordinary business, there would always be ordinary resolution.
 In special business, it may be through:
(i) Ordinary Resolution (like: Issue of shares at discount); and
(ii) Special Resolution.
Note:
(1) Special Resolution will only be for special business;
(2) But, special business would not always be through Special Resolution.
Notes from Handout
AGENDA AND RESOLUTIONS
Agenda: Statement of business to be transacted at a meeting is called agenda of the meeting. This
is mentioned in the ‘notice of the meeting’.
Agenda, in fact, defines the purpose of convening the meeting and, therefore, presented in the notice of the
meeting.
Agenda item: Each business within the agenda is called an “agenda item”. For members meeting,
agenda items can be bifurcated between “Ordinary” and “Special” business. The decision of
designating ordinary or special business will be as follows:
S. No.
Type of Meeting
1.
Statutory Meeting
2.
Annual General Meeting (AGM)
3.
Extra Ordinary General Meeting (EOGM)
4.
Class Meeting
46
Ordinary or Special Business
Bifurcation not applicable
Ordinary Business
(i) Consideration of accounts and reports of
directors and auditors.
(ii) Declaration of dividend.
(iii) Appointment of auditors and fixing of the
remuneration.
(iv) Election of directors.
(i) – (iii) cannot be discussed except in AGM.
Special Business (other than “ordinary
business”)
Other than above.
All businesses are special business. [(iv) can be
discussed].
Class Resolution & special business [S-28]
The reason to distinguish ordinary or special business is due to the requirement of “Statement of
Material Facts” which is required to be accompanied with “Notice of Meeting”, in order to set out
all the material facts concerning such business, including, in particular, the nature and extent of the
interest, if any, therein of every director, whether directly or indirectly and where approval of any
documents is proposed in the meeting, time and place of inspection of the document, be also
specified in the statement. [Section 160 (1) (b) – “Statement of material facts” with special matters.
Statement of Material Facts with Prescribed Contents [Important]:
For the following matter, the content of the Statement of Material Facts is prescribed (for others on
discretion):
(i) Issue of Shares at Discount [S-84];
(ii) To introduce Employees Stock Option Scheme (ESOS);
(iii) Buy-Back of Shares by listed companies – Section 95A & Buy-Back Rules, 1999;
(iv) Disposal of Sizeable part or undertaking by listed company – SRO 1227 / 05; and
(v) Investment in Associated Undertaking – Investment in Associated Undertaking Regulations,
2012.
Resolution {Sections 165 to 167}:
An agenda item that has been debated and voted is called a “resolution”.
The validity of any resolution will be determined, whether the resolution has:
 Duly been incorporated in the minutes; and
 The minutes have duly been signed by the Chairman
of the same meeting, or the Chairman of the subsequent
meeting – “signed minutes in minutes book”.
47
It is not required to define, how
many votes are in favour of, or
against, the resolution.
TYPES OF RESOLUTIONS
Board of Directors
Resolution by
Circulation
BOD Resolution
Resolution
passed in BOD
meeting. Note:
Before
members’
resolution,
there is always
BOD
resolution.


Resolution in
writing.
Signed by all
the directors
for the time
being entitled
to receive
notice of a
meeting of
the Directors.
This
resolution
shall be valid
and effectual,
as if it had
been passed
at a meeting
of the
Directors duly
convened and
held, but can
be proceeded
only for those
matters which
are not
specially
provided,
under the
Ordinance, to
be passed in
BOD
meetings.
Members
Ordinary
Resolution
Passed by a
majority of
members,
entitled to
attend and
vote, as are
present in
person, or
proxy.
48
Special
Resolution
Passed by
3/4th majority
of members,
entitled to
attend and
vote, as are
present in
person, or
proxy.
Creditors
Class
Resolution
Passed by
3/4th of the
(total)
members,
present in
person, or
proxy.
Creditors
Resolution
Generally,
rule of
majority,
unless the
Ordinance
or AOA
specifically
provides
otherwise.
PRE-INCORPORATION CONTRACT
(OR PRELIMINARY CONTRACT)
Meaning:
The “pre-incorporation contracts” or “preliminary contracts” are those which are entered by the
promoter on behalf of the company before its incorporation (i.e. formation) – e.g. Rent agreement.
Before the incorporation of the company, the promoter visually entered into certain contracts, like:


Purchase of assets, on behalf of the company.
Delegation of assignment to a consultant for proceeding over the legal formalities required in
order to form a company.
Status of Pre-incorporation Contracts:
Pre-incorporation contracts are not binding on the company, even after its incorporation. The
reason for the same it that before the incorporation, the company is not competent to enter into
the contract, as it has no legal entity – Contractual power is acquired
Under Section 32 (2), it is the date of incorporation mentioned in the certificate of incorporation,
from which a company gets the status of separate person and the contractual power and thus, a
company cannot be sued for incorporation contract.
On the basis of the above, the promoter will become personally liable for the pre-incorporation
contract.
Ways to avoid personal liability:
Section 196 (1) empowers the directors, inter alia, to pay all expenses incurred in promoting and
registering the company. Therefore, it can be established that after incorporation, the company
may honour the contracts entered into before its incorporation, but the need arises to provide a
procedure for the purpose and of course, AOA, may serve the purpose. Generally, process of
ratification [“ratify” means to approve / validate a contract] in members meeting is applied for
the purpose of adoption of pre-incorporation contract on the company.
Other ways to avoid the personal liability can be as follows:
49
 Process of novation [“novation” is an attempt to avoid personal liability”] whereby, after
incorporation of the company, the name of the party to the pre-incorporation contract will be
replaced, so as to include the company as one of the parties to the contract.
 Pending finalization of the contracts.
 Seeking indemnity from the company through any specific clause in the AOA, for the purpose.
Novation vs. Adoptions
In the case of “novation”, the name of the party to the pre-incorporation contract is included in the
contract whereas in the case of “adoption”, the name of the party is not included in the contract,
but the party is still bound by the contract.
DATE: 26/06/2012
TYPES OF RESOLUTIONS
TYPE OF
RESOLUTION
SPECIAL
RESOLUTION
ORDINARY
RESOLUTION
CLASS
RESOLUTION
Vote % Required
of Members
3/4th
Attended
50% +
Attended
Above Members
Must have voting
power
Must have voting
power
3/4th
Total (as per
Members Register)
2
Class Resolution –
Class members will
be entitled to vote
irrespective of
availability of voting
power
For many types of meetings
50
For class meetings only
Section 284 & 287:
= Specific approval of creditors
3/4th of votes
In relation to schemes of:
1)
2)
3)
4)
Compromise;
Arrangement;
Amalgamation (or Merger); and
Reconstruction.
Alteration of the following:
(i) Place Clause; and
(ii) Object Clause
Permissibility
√
Extent
(Boundaries of
Alteration)
S-21 to S-25
+ Rule – 13 of the Companies Rules, 1985
+ SECP Guidelines
Procedure of
Alteration
Same
Different
(Notes from Study Manual of Companies Ordinance, 1984)
Alteration of Memorandum
(i)
(i)
(a)
(b)
(c)
Alteration of Object Clause [S-21 to S-25]:
So far as may be required to enable it: - {S-21 (1)}
To carry on business more economically or more efficiently; or
To attain main purpose by new or improved means; or
To enlarge or change the local area of operations:
51
This is to do with companies other than trading corporations, as they have to provide Territories
of operation in Object Clause.
If more territories are about to be entered into --- this is “alteration of object clause”.
(d) To carry on some business, not being a business specified in its MOA, which may conveniently
or advantageously be combined with the business of the company; or
(e) To restrict or abandon any of the objects specified in the MOA; or
(f) To sell or dispose of the whole or any part of the undertaking of the company:
e.g. Textile business
It decides to change its business to that of a motorcycle manufacturer – Therefore, the whole
Object Clause will have to be changed to provide for the activity of motorcycle manufacturer OR
To provide RADICAL CHANGE to OBJECT CLAUSE.
Radical changes can’t be satisfied with respect to extent of alteration of object clause as defined
under section 21 (1). Therefore, it is not possible to provide.
Section-287: Scheme of Reconstruction:
It is used in order to provide, inter alia, Radical Change in Object Clause.
In this case, existing company will be dissolved and a new company will be formed by virtue of a
scheme duly approved by the Court, to provide, in the object clause, the proposed alteration.
; or
(g) To amalgamate with any other company, or body of persons.
(ii) Mutatis mutandis (As it is) as for alteration of place.
(ii) Alteration of Place Clause [S-21 to S-25]:
(i) Only Province / Part of Pakistan in which the Registered Office is situated is required to be
included in the MOA under sections 16, 17 and 18 of the Companies Ordinance, 1984.
(ii) Board of Directors (BOD) resolution to propose to change the place of Registered Office from:
 One province to another;
 One city or town in a province to another; and
 From a part of Pakistan not forming part of a province to a province and vice versa. {S-21(1)]
Therefore, the place of registered office may be changed as follows:
(1) Province
(2) City
Province
City
52
(3) Islamabad
(4) Province
Province
Islamabad
(iii) Special Resolution {S-21 (1)}
(iv) Confirmation from SECP {S-21 (2) & Rule -3} (See Handout given by Mr. Rizwan Manai, which is
provided later on):
 Application accompanied with prescribed fee, prescribed information and documents (of
immediate preceding day of special resolution) be signed and filed by a responsible person.
 Within 60 days of special resolution.
(v) SECP confirmation is not required where change of place is from:
 Punjab to Islamabad and vice versa.
 One city in a Province to another [Proviso to sub-section (2)]
(vi) Before confirming the alteration, SECP must be satisfied [sub-section (3)]:
 Sufficient notice to debenture holders and affected person / class in the opinion of SECP.
However, for special reasons, SECP may dispense with notice requirement.
 Entitled creditors [Rs. 50,000 – Rule 3 (3) (viii)] have given their consent / debt, or claim,
discharged, or determined, or secured to the satisfaction of the SECP.
(vii) Every Special Resolution is required to be filed to Registrar on Form – 26 under section 172
along with filing fee.
(viii) Copy of application to SECP is required to be filed with concerned CRO {SECP Guideline}.
(ix) SECP may order confirming the alteration {S-22}:
Either wholly or in part; and
On such terms and conditions; and
May order for costs as it thinks proper.
(x) SECP shall have regard to the rights and interests to the members / class of members / creditors
and for the purpose may adjourn the proceedings {S-23}:
o So that the arrangement may be made to the satisfaction of the SECP to purchase the
interests of dissident members;
o Directions can be issued for facilitating the arrangement;
o No part of the capital of the company may be expended in any such purchase.
(xi) Certified copy of SECP order + Printed copy of MOA, as altered, be filed within 90 days of SECP
order to Registrar. However, SECP may, at any time, extend 90 days period. {S-24 (1) (3)}.
(xii) Registrar shall certify the registration under his hand, conclusive evidence about the fulfillment
of all the requirements of alteration. {S-24 (1)}.
(xiii) Alteration shall be effective only after registration from Registrar under section 24 (& S-25).
(xiv) Where no registration within 90 days or extended period, the alteration and the order and
all connected proceedings shall become null and void on the expiry of 90 days / extended
period. {S-25}
53
(xv) SECP may, on sufficient cause shown, revive the order or alteration, on application within a
further period of 90 days. {S-25}
APPLICATION FOR CONFIRMATION OF SECP IN RELATION TO
ALTERATION OF MOA U/S 21 {RULE 3}
o Responsible officer is entitled to submit the application with SECP for the purpose.
o The application is required to be filed not later than 60 days from the date of special resolution.
Information to be provided in the above application:
(i) Name and address of the company.
(ii) Number and date of incorporation.
(iii) Subscribed and paid up capital.
(iv) Redeemable capital.
(v) Business actually being carried on and the clause in the MOA justifying it; and
(vi) Reasons for the proposed alteration.
The above information must be updated on the day immediately preceding the day of the passing
of the special resolution and is required to be signed by a responsible officer.
Documents as enclosure to above application:
(1)
(2)
(3)
(4)
(5)
A copy of MOA and AOA.
A copy of the special resolution.
Minutes of the meeting at which the special resolution was adopted.
Particulars of dissenting shareholders or creditors, together with the objections.
Statement in comparative form as follows:
Existing provision of
MOA
Proposed provision
Clause of S-21 (1)
under which
alteration is
considered
permissible
54
Brief explanation, how
the alteration is
considered as
permissible
(The above comparative statement can become applicable only in relation to proposed alteration of
object clause).
The following are also required:
o Pattern of shareholding in Form 34.
o Name and address of each of its creditors to whom exceeding Rs. 50,000 is due with the
amount mentioned against each along with their consent to the alteration; and
o Name and address of the persons likely to be affected along with their consent to the
alteration.
ALTERATION OF PLACE CLAUSE [S-21 to S-25]
ABC Ltd. has its registered office in Islamabad. The majority of its directors are foreign nationals.
Due to law and order, it has decided to have registered office in Dubai.
The above proposal is such that which doesn’t fall within the extent defined for the purpose of
alteration of place clause of MOA.
LUCKY CEMENT
Proposal – To produce coal fixed electricity
Existing Clause
Proposed Clause
Justification with
respect to S-21 (1)
[Relevant Clause]
(a) and (b)
To produce, generate,
transmit, consume and
sell coal and fixed
electricity.
55
How Considered
Permissible
Electricity is essential
to operating the plant.
This means electricity
will be cheaper and
will also result in the
availability of other
efficiencies.
DATE: 02/07/2012
COMPANIES ORDINANCE, 1984
Sections 1 to 36
S. No.
1.
2.
3.
4.
Situation
Solution
In a Private Limited Company, AOA restrict the free
transferability of shares. Give an example, how this
requirement may be achieved.
A company having two classes of shareholders
namely ordinary and preference (comprising 75 and
25 percent of capital respectively) had proposed to
vary the rights of preference shareholders and given
21 days notice to all the members for approving the
variation in rights. On the date of meeting, the
attendance (both in person and through proxy) of
two classes was as under:
Ordinary shareholders
61%
Preference shareholders
73%
The resolution proposing the variation was passed by
the majority of 76%, whereas only 24% in the
meeting opposed the variation.
Required:
1) Meaning of variations?
2) Comment whether the variation in rights were
approved of not.
A company is intending to borrow Rs. 50 million from
a bank, having complied with the requirements of
prudential regulations. On examination of its MOA,
the banks find that the same does not contain a
clause for borrowing.
Comment how the query of the bank in this regard
can be resolved.
Borrowing can be:
 Ultra vires to the company; and
 Ultra vires to the directors.
Explain your understanding of the above by giving
examples.
Transfer of shares by any member, or his attorney, in
consequence of death of bankers (?) will require
prior consent of all the members of the company.
Here, since variation in rights (as per AOA) of
preference shareholder is proposed which can be
translated in the form of:
(i) Abrogation;
(ii) Enhancement; and
(iii) Revocation.
Therefore, preference shareholders are effected
clause in the situation.
The query of the bank in this regard can be resolved
through:
(1) Loan, advance, credit from bank / financial
institution; or
(2) Borrowing through issue of redeemable capital
to bank / financial institution come within
“deemed power”.
If ultra vires to the director is also ultra vires to the
company, then this is “personal responsibility”. If
ultra vires to director is intra vires to the company,
then although the transaction will be binding on the
company, the director should be subject to the
consequences as provided in the AOA.
(i)
Concept
Ultra
vires to
the
company
(ii) Ultra
vires to
the
director
56
Meaning
Company has
borrowed a sum
which doesn’t fall
within:
o
Expressed; or
o
Deemed
power.
Borrowing power,
expressed, or
deemed, can be
copied with respect
to overall borrowing
of the company.
Example(s)
Loan from
associated
undertaking.
(2) Loan from
directors.
(1)
Only CEO can
assign the
authority to sign
the agreement
with the bank,
but Mr. A, a nonexecutive
director, can sign
the agreement.
5.
Mr. Ajmal is a member of KSE (Guarantee) Ltd. and
has undertaken a sum in liability clause. On his death,
his membership in the company transferred to his
son, Mr. Aman. Mr. Aman is of the view that he is a
member of the company, but not bound by liability
clause as he personally, did not subscribe the MOA of
the company.
Comment over the point of view of Mr. Aman.
Once MOA is subscribed and registered, then it is
binding on:
(i) Existing member – as he is a subscriber to the
MOA;
(ii) Future member; and
as they respectively
(iii) Legal heirs of the above. have signed the MOA
Therefore, on the basis of the above ‘deeming
provision’ about subscribing the MOA, inter alia,
with respect to the legal heirs of the subscribers, or
subsequent members, Mr. Aman is bound by the
“Liability Clause”.
NOTES FROM STUDY MANUAL OF COMPANIES ORDINANCE, 1984
ARTICLES OF ASSOCIATION (SECTIONS 26-29):
Section 28: Alteration / Addition of Articles: Subject to Ordinance and the conditions contained in
the MOA:
(1) BOD Resolution;
(2) Special Resolution;
(3) Affects substantive rights or liabilities of members, or of a class of members, vote by at least ¾
majority of that number of members, or class, affected by such alteration, personally or by
proxy – copy of resolution on Form 26 along with a copy of MOA & AOA duly amended – file
with the registrar within 15 days of the special resolution.
57
DATE: 03/07/2012
TABLE A OF THE FIRST (1ST) SCHEDULE
Model Articles of
Association
TABLE A OF THE
1ST SCHEDULE
Limited by Shares
Deemed Articles of
Association
Section 31
Additional Set of
Articles of Association
Company prepares own set, but their
Table A of the 1st Schedule
Is Not:
 Excluded; or
 Modified.
What is the case regarding the status of other tables in the 1st Schedule?
Refer to Study Manual of the Companies Ordinance, 1984, as below:
Section 29: Forms of Memorandum and Articles:
Company
Limited by Shares
Limited by Guarantee & not
having Share Capital
Limited by Guarantee & having
Share Capital
Unlimited Company
MOA
MOA & AOA
Table of 1st Schedule
Table B
Table C
MOA & AOA
Table D
MOA & AOA
Table E
Format of
The above formats shall be followed as near, or near thereto, as the circumstances permit.
58
There should be no reason, or grounds, to depart from the requirements as formats of Table B to
Table E by respective companies.
CIRCUMSTANCES DO NOT JUSTIFY FOLLOWING THE FORMATS (?)
Examples:
(1) Every company shall be with separate and distinct name from any other company.
(2) Address and Share Capital would be separate for each company.
Liabilities of Members
is not subject of
Articles of Association
Matter of Memorandum of Association
There is a compulsory requirement to subscribe for right issue (although it is a matter of choice),
because it is provided in the Articles of Association.
Normally, private company will provide, because due to the refusal of existing members, directions
will not have second choice to raise equity.
(1) BOD Resolution;
(2) Written Consent
of Existing Members (100% approval).
Questions:
(1) Whether every subsequent member will also be required to give consent in like manner?
Subsequent member will not be required to give the consent, but still the covenant is binding on
the basis that consent is being given by the predecessor.
(2) What would be the situation if some members are not agreeing over the matter and therefore,
refuse to give the consent?
Whoever gives the consent will be subject to alteration. But, once the dissenting member ceases to
be a member, his successor will be bound.
59
Memorandum of Association (MOA)
Increase in Liability in any Way
Guaranteed Limited Company
Limited Company
Guaranteed amount is being increased
Any member, or a few members,
being declared with unlimited liability.
BOD Resolution
The following are required:
1. Consent of existing member whose liability is being increased is required.
2. If increase in liability in the way to declare unlimited liability and member is also a director,
then special resolution is required.
3. Form – 26 is required.
Proposals
To decrease guaranteed amount
OR
To restore unlimited to limited
The above proposals do not fall within the extent of alteration of liability clause, which must have
been satisfied, inter alia, in order to proceed for any alteration in MOA (S-20).
60
Provisions as Regards to Name
Sections 16, 17 &
18
Section 143
MOA must
provide name of
the Private
Limited Company
Display outside every office +
official documents, contracts,
cheques, etc.
Name
Section 144
Non-compliance about
requirement to write name
on seal, or contract, etc.
Must be engraved
on common seal.
Liability arising on
the documents, on
which name of the
company is not
used, is used in
improper form.
Section 37
Criteria to
decide about
the name of
any company
+ Rule – 51
should also be
followed.
Sections
38, 39 & 40
Procedure
and
situation =
Alteration
of MOA
to change
the name
of the
company.
Personal liability of
concerned officer,
or director
Section 34: Effect of alteration in MOA or AOA:
Notwithstanding anything in the MOA or AOA of the company, no member of the company shall be
bound by an alteration made after the date on which he became a member if and so far as the
alteration requires him to take, or subscribe, more shares than that held by him at the date at
which the alteration is made, or in any way increases his ability as at that date to contribute to the
share capital of, or otherwise to pay money to, the company unless he agrees in writing before, or
after, the alteration.
Section 35: Copies of Memorandum & Articles to be given to members: On the request within 14
days on payment of the prescribed fee. Fees is written in Schedule 1 (for regulatory dealings).
61
Section 36: Alteration of Memorandum or Articles to be noted in every copy: Where an alteration
is made, every copy of MOA or AOA, issued after the date of the alteration, shall conform to the
MOA or AOA, as so altered.
Example:
1.
2.
3.
Party 1
Party 2
Company
Company
Company
SECP
Creditor
Member
ALTERATION OF LIABILITY CLAUSE OF MOA
S-28 stipulates the requirement of, inter alia, resolution of effected class with 3/4th majority, for
the purpose of alteration of AOA, where alteration affect the substantive:


Rights; OR
Liabilities
of the members of the class
But, in fact, the matter of liability of members towards the company, as will be determined with
reference to structure of the company and in accordance with S-298, is the subject matter of
MOA, under the “Liability Clause”.
Facets of Alteration of Liability Clause:
Following two situations can be explored with reference to “Increase in Liability” as provided in S34:
 Increase in guarantee amount in case of company limited by guarantee.
 To render the unlimited liability of any member, or a few members, in case of a company
limited by shares, or limited by guarantee.
It is not possible to render the liability of all members as unlimited, as thereby the company will
become an unlimited company and for the purpose, formalities for fresh registration, within the
meaning of S-109 will be required with certain modifications as compared to original registration.
If any of the above alterations is desired in MOA with corresponding alteration in AOA, then the
Ordinance requires to seek consent of every present member whose liability is being increased.
Once the said alteration, with the consent of members, has been carried out, all the subsequent
62
members will be bound by the said alteration and, therefore, their consent, for the purpose will not
be required.
However, if the increase in liability is to the tune so as to render unlimited liability of any director of
the company, then S-112 requires the following formalities for the purpose:




The matter must be authorized by AOA.
Special resolution must be passed.
Consent of existing director whose liability is being increased, so as to render unlimited.
All subsequent directors must be intimated about the unlimited liability through
inclusion of matter in their proposal.
ALTERATION OF AOA SO AS TO REQUIRE TO TAKE OR
SUBSCRIBE FOR MORE SHARES
Such an alteration can be desired by a private limited company which cannot go to the public and,
therefore, attempts to coerce its members to raise the capital who otherwise could not take, or
subscribe, the shares voluntarily.
S-34 requires the consent of every existing member in order to provide the matter in AOA. Once
the alteration is made, then all subsequent members will be bound by the said alteration.
Ordinance does not provide any other formalities for the purpose.
63
Date: 08/07/2012 (Sunday)
Corporate Laws
Section 37: Prohibition of Certain Names (Refer to page 8 of Study Manual)
Section 37 (1)
Section 37 (2)
Subjective criteria to select the
Name of the Company
If, upon application of
subjective criteria, the
conclusion is to have
the name of sub-section
(2), then prior to
seeking clearance from
the Registrar, SECP
approval is mandatory.
Since it is subjective, therefore,
it is mandatory to take
clearance from the Registrar
= Promoters’ Guide
= Clearance Certificate of
Registrar
= Essential annexure of Form-I
Note:
(1) Going concern cannot tell (or give consent to) any other company to use its name.
(2) If the company is going through winding up, it has the option to offer its name to be used by
another company.
Example:
(i) Nishat Mills Ltd.; OR
(ii) Nishat Co. Ltd.; OR
(iii) New Nishat Mills Ltd.; OR
(iv) New Nishat Co. Ltd.; OR
(v) Nishat International Mills Ltd.
64
Example:
Step 1: Registrar cleared the Name, applied for on 1.1.2012
Step 2: Deadline to file Form-I with above Name, by 31.1.2012, as reservation of Name for 30 days
Step 3: With effect from 1.2.2012, the Name can be allocated to other applicants
Section 37: Prohibition of certain names (Notes from Page 8 of Study Manual):
(i) The incorporation of a company involves several steps. The first step is to seek the availability of
name from the “registrar” which shall be confirmed within 2 days of the application, together
with the prescribed fee {Rule – 5}.
(ii) No company shall be registered by a name which, in the opinion of the SECP, is {as per subsection (1)}:
o Inappropriate;
o Deceptive; or
o Designed to exploit / offend the religious susceptibilities.
(iii) A company shall not registered by a name if {as per sub-section (2)}:
It is identical with a name already on the index of companies;
It has close resemblance with the name of an existing company;
Exception to the above is that where the company in existence is in the course of being
dissolved and signifies its consent in such manner as the registrar requires.
Addition of the words New, Modern, International, Mills, Enterprises, Company, Co.,
etc., are considered insignificant and do not constitute new name {SECP Guideline}.
(iv) Some names need prior approval in writing of SECP, before they can be registered. The names
which contain any words suggesting, or calculated to suggest {as per sub-section (3)}:
 The patronage (i.e. logo) of any past or present, Pakistan or foreign, Head of State;
 Any connection with the Federal Government or a Provincial Government, or any
department, or authority of such Government;
 Any connection with any corporation set up by, or under any Federal / Provincial law;
and
 The patronage of, or any connection with, any foreign Government, or any international
organization.
(v) Whenever a question arises about the violation of Section 37, the decision of the SECP shall be
final {Sub-section (4)}.
65
(vi) CROs cannot allow the word “bank”, or any of its derivatives as part of companies name, unless
prior approval of the SBP is produced as required under section 8 of the Banking Companies
Ordinance, 1962 {Circular 25 of 2003}.
(vii)
Following names are not allowed {as per SECP Guideline}:
 Name that creates a misleading impression about the business activities of a company,
or suggesting a business not undertaken by the company.
 Name containing a country name unless justified.
 Use of the word “The” in the beginning of its name.
(viii)
The name is reserved for 30 days {as per SECP Guideline}.
(ix) Application against refusal of a name by Registrar:
 Review application to Registrar of companies headquarters, Islamabad;
 Accompanied – Reasons + prescribed fee + decision of concerned Registrar + Affidavit.
Change of Name after Incorporation
Procedure (Rectification +
Business Needs)
Reason
(Sections 38 & 39)
(Section 39)
Rectification
about Section 37
Directed by
Registrar
Discovered
by the
company
itself
Business
Needs
COI reflects
company
incorporation
Certificate of
Incorporation (COI)
altered after
change of name
(issued by Registrar
(i) Board of Directors
Resolution.
(ii) Approval from Registrar
for Clearance (SECP
approval also required
under Section 37 (2).
(iii) Special Resolution.
(iv) Filing of Form – 26
within 15 days of
passing resolution.
For 1 year from date of certificate of incorporation altered, old and new name shall be shown on
official documents. On common seal, only new name shall appear.
66
Step 1: On 1.1.2009 – Loan agreement with HBL (5 year loan)
Old name of the company is XYZ Ltd.
Step 2: On 31.12.2011 – Change of name upon issuance of certificate of incorporation altered.
New name of the company is MNO Ltd.
Step 3: MNO Ltd. refused to pay to HBL as MNO Ltd. has no agreement with HBL.
Section 40 has provided protection:(i) To the company – about the rights that where established with the former name.
(ii) To the creditors – about the obligations incurred by the company with its former name.
Whereby whatever is:
o owed to; or
o owed from,
would not be effected only because of change of name.
(Notes from Page 9 of Study Manual)
Section 38: Rectification of name of company:
If the company is in contravention of section 37:
(1) It may change its name with the approval of registrar;
(2) Registrar directs that within 30 days of receipt – it can change its name with the approval of
registrar. Before issuing directions (issued by the Registrar), there is the opportunity of
representation against direction. No direction is issued after expiration of 3 years from the date
of registration of the company, or the registration by its new name, as the case may be.
Section 39: Change of name by a company:
(1) Special resolution + approval of registrar;
(2) Approval not required in case of addition / deletion of (Pvt.) due to conversion of status.
67
Section 40: Registration of change of name & effects thereof:
(1) Registrar enters new name in the register in place of former name and issues a certificate of
incorporation altered – on issue, change of name shall be complete.
(2) For a period of 1 year from the date of issue of the certificate – mention former name along
with new name. The new name shall be outside every office or place where business is carried
on and every notice and document issued by the company. If there is any addition / deletion of
(Pvt) due to conversion, this shall not require any change.
(3) Change of name shall not affect the rights, obligations and legal proceedings of the company.
Section 41: Alteration of names on commencement of Ordinance and change of status of the
company:
It shall be deemed to include Ltd., (Pvt) Ltd., etc.
Section 42
Available Legal Framework for Non-Profit Organizations
(Notes from Page 9 of Study Manual):
Companies
Ordinance,
1984
Every non-profit
organization
[definition to S-42],
which is able to
comply with the
requirements of:
Co-operative
Society Act, 1860
[Personal
liability matter]
Trust Act, 1882
(e.g. Provident
funds) – [Personal
liability matter]
Trade Organization
Ordinance, 2007
Rule 6 for
formation
Non-profit organization
deciding social activities for a
particular industry
Circular 29/2008
for operation
(i) Insurance Association of
Pakistan; and
(ii) Pakistan Hotels Association
Trade organizations are not eligible to be corporatized under the Companies Ordinance, 1984. Prior to the
Circular, trade organizations were also eligible to be corporatized under the Ordinance.
68
DATE: 10/07/2012 (Tuesday)
CASE STUDY IN RELATION TO ALTERATION OF MEMORANDUM OF ASSOCIATION (MOA)
Question:
(1) Mr. A was running the business of leather merchant since the last many years. He recently has
corporatized his business with the name ABC (SMC – Private) Limited. He has established the
registered office, in the province of Sindh.
Required:
(i) State the wording of “liability clause” which might have been appeared in the MOA, keeping in
view the possible structure of the company.
Answer:
Since it is a Single Member Company (SMC), therefore, the “Liability Clause” will be such as is
applicable for a company limited by shares.
Under SMC Rules, 2003:
(Private) Limited
SMC
Limited by Shares
LIABILITY CLAUSE:
Liability of the member is limited to the extent of the amount unpaid on the shares, if any.
Since the concept of SMC evolved under the Companies Ordinance, 1984, after its promulgation,
therefore, there would be no possibility that the SMC is having any liability on account of unpaid shares.
(ii) State the persons who might have signed the application for seeking the certificate of
incorporation.
Answer: The following persons are those who might have signed the application for seeking the
certificate of incorporation:
(I) Director, or secretary, who is named as such in the Articles of Association (Draft).
69
(II) Member of:
o ICAP (Institute of Chartered Accountants of Pakistan); and
o ICMAP (Institute of Cost and Management Accountants of Pakistan)
having license to practice in Pakistan.
(III) Advocate entitled to appear before the courts in Pakistan.
(iii) If the certificate of incorporation issued on 1st January 2011 whereas date of incorporation
mentioned in the certificate of incorporation is 22nd December 2010, then the concept of preincorporation contracts will be applicable in relation to the contracts entered into up till
_________________ (fill in the blank)
Answer:
The concept of pre-incorporation contracts will be applicable in relation to the contracts entered
into up till 21 December 2010, as per the date of incorporation as mentioned in the contract of
incorporation when the company acquires contractual power / capacity.
(iv) State the matter of responsibility in relation to pre-incorporation contracts and the possible
course of action in order to strategize the situation in most suitable way.
Answer:
Matters of Responsibility:
A promoter, who has entered the pre-incorporation contract, is personally responsible to avoid
personal responsibility:
(i) Adoption in Articles of Association;
(ii) Novation;
(iii) Indemnity; and
(iv) Pending finalization.
70
(2) Now, after few years of incorporation, following proposals are in hand:
o To change the name as directed by the Registrar.
o To provide the following additional activities within the object clause:
 To invest surplus funds in stock markets; and
 To place surplus funds with Islamic banks under Morahaba schemes.
o To abandon the existing activity of leather merchant and to start the business of dairy
farming for which radical change of set up is required as the new business cannot be
combined with existing infrastructure.
o To provide for unlimited liability of Mr. A who is sole member and therefore the sole
director of the company.
Required:
(i) The period within which the direction of Registrar might have been received requiring the
rectification of the name and the reasons that might have been used for directing the matter.
Answer:
Period of Direction:
The period within which the direction of Registrar might have been received, requiring the
rectification of name, is within 3 years of:
 Incorporation; or
 Change of name.
Reason for Direction:
Original as change in name is not in line with parameters provided in S-37.
(ii) The deadline up to which the above direction of Registrar is required to be complied with.
Answer:
The above direction of Registrar is required to be complied with within a period of 30 days from the
receipt of the direction.
71
(iii) Checklist of steps required for the purpose of change of name.
Answer:
Step 1. Board of Directors (BOD) resolution is required.
Step 2. Application for SECP to seek approval of name, as suggested by S-37 (2), is required.
Step 3. Application to Registrar (concerned) for seeking clearance over the name proposed in BOD
meeting is required.
Step 4. Notice of member meeting & since this is a ‘special business’ (i.e. change of name),
statement of material facts, is required.
Step 5. Special resolution in members meeting.
Step 6. Filing of Form-26 with Registrar (concerned) within 15 days of passing special resolution.
(iv) The date on which the procedure for change of name shall be completed and any other
formality in relation to the situation.
Answer:
Change of name: The change of name shall be completed with effect from the issue date of the
altered certificate of incorporation.
Other formalities: Other formalities are that from 1 year from the completion of the change of
name, the former name is required to be mentioned along with the new name at the following
places:
o Outside of every business premises; and
o On official documents.
72
(v) Design the comparative statement that should be accompanied with the application addressed
to SECP for seeking confirmation of SECP, over the matter of alteration of MOA, for change of
object clause in relation to providing additional activities and bringing radical changes.
Answer:
COMPARATIVE STATEMENT AS ENCLOSURE (UNDER RULE – 3) OF APPLICATION TO SECP FOR
SEEKING CONFIRMATION ORDER
Existing provision in
MOA
Proposed provision in
MOA
(i)
N/A
To invest surplus funds in
stock markets
(ii)
Same as (i)
To place surplus funds
with Islamic banks under
Morabaha schemes
(investment)
Clause of S-21 on the
basis of which it is
considered that the
proposed business falls
within the scope of
alteration
This additional activity
can conveniently and
advantageously be
combined with the
existing set up.
Same as (i)
Justification on the basis
of which it is concluded
that proposed within the
scope of alteration
Fund management is
considered essential for
every type of business
and usually existing set up
is considered sufficient to
earn the fund
management activity as
well.
Same as (i)
Note:
On the basis of description, the proposed business is compared to existing business, and
furthermore, the provision of the question emphasizes about the requirement of radical change.
It is valid to conclude that proposed business does not fall within the extent of the alteration as
provided in S-21.
Therefore, alteration on this account can’t be provided.
(vi) Discuss the possibility in order to render the liability of Mr. A as unlimited.
Answer:
To render the liability of Mr. A (sole member & sole director) will result in the situation as
applicable to unlimited company. Such a situation can’t proceed through the alteration of MOA, or
for the purpose provided by the Ordinance, there is the problem of fresh registration under Section
109. However, the process of fresh registration, even, can’t serve the purpose, as the SMC is
compulsory required to remain as limited by shares.
73
Operational
Conditions
Non-Profit Organization (NPO) of Section 42 –
Circular
29/2008
Relevant documents to go with corporatization of NPO
Definition of
Non-Profit
Organization
(NPO) as per
Section 42 &
Circular 29/2008
Promoters
Guide
Rule – 6 of the
Companies
Rules, 1985
NPO desiring
corporatization is
first required to
apply for seeking
the license from
SECP
Filing of Form – I
with the Registrar
for seeking
incorporation
certificate –
Section 30.
Procedure for
seeking the
license of the
SECP
In the license, the
SECP may dispense
with the
requirement of the
Ordinance to write
(Guarantee) Limited
at the end of the
name of the
company
ASSOCIATION NOT FOR PROFIT / LIMITED BY GUARANTEE (Notes from Study Manual)
Section 42: Power to dispense with ‘limited’ in the name of charitable & other companies:
Meaning of association not for profit:
(A) Object to Promote
 Commerce;
 Art;
 Science;
 Religion;
 Sports;
 Social Services;
 Charity; or
 Any other useful object.
(B) Application of:
o Profit, if any; or
o Other income
in promoting its objects.
74
(C) To prohibit the payment of
any dividend to its members.
Pre-requisite to form association not for profit with corporatized status:
The association first has to apply for “license” of SECP and then, registration activities be proceeded
with the CRO. Circular 29/2008 provides that such a company will always be a “company limited by
guarantee”.
Procedure to file application with SECP for the purpose of above license (Rule 6):
Application should be made to the SECP by promoters or members or any person authorized by the
association in this behalf. The application shall be accompanied by:
(a) Three copies of draft Memorandum of Association (MOA) and Articles of Association (AOA).
(b) A list of promoters with their occupation and addresses.
(c) A declaration by a person of Rule 4 (2) to the effect that he has scrutinized the application and
accompanying documents, and that he is satisfied that the same are drawn up in conformity
with the Ordinance and fulfill the conditions for the grant of license.
(d) The names of companies, associations and other institutions in which the promoters hold any
office, stating the office held in each case.
(e) If the association is already in existence, a copy of each of the audited balance sheet, income
and expenditure account and the annual report on the working of the association for the
financial year immediately preceding the date of the application.
(f) An estimate of the future annual income and expenditure, specifying the sources of income and
objects of expenditure; and
(g) A brief statement of the work already done by the association, or proposed to be done.
SECP, on being satisfied, as it is in the public interest so to do, may grant the license applied for,
subject to such conditions as it may deem fit to impose. If the conditions so imposed, the same may
be required to be included in the Memorandum of Association (MOA).
While processing a case for grant of license, the Credit Information Bureau (CIB) report of
promoters shall be called from the State Bank of Pakistan (SBP) and the persons whose CIB report
show total overdue amount of exceeding Rs. 300,000, shall not be allowed to act as promoters of
the association.
Conditions for grant of license:
1. At least three subscribers / members. The limit of liability of each member is at least Rs.
100,000. Subscribers can quit on an application to the SECP and will be held responsible and
accountable.
75
2. Undertaking of promoters:
 Sufficient skills, expertise and resources for attainment of the company’s objective.
 Shall contribute a reasonable amount as start-up donation having regard to the
circumstances of the case.
3. Accounts closing on the 30th June of each year.
4. No investment, whatsoever, in associated companies except subject to SECP approval and the
conditions imposed for the purpose.
5. Not to be engaged in industrial or commercial activities, or function as trade organizations. No
trading activity shall be undertaken.
6. They should not exploit, or offend, religious susceptibilities.
7. All letterheads, etc. – e.g. “a company set up under section 42 of the Companies Ordinance,
1984”.
8. Comply with conditions as imposed from time to time.
9. Income / profit utilization for object only and no dividend / bonus / profit to members / family.
10. Receive funds, etc., from foreign source(s) after approval of the relevant public authority. All
funds should be received through the banking channel.
11. Other license may be applicable from public authorities.
Revocation of license:
At any time by SECP, after an opportunity of being heard and upon its revocation, the Registrar shall enter
the word or words “Limited”, “(Private) Limited”, or “(Guarantee)” Limited” (not necessary anymore), as the
case may be, at the end of the name of the association in the register, and the association shall cease to
enjoy the exemptions and privileges granted by the preceding sub-sections.
76
Date: 17/07/2012
(i) Company having Share Capital:
Rights of:
(a) Voting; or
(b) Divisible profits
Dividend
Bonus
Surplus in winding up
(ii) Company not having Share Capital:
= How the interest of members particularly:
Section 160 –
Each member will
have one vote.
Voting
Rights over divisible
profit
To be determined
Normally, this is
written in the
Articles of
Association, or a
resolution.
Memorandum
of Association
(MOA)
or
Articles of
Association
(AOA)
or
Any
resolution
Generally, guaranteed amount is used as a basis to distribute divisible profit.
(iii) Guarantee Limited Company (not having Share Capital):
In Guarantee Limited Company (not having share capital)
Every member is ready to invest in the form of loan similar to lenders of the company
Effective role of both financiers = Same, but divisible profit for members in the capacity of a member
The set of parameters for divisible profits = Attempt to divide undertaking (Profit and Loss Account and
Balance Sheet into interests in shares)
This division in share, or interest, will be called as
provision of Share Capital of the company.
77
If alteration of mechanism is desired – Alteration will be under the procedure as applicable for the
alteration of Share Capital – Section 92.
Changing of Types
Possibilities
Public Limited
Company to
Private Limited
Company
Single Member
Company (SMC)
to Other Private
Company
Other Private
Company to
Single Member
Company (SMC)
Private Company
to Public Company
Section 44 –
SMC Rules, 2003
SMC Rules, 2003
Section 45
Rule 7 of Companies
Rules, 1985
Listing Regulations
30A to 30E
SECP Guideline over the Conversion
What about:
(i) Single Member Company (SMC) to Public Limited Company (PLC);
OR
(ii) Public Limited Company (PLC) to Single Member Company (SMC)
These are not possible.
Two-way procedure (effectively) is to be followed.
Every change of type … will be effectively concluded through alteration of Articles of Association (AOA), as
AOA is defining document over type of a company.
78
Public Company to Private Company
Where Public Limited Company (PLC) is listed
Where Public Limited Company (PLC) is not listed
Listing Regulations (L / R):
Only Public Limited Company (PLC) is allowed
to list its securities on the Stock Exchange
Procedure to be followed in order to apply for voluntary delisting (because, after
conversion … further continuation of listing is not possible).
Delisting
Compulsory
Delisting
Voluntary
Delisting
Board of Directors
(BOD) of Stock
Exchange would
announce the delisting
on the basis of certain
non-compliance of
Listing Regulations,
including with the
reason for
commencement of
winding up.
Company will apply
for delisting with the
procedure of Rule –
30A to 30E.
To proceed over voluntary
delisting
If Board of Directors
(BOD) of Stock
Exchange agrees.
Prohibit = Invitation
BOD Resolution(s)
To propose to members for:
(i) Voluntary Delisting; and
(ii) Alteration of AOA as to provide:
79
Limit of Members = 50
Restrictive = Transfer of
shares, if any
Purchase by spouses approved by: (i) Stock Exchange; and
(ii) Members through Special Resolution.
Appointment of: (i) Commercial Bank; or
(ii) Investment Bank; or
(iii) Member of Stock Exchange
As purchase agent
on 1.1.2010
(Say) announcement of offer period from 1.3.2012 to 30.4.2012 (or as fined by Stock Exchange).
If closing date is 30.4.2012, then validity date of irrevocable guarantee on behalf of sponsors.
15.5.2012
OR
Whichever of them is earlier
Date of entire purchase
All have not accepted the offer, therefore, the guarantee continued till 15.5.2012.
= How long dissenting shareholders will be entitled to surrender the shares, if delisting is allowed
= With effect from 16.5.2012
= Upto period specified by the Stock Exchange (normally, 1 year from delisting).
Single Member Company (SMC)
(i) Always limited by shares;
(ii) Will have 1 member;
(iii) Number of members = 1 (as per Articles of Association);
(iv) Above “single member” will have entire share capital of the company in its own name;
(v) Above single member will always be a natural person;
(vi) Above single member shall be a SOLE DIRECTOR of the company; and
(vii) But, following:
(a) Nominations are mandatory:
(1) Nominee Director
will work in the absence of (including the death of) the sole director.
(2) Alternate Nominee Director
will work in the absence of (including the death of) the
nominee director. This nomination is to be done through filing of prescribed form with the Registrar.
80
(b) Appointment is mandatory
Company Secretary
Section – 205:
Within 10 days of change of the particulars,
notify the change to the company
(i) Chief Executive;
(ii) Director;
(iii) Managing Agent;
(iv) Chief Accountant (CFO);
(v) Company Secretary;
(vi) Auditors; and
(vii) Legal Advisors
Within 10 days of the appointment – Notify his
prescribed particulars to the company
Particulars like:
(i) Address; or
(ii) Inclusion of partners in the audit firm
ROLE OF COMPANY
(i) Provide particulars, or changes, therein, in … Register of Directors, or Officers; and
(ii) File information, or change, therein, to the Registrar on Form – 29.
The above are to be done within 14 days of:
(a) Appointment; or
(b) Change.
NOTES FROM STUDY MANUAL OF COMPANIES ORDINANCE, 1984
Section 43: Provisions as to companies limited by guarantee:
In the case of a Guarantee limited company, that does not have Share Capital, every provision in
the Memorandum of Association (MOA), or Articles of Association (AOA) / resolution purporting to
give any person a right to participate in the divisible profits of the company, otherwise than as a
member, shall be void.
Every provision in the MOA / AOA / resolution purporting to divide the undertaking of company in
shares, or interests, shall be treated as a provision for a share capital, notwithstanding that the
nominal amount, or the number of shares, or interests, is not specified thereby.
81
PROVISIONS RELATING TO CONVERSION OF PUBLIC TO PRIVATE / LESS THAN MINIMUM MEMBER
Section 44: Conversion of public company into private:
Prior approval of SECP subject to conditions imposed.
Refer to Rule 7, Listing Regulations 30A – 30E & SECP Guideline.
Checklists of steps involved:
1. Board of Directors (BOD) resolution.
2. If the company is listed, then the proceeding will be required to convert the listed Public Limited
Company (PLC) to unlisted PLC. The proceedings in this regard will be as follows:
i) BOD decision to purchase shares without any discrimination by sponsors / majority
shareholders.
ii) Immediate communication of decisions to stock exchange along with the prescribed fee,
providing the indicative purchase price. The indicative purchase price shall not be lower
than the higher of the following:
 Current market price (on the date of the intimation of BOD decision).
 Average market price (annualized).
 Intrinsic value per share (estimated net realizable value of the assets of the company /
number of shares).
 Earning multiplier approach (Price Earnings Ratio * Earnings per Share) [for profitable
companies].
 Maximum purchase price of sponsors, in the open market, in the preceding one year.
iii) Board of Directors of stock exchange may prescribe the indicative price, as above, or any
other price at which sponsors should purchase.
iv) If the application is accepted by the stock exchange and sponsors agreed thereto, members’
special resolution is required for the purpose.
v) After special resolution, sponsors shall submit formal application for the purpose along with
the following:
 Copy of special resolution & minutes.
 List of shareholders.
 Undertaking being an irrevocable open offer from purchasing agent (commercial bank,
investment bank, member of stock exchange) on behalf of majority shareholder to
purchase for at least 60 days, or as fixed by the stock exchange. The purchase agent will
provide a bank guarantee with an amount, at such format as determined by the stock
exchange, to secure the obligation and the said bank guarantee will remain valid till at
least 15 days from the expiry date of the said open offer, or when all outstanding
securities have been purchased by the majority security holders, whichever is earlier.
82
3.
4.
5.
6.
 Undertaking that shares will even be purchased where de-listing allowed, up to a
specified time.
Filing of Form – 26 with the Registrar.
Apply to SECP within 60 days of special resolution on Form – 2 (Rule 7).
SECP shall file an order with the Registrar and the Registrar shall issue a certificate.
Further formalities, as regards reducing the number of members to 50, may be applicable.
83
DATE: 26/07/2012
[Notes from Register]
Section – 204A: Single Member Company (SMC) will always have Company Secretary (CS).
Other Private Company
Single Member Company (SMC)
Other Private Company
other than Public Limited
Company (PLC)
Voluntary
New shares being
issued to a person
other than a Single
Member
OR
By Implication
Death of a Single
Member and
legal heirs are
more than 1
Part shareholder of
Single Member
Company, being
transferred to other
than Single Member
Company
Single Member
pledged his shares with
lenders and due to
default for repayment
lenders (more than
one enforced the
security)
Under Section 305: Circumstances in which the Court can order for compulsory winding up
Out of circumstances
One of the situations – Single Member ceases to be a member [i.e. No legal heir of Single Member]
84
Private Company (Articles of Association)
i.
ii.
Restrictive transfer of shares
Prohibition for inviting subscription from
Public Limited Company (PLC)
Public Limited Company [PLC] (Articles of
Association)
Missing
Missing
(Because of being a PLC)
How Promoters / Sponsors / Directors / Members will acknowledge in the PLC about:
(i) Free transferability of shares; and
(ii) Availability of right to invite subscription from a Public Limited Company (PLC).
Demonstrating a document to acknowledge about the above matters (right) in writing
Statement in Lieu of
Prospectus [= Private
Placed PLC]
o
o
Prospectus
General
Public
o
o
Part – 2, 2nd Schedule;
Prepared and filed with
the Registrar before the
first allotment.
Present
ABC Ltd
ABC (SMC-Pvt) Ltd
ABC (Pvt) Ltd
ABC (Pvt) Ltd
Existing rights
and
obligations
(with former
name) are
protected, but
process of
‘novation’ is
desired.
Part – 1, 2nd Schedule;
Prepared and issued and
filed with the Registrar
before allotment to the
general public
Proposed
ABC (Pvt) Ltd
ABC (Pvt) Ltd
ABC (SMC-Pvt) Ltd
ABC Ltd
This shall not be considered as a change of name
Change of type – Proceedings sufficient to provide
the effect in Change of Name accordingly
= No separate formalities for Change of Name [Section 39 – Not Applicable]
85
Generally
Placed PLC
Section 242 = Privileges include non-filing of audited accounts with the Registrar by a Private
Company within 30 days of the above, where the paid-up capital is up to Rs. 7.5 million.
ABC (Pvt) Ltd has a paid-up capital of Rs. 2 million
Auditors – Point out
Requirement of filing of audited accounts applicable --- Reason: Company might have violated all,
or any, condition of Section 2 (1) (28) thereby.
The Private Company will be considered at par with regards to formalities applicable, under the
Ordinance, on a Public Limited Company (PLC).
Generally, such a Private Company is called a “DEEMED PLC”.
Due to the applicability of Section 46, Types of Companies under the Ordinance are:
(i) Private Company;
(ii) Public Limited Company (PLC); and
(iii) Deemed PLC [Company can’t be formed as a Deemed PLC, nor would the circumstances render
the title as such].
Private = 2
Section 15: Minimum number of members
Public Limited
Company (PLC) = 3
ABC (Pvt) Ltd was incorporated on 1.1.2011, with 2 members.
It borrowed Rs. 10 million on this date. Due to the death of one of the members on 1.2.2011, now
the company, from this date onwards, with 1 member.
Add: Borrowings:
1.4.2011 --- Rs. 5,000
1.9.2011 --- Rs. 1,000
 There is no repayment during the year for any borrowing.
 Year End = 31.12.2011. Point of concern is at 31.12.2011, for audits due to other private
company with 1 member.
86
 Position of minimum number of members should have been restored by 1.8.2011 (6 months
time limit is allowed for the purpose of regularization).
 Because of the situations and consequences --- Lifting of Veil
On remaining or surviving member, for Rs. 10 million (Liability contracted after 6 months of
continuing with less than the minimum number of members)
Defence: Not cognizant
Normally:
(i) Member not being director; and
(ii) Member being director, but a Non-Executive Director (NED).
CONVERSION OF SINGLE MEMBER COMPANY (SMC) TO OTHER PRIVATE COMPANY – SECP
GUIDELINE + SMC RULES, 2003
[Notes from the Study Manual of the Companies Ordinance, 1984
This is the matter to provide for:
1) Alteration of Articles of Association (AOA) through a Special Resolution.
2) Transfer of shares to another member, or members.
3) Appointment of additional director.
1)
Transfer of shares
2)
Special Resolution
- Articles of Association
(AOA) alteration for
change
Appoint Additional
Director
File Form – 29
3)
Transfer OR Allotment
Death (where no
winding up)
Under operation of
law
Decision of Directors
[Sole Director : Single
Member]
Nominee director shall
transfer in the name of
legal heirs within 7 days of
death
Within 30 days of transfer
Within 30 days of transfer
Transfer within 7 days of
the order of the Court
[Note: The single member
can only be a mutual
person]
Within 30 days of transfer
Within 15 days of Special
Within 15 days of Special
Within 15 days of Special
Resolution
Resolution
Resolution
4)
Within 14 days of
Within 14 days of
Within 14 days of
Appointment
Appointment
Appointment
5) Notice of conversion to
Within 60 days of Special
Within 60 days of Special
Within 60 days of Special
Registrar on Section 2
Resolution
Resolution
Resolution
Person on becoming member --- shall pass Special Resolution and file Form – 26 within 15 days of Special Resolution
+ Appoint Additional Directors
87
CONVERSION OF OTHER PRIVATE COMPANY TO SINGLE MEMBER COMPANY (SMC) – SECP
GUIDELINE + SMC RULES, 2003
1)
2)
3)
4)
5)
6)
7)
BOD Resolution;
Special Resolution for alteration of the Articles of Association (AOA);
Application to SECP on Section 4 within 30 days of the Special Resolution;
SECP approval --- Information + Satisfaction;
Transfer of shares to Single Member within 15 days of SECP approval;
Notify change in BOD on Form – 29 within 14 days of transfer [i.e. resignation of directors];
SECP’s order (certified) + Section 5 + nomination of nominee director (Section 1) with Registrar
– within 15 days.
Section 45: Prospectus or Statement in Lieu of Prospectus to be filed by private company ceasing
to be a private company:
The company shall file, with the Registrar, within 14 days of alteration of the Articles of Association
(AOA). It ceases to be a private company as on the date of alteration.
Registrar shall issue filing certificate and certificate of conversion.
CONVERSION OF PRIVATE COMPANY INTO A PUBLIC LIMITED COMPANY (PLC):
1) BOD resolution;
2) Special resolution deleting from its Articles of Association (AOA), the statutory restrictions
which are essential for a Private Company, which are as follows:
RESTRICTIONS ON A PRIVATE COMPANY:
(i) Restriction on transfer of shares;
(ii) Limits the number of its members to 50, not including those in the employment of the company; etc.
3) Filing of special resolution on Form – 26 within 15 days + copy of all Articles of Association
(AOA);
4) Filing of “Prospectus” OR “Statement in Lieu of Prospectus” within 14 days;
5) Fulfillment of requirement with respect to:
i. Minimum number of members;
ii. Form – 3 (i.e. return of allotment); and
iii. Minimum number of directors.
88
6) Become a Public Limited Company (PLC) from the date of alteration, i.e. date of Special
Resolution;
7) No separate formalities required for deletion of “(PVT)”
8) Due to change, the “CONSTITUTION” & the “LEGAL ENTITY” are not affected. Thus, the legal
proceedings instituted by its former name may be continued by its new name.
Section 46: Consequences of default in complying with conditions constituting a company as a
private company:
It ceases to enjoy privileges & exemptions conferred on a Private Company by the Ordinance.
Unless it is proved accidental, or due to inadvertence – On the application of a company, SECP may
consider (it good) to grant relief to the company from such circumstances.
Section 47: Liability for carrying on business with less than three, or in case of a private company,
two members:
It carries on business for more than 6 months – willfully and knowingly, every member cognizant of
the fact shall be severally liable for all liabilities contracted after 6 months. This section is not
applicable to the Single Member Company (SMC).
Grounds of Defence: Not cognizant of the fact that it is carrying on business with fewer than 2, or 3,
members.
89
DATE: 02/08/2012
PROCEDURE & MANNER OF COMMUNICATION
Communication
with the Company
Communication
with the Registrar
Communication
with:
(i) Head of
Registrar;
(ii) SECP; and
(iii) Stock Exchange
Section 48
Section 49 + Rules
Rules
Communication
by the Company
with the
Members
Communication
by the Company
with the
Creditors
Section 50 +
Circulars + Rules
Rules
Section 48: Service of documents on company or office thereof [Notes from Study Manual]:
Documents may be served at the registered office by certificate of posting, or by registered post, or
leaving it at Registered Office.
[Notes from Register]:
Communication with the Company
May be title
With the name
of the
company
OR
Addressed to:Registered Office
90
With the name
and designation
of officer thereof
Mode of Service of Documents on Company or Office Thereof:
(1) Registered post;
(2) Certificate of posting; and
(3) Personal delivery at registered office (Courier is considered as included here).
E-mail is not a valid mode to communicate with the company under the Ordinance.
Section 49: Service of documents on register/to Registrar [Notes from Study Manual]:
The documents shall be served at the office of the Registrar by registered post / hand delivery, or
leaving it for him against acknowledgement.
Mode of Service of Documents on Register/to Registrar [Notes from Register]:
(1) Registered post; and
(2) Personal delivery (Courier is considered as included here)
Acknowledgement has
to be obtained
It has to be
addressed to CRO
Section 50: Service of notice to members [Notes from Study Manual]:
Notice may be served to members either personally or by post, only to those having their registered
address(es) in Pakistan. If the registered address is not in Pakistan, the newspaper advertisement circulating
in the Province, or the part of Pakistan not forming part of a Province, in which the registered office of the
company is situated. If the service of notice to members is done by post, then this is deemed to be effected
if it is properly addressed, prepaid and posted. Unless there is evidence to the contrary, then the service of
notice to members shall be (deemed to be) effected at the time when it is delivered in the ordinary course of
post. A listed company, in addition to the aforesaid, must advertise the notice to members in at least one
issue each of a daily newspaper in English language and a daily newspaper in Urdu language, circulating in
the province of Stock Exchange.
A notice may be given by the company to the joint-holders of a share by giving the notice to the joint-holder
named first in the register in respect of the share.
Notice of general meeting shall be given to every member, to every person entitled to a share in the
consequence of the death or insolvency of a member and to auditors.
Refer to:
(1) Rules 8, 9, 10, 27, 28, 30, 32 and 33;
(2) Circular 2 of 2001;
(3) Circular 5 of 2002;
(4) Circular 4 of 1999;
(5) Circular 2 of 2000;
(6) Circular 2 of 2002;
(7) Circular 1 of 2008; and
(8) Circular 10 of 2012.
91
Mode of Communication with Members [Notes from Register]:
Titled with
(2) Post
1st Named
member where
joint holders
Name of
member
(1) Personal delivery
Ordinary Post (Certificate of Posting)
Registered Post
Addressed to
(3) Courier service (Circular 18 / 2000)
Registered
Address of
Member
OR
Communication
address in
Pakistan, where
the registered
address of
members is not
in Pakistan
Section 147: Register of Members and Index [Notes from Register]:
Registered Address of Member
= Address of Member as per Register of Members, is required to be maintained at Registered Office
by any company
In case the Registered Address is at a place outside Pakistan
then, the member is allowed
to provide communication address for any place in Pakistan at which the company will address the
communication.
Section 50: Service of notice to members [Notes from Register]:
Where the communication address of Pakistan is not provided
&
Registered address is that of outside Pakistan
92
Then, the company will
address, to the member,
through publication in a
newspaper having
circulation in the province
of the registered office.
If more than one member is with a registered address outside Pakistan
Whether separate publication for every member
General publication for
addressing all the members
with registered address
outside Pakistan
OR
Specific address publication
for every member having
address outside Pakistan
Both are acceptable
If the following conditions, or parameters, are satisfied, then the communication shall be
considered as effected, even though the addressee has not been received, or has not been read.
(1) Communication is addressed to:
(i) Registered address in Pakistan; or
(ii) Communication address in Pakistan.
(2) Prescribed postage charges, or other charges (e.g. courier charges) have been paid for the
purpose.
(3) Communication should actually have been delivered for the course of post (i.e. by post).
Example:





AGM’s notice days = 21 days.
(Say) AGM is on 22.1.2012.
Company dispatched notice of meeting on 1.1.2012.
Notice of meeting started reaching (i.e. being received by) the members from 5.1.2012 onwards.
Still, the company has fulfilled 21 days requirement as the Date of Dispatch = Date of
Communication.
93
Person Entitled to Receive Notice of General Meetings
(1) Every member.
(2) Person entitled in consequence of death of the member – the fact is known to the company.
Nominee of member = Table A
Next of kin = Entitled to attend, but the voting power is with the member.
(3) Auditors
(Code of Corporate Governance)
=
Auditor being
Engagement partner
OR
Any other partner of the firm,
as nominated by the firm, in
the absence of the
engagement partner
They will attend the AGM and be
obliged to respond to queries
raised over accounts, or audit.
Standardization of Publication of Notices of General Meeting in Newspaper by a Listed Company
(1) Circular 4 of 1999:
(i) Morning newspaper, being:
o Known;
o Common; and
be selected
o Widely circulated
(ii) If the company is listed on all Stock Exchanges in Pakistan
Country-wide circulation.
Morning newspaper +
(2) Circular 2 of 2000
Publication should be done at / on conspicuous places in
newspaper, rather than classified pages.
94
(3) Circular 2 of 2001
Notice of meeting, simultaneous to dispatch to members, should
be sent to the SECP, through fax on the same day.
(4) Circular 5 of 2002
Newspaper cutting of publication should be sent to the SECP
within 7 days of publication.
Circular 10 of 2012:
Sending through e-mail at general.meetings@secp.gov.pk is also acceptable.
Scanned copy of publication can be sent through the e-mail at the above address, but in the
situation above {i.e. (4) above}, 7 days limit of publication is reduced to 3 days.
(5) Circular 1 of 2008 …
(i) English newspaper publication = English language; and
(ii) Urdu newspaper publication = Urdu language.
95
Date: 09/08/2012
Summary of Relevant Rules of Companies (General Provisions and Forms) Rules,
1985, in Relation to “Communication” (Handout)
S. No.
Rule Reference
1.
8
Title of Rule
Requirement / Procedure
2.
9 & 33
3.
9A – 9G
Permissibility of submission to SECP /
Registrar electronically [see notes later on]
4.
10
Circulation of reports and notices by
companies to members, debenture holders
or creditors
5.
27
Translation of documents being filed with
the Registrar, not in English or Urdu
language [see notes later on]
6.
28
Signing and authentication of application,
documents, etc. [see notes later on]
7.
30
Mode of submission of application, etc. to
Registrar, SECP or Federal Government
8.
32
Requirement of cc
Completion date of submission with SECP
and Registrar [see notes later on]
Mode of submission to SECP / Stock
Exchange
96
The day on which submission is received by (not
dispatched) by the offices of SECP or Registrar
At their headquarters by registered post, or by
delivery either in person, or through an agent, against
an acknowledgement of receipt. [Ordinary post is not
acceptable]

Optional.

Enclosures of electronic filing may also be filed
electronically

Authentication of electronic filing by affixing
electronic signature, or advanced electronic
signature – Password is assigned.

Scanned copy of additional documents may also
be filed.

Personal delivery against an acknowledgement.

Registered post.

Certificate of posting.

Courier.
The document must be accompanied with translation
thereof, either in English or Urdu language. The said
translation must be accompanied with an
authentication by an affidavit of any person having, in
the opinion of the Registrar, an adequate knowledge
of the language of the original and of English or Urdu,
as the case may be. [Section 452]

If being filed by, or on behalf of, the company =
“responsible officer”.

Individual = by such individual.
Federal Government, SECP or Registrar, as the case
may be, may require such documentary proof with
reference to status, designation or entitlement of the
person or individual making or authenticating.

Duly signed and verified by an affidavit, with
name and address of responsible officer.

Neatly and legibly written, typed or printed and
setting out the facts, grounds and claims or relief
applied and specify the provisions of the
Ordinance under which action of relief is applied
for.

Documents referred / relied in application be
accompanied. If appeal, then decision’s certified
copy be also enclosed.

One spare copy, duly signed, with complete
enclosures.

Original bank challan.
Submission with
Cc
Federal Government
SECP and Registrar
concerned
SECP / Head of
Registrar concerned
Registrar
The fact of cc must also be stated in the application.
Notes from Register
S. No. 1: Completion date of submission with SECP and Registrar:
Memorandum of Association (MOA) alteration for Object Clause
Special Resolution … date – 1.3.2012
Submission of application with SECP for seeking SECP confirmation over the alteration --- 60 days
deadline to submit
Application’s dispatch to SECP
by 60 days
OR
Application dispatch in such a way
that SECP office has been received
in 60 days
S. No. 3: Permissibility of submission to SECP / Registrar electronically:
6th Schedule
= Fee for filing of documents with:
(i) Registrar; and
(ii) SECP
Concessional rates are
provided, if filed electronically
S. No. 5: Translation of documents being filed with the Registrar, not in English or Urdu language:
Section 452:
Company incorporated outside Pakistan, having a place of business in Pakistan (branch) = certain
filing requirements of documents of the company by the branch.
It may not be in
Urdu / English.
In the Companies Ordinance, 1984, the purpose and the place, i.e. branch, is the subject of the
Ordinance as a Foreign Company.
97
S. No. 6:
Having vested authority
under the Ordinance
Chief Executive or Managing Agent
Responsible officer
Any other officer as
authorized by the Company
Director – Circular 7 / 2004
Company Secretary
Irrespective of the Format of the Form
Directors are entitled to sign
Form – 26
Rule – 30 = to be used when there
would be any filing under the
Ordinance with SECP
---- Sd ---(Chief Executive / Company Secretary)
Common Seal:
(1)
(2)
(3)
(4)
Section 89 – Share certificates;
Section 162 – Form of proxy;
Section 212 – Power to some to execute deed on behalf of the company; and
Section 213 – Authorization to someone to used official seal abroad.
Notes from Study Manual
Section 51: Authentication of Documents and Proceedings:
The documents and proceedings should be signed by Chief Executive / Directors / Secretary / Other
Authorized Officer. Definition of “Officer” – Refer to Section 2 (sub-section 1) {clause 24}
Refer to Circular 7 of 2004.
98
Study Manual: page 115:
NBFC – Required Coverage
Document
Relevance of Document


(1) Section 282
Extent of Coverage
Concept of NBFC;
Basis of power of SECP to introduce:
(i) NBFC Rules, 2003 SROs
+Circulars +
Amendments


(2) NBFC Rules, 2003
(3) NBFC Regulations, 2008


(ii) NBFC Rules, 2008
Procedure for formation of NBFC; and
Conditions applicable to NBFC for starting
operation / remaining in operation.
Formation of Notified Entities; and
Operation (Business) parameters, or
procedures for:
o NBFC; and
o Notified Entity
Complete, except for the
matter of penalty
Complete as amended
Regulation 25
+ Schedule 11
+ Schedule 9
Section 282A (a):
NBFC – Definition:
COMPANIES Licensed by SECP to carry out one, or more, of the following forms of business:
Section 2 (1) (7)
= Formation
under the
Companies
Ordinance, 1984
(i) Leasing;
(ii) Investment Finance Services (IFS) {Investment Bank};
(iii) House Finance Services (HFS);
(iv) Venture Capital Investment;
(v) Discounting Services (DS);
(vi) Investment Advisory Services;
(vii) Asset Management Services; and
(viii)
Such other forms of business as the Federal Government may
notify for the purpose.
SRO 1072 / 2007
SRO 1073 / 2007
= Private Equity or Venture Capital
Fund (VCF) Management Services
99
= Real Estate Investment Trust
(REIT) Management Services
Through Private Equity or Venture Capital Fund (VCF) Regulation, 2008, Venture Capital Investment
Management Services is no longer an acceptable form of business for NBFCs with effect from
10/2/2010.
Question: What about the case of an existing NBFC doing business of Venture Capital Investment
Services (e.g. TRG PAK)?
Answer: Within a transitional period as defined in the Regulation, the business should be converted
into Private Equity or VCF Management Services in the manner as provided in the Regulation.
NEXT CLASS:
PAKISTAN INDEPENDENCE DAY – TUESDAY, 14TH AUGUST FROM 11:30 AM – 1:00 PM
100
Date: 14/08/2012
Concept of Notified Entity [Section 282A (b)]
Certain activities of a Non-Banking Finance Company (NBFC), within the defined business, are
required to take separate status than from NBFC (separation of risk) and such separate status will
be subject to defined management by relative NBFC in order to take the remaining beneficial
position from that activity.
Such a separate status entity (in fact business segment, otherwise)
Notified Entity
Definition under section 282A (b):
Such:





Companies;
Class of companies;
Corporations;
Trusts; and
Such other person, or entity
Which the Federal
Government may
provide for the purpose
of this clause
Form of
Separate
Status of
Notified Entity
So Far Announced Notified Entity
Notified Entity
(i) Open-End Mutual Fund
(ii) Closed-End Mutual Fund
(iii) Investment Company
(iv) Real Estate Investment
Trust (REIT)
(v) Private Equity and Venture
Capital Fund (VCF)
Shape of Separate Status
Trust
Trust
Company Under Companies
Ordinance, 1984
Trust
Trust
101
Related NBFC
Asset Management Company
Asset Management Company
Asset Management Company
Real Estate Management
Company (RMC)
Fund Management Company
(FMC)
4 STEPS APPROACH TO HANDLE AN NBFC
STEP # 1:
Apply to SECP to form an NBFC through the submission of:
(i) Feasibility Study;
(ii) Prescribed form & Prescribed fee;
(iii) Checklist of “Fit and Proper Criteria” [Schedule 9 of NBFC Regulations, 2008] of each of:
a. Promoters;
b. Major shareholders (10% common voting power);
c. Director; and
d. Chief Executive.
NBFC = “Ab-initio” (at the beginning) formation
= Alteration of Memorandum of Association (MOA) to give effect to undertake the business as NBFC is not
possible.
STEP # 2:
Formation of Public Limited Company (PLC) within 6 months of availability of SECP permission.
STEP # 3:
Licensing for each of the businesses from the SECP through submission of prescribed application and
prescribed fee.
Rules for Licensing:
(i) Separate tier (or bracket) of Equity must be satisfied for each of the license applied.
Note: “At licensing” = throughout the life
S. No.
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
Business
Leasing
IFS [Investment Finance Service]
HFS [Housing Finance Service]
VCI [Venture Capital Investment]
DS [Discount Service]
AMS [Asset Management Service]
IAS [Investment Advisory Service]
REIT [Real Estate Investment Trust]
Private Equity or VCF [Venture Capital Fund]
102
Minimum Tier of Equity
(Rs. million)
700
1,000
700
No longer
Not defined
200
30
50
30
Example:
ABC Ltd = applying for license for:
(i) Leasing; and
(ii) IFS
= Minimum Equity = 1,700 million
What is Equity?
(1)
(2)
(3)
(4)
(5)
It Includes
Paid-up capital +
Reserves +
Sub-ordinated loan +
Accumulated profits –
Accumulated losses
(1)
(2)
(3)
(4)
It Excludes
Deferred Tax Reserve +
Revaluation Surplus +
Treasury Stock +
Redeemable Preference Shares
Sub-Ordinated Loan:
Loans:
o Given; or
o Arranged
by sponsors of NBFC
Free of cost of an NBFC
In order to enable NBFC to
meet Minimum Equity
Requirements
(ii) Minimum Equity at licensing of RMC and FMC will be in the form of Paid-up Capital.
During operation:
(1) FMC is still required to satisfy Rs. 30 million requirements in the form of Paid-up Capital.
(2) RMC – Required to raise equity to Rs. 200 million, on or before the launch of the 1st Real Estate
Investment Trust (REIT), out of which paid-up capital is at least Rs. 50 million.
(iii) License applied for IFS is also valid for DS. Separate license for DS is not required.
(iv) Following licenses (each of them) will not be eligible for any other license, within the same company.
(a) IAS [Investment Advisory Services]; or AMS [Asset Management Services]; or Both.
(b) RMC; and
(c) FMC.
At least formation of 4 companies as NBFC where there is the desire to undertake all NBFC businesses.
103
STEP # 4:
Operations (including Formation of Notified Entity) under NBFC & Notified Entity Regulations, 2008.
Regulation 25 +
Schedule XI
And Schedule IX
Investment Finance Service (IFS) [Handout]
(1) Money Market Activities:
 Issue Cash Premium (CP) / Cash on Deposit (COD) of maturity not less than 30 days.
 Discount CP / promissory notes.
 Trade in CP / Government security / promissory notes.
 Assist in issue of CP.
(2) Capital Market Activities:
Invest in listed security.
Professional analysis of portfolios.
Underwriting public issue.
Private placement of public issue.
Portfolio management.
Margin loan.
(3) Project Finance Activities:
 To provide finance for project through:
Underwriting
of issues
Term
Finance
Certificates
(TFC)
Participation
Term
Certificates
(PTC)
 Guarantee / counter guarantee, financing
 Open Letter of Credits (LCs).
104
(4) Corporate finance (Advisory) Services:
 Adviser / agent – in / for loan;
 Adviser for:
Corporate &
Financial
Restructuring
Mergers
Acquisitions
Divestures
(5) General Services (specified by SECP):
(a) Safe deposit; and
(b) Collection agents.
NEXT CLASS: After Eid-ul-Fitr holidays – The 1st Sunday after Eid from 8:30 am to 10:30 am
DATE: 26/08/2012
Other Mode = NBFC & Notified Entities Regulations, 2008 = Consumer Lease
ABC Ltd. approached Orix Leasing
Mortgage Lawn
OR
Working Capital Loan
OR
Advance against Lease
Which of the above financing is acceptable for Orix Leasing to undertake?
Operating Lease
Since
Finance Lease
Consumer Lease
Permissible as it is covered under the
definition of Lease, therefore, the
preparatory steps, Management, including
Advance against Lease is also considered
permissible.
105
Mortgage Loan
+ Working Capital Loan
It can’t be accounted for, as covered under
the definition of Lease.
It is not permissible to undertake
Commercial Paper = unsecured promissory note having maturity
Not less than 30 days
Not more than 1 year
To raise finance
From private
investors
General public
OR
After compliance with Commercial Paper (CP)
Guidelines, issued by SECP
Certificate of Deposit (COD) = Dedicated and specifically designed debt instrument for:
o Leasing Company;
o Housing Finance Company (HFC); and
o Investment Finance Company (IFC)
To raise finance from
General Public
&
Institutional Investors
in line with procedure defined in NBFC’s and Notified Entities Regulations, 2008.
Margin Loan
Loan to finance purchase of securities
Against security of the securities whose purchase is being financed
106
The portion of purchase price that is being financed by customer and that would not be less than 30% of purchase
price, is called “Margin”.
In order to have financing arrangement with Discounting Company, there must be an existence of
Financial Instruments as a base for the purpose.
ABC Ltd. approached XYZ Discounting House Ltd. to discount Taxes Receivable as appearing on
Balance Sheet of 30.6.2012.
The security there-against is the plan of the company.
Taxes Receivable is not a Financial Instrument, therefore, financing there-against from Discounting
Company is Not Permissible.
Determining factor to have license of Investment Advisory Services (IAS) for portfolio
Management and related services rather than Investment Finance Services (IFS) license:
1) Size of Equity being Rs. 30 is much lesser than as required for IFS – Rs. 1,000.
2) If, additionally, activities of Asset Management Services (AMS) are desired, then the license of
AMS can be combined with IAS and not with IFS.
Investment Company
Engaged in buying and selling of securities
Clients (in the
capacity of brokers)
Own
Under NBFCs & Notified Entity Regulations, 2008
Asset Management Company (AMC) and Investment Company
They are required to have
Managing Agent Agreement.
Regulations 2008
CE Mutual Fund Certificate is compulsorily listed on any Stock Exchange in Pakistan
= If investor wants to get back his money, then in the absence of the possibility of asking Asset
Management Company (AMC) for the proposal, will sell in the Stock Exchange.
107
Asset Management Company (AMC)
= Management of Collective Investment Schedules
In the form of
Managing Agent
In the form of
Constitution
Investment Company
Open-End
Mutual Fund
Closed-End
Mutual Fund
Question: Are all the above status mandatory at all times?
Answer:
No. Any Asset Management Company (AMC) may be confined to a particular activity, rather than all
the activities.
Question: How many notified entities can be launched with the single license of Asset Management
Company (AMC)?
Answer:
There is no limit.
INVESTMENT FINANCE SERVICE (HANDOUT)
(1) Money Market Activities:
 Issue Commercial Paper (CP) / Certificate of Deposit (COD) of maturity not less than 30 days.
 Discount CP / promissory notes.
 Trade in CP / Government security / promissory notes.
 Assist in issue of CP.
(2) Capital Market Activities:
 Invest in listed security.
 Professional analysis of portfolios.
 Underwriting public issue.
108
 Private placement of public issue.
 Portfolio management.
 Margin Loan.
(3) Project Finance Activities:
 To provide finance for project through:
Underwriting
of issues
Term Finance
Certificates
(TFC)
Participation
Term Certificates
(PTC)
 Guarantee / counter guarantee, financing
 Open Letter of Credits (LCs).
(4) Corporate finance (Advisory) Services:
 Adviser / agent – in / for loan.
 Adviser for:
Corporate &
financial
restructuring
Mergers
Acquisitions
Divestures
(5) General Services (specified by SECP):
(a) Safe deposit; and
(b) Collection agents.
109
NBFC – PERMISSIBLE BUSINESSES (HANDOUT)
S. No.
1.
PERMISSIBLE
BUSINESS
Leasing
2.
Investment
Finance Services
(IFS)
3.
Housing Finance
Services (HFS)
4.
Discounting
Services (DS)
5.
Investment
Advisory Services
(IAS)
DEFINITION OF PERMISSIBLE BUSINESS
RELATED NBFC
Leasing includes financial services provided on:
o Operating lease; OR in accordance with applicable IAS
o Finance Lease basis
OR, any other mode determined by the SECP from time to time.
Include:
o Money Market Activities;
o Capital Market Activities;
o Project Finance Activities;
o Corporate Finance Services; and
o General services as specified by SECP through NOG.
Means:
o The loan provided to INDIVIDUALS;
o For the purchase of:
including the facilities availed for
 Residential House; or
the purpose of making
 Apartment; or
improvements in home /
 Land
apartment / land.
Leasing company.
Means:
o The services relating to the discounting of Financial
Instruments.
Means the services provided for:
Managing
Discounting House.
DISCRETIONARY
PORTFOLIOS
Individual +
Institutional
Clients
NON-DISCRETIONARY
PORTFOLIOS

Portfolio of securities
managed by an NBFC.

Portfolio of securities
managed by an NBFC

Under an agreement
entered into with a
client on a duly
notarized stamp paper
of applicable value; and
Whereby investment
decisions are made and
executed by the NBFC
on behalf of its client.

Under an agreement
entered into with a client
on a duly notarized
stamp paper of
applicable value; and
Whereby investment
decisions are executed
by the NBFC on written
instructions of the client.


And include the business of advising others:
As to the value of securities; OR
As to the advisability of investing in, purchasing or selling of
securities, for remuneration.
110
Investment Bank.
Housing Finance
Company.
Investment Advisory
Company.
6.
Asset
Management
Services (AMS)
Means the services provided for management of:
COLLECTIVE INVESTMENT SCHEMES
Means
A Closed End
Fund
An Open End
Scheme
AND
Means:
Means
o
OR
An Investment
Company:
A Closed End Scheme:
o
Means:
A Company
registered with
the SECP under
the Ordinance in
accordance with
such criteria as
may be specified
by the SECP
through Notice
on Gazette.




A Scheme
constituted by
way of Trust.
To raise funds
through issue of
certificates to the
public.
For investing in
securities
including money
market
instruments for a
definite or
indefinite period.
But, which
doesn’t
continuously offer
certificates
entitling the
holder of such
certificates to
receive, on
demand, his
proportionate
share of net
assets of the
closed end
scheme.
111
o
A scheme
constituted by
way of Trust.
That
continuously
offers for sale
its units as
specified in the
constitutive
documents.
That entitles
the holder of
such units on
demand to
receive his
proportionate
share of the
net assets of
the scheme
less any
applicable
charges.
7.
REIT Management
Services
Means the REIT management services provided by a RMC for the
management of a REIT scheme in accordance with these
Regulations.
REIT scheme means, a REIT which is a closed End Scheme
launched by the RMC and Regulated under these Regulations
and includes:
 Development or Rental REIT Scheme: Investment for
construction / refurbishment for sale.
 Hybrid Rental REIT Scheme: Investment in commercial /
residential – For rental.
RMC: means an REIT
management
company licensed by
SECP as an NBFC to
launch REIT scheme
and provide REIT
Management
Services.
Exclusive Object:
= Launch REIT
Scheme and REIT
Management
Services
50 million paid up,
be raised before
public offer, to Rs.
200 million.
8.
Private Equity &
VCF Management
Services
Means the Management and Administration of the Fund
Closed-End Trust Structure
Strategy to Operate = As per Constitution document
FMC: means the
Fund management
company licensed by
SECP as an NBFC to
launch the fund and
provide Private
Equity (PE) &
Venture Capital (VC)
Fund Management
Services with respect
to it:
Exclusive
Object
Repealing
matter of
VCC.
30 million paid up
112
DATE: 02/09/2012
NOTES FROM NOTEBOOK
Asset Management Company (AMC)
= Asset Management Service (AMS)
Management of Collective Investment Schedule
Management in
the form of
Managing Agent
Management in
the capacity of
the Constitution
Management of
Closed-End Fund
(CEF)
Investment
Company
Open-End Mutual
Fund
Closed-End
Scheme (CES)
Buying and selling of
securities
Shares
Open-End Scheme
(OES)
Companies
Ordinance, 1984
Trust
[Closed-End
Mutual Fund]
Investment in the form
of units
Trust
= Continuous offer;
= Continuous reduction
No continuous
offering; and
No Redemption
but Voting
Rights
Investment in
the Certificate
Buying and selling of
secondary including
Money Market
Institution
One-time offering =
No point of
Redemption
113
Real-Estate Management Company (RMC)
Fund Management Company (FMC)
Trust
Development
REIT Scheme
Rental REIT
Scheme
Trust
Private Equity & Venture
Capital Fund (VCF)
Hybrid REIT
Scheme
Joint Venture (JV)
Operation
Investment in
Real Estate for
Sale (Capital Gain)
Investment in
Real Estate for
earning of
Rental Income
Both
features
As per constitution
document
Schedule – IX of NBFC & Notified Entities Regulations, 2008 = Fit & Proper Criteria Perpetual in Nature
For seeking permission to
form a NBFC
(i)
(ii)
(iii)
(iv)
To remain in operation
as a NBFC
Promoter and Major Shareholder;
Proposed Director;
Proposed Chairman; and
Proposed Chief Executive
(i)
(ii)
(iii)
(iv)
(v)
Fit & Proper criteria be
satisfied
114
Promoter and Major Shareholder;
Director;
Chairman;
Chief Executive; and
Key Executive
KEY EXECUTIVE
It includes:
(1) Chief Executive and person next to Chief Executive, including Chief Operating Officer (COO);
(2) Chief Financial Officer (CFO), Head of Finance and Accounts;
(3) Head of Internal Audit;
(4) Head of Credit Risk Management;
(5) Head of IT;
(6) Head of Research;
(7) Head of Human Resources (HR);
(8) Head of Operation;
(9) Head of Marketing;
(10) Head of Legal, Company Secretary or Compliance Officer;
(11) Head of Treasury or Chief Investment Officer;
(12) Fund Manager;
(13) Investment Analyst;
(14) Any other functional responsibility which the SECP may include for the purpose.
Fit & Proper Criteria points under Schedule-IX are indicative. SECP can also consider other points on
this account.
Annexure – A:
Checklist of Fit & Proper Criteria is divided into 4 heading and points therein:
(a)
(b)
(c)
(d)
Integrity & Track Record;
Financial Soundness;
Competency & Capability;
Conflict of Interest
115
Pension Fund = Voluntary Pension Scheme (VPS)
Launched by: Fund Manager
Approved by SECP to act
as such with the status of:
Open-End Scheme
(OES)
Under Voluntary Pension
System Rules, 2005, and
approach by SECP
Insurance
Company
OR
THE NON-BANKING FINANCE COMPANIES
(ESTABLISHMENT AND REGULATION) RULES, 2003
NBFC [Section 2 (xxxiii)]
As defined in Section 282 A.
ELIGIBILITY CRITERIA FOR THE ESTABLISHMEN OF A NBFC (Section 3):
Each of the promoters and major shareholders (who are persons having 10% or more voting rights),
proposed director, Chief Executive, Chairman fulfills the terms and conditions mentioned in the fit
and proper criteria as may be specified by SECP.
PERMISSION TO FORM A NBFC (Section 4):
1. Application on prescribed form + relevant documents + Non-Refundable processing fee.
2. SECP satisfied that Rule 3 if OK
Permission to establish NBFC.
3. Validity of permission
6 months (Extension of 3 months)
Promoters shall get the NBFC as incorporated Public Limited Company (PLC), or any other form of
company, as may be specified.
116
CONDITIONS FOR GRANT OF LICENCE (Section 5):
1. Separate applications on prescribed form to SECP for different forms of business under section
282 A of Companies Ordinance, 1984 + Non-refundable fee for each license.
2. License applied for Investment Advisory Services (IAS), or Asset Management Services (AMS), or
both --- Not eligible for any other license. SECP may issue license to AMS to manage only
Closed-End Fund (CEF).
3. AMS shall be eligible subject to specified criteria to undertake pension fund scheme.
4. License applied for Investment Finance Service (IFS) / Leasing / Housing Finance Service (HFS) /
Discounting Service (DS) / all shall not be eligible for other business. License for IFS are also valid
for DS and therefore, separate license not required.
Grant of License
5. SECP satisfied:
in prescribed
Conditions under Rule 3 are fulfilled; and
form for one or
Promoters are persons of means and integrity having knowledge of matters
more businesses.
NBFC AND NOTIFIED ENTITIES REGULATIONS, 2008
SCHEDULE – IX
FIT AND PROPER CRITERIA
Application and Scope:
(1) The Fit and Proper Criteria is applicable to the following persons:
(i) Promoters and major shareholders of the NBFC.
(ii) Directors of the NBFC.
(iii) Chief Executive of the NBFC.
(iv) Key Executives of the NBFC.
(2) A proposed Director or Chief Executive shall not assume the charge of office until their
appointment has been approved by SECP, for the purpose of approval …. Application
(Annexure-A) and Affidavit (Annexure-B).
(3) Appointment of Key Executives doesn’t require the approval, but the NBFC shall ensure at the
time of appointing that the person qualifies the Fit and Proper criteria.
(4) Fit and proper criteria are perpetual in nature.
(5) All persons subject to Fit and Proper Criteria must submit any change in the submitted
information through the Company Secretary of the NBFC to the SECP.
(6) The fitness and propriety shall be assessed by taking into account all the relevant factors,
including but not limited to the following:
[continued on the next page]
117
(a) Integrity and Track Record:
Not considered, if he:
(i)
(ii)
(iii)
(iv)
has been convicted of an offence, involving moral turpitude.
has been involved in mismanagement of investments, financial or business conduct, fraud, etc.
has been subject to adverse findings by the SECP / other regulatory; or
has been actively involved in the management of a company / firm, whose registration / license has been revoked /
cancelled, or which has gone into liquidation / similar proceedings due to mismanagement / financial misconduct /
malpractices.
(v) is ineligible under Ordinance / other legislation or regulation, from acting as a director / serving in managerial
capacity of NBFC / company.
(vi) has entered into a plea bargain arrangement with the National Accountability Bureau (NAB); and
(vii) in case of promoters or major shareholders of NBFC
does not have the requisite disclosed and verifiable
financial resources.
It does not have established and proven track record of successfully running a business enterprise for 3 to
5 years, preferably a public listed company.
(b) Financial Soundness:
In determining a person’s financial soundness, the following shall be considered:
(i) Availability of a person’s financial statement / record, including wealth statements, or Income Tax Returns /
assessment orders.
(ii) Default in repayment of loan to a financial institution exceeding Rs. 1 million as declared by a Court of competent
jurisdiction.
(iii) Overdue / default as per latest Credit Information Bureau (CIB) report.
(iv) Pending application for adjudication as an insolvent.
(v) Un-discharged insolvent; and
(vi) Defaulter as declared by a Stock Exchange.
(c) Competence and Capability:
In determining a person’s competence and capability, the following shall be considered:
(i) Individuals (Directors) having management or business experience of at least 5 years at a senior level.
(ii) Directors experience in profession such as banking, Certified Information System (CIS), accounting, law, internal
audit, or IT, etc.
(iii) Chief Executive …. Minimum 7 to 10 years experience in a senior management position, preferably in regulated
financial services.
(iv) Chief Executive …. It should have demonstrated, through his qualification and experience, the capacity to
successfully undertake the cognate responsibilities of the position; and
(v) Key Executives …. Qualified professionals possessing relevant experience and certification relating to the job /
assignment.
(vi) Key Executives …. Qualified professionals possessing relevant experience and certification relating to the job /
assignment.
118
(d) Conflict of Interest:
The Director, or Chief Executive, of NBFC shall not:
(i) Director in any other NBFC engaged in similar business in Pakistan (not for nominee of Federal Government /
Provincial Government).
(ii) Director, Chief Executive (CE), Chief Financial Officer (CFO), Certified Internal Audit (CIA), Research Analyst (by
whatever name / designation called) in a stock brokerage house or in any company or entity owned and
controlled by a member of Stock Exchange; and
(iii) Member of Stock Exchange in the business of brokerage, or is a spouse of such member, or in control of more
than 20% shareholding, directly or indirectly through his close relatives.
(iv) Key executives
No heading for more than one function area (important) / No directorship in client of
NBFC / other Financial Institution (FI).
CONDITIONS APPLICABLE TO NBFC
For NBFC
Conditions of License:
Rule 5 of NBFC Rules, 2003
DATE: 04/09/2012
Conditions of Operation
Notified Entity is
not covered here.
Conditions to maintain &
remain with license
Only
NBFC
Rule – 7 of NBFC
Rules, 2003
NBFC & Notified
Entity
NBFC & Notified
Entity Rules,
2008
Operations shall be in line with,
otherwise license can be
revoked.
Out of Scope of Syllabus
Except Regulation 25 + Schedule XI + Schedule IX
Only for NBFC
119
Grays Group
Gray Leasing – Group Company being NBFC
They decided to form another NBFC of Leasing License
They can’t form a new company with license of Leasing as part of group already holding the same
license
Chief Executive:
(i) Directors;
(ii) Managing Agent;
(iii) Managing Director (MD); and
(iv) Chairman
Asset Management Company (AMC) # 1 …. Manage Investment Company # 1
Asset Management Company (AMC) # 2 …. Manage Investment Company # 2
Chief Executive of AMC No. 1 is allowed to take the position in Investment Company # 1
As Investment Company # 1 is managed by the same NBFC
In case of NBFC, whether listed or not, the following appointments are mandatory:
(1) Compliance officer = Not provided;
(2) Internal Auditor (IA) / MBA (Finance) / CA (Chartered Accountant), CMA (Cost & Management
Accountant), Receiver of Foreign Qualification in Accounting / CISA (Certified Internal Systems
Auditor);
Outsourcing
CA firm
Satisfactory QCA not being external audit of the NBFC
(3) Chief Financial Officer (CFO) is the same as above, except CISA.
120
Independent Director for the purpose to mean a person:
With NBFC
OR
(i) Who is not connected
With Promoters as
Directors of NBFC
On the basis of family relationship
(i) The person must not be a family member of:
o Directors; or
o Promoters
(ii) The person must not be a connected person of NBFC.
NBFC
(ii) Who is not having other relationship whether
Associated Company of NBFC
Pecuniary
OR
with
Otherwise
Related portion of NBFC
Directors and Key Executives
The test of independence desired from the fact that whether the person capable to exercise
independent judgment without being subservient to any external form of interference.
The ultimate decision of independence will be of the SECP, which will be final.
(1) If a person doesn’t fall in (i) or (ii) above
(2) If a person falls in (i) or (ii) above …
Independence is confirmed.
Apply …. Criteria of Decision Making
Decision making without External Influence
= Independent decision-making with external influence; and
= Not independent.
121
Study Manual of the Companies Ordinance, 1984
THE NON-BANKING FINANCE COMPANIES
(ESTABLISHMENT AND REGULATION) RULES, 2003 (continued)
CONDITIONS FOR GRANT OF LICENSE (SECTION 5) [continued]:
Subject to the following conditions:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
Incorporated as Public Limited Company (PLC), or such other form as specified.
Not part of group of companies already holding the license for the same form of business.
Minimum equity has specified by SECP.
Allotment to promoters
At least 25%
Shareholding of company’s promoters, or majority shareholders and directors have deposited
their shares with a Central Depository Company (CDC) in an account marked as blocked, to be
kept unencumbered and sale / transfer only after SECP approval.
Promoters / Majority shareholders & Directors undertaking
No sale / transfer of shares
except with SECP’s prior approval.
Appointment of Chief Executive (CE) who does not hold such office in any other company,
except for an investment company being managed by the said company, subject to prior
approval of SECP.
Company’s undertaking
No change in Memorandum of Association (MOA) [other than
an increase in Authorized Capital] & BOD without SECP prior approval.
Company’s undertaking
Conditions of these rules, the regulations and Prudential
Regulations or directions of SECP shall be complied with.
Undertaking that within 90 days of grant of registration, it shall furnish evidence to the
satisfaction of SECP that personnel employed by it for executive positions / research / other
related functions possesses sufficient educational qualifications & professional experience to
undertake proper form of business.
6. SECP may give conditions.
7. Renewal application on prescribed Form (at least one month before)
prescribed fee.
8. Renewal on prescribed form for 3 years + conditions may be imposed.
Valid for 3 years +
COMMENCEMENT OF OPERATIONS BY NBFC (Rule 6):
1. License issued + compliance with Rules and Regulations.
2. Subsequent to License
SECP may impose conditions in the public interest.
122
3. If a NBFC fails to commence business within 1 year of issuance of license, the license shall be
deemed to be cancelled or otherwise as specified by SECP in Notice on Gazette (NOG).
[However, as per Section 282 C (5), the provisions of the Rules, the Regulations and the
Ordinance shall continue to apply even if the license has expired, or license or registration of
NBFC / Notified Entity has been cancelled or suspended)
CONDITIONS APPLICABLE TO A NBFC (SECTION 7):
SHALL:
1. Book of Accounts – True & Fair for 10 years.
2. Statutory auditors’ appointment from the approved list of auditors as circulated by SECP.
3. Financial or chief accounting officer as Internal Auditor (IA) – Chartered Accountant (CA) / Cost
and Management Accountant (CMA) / Member of recognized foreign accounting organization /
Master in Communication / MBA (Finance) + Certified Internal Systems Auditor (CISA) for
Internal Auditor + 3 years experience. Internal Auditor outsourcing allowed to CA firm having
satisfactory QCR and not being the statutory auditors.
4. Compliance officer to ensure reporting to the SECP.
5. 1/3rd director be independent + 2 directors (excluding Chief Executive) 5 years relevant senior
management level experience in financial sector.
6. Accounts – Section 234 compliance (IASs) + Technical Releases (TRs) of ICAP.
7. Quarter + Half-Yearly + Annual accounts to SECP.
8. Disclose in Accounts (interim and final) – All facilities > 20% of its equity.
9. Follow directions to protect against involvement in money laundering & other unlawful trades.
10. Get credit rating, subject to annual renewal, for publication in accounts, etc.
11. Membership of relevant association and code thereof be followed.
12. Compliance with minimum equity requirement.
SHALL NOT:
1. Appoint as directors persons who hold such office in any other NBFC of same form of business.
This is not applicable on nominees of Federal Government / Provincial Government, or as
specified by SECP.
2. Appoint / change – Chief Executive (CE) / Director without SECP approval. This is not applicable
on nominees of Federal Government / Provincial Government.
3. (Important) Purchase / Sell with director / officer / employee / 10% shareholder (individually or
in concert with relatives) unless approved policy by Board of Directors (BOD). For directors,
prior approval of BOD, excluding the beneficiary director, is essential.
123
4. Merger / Acquisition / Takeover / Transfer controlling shares unless SECP approval is obtained.
5. Make investment in subsidiary except surplus equity (over and above minimum equity).
6. Per broker transaction = 10% of total brokerage expense. No common director / officer /
employee with broker.
7. Remove record to outside Pakistan unless SECP approval is obtained.
8. Make investment in unquoted shares in excess of 20% of its equity (excluding surplus equity
invested in wholly owned subsidiary for undertaking a form of business) + Approval in BOD
meeting + Decision to SECP within 14 days along with the Minutes.
9. Hold / deal / trade in real estate, except for own use, or as specified by SECP.
10. Provide unsecured facilities unless specified by SECP.
11. Raise funds from individuals unless specified by SECP.
12. Offer shares for other than cash. No loan / advance against own shares.
13. Encumber, etc., client’s assets for securing own obligation.
14. Undertake brokerage business except where separate company is formed. But, where the NBFC
has the license of Investment Finance Service (IFS), SECP may grant the permission, subject to
such terms and conditions as the SECP may impose, to undertake brokerage business without
forming a separate company.
DATE: 09/09/2012
Notes from Notebook
NBFCs (continued)
Connected person can’t be independent director of a NBFC
Question: Who is a connected person?
Answer: The exact definition of a “connected person” can be memorized from NBFC Rules, 2003.
(i) Director or officer of Investment Company managed by NBFC (Asset Management Company –
AMC).
ABC AMC
Managed XYZ Investment Company
Director
OR
Connected person of ABC AMC
124
Officer
(ii) Person beneficially having, directly or indirectly, 10% or more of the capital of the NBFC.
(iii) Person having, directly or indirectly, 10% or more voting power of NBFC.
Nominee Director, by virtue of Shareholder, 10% or more, will not be termed as an independent
director.
ABC Leasing Co. Ltd. – 30.6.2012
Lessee
A
B
C
D
E
F
Net Investment in
Finance Lease (in
millions)
200
80
20
500
100
100
Equity
% of Exposure over
Equity
1000
1000
1000
1000
1000
1000
20% [200 / 1000]
8% [80 / 1000]
2% [20 / 1000]
50% [500 / 1000]
10% [100 / 1000]
10% [100 / 1000]
It should be disclosed in the Notes + Particulars of Facilities
Exposure is over 20% of Equity
Conditions Applicable to a NBFC (Further Notes on Notes from Study Manual of Companies
Ordinance)
SHALL (continued):
Point # 9: Follow directions to protect against involvement in money laundering & other unlawful
trades:
Note: “Money laundering” is the process of converting black money to white money.
Directions to avoid money laundering:
(1) All Receipts and Payments in excess of Rs. 50,000 should be a crossed cheque.
(2) All dealings with the customers should be through their names. [Dealings should not be done
with / through a fictitious name – you have to get your customer form filled, to know about the
credentials of the customer, so that the customer is the same with whom one is dealing].
125
Point # 10: Get credit rating, subject to annual renewal, for publication in accounts, etc.:
Credit Rating – On annual basis advertised.
Point # 11: Membership of relevant association and code thereof be followed:
(1) Leasing Association of Pakistan (LAP) = Leasing Companies.
(2) Mutual Fund Association of Pakistan (MuFAP) = AMC (Asset Management Company).
(i) Mr. Salman … Chief Executive (CE) of NBFC can’t be a Chief Executive or Director of any other:
NBFC
Company
OR
Same form
Other form
Exception
Engagement, as such, is Managed Investment Company + SECP prior approval.
(ii) Mr. Aslam … Director of NBFC (Leasing Company)
Existing Engagements
Director of
Glaxo
No ineligibility
OR
Director of
Orix Leasing
OR
Ineligible
Same form of business
… existing engagement
Director of AB
AMC Co.
No ineligibility
Not eligible to have directorship
126
In the above, Mr. Aslam already has directorship of Orix Leasing by virtue of:
(a) Nomination for Federal Company; or
(b) Nomination for Orix Tokyo.
Required: Which of the nominations would result in establishing his qualifications to have
directorship in NBFC (Leasing Company)?
Answer:
If existing engagement in such form is due to Nomination of Federal Government
Then, it shall not be considered ineligible for directorship of NBFC (Leasing Company) of existing
engagement in same form.
Investment Finance Service (IFS) … Equity = Rs. 1500 million; Surplus Equity = Rs. 500 million
Question:
If you want to form a subsidiary, what is the Maximum Amount that can be invested in the
subsidiary?
Answer:
Rs. 500 million is the maximum amount that can be invested in the subsidiary.
Shall not:
If NBFC desires to undertake Brokerage Service, separate company can be formed.
Not yet declared as a Notified Entity
127
Question: Which NBFC will undertake Brokerage Service?
Answer:
Brokerage Service
Investment Finance
Service (IFS)
Investment Advisory
Service (IAS)
As part of Past Management
They have to form a separate company
However, it is allowed to undertake without separate company if applied to the SECP and the SECP
agrees to undertake without separate company & subject to conditions imposed.
POSSIBLE SUBSIDIARIES
Brokerage House of:
Investment Finance Service (IFS);
Investment Advisory Service (IAS)
Subsidiary
OR
AMC in order to launch
Closed-End Fund (CEF)
[Investment Company]
Wholly-owned subsidiary
OR
Brokerage expense is possible for:
o Investment Finance Service (IFS); and
o Investment Advisory Service (IAS)
When a separate company has not been formed, rather a
panel of brokers has been maintained to serve the purpose.
128
Brokers
Brokerage Expense for the
% of Total Brokerage Expense
Year
for the Year
100
10%
150
15%
Violation of
50
5%
limit of 10%
120
12%
80
8%
100
10%
100
10%
100
10%
100
10%
100
10%
1000
100%
A
B
C
D
E
F
G
H
I
J
Total
DATE: 11/09/2012
The Non-Banking Finance Companies [NBFC] (Establishment and Regulation) Rules, 2003
Conditions Applicable to a NBFC {Section 7}
SHALL NOT (continued):
Point # 8: Make investment in unquoted shares in excess of 20% of its equity (excluding surplus
equity invested in wholly owned subsidiary for undertaking a form of business) + Approval in BOD
meeting + Decision to SECP within 14 days along with the Minutes:
NBFC has been allowed to temporarily park their idle funds in:
(i) Shares;
(ii) Bank Accounts; and
(iii) Other investment schemes
But, the said deployment shall not be beyond a fixed limit.
In certain situations, investment is considered as essential business under the license.
Investment Finance Service (IFS) = Shares
Capital Market
Project Finance
Asset Management Company (AMC) = Investment Company’s Equity
Investment Advisory Service (IAS) = Brokerage House
129
Real Estate Management Company (RMC) + Fund Management Company (FMC) = Real-Estate
Investment Trust (REIT) or Private Equity Venture Capital Fund (VCF)
IGI Investment Bank Ltd
Investing in shares of Crescent Ujala Textile Ltd.
(Unlisted PLC … in order to provide Equity Finance for Expansion Plan)
 Equity of IGI Investment Bank = 1,500 million
 Maximum amount of investment in shares of Crescent Ujala Textile Ltd. = ?
1,500 x 20% = Rs. 300 (million)
In the above, if IGI has already invested un unquoted shares of Noor Textile Mills Ltd. which
amounts to Rs. 200 million
Maximum Amount of Investment in changed scenario in the shares of Crescent Ujala Textile Ltd.:
Maximum Investment Permissible in Unquoted Shares
300 million
Less: Already invested
(200 million)
100 million
Whenever NBFC is calculating 20% limit for investment in unquoted shares
Amount already invested in unquoted WHOLLY OWNED SUBSIDARY would not affect the amount
arrived at due to the application of 20% funds.
FORMED TO UNDERTAKE A BUSINESS
IGI Investment Bank Ltd.
Equity … Rs. 1,500 million
Brokerage House (corporatized & formed to undertake Brokerage Business)
IGI Finance Securities Ltd.
Wholly-Owned Subsidiary
“Unquoted”
Subsidiary
Maximum Investment for the purpose that IGI Investment Bank can explore
= Say, IGI invested Rs. 300 million;
Surplus Equity = Rs. 500 million
130
Current Proposal
= Project Financing of Alpha Ltd.: Rs. 400 million through subscribing of its further issue
Alpha Ltd. is unquoted.
Maximum Investment in
Unquoted = 1,500 x 20%
Less: Already invested in
unquoted
Remaining limit to invest in
unquoted
IGI Finex Wholly Owned
300
IGI Finex is Not Wholly Owned
300
---
(300)
300
0
Point # 9: Hold / deal / trade in real estate, except for own use, or as specified by SECP:
Specified by SECP
Real-Estate Management Company (RMC) is allowed to deal in Real Estate as per REIT Regulations,
2008.
Point # 11: Raise funds from individuals unless specified by SECP:
(1) Subordinated Loan (Sponsors / Directors);
(2) Certificate of Investment (COI) and Certificate of Deposits (COD):
o Leasing;
o Housing Finance Services (HFS); and
o Investment Finance Services (IFS) are allowed to be issued to individuals.
Point # 12: Offer shares for other than cash. No loan / advance against own shares:
ABC HFC (Housing Finance Company) --- Considering Housing Loan to Mr. A of Rs. 1,000 million
Listed Company
Besides Mortgage on Finance
Security includes pledge of shares of ABC HFC
131
Point # 13: Encumber, etc., client’s assets for securing own obligation:
In the above point (i.e. Point # 12), Mr. A has pledged shares of Unilever
Under Repurchase Option (REPO)
= Shares title now
= ABC Housing Finance Company (HFC)
ABC HFC is now deciding to raise loan through pledge of the above shares
Every NBFC dealing in Foreign Currency in the form having
Foreign Currency
Assets
Foreign Currency
Liabilities
Not yet defined?
(1) Leasing
+ Investment Finance Service (IFS)
+ Housing Finance Company (HFC)
They are allowed to issue
Certificate of Deposits (CODs)
outside Pakistan
They must have adequate hedge cover
to ground against adverse movement
of Foreign Currency.
(2) Investment Finance Service’s (IFS)
Letter of Credit
132
Date: 16/09/2012
Regulation 25 + Schedule II
Classification
Facility’s overdue amount
Core Business Receivables



For example, Listing Regulation Receivables;
Investment in Term Finance Certificates (TFCs) by Investment Finance Company
(IFC); and
Housing Loan Receivable.
Provisioning
“Provision for Bad Debts” due to overdue situation
TIME=BASED PROVISION
Since the number of days
overdue is the criteria to
Determine
Classification
Calculate
Provision
Risk Based Provision
Provision is:
Under International Accounting Standards (IAS)
Accounts
800
Time-Based
500
Further
300
IAS-39
Risk-Based Provisioning still be assessed
IAS’s Provision (800) is
higher than Schedule XI
Provision (500)
IAS’s Provision is
lower than Schedule
XI Provision
133
Time-Based
provision will be
provided and RiskBased provision
assessed
PROCEDURE TO:
 CLASSIFY; and
 TO PROVIDE
A FACILITY
(Based on the Number of Days Overdue)
International Money Finance Co. Ltd. disbursed Rs. 10 million to Mr. S on 1.1.2012.
First installment is due on 30.6.2012
Rs. 1 million
Number of days overdue
Today is 30.6.2012
0
30.9.2012
Substandard
91
31.12.2012
Doubtful
182
CLASSIFICATION
(i) SUBSTANDARD
(iii) DOUBTFUL
(iv) LOSS
Number of days overdue of:
o Principal;
Of any
o
Interest; or
o
Both
installment
in more
than one
installment
PROVISION % ON
OUTSTANDING
PRINCIPAL OF
FACILITY
90 days or more
180 days or more
1 year or more
25%
50%
100%
TREATMENT OF INTEREST
Interest Receivable on 1st classification =
Reversal of income and credit the same to
Surplus A/C
9
Dr Income A/C
xxx
months
CR Suspense A/C xxx
(i)
30.9.2012
After 1st Classification …
to
The interest of ensuing
period should directly
31.12.2012
be credited to Surplus A/C
On 31st December … 2 installments outstanding
each Rs. 5 million
o
1st installment due on 30.6.2012; and
o
2nd installment due on 30.9.2012
FIFO will be used to calculate the Number of
days overdue.
If Subsequent Recovery in Cash,
Dr Suspense A/C
xxx
Cr Income A/C xxx
The installments not yet due, i.e. for periods
after 31.12.2013
(ii)
Rs. 25 million = 10 + 25
35 x 50%
134
SCENARIO BASED – NBFC
Question:
During the course of operations, besides other exposures, provided finance of Rs. 500 million to
ABC Cement Limited, in order to finance one of the projects, in the form of redeemable capital.
The repayment schedule is as follows:
(Rs. in million)
Date
1.7.2009
30.9.2009
31.12.2009
31.03.2010
30.06.2010
30.09.2010
Installment
Principal
Interest
112.50
110.00
107.50
105.00
102.50
100
100
100
100
100
12.5
10.0
7.5
5.0
2.5
Outstanding
500
400
300
200
100
0
After having payment of 3 installments, borrower defaulted in repayment of remaining
installments. For the purpose of following accounts:



Half-yearly accounts for the period ended 31st December 2010.
Quarterly accounts for the period ended 31st March 2011.
Annual accounts for the year ended 30th June 2011.
Your advice is sought in relation to following matters:
(i) Classification of facility for the purpose of time-based provisioning.
(ii) Treatment of outstanding principal and interest for each of the above accounts.
(iii) Change in answer, where default is in relation to interest and principal has duly been paid off.
Above facility is rescheduled on 30th June 2011. At rescheduling outstanding interest of Rs. 7.5
million and penalty of Rs. 10 million (cumulative under financing agreement) waived off and
outstanding principal of Rs. 200 million treated as disbursement of fresh financing. Repayment
schedule of rescheduled facility is as follows:
(Rs. in million)
Date
30.06.2011
30.09.2011
31.12.2011
31.03.2012
30.06.2012
Installment
Principal
Interest
55.00
53.75
52.50
51.25
50
50
50
50
5.00
3.75
2.50
1.25
135
Outstanding
200
150
100
50
0
Because of above rescheduling, your advice is sought in relation to the following:
(i) Possibility to reverse the provision on 30.6.2011, if any, because of rescheduling.
(ii) Requirement of further provisioning, if party again defaults in repayment even in relation to 1 st
installment. Further provisioning is required to be calculated for quarterly accounts of
30.9.2011 and half-yearly accounts of 31.12.2011.
Ignore the matter of collaterals, for any provision, under the
situation.
Answer:
DATE
Outstanding
Facility
Amount
(Principal)
Classification of Facility
Substandard
31-122010
31-032011
30-062011
Doubtful
Loss
Provision
Interest
For the
Period
To Date
200
200
50
100
200
200
0
100
100
200
200
200
150
50
Taken as of 30.9.2010
150
Reversal of
Income
A/C
Note:
Interest
Receivable
at
30.9.2010
amounting
to Rs. 7.5
million is
taken as
having
already
been
credited to
Suspense
A/C
through
Debit to
Income
A/C
200
It is Principal Overdue
OR
Interest Overdue
OR
Both
It is being used to classify, therefore, there will be no matter of
change as regards to classification, but effectively there will be no
calculation of provision due to absence of PRINCIPAL
OUTSTANDING OF THE FACILITY
Therefore, the usefulness of classification is restricted to the
extent to treat the interest accordingly.
136
Direct Credit
to Surplus
Interest of
the period
subsequent
to 1st
classification,
i.e.
substandard
not provided
in the
situation
Whether Collateral Can Be Deducted Against Outstanding Principal Of The Facility To Reduce The
Level of Provision
It is permissible in the following manner.
(OPTIONAL – But, if exercised manner is fixed)
PRINCIPAL OUTSTANDING OF FACILITY
(Taken for calculation of provision)
xxx
Less: Value determined (Under Regulation 25) by NBFC in relation to collateral in the form of
liquid assets as realizable without recourse of count
(xxx)
Less: Adjusted Fore-sale Value (FSV) of Other:




Collateral
Mortgaged
Pledged in
Leased assets
(xxx)
Value for Calculation of Provision
=
137
xxx
Date: 18/09/2012
SECURITY AGAINST BORROWING
MORTGAGE
CHARGE
It is created on immovable property of
borrower, like land, building (assets
with title documents)
It is created on movable property of
borrower, like debtors, stock in trade,
stores and spares, vehicles, etc.
(Assets may or may not have title
documents)
Fixed Mortgage
Equitable Mortgage
[Legal Mortgage or
Registered Mortgage]
Title documents
deposited with lender,
whereas property
remains with the
borrower
Property passes to
lender (Ownership right
+ title documents)

Use / sale, can’t be
without lender’s
approval.

Fixed Charge (Lien)
It contains the following
characteristics:
(i) Created on identified
assets (On a specific
assets).
(ii) Above identified assets
must be existing assets
(Not future assets).
(iii) Borrower will no longer
be allowed to use the
asset without lender’s
approval. Physical
possession may or may
not be taken over by
the lender.
Sale, can’t be
without lender’s
approval.
However, use by
borrower without
any intervention of
lender.
138
Floating Charge
(Hypothecation)
It contains the following
characteristics:
(i) Created on class of
assets. (Not on a
specific asset)
(ii) Above class / assets,
under charge, may be
o Existing; or
o Future
(iii) Borrower will be free to
use the asset, under
security as floating
charge, without any
intervention of lender.
However, overall level
of the class be
maintained up to the
amount mentioned in
the charge deed.
[Borrower can use the
asset {Inventory} but
has to replenish it in
order to maintain the
value of the charge]
Power of Board of Directors (BOD) to Put the Asset as Security:
(i) Borrowing in the form of:
o Loan, advance, or credit, as defined in the Banking Companies Ordinance (BCO), 1962; OR
o Non-interest bearing securities to Bank or Financial Institution
Is covered under deemed power of the company, with overriding effect over the Ordinance, other
laws, Memorandum of Association (MOA) and Articles of Association (AOA). Therefore,
preparatory steps for the purpose, including putting the assets as security, also considered as
covered under deemed power.
(ii) Borrowings, other than the above, must be substantiated with reference to specific power in
Memorandum of Association (MOA) for the purpose and therefore, power to put the assets as
security against said borrowing should also be derived from the MOA.
(iii) In any case as above, power whether deemed or specific, must be exercised in BOD meeting as
required under section 196.
Form 10 – 21 days of creation of charge of description of charge satisfies condition laid down in
Section 121.
o
Register the charge with the Registrar.
Liquid Assets = Asset readily convertible into cash, like:




Government securities;
Shares of listed companies;
Bank deposits; and
Units of Mutual Funds
Forced-Sale Values (FSVs) = Value determined by valuer under Regulation No. 25, after taking into
consideration the sale in:
 Forced; or
 Distress
Condition
Title of Security against Financing =?
Pledge = Similar to fixed charge
Lender’s possession
In the form of security
139
Non-Performing = Classified facility
Performing = No overdue OR Overdue, but not yet classified
Forced-Sale Value (FSV) = Determined by valuer
Adjusted Forced
Sale Value (FSV)
For other than liquid assets x Adjustment factor
Investment Finance Service (IFS)
Housing Finance Service (HFS)
Leasing
70% for 10 years
Age of valuation (as per
valuation report)
Adjustment factor %
Age of Valuation
80%
1 year
70%
2 years
50%
3 years
4 Quarters
30.6.2012 = FSV as per report = 500
1st Quarter: 30.9.2012
80% x 500 = 400
2nd Quarter: 31.12.2012
400
3rd Quarter: 31.03.2013
400
4th Quarter: 30.06.2013
70% x 500 = 350
Adjustment Factor Offer
12 Quarters or 3 years on Investment Finance Service (IFS) + Leasing; OR
10 years = Housing Finance Service (HFS)
140
(1) After 3 years or 10 years…
Fresh valuation under Regulation 25.
In the absence of Fresh valuation, Existing valuation = 0
(Intermediary valuation not allowed)
(2) If Fresh Valuation is carried out, then:
 Existing valuation; or will be used for application of Adjustment Factor
 Fresh valuation
@ 50% IFS +
Leasing
OR
@ 70% HFS
Existing value used for:
12 Quarters … 500 million
600 million = 500
Fresh Valuation
400 million = 400
Valuation for application of factor for 13th quarter
Notes from Study Manual of Companies Ordinance, 1984
NBFC & NOTIFIED ENTITIES REGULATIONS, 2008
Classification and Provisioning for Non-Performing Assets [Regulation No. 25]
(1)



Leasing Company
- Shall observe the criteria for classification & provisioning
Investment Finance Company (IFC) - Schedule X = till 30th June 2012
Housing Finance Company (HFC) – Schedule XI = with effect from 1st July 2012
(2) Additionally, subjective evaluation of performing and non-performing advances, loans and lease
portfolio shall be made for risk assessment. If considered necessary, further downgrade
accordingly.
141
(7) NBFC may avail the benefit of leased assets or collateral by considering the realizable value for
deduction from the outstanding principal amount of loans / advances / lease against which such
assets are leased / mortgaged / pledged or collaterally held. Forced Sale Value {duly adjusted}
(FSV) [other than for Liquid Assets] x Adjustment Factor Revaluation after 3 years and in case of
Housing Finance Services (HFS) after 10 years.
(8) Non-performing facility:
 Against which security or in case of lease, additional security is not available; OR
Additional Collateral = Token Mortgage or Charge
 Where mortgaged, pledged or leased assets have not been valued and verified by external
auditors.
142
Date: 23/09/2012
No Objection Certificate (NOC): This is to allow borrower to create from the encumbrance on
the asset, in the form of second charge.
If issued
Security ineligible now, to use for reducing the provision
 Value of security under Pari Passu = 10 million
10 million
= 1.40
7 million
 Lender:
1 ---- 3 million
2 ---- 4 million
7 million
Ratio to distribute
amongst lender at
realization
45%
Collaterals
Liquid Assets
Other Collaterals
Generally, after every 6 months valuer
issued the addendum to the valuation
report about maintenance of such value
Pledge Stock
If lower value assessed than valuation
taken at lower value
Fixed Charge Over
Inventory
Default of Rs. 200 million (as Principal)
Rs. 7.5 million (as Interest)
The above facility was supposed to be exhausted on 30.9.2010
Today, 30.6.2012 --- Arrangement with borrower:
143
o
o
o
o
Fixed Mortgage;
Equitable Mortgage;
Pledge of Shares;
Fixed Charge Other
Than On Inventory


Rs. 207.5 million is considered as fresh facility;
OR
Rs. 200 million is considered as fresh facility (therefore, interest outstanding of Rs. 7.5
million waived)
(1) New Repayment Schedule will be designed & Other terms:
o Security;
o Interest rate; and Same
o Default payments
= Rescheduling of Non-Performing Facility
(2) New Repayment Schedule + Revised terms
= Restructuring of Non-Performing Facility
The Rescheduling
OR
On 30.6.2012 and revised repayment on quarterly basis
1st Quarterly payment on 31.3.2013
The Restructuring
The period, during which installment will not become due = Grace period
May be with accrual of
interest
May be with
freezing of interest
From Rescheduling
Date
From 1.1.2013
Whether the company is allowed to reverse the provision on 30.6.2012
(Provision of Rs. 200 million)
144
Provision’s Reversal
Earliest possible date …
Last date of 6 months
Retention period
30.6.2012
If
Expiry of
Grace Period
Terms and conditions of
Rescheduling /
Restructuring fully met
20% (at least)
OF
+
Rs. 207.5 million
Rescheduling date will
be covered from
(30.6.2013)
Restructured or
Rescheduled
amount
OR
Rs. 200 million recovered
in cash
If NBFC sought your advice to explore the possibility to reverse the provision immediately on
30.6.2012
= Should ask the borrower to adjust 50% of the amount proposed to be restructured … immediately
on this date – 30.6.2012 – in cash.
Reporting of Non-Performing Facility Quarterly Basis:
o SBP … through Credit Information Bureau (CIB); or
o SECP … through prescribed for under NBFC Regulations
Impact of Rescheduling on the Reporting of facility earlier reported as Non-Performing on
Rescheduling … 30.6.2012 --- Facility will be classified as Performing.
It shall still be reported as Non-Performing, till the provision is allowed to be reversed.
After the said eligibility, it shall be reported to SECP as well as good facility (Performing).
In the above, 1st installment was due on 31.3.2013
145
Borrower again defaults
(say): Rs. 20 million Principal
Rs. 5 million
Interest
Rs. 25 million Installment
On 31.3.2013, Rescheduled amount (say) Rs. 200 million will be accounted for as a Loss
+
Further provision based on further overdue from Rescheduling or Restructuring.
SCENARIO BASED – NBFC
Question:
Above facility is rescheduled on 30th June 2011. At rescheduling, outstanding interest of Rs, 7.5
million and penalty of Rs. 10 million (cumulative under financing agreement) waived off and
outstanding principal of Rs. 200 million treated as disbursement of fresh financing. Repayment
schedule of rescheduled facility is as follows:
(Rs. in million)
Date
30.06.2011
30.09.2011
31.12.2011
31.03.2012
30.06.2012
TOTAL
Installment
Principal
Interest
55.00
53.75
52.50
51.25
217.50
50
50
50
50
200
5.00
3.75
2.50
1.25
Outstanding
200
150
100
50
0
Because of above rescheduling, your advice is sought in relation to the following:
(i) Possibility to reverse the provision on 30.06.2011, if any, because of rescheduling.
(ii) Requirement of further provisioning, if party again defaults in repayment even in relation to 1 st
installment. Further provisioning is required to be calculated for quarterly accounts of
30.09.2011 and half yearly accounts of 31.12.2011.
Ignore the matter of collaterals, for any provision, under the
situation.
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Answer:
(i) If at rescheduling borrower agrees to adjust at least Rs. 100 million.
(ii)
Classification at Rescheduling
Number of days overdue at Rescheduling
Loss
1 year
Add: Further days since Rescheduling
or Restructuring
90 days
Revised --- Number of days overdue
1 year or more
Revised classification based on Number of days overdue (Revised) … Loss
Further Provision … No need as already provided in full
Interest – 30.9.2011: Reversal of Income and Credit to Suspense Account – Rs. 5
31.12.2011: Direct Credit to Suspense Account
Question:
Which type of business undertaken under NBFC?
Answer:
Definition of NBFC & Notified Entity:
There are 4 types of companies undertaken under NBFC:
(1) Leasing, Housing Finance Scheme (HFS), Investment Finance Service (IFS) & Discount Service
(DS);
(2) Asset Management Service (AMS) & Internal Auditor (IA);
(3) Private Equity Capital Fund; and
(4) Real Estate Investment Trust (REIT).
Question:
License
3 years
Renewal
Application
Permission to commence & remain in the business from SECP:
Fit and proper;
Public Limited Company (PLC);
Minimum Equity;
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In last month of expiry period
25% to Promoter;
Central Depository Company (CDC)
Block Form; and
Memorandum of Association (MOA)
License not renewed
Electronic
No change unless approved by SECP.
Compliances of law applicable to no operation
NBFC RULES AND REGULATIONS – PAST PAPERS
Summer 2012:
Q: 10
(a) An open-end fund is being managed by LM Limited which is an NBFC.
List the persons who would be termed as a “connected person” in relation to the above openend fund.
(08 marks)
(b) Describe the provisions contained in the NBFC Rules, 2003, in respect of the following:
(i) Credit rating
(03 marks)
(ii) Appointment of internal auditor
(04 marks)
(iii) Sale or purchase transaction between an NBFC and any of its directors
(03 marks)
Answer to Q: 10
(a) "Connected” or “Connected person" in relation to a NBFC and collective investment scheme,
means:
(i) Any person or company or trust beneficially owning, directly or indirectly, ten per cent or more
of ordinary share capital of the NBFC or the closed-end fund being managed by it, or being able
to exercise, directly or indirectly, ten per cent or more of the total voting power in that NBFC or
the closed-end fund being managed by it;
(ii) Any person or company or trust controlled by a person who or which meets one or both, of the
descriptions given in sub-clause (a);
(iii) Any member of the group of which that person, company or trust forms part;
(iv) Any collective investment schemes managed by the same NBFC, licensed as an asset
management company or investment adviser, as the case may be; or
(v) Any director or officer of that NBFC, or the closed-end fund being managed by it, or of any of
their connected persons as specified in sub-clauses (a), (b) and (c).
(b)
(i) Credit rating:
(1) A NBFC shall obtain “credit rating” and, in the case of investment adviser and asset
management company, management quality rating, as and when it becomes eligible for rating
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as per the rating criteria of the rating agency, which should be at least of a minimum grade or
such rating as may be specified by the Commission from time to time, from a rating agency
registered with the Commission, and such rating shall be updated at least once every financial
year.
Provided that the NBFC shall within one year of the down grading in its credit rating from the
grade specified above, obtain a fresh credit rating and during the period that its credit rating is
below the grade so specified, the NBFC may be allowed by the Commission to continue its
operations on such conditions as are deemed appropriate.
(2) A NBFC shall publish the credit rating and management quality rating, as the case may be, in its
annual report and quarterly reports, annual and quarterly reports of the collective investment
schemes managed by an investment adviser or asset management company, if applicable, and
any advertisement and brochures in relation to promotion of its business.
(ii) Appointment of internal auditor:
A NBFC shall appoint an internal auditor who is(i) A chartered accountant;
(ii) A certified internal auditor;
(iii) A member of a recognized foreign accountancy organization;
(iv) A person having master’s degree in commerce or business administration with finance
specialization and has relevant audit experience of at least five years in financial institutions; or
(v) A chartered accountancy firm to whom this function is outsourced.
(iii) Sale or purchase transaction between an NBFC and any of its directors:
Summer 2011:
Q: 8
(a) XYZ Limited, an NBFC, is in the process of classification and provisioning of its non-performing
assets. You are required to advise the company about the criteria for determining the realizable
value of mortgaged, pledged, leased or collaterally held assets in the light of provisions
contained in Non-Banking Finance Companies and Notified Entities Regulations, 2008.
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(b) Explain the terms Open-end Scheme and Close-end Scheme as included in the NBFC Rules,
2003.
Answer to Q: 8 (a)
NBFCs shall observe the following criteria for determining the realizable value of mortgaged,
pledged, leased or collaterally held assets, namely:(a) Only assets having registered mortgage, equitable mortgage (where NOC for creating further
charge has not been issued by NBFC) and pledged or collaterally held assets shall be considered;
(b) Assets having pari-passu charge shall be considered on proportionate basis;
(c) Hypothecated assets and assets with second charge or floating charge shall not be considered;
(d) Valuations shall be carried out by an independent professional valuer listed on the panel of
valuers maintained by the Pakistan Banks Association or the Leasing Association of Pakistan;
(e) The valuers while assigning any values to the mortgaged, pledged, leased or collaterally held
assets, shall take into account all relevant factors affecting the salability of such assets including any
difficulty in obtaining their possession, their location, their condition and the prevailing economic
conditions in the relevant sector, business or industry;
(f) The realizable value of mortgaged, pledged, leased or collaterally held assets determined by the
valuers must take into account the amount that can be realized from the asset if sold in a forced or
distressed sale condition;
(g) The valuers shall in their report explain the assumptions, calculations, formula and method
adopted in determination of the realizable values;
(h) Valuations shall be conducted at least once in three years:
Provided that, except for a Housing Finance Company, if a valuation is older than three years, a
fresh re-valuation shall be done failing which the valuation shall be taken as nil.
Answer to Q: 8 (b)
Open-ended scheme vs. Close-ended Scheme:
“Open-ended Scheme” means a unit trust scheme constituted by way of a trust deed which
continuously offers for sale a security which entitles the holder of such security on demand to
receive his proportionate share of the net assets of the scheme ;
“Close-ended Scheme” means a scheme constituted by way of trust to raise funds through issue of
certificates to the public for investing in securities including money market instruments for a
definite or indefinite period but which does not continuously offer certificates entitling the holder
of such certificates, to receive, on demand, his proportionate share of the net assets of the closedend scheme.
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Summer 2010:
Q: 6
(a) The Board of Directors of Pioneer Leasing Limited is in the process of appointing a new Head of
Investment. List down the criteria specified in the Non-Banking Finance Companies and Notified
Entities Regulations, 2008, for assessing the person being appointed with respect to:
(i) Integrity and track record;
(ii) Financial soundness
(b) Explain the term “Independent Director” and narrate the provisions related to appointment of
such directors, as specified under NBFC (Establishment and Regulations) Rules, 2003.
Answer to Q: 6 (a)
(i) Integrity and track record:
A person shall not be considered Fit and Proper if he:
(i) Has been convicted of an offence involving moral turpitude;
(ii) Has been involved in the mismanagement of investments, financial or business misconduct,
fraud, etc;
(iii) Has been the subject to adverse findings, after conducting an inquiry, by the Commission or
any other regulatory or professional body or government agency;
(iv) Has been actively involved in the management of a company or firm whose registration or
license has been revoked or cancelled or which has gone into liquidation or other similar
proceedings due to mismanagement of affairs, financial misconduct or malpractices;
(v) Is ineligible, under the Ordinance or any other legislation or regulation, from acting as a
director or serving in a managerial capacity of an NBFC or a company;
(vi) Has entered into a plea bargain arrangement with the National Accountability Bureau;
(vii) In case of promoters or major shareholder of NBFC, does not have the requisite disclosed
and verifiable financial resources; and
(viii) In case of promoters or major shareholders of NBFC, does not have an established and
proven track record of successfully running a business enterprise for 3 to 5 years, preferably a
public listed company.
(ii) Financial Soundness:
In determining a person’s financial soundness, the following shall be considered:
(i) Whether such person’s financial statements or record including wealth statements or income
tax returns or assessment orders are available;
(ii) Whether the person has been declared by a court of competent jurisdiction as defaulter in
repayment of loan to a financial institution exceeding Rupees one million;
(iii) Whether the latest Credit Information Bureau report of the person shows overdue
payments or default to a financial institution;
(iv) Whether the person has applied to be adjudicated as an insolvent and his application is
pending;
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(v) Whether the person is an un-discharged insolvent; and
(vi) Whether the person has been declared a defaulter by a stock exchange.
(b) Explain the term “Independent Director” and narrate the provisions related to the appointment
of such directors, as specified under NBFC (Establishment and Regulation) Rules, 2003.
Answer to Q: 6 (b)
Independent Director
“Independent Director” is any person other than any director or officer of that NBFC, or the closedend fund being managed by it, or of any of their connected persons as specified in sub-clauses (a),
(b) and (c).
Summer 2009:
Q: 12
(a) MZE Limited, an NBFC engaged in leasing business, is currently facing serious financial crisis.
SECP is not satisfied with the financial management of the company and has ordered a special
audit of the company. In the light of the relevant provisions of the Companies Ordinance, 1984
relating to NBFCs, you are required to explain whether the Commission is empowered to make
such an order. Also describe the rights of the Commission in this regard?
(06 marks)
(b) Describe the conditions applicable to a NBFC relating to the appointment of internal auditor,
under the NBFCs (Establishment and Regulation) Rules, 2003.
(05 marks)
Answer to Q: 12
(a)
Whether the Commission is empowered to make such an order:
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(b) Conditions applicable to a NBFC relating to the appointment of internal auditor under the
NBFCs (Establishment and Regulation) Rules, 2003:
A NBFC shall appoint an internal auditor who is(i) A chartered accountant;
(ii) A certified internal auditor;
(iii) A member of a recognized foreign accountancy organization;
(iv) A person having master’s degree in commerce or business administration with finance
specialization and has relevant audit experience of at least five years in financial institutions; or
(v) A chartered accountancy firm to whom this function is outsourced.
Summer 2007:
Q: 4
(a)
Mr. Luqman, a Senior Director of STQ Limited, a non-banking financial institution (NBFC),
wishes to retire and wants his son to be appointed in his place. As the company secretary of STQ
Limited, advise him about the conditions specified in NBFC Rules, 2003, which his son must satisfy
to be eligible for appointment as the Director of STQ Limited.
(07 marks)
Answer to Q: 4 (a)
Conditions that must be satisfied to be eligible for appointment as the Director of STQ Limited:
The condition is that at least two of its directors (excluding chief executive officer) must be
appointed who have senior management level relevant experience of at least five years. So, Mr.
Luqman’s son shall have senior management level relevant experience of at least five years.
A NBFC shall not:
Appoint as directors persons who hold such office in any NBFC engaged in a similar business while
holding a similar license under these rules.
Provided that this clause shall not apply to the nominees of the Federal or Provincial Governments
on the board of any NBFC.
Summer 2006:
Q: 6
(b) A group of investors want to incorporate a company which will be engaged in leasing and
venture capital business. You are required to explain the minimum capital requirement of
running these businesses under NBFC Rules, 2003.
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(c) What restrictions have been placed on the scope of business activities of a leasing company
under the NBFC Rules, 2003?
Answer to Q: 6
(b)
Minimum Capital Requirement of Running These Businesses Under NBFC Rules, 2003:
(1) Leasing: 700 million equity;
(2) Venture Capital Business: 50 million [Teacher: 30 million]
(c) Restrictions that have been placed on the scope of business activities of a leasing company
under the NBFC Rules, 2003:
An NBFC SHALL NOT:
(1) Appoint, as directors, persons who hold such office in any other NBFC of the same form of
business. This is not applicable on nominees of the Federal Government / Provincial
Government.
(2) Appoint / change the Chief Executive / Director without SECP approval. This is not applicable on
nominees of the Federal Government / Provincial Government.
(3) Purchase / Sell with director / officer / employee / 10% shareholder (individually or in concert
with relatives) unless approved policy by the Board of Directors (BOD). For directors, prior
approval of BOD, excluding the beneficiary director, is essential.
(4) Merger / Acquisition / Takeover / Transfer controlling shares unless SECP approval.
(5) Make investment in subsidiary except surplus equity (over and above minimum equity).
(6) Per broker transaction = 10% of total brokerage expense. There should be no common director
/ officer / employee with broker.
(7) Remove record to outside Pakistan unless SECP approval.
(8) Make investment in unquoted shares in excess of 20% of its equity (excluding surplus equity
invested in wholly owned subsidiary for undertaking a form of business) + Approval in BOD
meeting + Decision to SECP within 14 days along with the Minutes.
(9) Hold / deal / trade in real estate except for own use, or as specified by SECP.
(10) Provide unsecured facilities unless specified by SECP.
(11) Raise funds from individuals unless specified by SECP.
(12) Offer shares for other than cash. No loan / advance against own shares.
(13) Encumber, etc client’s assets for securing own obligation.
(14) Undertake brokerage business except where the separate company is formed. But, where
the NBFC has the license of Investment Finance Service (IFS), SECP may grant the permission,
subject to such terms and conditions as the SECP may impose, to undertake brokerage business
without forming a separate company.
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Winter 2011:
Q: 8
(a) Al-Faizan Investment Limited (AFIL), is a non-banking financial institution (NBFC) listed on the
Lahore Stock Exchange. It intends to make investment in unquoted shares of Folks Resorts (Pvt)
Limited. Narrate the conditions that AFIL would need to comply with under the NBFC Rules,
2003 while making the above investment.
(05 marks)
(b) With reference to Non-Banking Finance Companies and Notified Entities Regulations, 2008:
(i) List the persons who are included in the definition of Key Executive.
(06 marks)
(ii) Identify the circumstances under which a Director is considered to have a Conflict of
Interest.
(06 marks)
Answer to Q: 8
(a) AFIL shall not make investment in un-quoted shares of any company unless approved in a board
meeting after carefully analyzing the merits and financial impact of the investment and
recording the decision in sufficient detail in minutes of the meeting.
Provided that such decisions shall be communicated to the Commission within fourteen days of
the board meeting along with copy of the minutes;
Provided further that the total investment in un-quoted shares shall not exceed twenty percent
of equity of the NBFC. In exceptional circumstances, however, the limit of twenty percent may
be exceeded with the prior approval of the Commission. Any existing company, whose
investment in un-quoted shares is in excess of twenty percent of the time of this rule becoming
effective, shall bring such investment up to twenty percent within a period of twelve months
from the date of effectiveness of this rule.
(b)
(i) Key Executive:
"Key Executive” means key executives of the NBFC and includes, inter alia, the persons
discharging the following functional responsibilities, a. Any executive, including the chief executive or any officer acting as second to chief executive
officer including chief operating officer or by whatever name called;
b. chief financial officer, head of accounts or head of finance;
c. head of internal audit;
d. head of information technology;
e. head of credit or risk management;
f. head of human resource;
g. head of operations;
h. head of marketing;
i. head of research;
j. head of treasury or chief investment officer;
k. head of law, company secretary or compliance officer;
l. investment analyst;
155
m. fund manager; and
n. any other functional responsibility which the Commission may include.
(ii) Circumstances under which a Director is considered to have a Conflict of Interest:
Conflict of interest:
The directors or chief executive of NBFC shall not:
(i) Be a director in any other NBFC engaged in a similar business in Pakistan.
Provided that this condition shall not apply to nominees of the Federal or Provincial
Governments on the board of any NBFC;
(ii) Be a director, chief executive, chief financial officer, chief internal auditor, research analyst
or a trader (by whatever name or designation called) in a stock brokerage house or in any
company or entity owned and controlled by a member of a stock exchange; and
(iii) Be a member of a stock exchange engaged in the business of brokerage or is a spouse of
such member or in control of more than 20% shareholding, directly or indirectly through his
close relatives.
Winter 2010:
Q: 5
EFL has recently been incorporated as a non-banking financial institution and plans to carry out
more than one form of business. You are required to advise it in respect of the following:
(a) Any eight conditions specified under the NBFC Rules, 2003, for the grant of licence. (08 marks)
(b) The provisions as regards validity and renewal of licence granted to the NBFC.
(04 marks)
Answer to Q: 5
(a) Eight Conditions Specified Under the NBFC Rules, 2003, for Grant of Licence:
(1) the company is incorporated as a public limited company under the Ordinance having at least
seven directors;
(2) the company is not in direct competition with the business of its holding company and a license
to carry on the same business has not been issued to any group company;
(3) the company has minimum equity as may be determined by the Commission from time to time,
in respect of each business activity mentioned in section 282A of the Ordinance;
(4) the company has allotted at least twenty per cent of the paid-up share capital to the promoters;
(5) the company’s promoters, major shareholders and directors have given undertaking that they
shall not dispose of their shares for a minimum period of three years from the date of
commencement of business and there after only with the prior approval of the Commission;
156
(6) the company appoints its chief executive who does not hold such office in any other company
except for a fund being managed by the said company, provided that prior approval of the
Commission has been obtained in this regard;
(7) the company has given an undertaking that no change in the Memorandum of Association,
other than increase in the authorised share capital, shall be made without prior approval of the
Commission; and
(8) the company has given an undertaking that the conditions of operation as set out in these rules
or regulations or specified by special order of Commission or any direction given by the
Commission shall be duly complied with; and
(9) the company has furnished an undertaking that within ninety days of the grant of certificate of
registration it shall furnish evidence to the satisfaction of the Commission that the personnel
employed by it for executive positions, research or other related functions possess sufficient
educational qualifications and professional experience to undertake the proposed form of
business of the NBFC.
(b) Validity and Renewal of Licence Granted to the NBFC:
The licence granted to the NBFC under these rules shall be valid for one year and each licence shall
be renewable annually on an application as set out in Form IV along with payment of a fee of
rupees twenty five thousand.
(5) The Commission may, after making such inquiry and after obtaining such further information, as
it may consider necessary, renew the licence of such NBFC, for one year in Form V on such
conditions, as it may deem necessary.
Provided that till the Commission renews the licence or refuses to do so, the existing licence of the
NBFC, which has applied for renewal under sub-rule (4), would remain valid.
Winter 2009:
Q: 10
(a) Explain the terms ‘asset management services’ and ‘investment finance services’ as included in
the NBFC Rules, 2003.
(04 marks)
(b) Briefly explain the restrictions that have been placed on the NBFCs under the NBFC Rules, 2003,
in respect of the following:
(i) appointment of directors from the same family;
(ii) transfer of ownership of controlling shares; and
(iii) employing a person as a broker.
157
Answer to Q: 10
(a) Asset Management Services (AMS):
“Asset management services” mean the services provided for management of open-ended schemes
and include offering of investment schemes under trust deeds, managing portfolios for both
individual and institutional clients on a discretionary basis and issue of redeemable securities.
Investment Finance Services (IFS):
“Investment finance services” include money market activities, capital market activities, project
finance activities, corporate finance services and general services as described in rule 14.
(b)
(i) Appointment of directors from the same family:
Not more than fifty percent of the directors of a NBFC shall be from the same sponsoring
institution or same family, including spouse, lineal ascendants and descendants, and brothers
and sisters.
(ii) Transfer of ownership of controlling shares:
A NBFC shall not transfer ownership of shares in subsidiary or associated company, merge with,
acquire or take-over any other company unless it has obtained prior approval of the
Commission in writing to such transfer or scheme of such merger, acquisition or takeover.
(iii) Employing a person as a broker:
A NBFC shall not enter into transactions with any connected broker, which exceed ten per cent
of the transactions of the NBFC in any one accounting year; subject, however, that such
connected broker shall not have a common director or officer or employee with the NBFC.
(To be continued later on)
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Date: 28/09/2012
Winter 2008:
Q: 3
(a) List the types of businesses that NBFCs are permitted to carry out under the relevant provisions
of Companies Ordinance, 1984.
(b) In order to reap the benefits of large scale operations, the Board of Directors of Moonlight
Leasing Limited and Dream Leasing Limited intend to amalgamate the operations of the two
companies. State the procedure which should be followed for the merger of the two companies
and the approvals required to be obtained for this purpose, under the provisions relating to the
establishment and regulation of NBFCs.
Answer to Q: 3
(a) Types of businesses that NBFCs are permitted to carry out under the relevant provisions of the
Companies Ordinance, 1984:
(i) Investment Finance Services;
(ii) Leasing;
(iii) Housing Finance Services;
(iv) Venture Capital Investment;
(v) Discounting Services;
(vi) Investment Advisory Services;
(vii) Asset Management Services; and
(viii) Any other form of business which the Federal Government may, by notification in the official
Gazette specify from time to time.
(b) Procedure which should be followed for the merger of the two companies and the approvals
required to be obtained for this purpose under the provisions relating to the establishment
and regulation of NBFCs:
(1) Without prejudice to the provisions contained in Part IX of this Ordinance, NBFCs may be
amalgamated with each other provided a scheme containing the terms of such amalgamation
has been placed in draft before the shareholders of each of the NBFC concerned separately, and
approved by a resolution passed by a majority in number representing two thirds in value of the
shareholders of each of the said NBFCs, present either in person or by proxy at a meeting called
for the purpose.
(2) Notice of every such meeting as is referred to in sub-section (1) shall be given to every
shareholder of each of the NBFC concerned in accordance with the relevant articles of
association, indicating the time, place and object of the meeting, and shall also be published at
least once a week for three consecutive weeks in not less than two newspapers which circulate
in the locality or localities where the registered offices of the NBFCs concerned are situated, one
of such newspapers being in a language commonly understood in the locality or localities.
(3) Any shareholder, who has voted against the scheme, of amalgamation at the meeting or has
given notice in writing at or prior to the meeting to the NBFC concerned or the presiding officer
of the meeting that he dissents from the scheme of amalgamation, shall be entitled, in the
event of the scheme being sanctioned by the Commission to claim from the NBFC concerned, in
respect of the shares held by him in
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Companies Ordinance, 1984 that NBFC, their value as determined by the Commission when
sanctioning the scheme and such determination by the Commission as to the value of the
shares to be paid to dissenting shareholder shall be final for all purposes.
(4) If the scheme of amalgamation is approved by the requisite majority of shareholders in
accordance with the provisions of this section, it shall be submitted to the Commission for
sanction and shall, if sanctioned by the Commission by an order in writing passed in this behalf
be binding on the NBFCs concerned and also on all the shareholders thereof.
(5) Where a scheme of amalgamation is sanctioned by the Commission under the provisions of
this section, the remaining or resulting entity shall transmit a copy of the order sanctioning the
scheme to the registrar before whom the NBFC concerned have been registered and the
registrar shall, on receipt of any such order, strike off the name of the NBFC hereinafter in this
section referred to as the amalgamated NBFC which by reason of the amalgamation will cease
to function.
(6) On the sanctioning of scheme of amalgamation by the Commission, the property of the
amalgamated NBFC shall, by virtue of the order of sanction, be transferred to and vest in, and
the liabilities of the said NBFC shall, by virtue of the said order be transferred to and become
the liabilities of the NBFC which under the scheme of amalgamation is to acquire the business
of the amalgamated NBFC, subject in all cases to the terms of the order sanctioning the scheme.
Winter 2007:
Q: 8
A large group based in Dubai wishes to set up a company for carrying out a vast spectrum of
investment-related activities in Pakistan.
(a) You are required to advise them on the various forms of investment related businesses referred
to in Section 282A of the Companies Ordinance, 1984.
(b) List the activities that may be carried out under each of the above terms of businesses as
specified in NBFC Rules, 2003.
Answer to Q: 8
(a) Various Forms of Investment Related Businesses Referred to in Section 282A of the
Companies Ordinance, 1984:
(i) Investment Finance Services;
(ii) Leasing;
(iii) Housing Finance Services;
(iv) Venture Capital Investment;
(v) Discounting Services;
(vi) Investment Advisory Services;
(vii) Asset Management Services; and
(viii) Any other form of business which the Federal Government may, by notification in the
official Gazette specify from time to time.
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(b) Activities that may be carried out under each of the above terms of businesses as specified in
NBFC Rules, 2003:
(i) Investment Finance Services:
“Investment Finance Services” include money market activities, capital market activities, project finance
activities, corporate finance services and general services as described in rule 14.
(ii) Leasing:
“Leasing” includes financial services provided on operating lease or finance lease basis (in accordance with
International Accounting Standard-17) or any other admissible mode determined by the Commission from
time to time.
(iii) Housing Finance Services:
“Housing Finance Services” mean financial services related to development and construction of residential and
commercial properties and comprise the services as specified in rule 20.
(iv) Venture Capital Investment:
“Venture Capital Investment" means financing of any venture project by a NBFC licensed to operate as a
venture capital company or by a venture capital fund being managed by such NBFC, through equity or other
instruments whether convertible into equity or not.
(v) Discounting Services:
(vi) Investment Advisory Services:
“Investment Advisory Services” mean the services provided for management of closed-end funds and include
the business of advising others, either directly or through publications or writings, as to the value of securities
or as to the advisability of investing in, purchasing or selling of securities for remuneration.
(vii) Asset Management Services:
“Asset Management Services” mean the services provided for management of open-ended schemes and
include offering of investment schemes under trust deeds, managing portfolios for both individual and
institutional clients on a discretionary basis and issue of redeemable securities.
Winter 2006:
Q: 8
(a) PQR Limited, an NBFC, has a license to undertake Investment Financial Services. List some of the
services that it may perform while carrying out:
 Project financing; and
 Corporate finance services.
Answer to Q: 8 (a)
 Project financing:
(i) make investment in projects through underwriting of public issue of stocks, shares and securities, shortterm and long-term participation term certificates and term finance certificates of varying features;
(ii) guarantee and counter-guarantee loans and obligations, including establishment of documentary credits;
and
(iii) open letters of credit for their corporate clients for the import of machinery for installation, expansion,
balancing, modernization and replacement.
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 Corporate finance services:
(i) act as adviser and financial agent for companies in obtaining direct bank loans, syndicated loans, export
credits, leases and project finances, both domestically and internationally;
(ii) assist companies in private placement of debt and equity, domestically and abroad;
(iii) act as adviser to companies in corporate or financial restructuring as well as in the preparation of resource
mobilization plans;
(iv) act as adviser to companies in mergers, acquisition and divestitures.;
(v) assist companies with cash management systems;
(vi) prepare feasibility, market or industry studies for companies, both domestic and foreign;
(vii) raise equity, such as through private equity and venture capital, for new and existing companies, by acting
as financial intermediary;
(viii) act as custodian for securities owned or held by clients pursuant to their instructions and provide each or
any of the following services; custody of securities, placing or execution of orders for purchase or sale of
securities, receipt of dividends and other income on securities, execution of voting and other rights in
connection with securities, holding the securities in the name of investment finance companies on behalf of
their clients, and transacting aforesaid activities through nominees, agents, or attorneys;
(ix) act as nominees, agent, attorney, administrator, executor or trustee for clients;
(x) act as trustee for collective investment schemes, private equity funds, venture capital funds, real estate
investment trusts and debt instruments, if so approved by the Commission.
Date: 30/09/2012
Notes from Study Manual of “Other Laws”
The Companies (Appointment of Legal Advisers Act, 1974)
DEFINITIONS:
(i) Advocate:
An “advocate” entered in any roll under the provisions of the Legal Practitioners and Bar
Councils Act, 1973.
(ii) Legal Adviser:
A “legal adviser” is a person appointed as such under section 3.
(iii) Company:
A “company” is a Company formed and registered under the Companies Act, 1913 [now,
Companies Ordinance, 1984] but does not include a Company, the paid-up capital of which is
less than Rs. 500,000 or a Company limited by guarantee or an association registered under
section 26 of Companies Act, 1913 [now, Companies Ordinance, 1984].
162
(iv) Registered Firm:
A “registered firm” is a firm registered under the Partnership Act, 1932, all the partners of
which are advocates.
APPOINTMENT OF LEGAL ADVISER
Every Company shall appoint:
AT LEAST ONE LEGAL ADVISER ON RETAINERSHIP (INDIVIDUAL / FIRM)
(1) To advise such Company in the
performance of its functions.
(2) To advise such Company in
the performance of its duties.
In Accordance with the Law
(v) Retainer:
A “retainer” shall, in no case, be less than Rs. 1,200 per month.
WHO MAY BE APPOINTED AS LEGAL ADVISER?
A Person
The Firm
Who is not already the legal
adviser of 3 Companies (3 or more)
Who is not already legal adviser of Companies
numbering the product of 3 and the number of
members of the firm or more
THE COMPANIES (APPOINTMENT OF LEGAL ADVISERS) RULES, 1975
MAINTENANCE OF REGISTER & RECORDS:
REGISTER
Form set out in Schedule I
163
CERTIFICATE FROM LEGAL ADVISER:
ONCE A YEAR
In the form set out in Schedule II
FURNISHING OF INFORMATION BY THE COMPANY:
1. Every Company shall, within 14 days of the Appointment:
Furnish in duplicate to the REGISTER OF THE REGION in which its registered office is
situated (Form – 29)
(a) THE NAME (NAMES OF THE PARTNERS IN CASE OF A FIRM);
(b) ADDRESS; &
(c) REMUNERATION of the Legal Adviser.
2. Every Company shall furnish such additional information or documents as the Registrar may
require.
3. The Registrar shall keep proper record of all the information received under this rule.
The Companies (Appointment of Legal Advisers Act, 1974)
Lawyer = having law degree
Advocate = Lawyers + Practicing license to practice law in Pakistan
Registration under Legal Practitioners & Bar Council Act, 1972
Legal Adviser = Advocate + Appointed under Legal Advisers Act, 1974, by a company (As defined in
the Act)
Corporate status under Companies Ordinance, 1984:
 Company formed under Company Law;
 Foreign Company; and
 Corporations
Less:
o Corporations
o Company Limited by Guarantee
o Non-Profit Organization (NPO)
xxx
xxx
xxx
164
o Company limited by shares having paid-up capital less than Rs. 500,000
xxx
xxx
Company – for Legal Advisers Act, 1974
ABC & Co.
3 Partners
Question: How many clients can be accepted under Legal Advisers Act, 1974?
Answer: 3 partners x 3 = 9 partners
Question:
How many days are there since incorporation to appoint Legal Advisers?
Answer:
o Legal Advisers Act, 1974, is silent.
o Since firstly Form – 29 is required within 14 days of incorporation, in which, inter alia,
appointment of Legal Advisers is also notified to the Registrar. Therefore, it is valid to conclude
that first, Legal Adviser should be appointed within 14 days of incorporation.
165
Legal Advisers Act, 1974
(Past Examination Question)
Q: 1
State the provisions contained in the appointment of Legal Advisors Act, 1974, relating to the
eligibility for appointment as legal advisers.
(03 marks)
Answer to Q: 1
It may be:
o Individual (Advocate); or
o Firm (Registered under Partnership Act, 1932 + All partners are Advocate)
ELIGIBILITY WHEN INDIVIDUAL BEING APPOINTED
It is not already Legal Adviser (as per Legal Advisers Act, 1974) for 3 months.
ELIGIBILITY WHEN FIRM BEING APPOINTED
Firm is not already Legal Adviser (Legal Advisers Act, 1974) of companies numbered – Number of
partners x 3 or more
Q: 2
Pills Limited is an unlisted public company. It intends to appoint MM Associates, a registered firm of
lawyers with two partners, as its legal advisers. MM Associates are already the legal advisors of the
following 6 companies:
(i) ABC Limited and XYZ Limited having share capital of less than Rs. 500,000
(ii) Rose Limited and Bee Limited having share capital of more than Rs. 500,000 but less than Rs. 1
million.
(iii) Crown (Pvt.) Limited with share capital of Rs. 1.12 million; and
(iv) Dice (Guarantee) Limited with a share capital of Rs. 1.5 million.
Based on the requirements of the Companies (Appointment of Legal Advisers) Act, 1974, explain
whether MM Associates can be appointed as the legal advisors of Pills Limited.
(05 marks)
166
Answer to Q: 2
Since two partners:
Therefore: Maximum Number of Clients, on Retainership basis, under Legal Advisers Act, 1974
= 2 partners x 3
= 6 clients being companies under Legal Advisers Act, 1974
ANALYSIS OF EXISTING CLIENTS
Client Name
Share Capital less
(i) ABC Ltd.
than Rs. 500,000
(ii) XYZ Ltd.
(iii) Rose Ltd. Share Capital of
500,000 to 1 million
(iv) Bee Ltd.
(v) Crown (Pvt.) Ltd. [Share
Capital = 1.12 million]
(vi) Dice (Guarantee) Ltd.
Company Being Covered
Under Legal Advisers Act, 1974
x
x
√
√
√
Cumulative Number of Clients
Under Legal Advisers Act, 1974
0
0
1
2
3
x
3
On the basis of the above analysis, it is valid to conclude that MM Associates is eligible to be
appointed as a Legal Adviser under the Legal Advisers Act, 1974, of Pills Ltd.
Q: 3
(a) Certain persons have been restricted from being appointed as legal adviser of a public limited
company. Specify the restrictions imposed in this regard under appointment of Legal Advisor’s
Rules, 1975.
(02 marks)
(b) State the particulars which are required to be specified in the Register of Legal Advisers.
(03 marks)
Answer to Q: 3
(a) Restrictions imposed in this regard under appointment of Legal Advisers’ Rules, 1975:
Refer to Answer to Q: 1
(b) Particulars which are required to be specified in the Register of Legal Advisers:
(1) The Names (Names of the Partners in Case of a Firm);
(2) Address; and
(3) Remuneration of the Legal Adviser
167
Q: 4
Describe the requirements of Companies (Appointment of Legal Advisers) Act, 1974, regarding
eligibility for the appointment as legal adviser?
Answer to Q: 4
Requirements of Companies (Appointment of Legal Advisers) Act, 1974, regarding eligibility for
the appointment as legal adviser
Who May Be Appointed As Legal Adviser
A Person
The Firm
Who is not already the legal adviser
of 3 companies (3 or more)
Who is not already the legal adviser of
companies numbering the product of 3
and the number of members of the firm,
or more
Q: 5
Who may not be appointed as legal advisor of a company under Companies (Appointment of Legal
Advisers) Act, 1974?
Answer to Q: 5
A company shall not appoint an advocate or a registered firm to be its Legal Adviser, if upon such
appointment, the number of companies of which such advocate or firm is a Legal Adviser will
exceed--,
(a) In the case of the advocate, three: or
(b) In the case of the firm, the product of three and the total number of partners of the firm:
Provided that a company in existence immediately before the commencement of this Act shall be
deemed to have complied with the provisions of this subsection if, before the expiration of three
months from such commencement, it terminates the appointment of the advocate or registered
firm the appointment of whom or which is prohibited by this subsection.
(2) No compensation shall be payable for the termination of an appointment of agreement under or
by virtue of the operation of the provisions of subsection (2).
168
Date: 30/09/2012
Types of Credit Rating
Solicited
Unsolicited
A credit rating assignment
from a person whose
credit rating is subject to
assessment
Assignment from a person
(say, Banker, or Lender),
other than the person
whose credit rating is
subject to assessment
Under any law
applicable in
Pakistan
Voluntary to
assess the level
of liquidity risk
Like:
It may be:
(i) Banking Companies
Ordinance, 1984:
(ii) Insurance Ordinance,
2000; and
(iii) NBFC Rules, 2003
 Credit Rating Agency (CRA); or
 Other than CRA
JCR --- Credit Rating Agency (CRA)
Mr. A is a director
Two clients under discussion to accept:
(i) Alpha Insurance Company Ltd. --- Mr. A is an elected director.
(ii) State Life Insurance Company Ltd. --- Mr. A is the nominee director of the Federal Government.
169
Question:
Which of the above proposed client shall not be accepted?
Answer:
Alpha Insurance Company Ltd. --- shall not be accepted because of common directorship. State Life
Insurance Company (SLIC) --- although common director, but due to nomination by the Federal
Government, therefore, allowed to accept, subject to the following formalities:
(i) Within 15 days of the working mandate for SLIC (acceptance of assignment of Credit Rating)
notify to SECP, over the fact; and
(ii) Undertaking (with above intimation) that Mr. A will not participate in the rating process to
assign rating to SLIC.
NOTES FROM STUDY MANUAL OF COMPANIES ORDINANCE, 1984
CREDIT RATING COMPANIES RULES, 1985
Requirement to have Credit Rating:
It is mandatory for certain companies, etc., under the relevant laws, to have credit rating from a
credit rating company duly approved by SECP. Such a credit rating company duly approved by SECP
is called Credit Rating Agency (CRA).
The requirement to have credit rating is applicable to the following:
o
o
o
o
o
o
Mutual funds;
Banks;
Insurance companies;
Non-Banking Finance Companies (NBFCs);
Company offering debt instrument to general public; and
Companies raising resources against the commercial papers.
Credit rating process:
Formal evaluation of credit history of
the company and capability of
repaying its obligations.
170
Status of Credit Rating Agency (CRA):
Incorporated as a limited company under the Companies Ordinance, 1984, and duly registered with
the SECP in order to become entitled for commencement of business as CRA.
Definition of a credit rating company:
It means a company which intends to engage in, or if so engaged primarily in the business of evaluation of
credit risk through a recognized and formal process of assigning rating to present or proposed loan
obligations of any business enterprise.
Eligibility for registration:
Incorporated as a limited company under the Companies Ordinance, 1984.
Entered into a joint venture or technical collaboration arrangement with internationally
recognized credit rating association for a period of at least 5 years. After the said 5 years, SECP
may relax the requirement in this regard, if found, in the interest of the capital market.
No director, officer or employee has been convicted of fraud or breach of trust or has been
adjudicated as an insolvent.
Promoters, in the opinion of SECP, are a means of integrity and have special knowledge to deal
with matters of a credit rating company.
Chief Executive is not the chief executive of any other company, or holding similar position in
any other company.
Procedure for registration:
Application accompanied with prescribed fee and the enclosures is required to be filed with the
SECP. If the SECP found the applicant as eligible for registration and considers that the registration
is in the interest of capita markets, may grant certificate of registration.
Renewal of registration:
o Annually;
o Prescribed application accompanied with prescribed fee and the enclosures. SECP may ask for
further information.
o SECP shall, after necessary inquiry, renew the registration within 30 days of receipt of
application or further information as the case may be.
171
Reporting requirement:
Report giving sector-wise details of credit rating notified during the year, fee structure and any
other information as required by the SECP, is to be filed within 4 months of close of accounting year
with the SECP.
Restriction on directors of a credit rating company:
 No director of the credit rating company shall be a director of a corporate entity whose credit
rating is being assessed. The said restriction shall not apply to a director of a credit rating
company nominated as a director of an entity by the Federal Government, or the provincial
government, or an institution which is directly or indirectly owned by the said governments.
However, the said nominee is required to report, to the SECP, within 15 days of the receipt of
the working mandate (credit rating assignment) from such entity together with an undertaking
that he shall not participate in the rating process of the entity.
 No director of the credit rating company shall hold 5% or more interest in corporate entity,
business firm or in any other way interested in the client.
 Change in the shareholding, chairman and the chief executive of a credit rating company shall
be with the approval of the SECP.
STAGES OF SHARE ISSUANCE DURING LIFE OF THE PUBLIC LIMITED COMPANY (PLC)
(1) First Allotment:
(i) Through the Statement in Lieu of Prospectus [Subscribers or Promoters or Sponsors of the
Memorandum of Association are providing the entire share capital].
OR
(ii) Through Prospectus [General public is participating with the sponsors or promoters or
subscribers to the Memorandum of Association for subscribing the 1 st issue].
(2) Subsequent Allotment:
Every allotment after First Allotment
Section – 86: To Existing Member only – In proportion to their existing shareholder
PRE-EMPTIVE RIGHT OF EXISTING RIGHT
: Out of exception to the above
On Exception = Special Resolution
+ Federal Government approval, company may allot to someone else than the Existing Members.
172
Someone Else: Generally, in the Public Limited Company (PLC), with the Statement in Lieu of
Prospectus at the First Allotment
= General public
Both of the Documents:
o Statement in Lieu of Prospectus; and
o Prospectus
If Subsequent Allotment of Public Limited Company (PLC) to Existing Members:
Section – 86 (3):
There must be an offer to existing members on the form of SRO 186 / 1992:

Whether the above circular of Section – 86 (3) is prospectus = Inviting subscription for
shares from Public
Existing Members
Also covered within “PUBLIC”, because of having Renouncing Right
Section – 53 (8): Provision of Ordinance for Prospectus is Not Applicable on
this prospectus.
Section – 53 (5): Situation where Application for allotment will not be accompanied with the
Prospectus:
(1) Application issued to the underwriter
(2) Application issued to Pre-IPO investor [Listing Regulation # 6]
= Out of the Essential Contents of
Prospectus, Name of the Underwriter is
a specific content.
= Without the prospectus, as at
that time, prospectus is yet to
be prepared.
“Person who subscribes the
unsubscribed portion of the public offer,
in pursuance of the agreement for the
purpose” [Underwriter agreement].
173
Pre-IPO Investor:
Prior to the Initial Public Offering (IPO), the company entered into the agreement with certain
persons to take a portion of the IPO.
The name of the above persons is required to be provided in the Prospectus.
The above attempt is in order to induce the public to subscribe for the IPO
Pre-IPO Investor is not allowed to dispose off shares for 6 months from the public offering date
(6 months lock in).
Section – 59
They are considered as not having relied on the prospectus for subscribing
Therefore, the rest of the allottees will be considered as having relied on the prospectus.
o
o
o
o
SECP approval = 1.1.2012
Newspaper Publication Deadline = 1.3.2012
ABC Ltd. issued (publicized) on, say, 1.2.2012
How to decide the subscription days = opening date of subscription list
It shall not be within 7
days of issuance.
and
It shall not be later than
30 days of issuance.
8.2.2012
to
2.3.2012
174
SECP can relax on
application.
Date: 30/09/2012 & 02/10/2012
PROSPECTUS AND STATEMENT IN LIEU OF PROSPECTUS (Handout)
Underlying rationale:
Private company is compulsorily required to provide in its Articles of Association (AOA), the
prohibition for inviting the public to subscribe for the shares or debentures of the company.
In case of a public limited company, the above restriction does not exist in its AOA and therefore,
public limited company can invite the public for the purpose.
In order to demonstrate that the above prohibition is not applicable, the law has made it
mandatory for every public limited company to at least, once in a life:


Issue (to public) and file (with the Registrar), the prospectus; or
File (with the Registrar), the statement in lieu of prospectus.
The prospectus is required to be prepared in accordance with Part I of the 2nd Schedule whereas
statement in lieu of prospectus is required to be prepared in accordance with Part II of the 2 nd
Schedule.
Deciding criteria to issue and file prospectus or file statement in lieu of prospectus:
By default, every public limited company is required to file statement in lieu of prospectus with the
Registrar for registration, at least 3 days before the first allotment of shares or debentures.
The above requirement will not be applicable where the company has issued a prospectus on, or
with reference to, its formation, which forms the basis of allotment. The prospectus is issued in the
situation where the company has planned to proceed for offering of its securities to the general
public. In such cases, the ultimate listing of securities will be inevitable. The prospectus before
going to public is passed through under the following phases:




Clearance from Stock Exchange;
Approval of SECP, in 60 days period prior to its publication in newspapers.
Filing with the Registrar, on or before the publication.
Issuance of prospectus through publication in the English and Urdu newspapers.
Definition of Prospectus {Section 2 (1) (29)}:
It means any document, described or issued as a prospectus and includes any of the following:
175




Notice;
Circular;
Advertisement; or
Other communication
Inviting offers from the public for the:
Subscription; or
Purchase of
Any shares in, or debentures of, a body corporate
OR
Inviting deposits from the public, other than deposits invited by a banking company, or a financial
institution
Whether described as prospectus or otherwise
Various Forms of Prospectus
Prospectus
Offer for Sale
To invite the Public
By the Company
to General Public
By the Company to
Existing Members
The document is
titled as a
Prospectus
[Section – 53]
The document is
titled as a Circular
under section 86 (3)
In certain situations,
rather than the
company directly,
some one, on behalf of
the company
approaches the public
to subscribe and
purchase the shares or
debentures
[Section – 86]
The document is titled
as an offer for sale and
it is deemed as a
prospectus for the
company
[Section – 61]
176
By the person who
holds more than
10% of the shares
or debentures and
desired to dispose
off through the
public offering
The document is
titled as an offer for
sale and it is
deemed as a
prospectus for the
company
[Section – 62]
Date: 02/10/2012
SOME PECULIARITIES AND TERMS IN RELATION TO GENERAL
PUBLIC OFFERING OF SHARES OR DEBENTURES
For essential elements in order to constitute a document as prospectus:
Addressee
Addresser
Public
Issuing
house
Company
10%
Shareholder
Four essential elements in order to constitute a document as prospectus:

It is always addressed to the public by way of invitation.
“Public” to mean general public, as well as section of the public but in order to construe section
of the public as public, addressee must have renouncing right.

The above invitation must be to:
 Invite offers to subscribe or purchase shares or debentures of the body corporate.
 Raise deposits other than the deposits invited by a banking company or financial institution.

The invitation can be made:
By the Company; or
On behalf of the company

The document may be titled as prospectus or otherwise. If the title of the document is other
than prospectus like offer for sale, then the provisions for the Companies Ordinance, 1984, as
regards to prospectus shall also be applicable on this document where the above essentials are
satisfied, unless specific waiver is provided under this Ordinance.
Application for allotment:
o Prospectus must be accompanied with the application for allotment for which SECP is
empowered to prescribe the specification.
o Although the SECP has not yet prescribed any specification, but generally a standardized form is
used for the purpose.
177
o If a person desirous to subscribe or purchase the shares or debentures of the company in
pursuance of invitation through prospectus, then the said application is required to be filed
during the subscription days with the bankers to the issue.
Subscription days:



The days, as required to be provided in the prospectus as an essential constituent, during which
the application for subscription or purchase of shares can be filed with the bankers to the issue.
Of course, there would be at least 1 day for the purpose, but the maximum number of days is
not specified under the Ordinance.
If the subscription days are provided in the prospectus as 1 st January 2011 to 4th January 2011,
then the 1st January will be called as “opening date of subscription list”, whereas the 4 th January
will be called as the “closing date of subscription list”.
Date: 07/10/2012
SOME PECULIARITIES AND TERMS IN RELATION TO GENERAL PUBLIC OFFERING OF SHARES OR
DEBENTURES [continued]
Bankers to the issue:



Body corporate inviting subscription for shares or debentures from the public, then the receipt
of subscription must be through special bank account opened for the purpose.
The account(s) opened for the purpose are called subscription accounts and the banks in which
the said account(s) are executed are called “bankers to the issue”.
The names of bankers to the issue are required to be provided in the prospectus as essential
constituent for the purpose.
Minimum subscription:


Minimum subscription is one of the essential contents of the prospectus.
“Minimum subscription” is to mean the minimum amount which, in the opinion of the directors
or signatories of the Memorandum of Association (MOA) arrived at after due inquiry, that must
be raised by the issue of shares in order to provide the sum for the followings, distinguishing the
amounts for each head:
 Purchase price of any property purchased, or to be purchased.
178
 Preliminary expenses, underwriting commission and commission to bankers to the issue, as
payable by the company.
 The repayment of money borrowed by the company in respect of the foregoing matters.
 Working capital.
 Any other expenditure, stating the nature and purpose thereof and the estimated amount in
each case.
If the amount provided in respect of matters aforesaid otherwise than out of the proceeds of
the issue, then the source out of which amounts are to be provided are required to be
mentioned in the prospectus.
Pricing for the issue:
First issue:
It will always be at face value or nominal value or par value.
Subsequent issue:
It may be at premium or discount to face value keeping in view the formalities required for the
purpose, under the law.
Loan-based versus equity-based projects:




Whenever a company is going for general public offering (public at large) for ultimate listing,
then it is required to identify the project as loan-based project or equity-based project.
The above determination is with reference to identification of the formalities, required to be
fulfilled, for the purpose.
The formalities are provided in Rule No. 3 of Capital Issue Rules, 1996.
In the above rule, equity-based project means a project in which fixed capital expenditure
(determined at the time of public offering) are proposed to be financed out of equity, whereas
loan-based projects means a project which cannot be established as equity-based project.
Notes from Notebook
Bankers to the issue (Section – 68): If separate bank account is not opened for collecting
subscription money for issue to the general public, then the allotment is voidable.
179
Minimum subscription:
 Required subscription amount
--- 500 million
 Minimum subscription
--- 300 million {Directors have decided after due enquiry,
as required for the following purposes)
S. No.
Utilization of Minimum
Subscription for
1.
Land purchased
+
Building purchased or to
be purchased
2.
Preliminary expenses
Commissions
Underwriters
3.
4.
5.
Amount of
Subscription
Proposed to be
Utilized
100
Other Sources
Amount
Proposed to be
Utilized
100
100
-
100
-
-
200
-
Description of
Other Sources
 Internal cash
generation
prior to
offering; or
 Loan
-
Bankers
Repayment of money
borrowed for the above
purposes
Working capital
Others
-
 Loan
-
Rule – 3: Capital Issue Rules, 1996:
1st (General) Public Offering
= Through Prospectus
May be the 1st
issue of the
company
May be the
subsequent issue
of the company
Fixed Capital Expenditure
The project should be distinguished as:
(i) Loan-Based Project; or
(ii) Equity-Based Project
180
= 100% proposed to be
financed through Equity
Equity-based Project
Question: Why do we have to distinguish between Loan-based and Equity-based?
Answer:
Formalities leading to get the:


Clearance of Stock Exchange; and
Approval of SECP
would vary depending upon whether it’s a:
(a) Loan-based; or
(b) Equity-based
PROSPECTUS (FORMAT) – Part I Schedule
Contents
(Section – 1)
Reports
(Section – 2)
Consideration for
(Section – 3):
 Contents; and
 Reports
Auditors Report
Certification of Chief
Executive + CFO:
Contents
o
o
o
Full;
True; and
Plain
Contents
Clause 30A,
Section – 1, Part –
I, 2nd Schedule
5 years
financials
of the
company
5 years
financials
of the
subsidiary
(ies)
Companies proposed to
be acquired out of the
subsidiary money,
resulting that the
company would become
subsidiary.
181
Specialpurpose
Financial
Statements
of
OR
Other business
proposed to be acquired
out of the subsidiary
money, establishing the
control stake.
Under the Procedure of Listing
MINIMUM Amount payable on each application shall not be less than Rs. 5,000
Issue of Capital Rules, 1996:
Rule – 8: Procedure for issue of shares other than Cash
Concept of Material Contracts for Prospectus
(1) Contracts for appointment of:
(a) Chief Executive;
(b) Managing Agent; and
(c) Secretary
+
(2) Other contracts (Not being contracts of ordinary course) [Still continuing] and entered into
within the preceding 2 years.
Used to define material contracts:
(1) To provide detail in prospectus; and
(2) Section – 57: Copies of material contracts
should be enclosed with the Prospectus,
being filed with the Registrar;
(3) Section – 58: Any variation of Material
Contracts, requiring members’ approval
182
PROSPECTUS [SECTION 52-66] {Definition: Section – 2 (1) (29)}
Section – 52: Prospectus to be Dated:
A prospectus issued by, or on behalf, of a company shall be dated, and that date shall, unless the
contrary is proved, be taken as the date of publication of the prospectus.
Section – 53: Matters to be Stated and Reports to be set out in the Prospectus:
A Prospectus issued by, or on behalf of the company must state:
(1) Contents / matters specified in Section 1 or Part-1 of 2nd Schedule; and
(2) Set out the reports specified in Section 2 of the said part.
Information that must be included in the prospectus briefly include:
1. Contents of Memo with Names, Addresses, Description & Occupations (NADO) of the
signatories to the memorandum and number of shares subscribed by them;
2. The number and values of shares, if any, and the nature and extent of the interests of the
holders in the property and profits of the company;
3. Any provision in the articles as to the remuneration of the Directors, whether for their services
as directors, Chief Executive, or otherwise.
4. Description of the business to be undertaken and its prospects.
5. The NADO of the Directors or proposed directors, Chief Executive or proposed Chief Executive,
Managing Agent or proposed Managing Agent (where permissible), Secretary or proposed
secretary, if any. Where such person is already a director / Chief Executive / other officer of any
other company, they have to state the name of such other company and office held therein.
6. Any provision in Articles of Association (AOA), or in any contract which has been entered into
as to the appointment of Chief Executive, Managing Agent, the remuneration and
compensation for loss of office.
7. Where the shares are offered to the public, the minimum amount which must be raised in order
to provide for:
o
o
o
o
o
o
Purchase price of property purchased, or to be purchased – which is to be defrayed in the whole,
or in part, out of the proceeds of the issue;
Preliminary expenses payable by the company and underwriters and bankers’ commission;
Repayment of any money borrowed in respect of foregoing matters;
Working capital;
Any other expenditure stating the nature and purpose thereof and estimated amount in each
case; and
The amounts to be provided in respect of the aforesaid otherwise than out of the proceeds of
the issue and the sources out of which those amounts are to be provided.
183
8. Date and time of the opening and closing of the subscription list.
9. Amount payable on application of each share. Details of allotment of previous 2 years, if any.
10. Substance and particulars of any contract or arrangement, whereby any option or preferential
right (for shares or debentures) given or proposed to any person – period during which the
option is exercisable / price / NADO / other facts.
11. Shares issued for consideration other than in cash in previous 2 years or agreed to be issued.
12. The amount paid or payable by way of premium, if any, on each share which has been issued
within the preceding 2 years or is to be issued, where the same class share with varying
premium, or at par or discount – reasons and how premium have been, or are to be, disposed
of.
13. Short particulars of every transaction relating to the property completed within the preceding 2
years, in which any vendor of the property to the company or any person who is, or was, at the
time of the transaction, promoter, or a director or proposed director, or has any interest (direct,
or indirect).
14. Underwriter – Names of the underwriters and opinion of the directors that the resources of the
underwriters are sufficient to discharge their obligations.
15. Particulars of underwriting commission paid within the preceding 2 years, or payable to any
person (NADO of such persons).
16. Preliminary expenses, paid or payable.
17. Expenses of the issue, paid or payable.
18. Any amount or benefits paid or given within the 2 preceding years, or intended to be paid, or
given to promoter / officer and the consideration thereof.
19. The dates / parties / general nature of the contract, appointing the Chief Executive / Managing
Agent / Secretary OR other material contract of the preceding 2 years (not being entered into in
the ordinary course of business) and the time and place of inspection of the contract.
20. The names and addresses of the auditors and legal advisers, if any.
21. Full particulars of the nature and the extent of interest, if any, of every director or promoter:
o in the promotion; and
o in any property acquired within 2 years or proposed to be acquired.
22. Rights of voting and in respect of capital and dividends attached to the shares.
23. The length of time during which business has been carried on.
24. Particulars of capitalization of profits of the company / subsidiary.
25. Particulars and utilization of Surplus on Revaluation of Company / Subsidiary.
26. Where the Articles of Association (AOA) imposes any restrictions upon:
Members in respect of right to attend, speak or vote;
Members for right to transfer the shares; and
Directors in respect of powers of management.
27. Reasonable time and place at which the copies of Balance Sheet and Profit and Loss accounts, if
any, on which the auditors report is based, may be inspected.
184
28. The principal purposes for which the net proceeds of the issue are intended to be used and the
approximate amount intended to be used for each such purpose.
29. If any shares are to be issued otherwise than for cash – Details.
30. A summary in columnar form of the earnings of Company and Subsidiary – Consolidated or
otherwise – for each of the last 3 financial years.
31. Pending legal proceedings other than ordinary to which the company / subsidiary is a party.
Notes from Handout:
Date: 11/10/2012
Format of Part I of 2nd Schedule
Section 1
Section 2
Section 3
Provision applying
to Section 1 and 2
of this part
Contents of Prospectus
Auditors
Report
Certificate of
CEO + CFO
Reports of Auditors (Under Section 2 of Part – I of 2nd Schedule
WHERE THE COMPANY
HAS NO SUBSIDIARIES
(1)
(2)
(3)
(4)
(5)
Report of Profit and Loss Account of
the preceding 5 years:
o
Recurring; Or
o
Non-recurring
Report on the assets and liabilities at
the last day to which the accounts
were made up.
Class-wise dividend + Particulars of
class, Particulars where no dividend.
Statement that there is no dividend.
Where there are more than 90 days
between the year and the prospectus
date, and the accounts are not
prepared for any year, then reason
should be given.
WHERE THE COMPANY
HAS SUBSIDIARIES
BUSINESS TO BE
ACQUIRED
In addition to reporting on the
company’s financials, the subsidiary’s
financials should be also reported in
the same way under the following
manner:
Resulting to be subsidiary:
(1)

(2)
(3)
Separate reporting for each
subsidiary; OR
Combined reporting on
combined profit & loss account,
etc., of subsidiary; OR
Consolidated with the holding
company’s accounts.
185
Otherwise (with
controlling stake)
Reporting on:

Last 5 years profit &
loss account of the
acquiree; and
Latest balance sheet
of the Proposed
Subsidiary.
Special purpose 5
years Profit and Loss
Account and Balance
Sheet and the closing
date should not be
more than 120 days
before the date of
the prospectus.
Notes:


Where the company has carrying on business for less than 5 years, or there is incorporation
within the preceding 5 years and thus, the accounts have not been available for the said 5 years,
then so much of the years for which accounts are prepared will be reported on, by the auditors,
for the purpose of prospectus with the statement of the fact.
Where the above reporting results in different figures, then the figures that have been reported
in the audited accounts of the respective years, then either of the following strategies can be
followed by the auditors:
Indicate, by way of note, any adjustment as respect to figures of any profit or loss or assets
and liabilities dealt with by the report which appears to the person making the report
necessary; or
Make those adjustments and indicate that the adjustments have been made
Emphasis of Matter paragraph
Notes from Study Manual of the Companies Ordinance, 1984
Certifications:
Chief Executive and the Chief Financial Officer shall certify that the prospectus constitutes a full,
true and plain disclosure of all material facts relating to securities offered by the prospectus.
{Section – 2, Clause 30A, 2nd Schedule}
Issue of Prospectus:
> 30 days.
7-30 days before the opening of the subscription date. SECP may allow
Section – 54: Experts to be Unconnected with Formation or Management of the Company:
Expert’s statement can be included in the prospectus only when he is not / has not been, engaged /
interested in the:


Formation or promotion; OR
Management of the company.
186
Section – 55: Expert’s Consent to Issue Prospectus Containing Statement by Him:
Issue of the Prospectus only when:


Written consent to the issue;
That consent should not be withdrawn before the delivery of a copy for Registration; and
Statement of the above fact appears in the prospectus.
Section – 56: Penalty & Interpretation:
(i) Contravention of Section – 54 or Section – 55, the company and every person who is knowingly
a party to the issue = Rs. 5,000
(ii) For Sections 54 & 55, “Expert” includes:
o Engineer;
o Valuer;
o Accountant; and
o Every other person whose profession gives authority to a statement made by him.
Notes from Notebook
Auditors report date
for Prospectus …
31.10.2012
Reportable Years
Year End: 30.6.2012
30th June – Years
2012, 2011, 2010,
2009 & 2008
1.1.2013
In the above, for the situation of reporting on 31.10.2012
Accounts of 30.6.2012 are under audit
Auditor will now report on the accounts of 30th June of the years 2011, 2010, 2009, 2008 & 2007
Accounts of 30.6.2012 are not ready
They are under audit, etc.
Since there are more than 90 days since the Year End and accounts are not ready
auditor is requiring to report the reason
187
because the
In the above, instead of 31.10.2012
The reporting date is 31.8.2012 and accounts of 30.6.2012 are not ready
Reportable years:
30.6.2011
30.6.2010
30.6.2009
+
Reason so as not
to report on
30.6.2012?
30.6.2008
30.6.2007
Reason why he is not
required to report?
As 90 years has not elapsed
since the Year End
Prospectus date – 31.12.2012
Closing of Special Purpose
Accounts of Proposed
Acquisition of a business with
contractual intent; OR
30.8.2012 to 31.12.2012
Role of Expert for Prospectus
Who is an Expert?
Expert’s requirement
[Section – 56]
Eligibility / Qualification
to report Prospectus
[Section – 54]
Minimum Role of Expert for Prospectus = Auditors
188
Procedure to have
Reporting of Expert on
Prospectus
[Section – 55]
Additionally, due to support the statement of future prospects of the company (as required to be
reported in the Prospectus).
Experts are also involved
Oil Drilling and Exploration Company
Study Manual of the Companies Ordinance, 1984
Page 17
Generally, involvement due to professional capacity in the
Formation
OR
Management
Is not considered an ineligibility to act as an expert
A, B and C are Promoters of ABC Ltd.
Mr. C is a lawyer (an Advocate)
Company is about to issue the Prospectus. In order to support the management’s contention about
the contingency, A and B asked ‘C’ to provide the statement in the capacity of an expert.
Since Mr. C has been involved in the Promotion, OR Formation of the company and the above
involvement is other than in the professional capacity.
SECP Guidelines on Prospectus
Listing Regulation # 8:
Issue of Prospectus only when it has been cleared by the Stock Exchange
Section – 57:
Issue the Prospectus within 60 days of the approval of the SECP
For submission with the SECP seeking approval
It must have been cleared for the Stock Exchange
If the 1st issue is to the general
public
Formalities of Rule – 3 of the
Capital Issue Rules, 1996,
should be fulfilled, depending
upon the classification of the
project:
(i) Loan-based; or
(ii) Equity-based
= Before clearance by the Stock
Exchange
189
Date: 13/10/2012
THE COMPANIES (ISSUE OF CAPITAL) RULES, 1996
SECP may relax any rules for any case, if not practicable for reasons to be recorded.
Penalty: - Rs. 2,000 + Rs. 100 per day and any other day as per the Companies Ordinance, 1984.
This is applicable to:
1.
2.
3.
4.
Companies proposing a public issue;
Right and bonus by listed;
For all companies issuing shares other than cash; and
Certain persons offering to the public.
Issue of Capital (First time) through Public Offering:
1.
2.
3.
4.
(I) Loan-Based Projects
Financial Plan approved by an institution financing
the project (size of capital to be issued shall be in
accordance with the said plan).
Auditor’s Certificate: Sponsor subscription has been
received in full and at least 80% thereof has been
utilized in the project.
Stock Exchange verification: 30% of the Plant and
Machinery installed and the last consignment of the
plant and machinery, where required has been
shipped to the company.
Sponsors shall, at all times, retain at least 25% of the
capital of the company.
1.
2.
3.
4.
5.
(II) Equity-Based Projects
The project shall be appraised by a financial
institution or commercial or investment bank.
Auditor Certificate shall be accompanied with the
above proposal confirming that:
 Capital allocated to sponsors, foreign and local
investors, if any, has been fully paid; and
 The land for the project has been acquired,
letters of credit have been established and
shipment schedule of plant and machinery has
been finalized by the suppliers.
Sponsors shall retain at least 25% of the capital of the
company for a period of 5 years from the date of
public subscription.
Fixed Capital expenditure shall be entirely financed by
equity.
The issue shall be fully under written and the
underwriters, not being associated companies, shall
include at least 2 financial institutions, including
commercial and investment banks and the
underwriters shall evaluate the project in their
independent Due Diligence Report (DDR).
Further Notes of the Above:
Definition of “Underwriter”:
He / she is a person:



Who subscribes The unsubscribed portion of the public offering;
In pursuance of an agreement for the purpose (Underwriting agreement).
190
Equity-Based Projects
Out of all
Minimum underwriters = 2
Maximum = Company will decide
o
o At least 2 Financial Institutions, including Commercial and Investment Bank; and
All are unassociated with the Company (underwriter should not be associated companies of issuers).
Every underwriter:
 Whether compulsory appointment (Equity-Based); OR
 Voluntary appointment (Loan-Based)
Qualification of
Underwriter
And
Underwriter will always
be a company
Should be in line with
Ballators, Transfer Agent
Manner of
appointment
Underwriters Rules, 2001
“Written
agreement”
ABC Ltd. - Public Issue Equity-Based Project
Situation
×
Situation 1:
Required to have 2
Financial Institutions
satisfied;
But, underwriter includes
associated company
Therefore, Required not satisfied.
× Situation 2:
Although all are not
associated, but are required
to have at least 2 Financial
Institutions as underwriter is
not satisfied.
× Situation 3:
Since underwriter includes
individual which can’t be
applied as such because of
Rules – 2001
Underwriter 1
Underwriters
Underwriter 2
HBL
NBP
XYZ Ltd.
Associated Company
HBL
XYZ Ltd.
(Pharma giant)
[Not associated
company]
MNO Ltd.
(Textile giant)
[Not associated
company]
HBL
NBP
Mr. A (Director of ABC
Ltd.)
191
Underwriter 3
Notes from Study Manual of Companies Ordinance, 1984
Section 57: Approval, Issue and Registration of Prospectus:
(i) Every prospectus issued by:
Required to be approved by the SECP within 60
 Listed company;
days preceding the date of issue {Sub-section (1)}
 Proposed to be listed; and
 Any other person
(ii) Application for approval must be accompanied by {Rule – 11}:
 3 copies of the prospectus;
 Such certificates, or other documents, as are required to be appended thereto; and
 Affidavit affirming, among other things, that all information in the prospectus and all other
documents filed in connection with it is true and correct.
(iii) Before the date of publication, a copy should be delivered to the Registrar duly signed by every person
who is named therein as a director or proposed director, or by his agent authorized in writing, and
having endorsed thereon or attached thereto {Sub-section (3)}:
o Consent under section 55;
o In case of a prospectus issued generally, a Copy of the contracts / memorandum in writing under
clause 16, Part-I, 2nd Schedule {contract appointing or fixing the remuneration of Chief Executive /
Managing Agent / Secretary + Material contract not in the ordinary course of business / contract
entered into more than 2 years before the date of prospectus} + Statement signed by a person
setting out the adjustments and giving the reason thereof as required under clause 36, Part-I, 2nd
Schedule {Adjustments can be shown in report or make adjustment and indicate that adjustments
have been made.
(iv) Every prospectus to which this section applies, shall, on the face of it {Sub-section (4)}:
State that the copy has been delivered to the Registrar;
Specify documents attached with the above, or refer to the statements in the prospectus specifying
the documents; and
State that the application has been made / proposed to be made for listing.
(v) Registrar shall not register a prospectus unless {Sub-section (5)}:
 Requirements of Sections 52, 53, 54, 55 & 57 fulfilled; and
 Prospectus is accompanied by the consent in writing of the person, if any, named therein as the
auditor, legal adviser, attorney, solicitor, banker or broker to act in that capacity.
(vi) Penalty = Company and Every person knowingly or willfully in default shall be liable to a fine of up to Rs.
10,000 and Rs. 200 for every day during which the default continues.
192
Timing to file application with Stock Exchange, seeking the listing of shares of companies being offered
through Prospectus
Along with or before the application seeking the clearance on the Prospectus
Why such a defining (?)
under Listing Procedure?
If the issue size is (at least) 10
million shares of Rs. 10 each
= From the issue date, shares of the
company will be provisionally listed
for trading
Auditors
Consent over
Prospectus
Consent in the
capacity of an Expert
Consent to act as the
auditor of the company
Consent to act as such
may also be supportive with the
consent in the capacity of an Expert
Section 58: Terms of Contract Mentioned in Prospectus or Statement in Lieu of Prospectus Not to be
Varied:
The terms of the contract mentioned in the prospectus or statement in lieu of prospectus shall not be varied
at any time, except subject to the approval of, or on the authority given by the Company in General Meeting.
193
Section 59: Civil Liability for Misstatements in the Prospectus:
A person is liable to pay compensation to every person {Sub-section (1)}:


Who subscribes for; OR
Purchases any shares or debentures on the faith of the prospectus.
FOR: Any loss, or damage, he may have sustained;
BY REASON OF: Any untrue statement included in the prospectus
FOLLOWING PERSONS SHALL BE LIABLE:
Every person who is a director of the company at the time of the issue of the prospectus;
Every person who has authorized himself to be named and
o Is named in the prospectus either as a director; OR
o As having agreed to become a director, either immediately or after an interval of time.
Every person who is a promoter of the company; and
Every person who has given consent under section 55 OR 57 (5).
PROVIDED THAT:
Person who has given consent under section 55 OR 57 (5) shall not be liable except in respect of an untrue
statement, if any, purporting to be made by him as an expert.
Defenses available for Sub-section (1) to Directors, etc. {Sub-section (2)}:
The person (other than an expert) so sought to be made liable may escape liability, if he proves:
 Having consented to become a director, withdrew before the issue and it was issued without authority
or consent.
 Issued without knowledge or consent, on becoming aware of its issue, he forthwith gave reasonable
public notice that it was issued without his knowledge or consent.
 He was ignorant of the untrue statement and on becoming aware of the same, after the issue of the
prospectus and before the allotment, he withdrew his consent and gave a public notice to that effect.
 He believed on reasonable grounds that the statement was true.
 Statement was in fact made on the authority of an expert and the expert has given his consent under
section 55 and had not withdrawn it.
 The statement was a correct and fair copy of an official document or was made on the authority of an
official person.
194
Liability for Wrongdoing
Civil Liability
Criminal Liability
Because of the wrongdoing, someone
has suffered who has brought the claim
of damages against the wrongdoing
(although not prohibited under any
statute), then the liability to compensate
that so arises on the defendant towards
the claimant, is called “CIVIL LIABILITY”
Because of the wrongdoing (i.e.
crime – prohibited under the law)
irrespective that someone has
suffered is not the liability, will arise
in the form of:
o
o
Fine; and / or
Imprisonment
= Suffering
+ Claim
+ Court so agrees
In case of the prospectus which contains an UNTRUE STATEMENT (under section 63), the situation will give
rise to:
Civil Liability
[Section – 59]
as well as
Criminal Liability
[Section – 60]
Condition, inter alia, to claim Civil Liability due to the Misstatement in the Prospectus:
o
Reliance on prospectus
to Subscribe
the shares
OR Purchase
and resultantly suffered the loss.
The following can’t claim the civil liability as reliance for purchase / subscription other than on
prospectus:
(1) Underwriter; and
(2) Pre-IPO investor
195
Untrue Statement
[Section – 59 / Section – 64]
Statement in the
Prospectus
Misleading
Omitted
Part – I, 2nd Schedule
In the Form
Format of Statement
or Report not followed
In context
Not followed
Although the form
(format) is followed
(but) Truthfulness is
not followed
Furthermore, if there is a Misleading Statement:
 In the form; OR
 In context
Then, the statement is an
Untrue Statement for the
Prospectus.
 In the Memorandum of Association (MOA); OR
 In any report referred in the Prospectus; OR
 In any document referred in the Prospectus
Material Contract
Company is about to purchase Land, the agreement is finalized and is termed as a material contract. In the
contract, Land is referred as “Residential purpose”.
The above statement is misleading in context. Although the statement is not being provided in the
Prospectus, the document in which the statement is provided is being referred in the prospectus.
Therefore, the statement will also be called / termed as an Untrue Statement for the Prospectus
196
Date: 14/10/2012
Section – 59: Civil Liability for Misstatements in Prospectus:
Compensation to every person {Sub-section (1)}:


Who subscribes for; OR
Purchase any share, or debentures, on the faith of the Prospectus.
FOR: Any loss or damage he may have sustained.
BY REASON OF: Any Untrue Statement included in the Prospectus.
FOLLOWING PERSONS SHALL BE LIABLE:
 Every person who is a director of the company at the time of the issue of the Prospectus.
 Every person who has authorized himself to be named; and
 Is named is the Prospectus either as a director; OR
 As having agreed to become a director, either immediately or after an interval of time.
 Every person who is a promoter of the company; and
 Every person who has given consent under Section – 55 OR Section – 57 (5).
PROVIDED THAT:
Person who has given consent under Section – 55 OR Section – 57 (5) shall not be liable except in
respect of an untrue statement, if any, purporting to be made by him as an expert.
Defenses available for Sub-section (1) to Directors, etc. {Sub-section (2)}:
The person (other than an expert) so sought to be made liable may escape liability, if he proves:
(1) Having consented to become a director, withdrew before the issue and it was issued without
authority or consent.
(2) Issued without knowledge or consent, on becoming aware of its issue, he forthwith gave
reasonable public notice that it was issued without his knowledge or consent.
(3) He was ignorant of the untrue statement and on becoming aware of the same, after the issue of
the prospectus and before allotment, he withdrew his consent and gave a public notice to that
effect.
(4) He believed on reasonable grounds that the statement was true.
(5) Statement was, in fact, made on the authority of an expert and an expert has given his consent
under Section – 55 and had not withdrawn it.
197
(6) The statement was a correct and fair copy of an official document or was made on the authority
of an official person.
Defenses available for Sub-section (1) to Experts {Sub-section (3)}:
An expert may be made liable only in respect of any untrue statement purporting to be made by
him as an expert. He may, however, avoid his liability, if he proves:
(1) Having given his consent under Section – 55, he withdrew it in writing before the delivery of a
copy of the Prospectus for registration.
(2) After delivery of a copy for registration and before the allotment, he, on becoming aware of the
untrue statement, withdrew his consent in writing and gave a reasonable public notice to that
effect.
(3) He was competent to make the statement and believed on reasonable grounds that it was true.
Right of Indemnity (i.e. legal damages) {Sub-section (4)}:
Every such director, or expert, who has escaped liability on the above grounds, shall be entitled to
be indemnified by other director, directors, or experts who continue to be liable, against all
damages, costs and expenses which they may have incurred.
Right of Contribution {Sub-section (5)}:
The right of contribution between persons jointly liable is there, if only one or a few of them have
paid damages for loss arising out of misrepresentation.
Joinder of Parties:


A number of subscribers may join as plaintiffs in one action, but each will have to prove
separately the truth / falsehood of the statement; and
A subscriber may combine in the same action his claim for rescission (i.e. the act of rescinding,
abrogating, annulling, or vacating) and damages for fraud or compensation for
misrepresentation against the company, directors and other persons.
198
Promoter {Sub-section (6)}:
It is a person who was a party to the preparation of the Prospectus, or a portion thereof, containing
the untrue statement, but does not include any person by reason of his acting in a professional
capacity for persons engaged in procuring the formation of the company.
Section – 60: Criminal Liability for Misstatements in Prospectus:
Criminal liability involves a fine, or a term of imprisonment on the guilty party, whereas civil liability
involves a remedy to the aggrieved party, e.g. paying damages by way of compensation.
This section states that where a prospectus contains an untrue statement, every person authorizing
its issue shall be punishable with imprisonment up to 2 years, or a fine up to Rs. 10,000 or both,
UNLESS HE PROVES that:


The statement was immaterial; and
He believed on reasonable grounds that it was true.
Sub-section (2) exempts persons of Section – 55 and Section – 57 (5) from liability under this
section.
Section – 61: Documents containing offer of shares or debentures for sale to be deemed
Prospectus:
Where a company allots, or agrees to allot, any shares in or debentures of the company with a view
to all or any of those shares or debentures being offered for sale to the public, any document by
which the offer for sale to the public is made shall, for all purposes, be deemed to be a Prospectus
issued by the company and all enactments and rules in relation to contents, filing and registration
and as to the civil and criminal liability shall remain applicable on the company.
For the purpose of this Ordinance, it shall, unless the contrary is proved, be evidenced that an
allotment of, or an agreement to allot, shares or debentures was made with a view to the shares or
debentures being offered for sale to the public if it is shown.
(1) That an offer to the public was made within 1 year after the allotment.
(2) That at the date when the offer was made, the whole of the consideration to be received by the
company in respect of shares or debentures had not been received by it.
(3) Offer of shares and debentures was in pursuance of an understanding to which the company
was directly or indirectly a party or a condition imposed by any authority in relation to the
position business or privileges of the company.
199
Further Disclosures:
(1) Net amount received, or to be received, by the Company;
(2) Where and when the agreement of allotment may be inspected.
Person offering is deemed to be the director for the purpose of Section – 57 – approval,
registration, etc.
The Prospectus shall be signed by not less than 2 directors / one-half of the partners of the issuing
house if it is a Company / firm, respectively.
Notes from Notebook:
Date: 14/10/2012
Constituents to Claim Civil Liability (Damages) in Relation to the Prospectus
(1) Untrue statement in the Prospectus – Section 64;
(2) Reliance on the Prospectus;
Subscribe
Purchase
OR
(3) Resultantly, suffered with losses; and
(4) Applied to the Court due to the reason.
If Untrue Statement is About Material Contract
(i) Director;
(ii) Proposed Director; and
(iii) Promoter
Five Years Profit and Loss Account - Untrue Statement
(i) Director;
(ii) Proposed Director;
(iii) Promoter; and
(iv) Expert – Auditor
200
Report on Contingency
Untrue Statement
(1)
(2)
(3)
(4)
Escape the liability
As the untrue statement
was on the basis of the
official document
Director;
Proposed Director;
Promoter; and
Expert:
o Legal Adviser
Oil Exploration Company
Issued Prospectus
Future Prospectus – Inter alia, provides “License obtained from Government for Exploration”
Subsequent to offering allotment
License withdrawn
Losses to Company, Share price gone down
3 Conditions under
Section – 61 (Indication)
Allotment
Company
OR
Agreement to
allot
(Subsequently)
Offerer
= Other than the company
Any other condition based
on circumstances
and view is being taken (as there
is no public offering) that the
allotment or agreement to allot is
a public offering
Offer to public (Actual Offer)
Offering document
= Deemed Prospectus for the company
Payment to the company for allotment or agreement to allot is conditional upon the receipt as an
outcome of the actual public offering.
201
Privatization Commission
Aga Khan Foundation
sold the controlling Shareholder
Portion to be offered to General public and to get the listing of shares
HBL is involved due to the imposition of the Privatization Commission as providing information to
Aga Khan Foundation for preparation of the offering document and to comply with the post-listing
requirements.
Date: 15/10/2012
Section – 62: Offer of shares or debentures for sale by certain persons: Sale to public by 10%
owner:
(1)
(2)
(3)
(4)
(5)
With SECP approval;
Documents of offer by such person is deemed to be the “Prospectus”;
For Section – 57, the person offering is deemed to be the “director”;
Size of capital > 100 million or 25% capital; and
A notice, circular, advertisement or other document soliciting bids, offers, proposals or tenders
for sale of shares or other securities acquired in the course of normal business or for negotiating
sale thereof, or expressing an intention to disinvest such shares or other securities issued by a
scheduled bank or financial institution shall not be deemed to be a Prospectus or an offer for
sale to the public for the purpose of Sections 61 and 62.
Section – 62A: Issue of securities outside Pakistan:
No company shall, except with the prior approval of SECP, issue any security outside Pakistan.
Section – 63: Interpretation of provisions relating to the Prospectus:
If the statement is untrue, then it may be:
(1) Misleading in the form and context in which it is included; and / or
(2) Omission.
“Included” means in the Prospectus, or any report or Memorandum of Association (MOA),
appearing on the face or any reference incorporated therein.
202
Section – 64: Newspaper advertisement of Prospectus:
Details of the Memorandum of Association (MOA), signatories, number of shares subscribed by
them not mandatory.
Section – 65: Construction of references for offering shares or debentures to the public, etc.:
Any reference in this Ordinance, or in the articles of a company to the offering of shares or
debentures to the public, or to invitation to the public to subscribe for shares or debentures, shall,
unless otherwise expressly provided in this Ordinance, include a reference to the offering of shares
or debentures to any section of the public or to invitation to any section of public to subscribe for
shares or debentures, as the case may be.
Public includes existing members or debenture holders or clients of a person issuing the Prospectus.
No offer or invitation shall be treated as made to the public:


If calculated not to result in becoming available for subscription or purchase by person other than
those receiving the offer; OR
Otherwise as being domestic concern of the persons making and receiving the offer.
Without prejudice to the generality of sub-section (2), a provision in a company’s articles
prohibiting invitations to the public to subscribe for shares or debentures shall not be taken as
prohibiting the making to members or debenture holders of an invitation which can properly be
regarded in the manner set forth in that sub-section.
Page # 101 of the Study Manual of the Companies Ordinance, 1984:
9) Offer for sale by persons > 10% of Company shares:
They may offer for sale to the public if:1. Size of capital offering to public shall not be less than the lower of 100 million / 25% Capital.
2. No premium shall be charged unless the company has profitable operational record for at least
one year.
3. In case a premium is to be charged on the sale of shares, the offer shall be fully underwritten
and the underwriter, not being associated companies, shall include at least 2 Financial
Institutions, including Commercial and Investment Banks who will give full justification of the
amount of premium in their independent Due Diligence Report (DDR).
4. DDR = Part of material contracts.
5. Full justification of premium shall be disclosed in the offer of sale.
203
7) Offer (by new management) for Sale of Shares of Privatized Companies:
No offer for 3 years from privatization at price > purchase price adjusted by right or bonus issue, or
any other distribution out of the pre-acquisition reserves.
Section – 62, Page # 20 of the Study Manual of the Companies Ordinance, 1984:
Holding more than 10%
If a Public Limited Company (PLC)
Option to dispose off through a public offering
Unlisted
Company (PLC)
Company already
listed
Therefore,
generally, it is
considered essential
to take into the
confidence, the
Management of the
Company
For the purpose
Formalities:
It will be required to
be complied with by
the company.


For listing; and
Post-listing (Code of
Corporate Governance)
For these two jobs
ABC Ltd.
Paid-up capital of 5,000,000 shares of Rs. 10 each
OR
50,000,000 shares of Rs. 10 each
Mr. A’s holding
700,000 shares of Rs. 10 each (14% Shareholding – Eligible to offer – under Section 62)
204
How to decide offer size
[Rule – 9, Capital Issue Rules, 1996]
Rs. 100 million
OR
Whichever is less
25% of capital
700,000 x 10 = 7,000,000
OR
25% x 5,000,000 x 10 = 12,500,000
50,000,000 shares of Rs. 10 each
15,000,000 shares of Rs. 10 each
(30% Shareholding – Eligible under Section – 62)
Had there been
a desire to have
5,000,000
shares of Rs. 10
each
Desired to dispose off the entire shareholding
15,000,000 x 10 = 150 million
Whichever is less
OR 100 million
50 million x 10%
= 5 million
Instead to
dispose off
through a
public
offering
ABC Bank acquired 30% Shareholding of XYZ Cement Ltd.,
in pursuance of Enforcement of Security under borrowing arrangement
Newspaper advertisement
= Although public offering – More than 10% Shareholding
205
Bank document is not
Offer for Sale
Offer for sale by persons > 10% of the Company’s shares
(Not being associated to Offerer)
Reserve per share
Arif Habib Group acquired
Fatima Fertilizer from Privatization Commission
Disposed off part of Shareholding acquired through public offering in the capacity of more than
10% Shareholding
Benchmarking for the pricing of shares
As per Rule – 7
Besides formalities of Section – 62 + Rule – 9
The new management acquired on 1.1.2009
@ Rs. 10 per share
As 3 years is not elapsed,
since Privatization,
therefore, under Rule – 7,
offer price is not more than
the Privatization price.
Offering under Section – 62
on 1.1.2011
Maximum Offer Price = 10
OR
15.6.2012
Maximum Offer Price
As the offerer decides
5
Since the company has
declared bonus out of Pre-Acquisition
Reserve, therefore, the adjusted price is
the criteria to decide for the Offer Price
under Rule – 7.
3 years elapsed since
Privatization
If, in the above, immediately after acquisition, Arif Habib Group declared 100% Bonus out of the
Pre-acquisition Reserves.
As a result, paid-up capital of 100,000 shares was increased to 200,000 shares.
Arif Habib’s shareholding was also increased from 80,000 shares to 160,000 shares.
206
Original Price = 10; Adjusted Price = 5
Newspaper publication of Prospectus
Section – 53 (1A): English + Urdu
OR
Full form
Abridged form
(Section – 64)
Date: 15/10/2012
Section – 67 to Section – 73
= Allotment
Meanings:
“Appropriation of Share Capital out of the previously un-appropriated Share Capital (called the
Authorized Capital) of the Company
OR
“Acceptance by the Company, of the offer to take up the shares, as filed in the form of the
application for allotment”
Therefore, offering by more than 10% Shareholding will not result in allotment
There is no appropriation of Share Capital of the company
OR
There is no effect on issued and paid-up capital of the company
207
Date: 18/10/2012
Notes from Study Manual of the Companies Ordinance, 1984
ALLOTMENT (Sections 67 – 74)
APPLICATION
Section – 67: Form of application, being part of prospectus, may be specified by
SECP. The application in pursuance of prospectus shall not be less than the nominal
amount (i.e. minimum of Rs. 5,000), as may be specified by SECP, generally or
particularly. Application in pursuance of prospectus shall be irrevocable and all
certificates, statements and declarations of applicant shall be binding within 10 days
of closure of subscription list.
UNSUCCESSFUL /
UNACCEPTED
DECISION
Section – 71: Refund = within 10 days of decision:
SUCCESSFUL
The directors shall be jointly and severally liable to repay that money with surcharge
@ 1.5% for every month or part thereof from the expiration of the 15 th day and, in
addition, to a fine. Provided that a director shall not be liable if he proves that the
default in making the refund was not due to any misconduct or negligence on his
part.
Any condition purporting to require or bind any applicant to waive shall be void.
IRREGULAR
ALLOTMENT
Section – 70: Effect of Irregular Allotment:
(1) An allotment made in contravention of Sections 68 & 69 shall be voidable at the instance of the
applicant within 30 days after the holding of the statutory meeting and not later, or in any case
where the company is not required to hold a statutory meeting or where the allotment is made
after the holding of the statutory meeting, within 30 days after the date of the allotment and
not later, and shall be so voidable notwithstanding that the company is in the course of being
wound up.
(2) If any officer of a company knowingly contravenes or permits or authorizes the contravention
of Sections 68 & 69 with respect to allotment, he shall, without prejudice to any other liability,
be liable to compensate the company and the allottee respectively for any loss, damages or
costs which may have sustained or incurred thereby. Provided that proceedings to recover any
such loss, damages or costs shall not be commenced after 2 years of allotments.
REGULAR
208
RESTRICTIONS /
CONDITIONS AS PER
SECTION – 68
Date: 18/10/2012
Mr. A deposited application money
For Allotment & Subscription Money
With the bankers to the issue on
05.01.2012 during the subscription
days: 03.01.2012 to 07.01.2012
After the submission
He now changed his mind and asked
the Bank to return his application
= Due to the reason that the contract has not
yet been finalized. [The Company has not
accepted the offer of applicants].
Application for
allotment
Once filed
Irrevocable
209
Date: 18/10/2012
BALLOTERS, TRANSFER AGENTS
AND UNDERWRITERS RULES, 2001
[SRO 472 (1) / 2001 dated 27-06-2001]
Notes from Study Manual of Other Laws
Conditions for Acting as a Balloter, Transfer Agent, or Underwriter:
(1)
(2)
(3)
(4)
(5)
(6)
It must be a company.
It must employ a person possessing managerial experience.
It must have, on its payroll, employees possessing the following qualifications: LLB / CA / CMA.
It must have Hardware / Software (i.e. an IT-based system) & experts for the purpose.
Directors and employees should not have been convicted of fraud / breach of trust.
Directors and employees should not have been punished under any provision of Corporate Laws
(i.e. the Companies Ordinance, 1984).
(7) It should comply with all the directives of SECP.
Contractual Arrangements Mandatory:
Contractual arrangements with the client are mandatory, stating the detail of services to be
performed.
General Obligations:
(1) Proper record / documents for transactions / dealings.
(2) The records / documents shall be kept for a period of five years and shall be open for inspection
by a person appointed by the SECP.
Relaxation:
Relaxation may be given by SECP and reasons for giving the relaxation shall be recorded for case /
class.
210
Notes from Notebook
BALLOTERS
[Section – 2: Securities & Exchange Ordinance, 1969]
Balloter: A “balloter” is a person who provides services to an issuer of security for selection of the
required number of applicants of public issue through computer draw.
Balloting: The process of “computer draw” is called “Balloting”.
Appointment of Balloters is required under Listing Regulations – where the subscription received is
more than the required subscription.
Reporting to the Stock Exchange about Subscription Money Received and Matter of Balloting
(1) Within 5 days of the close of the subscription list, the Company will be required to submit, to
the Stock Exchange, the following:
(i) Details of subscription received; and
(ii) Cash of Banks to issue about subscription received.
On the basis
There would be balloting on
… Over-subscription
There is no need to ballot …
Under-subscription
(2) Immediately after Balloting, the Company will be required to submit the Ballot Register,
showing the name, address and other details of the successful applicants.
211
TRANSFER AGENT OR SHARE REGISTRAR
[SECTION – 2: SECURITIES & EXCHANGE ORDINANCE, 1969]
“Transfer agent” or “share registrar” is a person who provides services to an issuer of security for
maintenance of the record about:
o Issue of securities; and
o Transfer of securities.
Section – 204B of the Companies Ordinance, 1984:
Every Listed Company must appoint a Transfer Agent or Share Registrar.
Underwriters
Appointment
Under Capital Issue Rules, 1996
212
Say, Loan-Based
Project
VOLUNTARILY, to hedge against
the Risk of Under-subscription
BALLOTERS, TRANSFER AGENTS AND UNDERWRITERS RULES, 2001 (Refer to Study Manual of
Other Laws – page 35)
Mechanism of Stock Exchange:
(1) All transactions in Stock Exchange, for listed securities must be through:
Brokers
Member of Stock Exchange
Agents
Appointed Agent of any Member
Registered with the SECP under Brokers
& Agents Regulations Rules, 2001
(2) Brokers and agents execute the transaction through “KATS” [Karachi Automated Trading
Software].
(3) Under KATS, the broker who is buying and the broker who sells are not involved in any
interaction and even the identity of any broker of the Stock Exchange is not known to another
broker for a traded transaction.
(4) Settlement and Clearing Houses are responsible to conclude the exchange of quantities and
amounts between brokers.
(5) Settlement and Clearing House collects quantities which have been sold out, by a member and
are delivers the same to the buyers within the prescribed number of days (i.e. Clearing days).
In the same way, the brokers who have purchased will be required to pay to the Houses and the
Houses will then pay to the Broker who sold out.
213
Trading Counters in Stock Exchange
Regular or Ready
Counter
T+2
Every security listed
on any Stock
Exchange in Pakistan
is subject to trade on
this counter.
Future Counter
SPOT / T + 0
Within 7 working days
prior to
commencement of
book closure = Every
security of T + 2 will
be converted to T + 0
1 Month Future
One month opening = Last Monday of
the preceding month
One month closing = Last Friday of the
current month.
Provisionally Listed
Security Counter
Opening Date:
Issuance date of
Prospectus
(Newspaper
publication)
January Future
Last Monday of December: 28.12.2011
Last Friday of January: 26.1.2012
(i) Mr. A purchased 5,000 shares of
PSO on 15.01.2012
= Having 11 days to speculate,
otherwise on 26.01.2012
= Transaction (T) will be
established – now within 2 days
Closing Date: Issue
of shares after
allotment
Could not ‘square’
(i.e. nullify) the
transaction:
Transaction (T) will
be established.
Delivery will be
needed
Payment will
need to be made
(ii) Mr. B purchased 5,000 shares of
OGDC on 05.01.2012
= Having 21 days to speculate or
establish the Transaction (T) on
26.01.2012.
214
Date: 20/10/2012
CENTRAL DEPOSITORY SYSTEM (CDS)
Study Manual of Other Laws – page 5
MEANING OF CDS:
A “Central Depository System” (CDS) is a system established by a Central Depository Company
(CDC) whereby:
There will be an Electronic Book Entry System to record and maintain securities and to register
their transfer.
Change of ownership of securities without any physical movement of certificates or necessity
for execution of transfer deeds.
The ownership will be transferred as soon as securities move from one account to another.
CDS is purely a settlement vehicle and will not affect the trading in any manner whatsoever.
ADVANTAGES OF CDS:
1. CDS is necessary, as without it tracing volume is unmanageable / risky in growing situation;
2. CDS assists in development of stock market; and
3. The system (i.e. CDS) works similar to a bank. Securities will be deposited into CDS and
transactions will be effected electronically, thereby removing the current needs to count, verify,
store and transport countless certificates.
215
STRUCTURES OF CDS ACCOUNT
PARTICIPANTS
INVESTOR ACCOUNT
(Facility available to
Members of Stock
Exchanges only)
An account maintained by CDC in the
name of an account holder, so as to
record the title of the account holder
to any book entry securities entered
in such account
MAIN ACCOUNT
HOUSE ACCOUNT
INVESTOR SUB-ACCOUNT
(1) Allowed to each
Participant
through
“Participation ID”;
(2) Transit account for
movement of
securities.
(1) For securities owned
beneficially by
participants;
(2) Optional and any
number of such
accounts may be
created.
(1) For keeping securities
of individual clients;
(2) Participant can open
any number of such
accounts; and
(3) Sub Account holders
will also have direct
access to the CDC.
Sub-account means a sub-account
maintained, as part of the account of a
participant, in accordance with the
regulations of the CDC in the name of the
sub-account holder, so as to record the title
of the sub-account holder to any book entry
securities entered in the sub-account.
Participant means an account holder who is a member of
a stock exchange and shall perform the following
functions:



Perform services for sub-account holders in
accordance with the terms of an agreement entered
into between the CDC and each of the participants;
Transfer any securities to the CDC to the credit of any
sub-accounts under their respective accounts; and
Handle, on behalf of sub-account holders, the book
entry securities in the sub-accounts under their
respective accounts.
216
KEY OPERATIONAL FEATURES:
1. Deposit: Prescribed procedures for existing physical certificates. The company, not being entitled to
refuse the transfer of shares and debentures under Section – 76, shall transfer the same in favour of the
CDC within 5 days of the application, provided that the requirement of transfer are complied with
{Section – 74 (1)}.
2. Withdrawal: Request for withdrawal of securities from CDS can be filed with the CDC at any time by:
o The account holder, to have them registered in his own name: OR
o By a participant, to have them registered in the name of his sub-account holder.
3. Book Entry Transfer: All the transfers of securities shall be done electronically, or by similar means
without any associated movement of cash or otherwise.
4. Pledge / Lien [important]: In favour of the lender for securing the payment of the debt or liability or
performance of any obligation; it is possible subject to the following procedure (process of “blocking”):
 Instructions may be given to the CDC by the account holder and in case of a sub-account holder, by
the participants. A participant must have the authorization of the sub-account holder concerned for
the purpose.
 After the above instructions, the account holder or the participant ceases to handle the pledged
book entry securities and the notice of blocking shall be available to the pledgee (i.e. Bank / lender)
by CDS.
 The pledgee shall be empowered to transfer the securities upon default of the “pledgor”. The
pledgee can also exercise the powers available under the contract. Pledgee can also exercise the
powers available under the Contract Act, 1872, or any other power given as granted by the pledgor
in writing.
 In order to remove the block (loan’s repayment), the pledgee will be required to give instructions to
the CDC.
Notes from Notebook
Central Depository System (CDS)
Operated by the CDC
Formation’s Conditions
Just Overview
217
= Detail
Companies under the Companies
Ordinance, 1984
Especially formed for the purpose
(1) Electronic custody;
(2) Electronic movement or transfer; and
(3) If formalities for movement for the CDC Act, 1997, are fulfilled, then the transferee will have a
valid title over shares irrespective of the matter of whether he has paid or not.
CDC Act, 1997
The CDC Act, 1997, has an overriding effect over the following:
(i) Memorandum of Association (MOA);
(ii) Articles of Association (AOA);
(iii) Statute;
(iv) Charter;
(v) Other documents; and
(vi) Including Companies Ordinance, 1984, and Other Laws.
Rule of CDC
Shareholder
Member of the Company
Company
Beneficial Owner
Issuer
“Deemed member”
He will exercise all the benefits
and privileges of membership.
218
As the title of shares
under CDS will be with
the CDC, therefore, it is
the “Custodian as
Trustee of Shares”.
Participant Account – Just Identification Of:
Main Account
House Account
Sub Account
Case # 1:
ABC Securities (Pvt.) Ltd.
Bought 5,000 shares of PSO:
o 1,000 own shares;
o 2,000 of client Mr. X; and
o 2,000 of client Mr. Y
Deposit
FOR
Withdrawal
Participant Account – Just Identification Of
Will be operated by
Broker
Main Account
Receiving Account from
Settlement and Clearing
House
5,000 shares
House Account
Debit 100 to the House
Account
And
Credit to the Main
Account
1,000 shares
219
Sub Account
Mr. X – 2,000
Mr. Y – 2,000
With Credit of 4,000
shares to the Main
Account
Case # 2: ABC Securities (Pvt.) Ltd.
Sold 5,000 shares of OGDC:
o 1,000 own shares;
o 1,000 - Mr. X; and
o 3,000 - Mr. Y client
Deposit
FOR
Withdrawal
Participant Account – Just Identification Of
Will be operated by
Broker
6890 – 1299
6890 – 1258
House Account
Main Account
From this Account, Quantity will be
transferred to Clearing and
Settlement Houses:
Credit 1,000
Sub Account
6890 – 1268, 1278
Credit 1,000
Credit 3,000
Debit House A/C 1,000
Debit Mr. X Sub A/C 2,000
Debit Mr. Y Sub A/C 2,000
Credit to Settlement House
All Debit & Credit with reference to
written instruction of participant by
the CDC
Investor Account will be handled by the Investor himself / itself
FOR:
Receiving the Quantity: Written authority of Investor, in favour of the participant, in order to allow
him to deposit the shares.
Withdrawal: Cheque should be issued in favour of the participant to withdraw shares in order to
get deposit in Main Account.
220
POSSIBILITY TO HAVE PHYSICAL SHARE CERTIFICATES
Companies offered
shares for listing after
CDC Act, 1997
Companies offered
shares for listing before
CDC Act, 1997
(1) The company is compulsorily required to be registered
with the CDC.
(2) Based on the above registration, all the shares of the
successful applicants will be issued in the form of CDC.
(3) The applicant will be requiring to mention his:
(a) Sub Account; or
In the application of
(b) Investor Account
allotment
Based on the directive of the
CDC, the company will be
registered with the CDC, within
the transitional phase; every
one will be required to transfer
the shares in favour of the CDC,
since after the registration of
the company with the CDC,
physical trade will was not
allowed.
(4) The shares so issued to the CDC will then be credited to
the respective accounts of the successful applicants
based on the list provided by the issuer.
(5) However, if the applicants are desirous to have shares
in physical form, then they are allowed to do so,
through the exercise of option in the application of
allotment.
But, the shares will not
Physical
be eligible to trade
√
unless transferred in
Electronic Form
favour of the CDC.
√
Although there is a
directive of the CDC,
but the company is
not proceeding to
the Register with
the CDC
Physical trade is still
continuing.
Example:
Scrip
PSO
OGDC
PPL
Holding
5,000
2,000
1,000
Block
3,000
2,000
-
Free
2,000
1,000
In order to trade in the Stock Exchange
Every Broker is required to deposit a sum or security of equivalent value with the Stock Exchange to
avail the credit limit
Matter of availing the limit – “Stock Borrowing”
221
Whether the security in Electronic Form is eligible for deposit with the Stock Exchange?
= Yes, through the Process of Blocking with the modification that:
In this “blocking”, the Participant is not required to have written authorization of the Sub Account holder.
222
Date: 22/10/2012
Study Manual of Other Laws
CENTRAL DEPOSITORY SYSTEM (CDS) [continued] – Page 6 & 7
5. Stock Borrowing: Exposure limit without associated money movement.
6. Corporate Action: The Bonus and Right in relation to securities registered in the name of the
Central Depository shall be allotted to the Central Depository. The Central Depository shall,
upon said allotment determined the entitlements of the respective account holders / subaccount holders with reference to holding as of close of business hours of the Central
Depository on the day before the first day of closure of register of members / debenture
holders / any other security. Changes are made in the holding of respective account holders on
the basis of the said determination. Fractional entitlement shall not be credited.
7. Physical Trade: Would not be possible for securities which have been registered with the CDC.
CENTRAL DEPOSITORY NOT TO BE A MEMBER OF AN ISSUER:
(i) CDC shall be deemed not to be a member of the issuer.
(ii) The account holder / sub-account holder shall be deemed to be a member of the issuer and
shall be entitled for all rights, powers and privileges and be subject to all liabilities, duties and
obligations of a member as conferred under the Companies Ordinance, 1984, or by any other
law / Memorandum & Articles of Association.
(iii) The above situation shall also be applicable in relation to the debentures.
(iv) The issuer shall not be obliged to enter in any registers maintained by it, the names and
particulars of persons who are members or owners of the securities, as above.
TRANSFER UNDER BOOK ENTRY SYSTEM:
(i) A transfer of book entry security from accounts or sub-accounts to other accounts or subaccounts shall be affected by making of an appropriate entry in the central depository register.
(ii) The above transfer shall be considered as a valid and effective transfer of item.
223
EFFECT OF BOOK ENTRY TRANSFER ON TRANSFEREE:
(i) The transferee shall be deemed to have agreed to have accepted the transfer of such book
entry securities subject to the terms and conditions on which the transferor held them
immediately before the time of its transfer; and
(ii) The transferee shall be deemed to have agreed to become the member of the issuer and to be
bound by the issuer’s charter, statute or Memorandum & Articles of Association.
ESTABLISHMENT OF CDC
ELIGIBILITY:
1. Public Limited Company (PLC);
2. Equity Participation / Technical Collaboration Arrangement with an internationally recognized
institution or agency;
3. At least one Stock Exchange to be a member;
4. No Promoter / Director / Officer / Employer:
(a) Convicted of fraud / breach of trust;
(b) Associated with illegal banking business;
(c) Sponsor / Director / Chief Executive / Senior management of defaulting co-operative finance
society / Finance Company; and
(d) Defaulter of commercial bank / Financial Institution / Non-Banking Finance Company (NBFC)
/ suspended payment or compounded (i.e. given relaxation).
5. Promoters must be a means of integrity & special knowledge.
REGISTRATION:
1. Application on the prescribed Form and the prescribed fee.
2. SECP after being satisfied as to:
(a) Applicant is eligible for registration; and
(b) It would be in the interest of Capital Market.
3. Certificate is renewable annually through application on prescribed Form and the prescribed
fee.
224
INFORMATION / DOCUMENT FOR REGISTRATION OF THE CDC:
1.
2.
3.
4.
Copy of the Memorandum of Association & Articles of Association.
Undertaking to keep the information up to date at all times.
Original copy of the treasury challan for registration fee.
Others – like Name / Address / Telephone Numbers / Agreements (i.e. Technical Collaboration
Arrangement) / etc. + Affidavit of clean record and the experience of directors / etc.
Notes from Notebook
CDC Guideline for Bonus Issue
Note: CDC = Central Depository Company
(1) Company shall intimate the matter of Bonus declaration, to the CDC, at least 7 days before the
commencement of the Book Closure, through the submission of the certified true copy of the
BOD Resolution over the declaration.
(2) CDC will submit the Beneficial Owner Report (BOR) or the List of Beneficial Owners Report
(LOBR) with the company within 2 business days of Commencement of Book Closure (5 business
days in case of interim bonus), showing the account holders detail, including the Number of
Shares held, at the close of business days, immediately preceding the commencement of Book
Closure.
(3) On the basis of BOR, the company will allot bonus shares to the CDC and the CDC will then
credit the Bonus Shares to the respective account holders in the following manner:
Account holders’ shareholding x % of Bonus Declaration
CDC Guideline for Right Issue
(1) Company shall intimate, to the CDC, the Right declaration through the submission of the BOD
Resolution, at least 15 days before the Commencement of Book Closure.
(2) On the basis of the above, the CDC can declare the unpaid right letters as a separate security,
for CDC purposes, and be entitled for electronic custody and trade.
(3) If the CDC so decides, then the decision of the CDC shall be intimated to:
(i) Company; and
(ii) SECP.
(4) In any case, the company shall allot the unpaid right letter to the CDC, on the basis of the BOR,
required to be provided by the CDC within 2 business days of the Commencement of Book
Closure, showing the account holders’ details, including the Shareholders on the closure of the
business day immediately preceding the commencement of Book Closure. The said allotment
225
must be done within 14 days of commencement of Book Closure. The CDC will then credit the
right letter to the respective account holders in the following manner:
Account holders’ shareholding x % of Right Declaration
(5) If the unpaid right letters have been declared as a separate security of trade, then the trade will
continue up till 5 business days preceding the last date of the payment to exercise the right.
(6) In any case, the Shareholders desiring to pay for the right letters should approach, to the CDC,
and the said approach would be through the participant in the case of the Sub Account holders
to have a prescribed form for payment of “Right Subscription Money” with Bankers to the
Company.
(7) On the basis of the details available from Banks about the payment of right subscription money
by the respective account holders, the company will credit the Right Shares to the CDC and the
CDC will then credit the same to the respective account holder.
Circular 17 / 1999 + CDC Act
(i) Register of Members:
Company may decide to include the CDC as the Shareholder, or an alternative to the respective
account holders, can be presented as members.
(ii) But, in any case, the pattern of Shareholding (Essential Constituent of the Directors Report &
the Annual Report) should show the detail of the respective account holders, rather than the
CDC as Shareholding.
Circular 16 / 2000
(1) Shares being the following:
(i) Bonus;
Shall be issued in physical form to the CDC with the title of CDC
(ii) Right; and
(iii) Allotment (IPO)
(2) Question:
How long will the CDC keep the physical Share Capital on behalf of the respective Account
Holders?
Answer:
(i) Immediately upon the issuance of shares, the shares shall be cancelled by the CDC with the
following cross mark:
Cancelled
226
(ii) Minimum Maintenance Period of:
(a) Cancelled share certificates
= 6 years from issuance date
(b) Transfer deeds
= 3 years from issuance date,
after the above period. The CDC can dispose off the above in the presence of:
(i) Chief Executive of the Company; and
(ii) Auditor of the Company;
and the auditor shall certify the disposal.
CDC (Central Depository Company) and CDS (Central Depository System) – Past Examination
Questions [Handout]
Q: 1
The Board of Directors of Modern Textile Mills Limited (MTML) recommended the issue of 20%
bonus shares for the year ended September 30, 2010. The register of members for determining the
entitlements was closed from October 22, 2010 to October 29, 2010 (both days inclusive). The
company is listed on the Karachi and Lahore Stock Exchanges and its securities are entered in the
Central Depository System.
State the responsibility of MTML and the Central Depository upon issuance of bonus shares under
the Central Depository Act, 1997.
(04 marks)
Answer to Q: 1
(i) Intimate to the CDC about the
declaration of Bonus
(ii) Providing BOR
(iii) Allotment of Bonus Shares to
the CDC
(iv) Credit to the above allowed to
respective account holders
Responsibility of MTML
Responsibility of CDC
√
7 days before the Commencement
of Book Closure
---
---
√
Within 2 business days of the
Commencement of Book Closure
√
---
---
√
227
Q: 2
(a) Explain the terms “Participant” as defined under the Central Depository Act, 1997. (03 marks)
(b) The Securities of Shalimar Investment Company Limited (SICL) are registered in the name of
Central Depository Company (CDC). List the steps which the CDC will have to take where a
bonus issue is declared by the SICL?
(05 marks)
Answer to Q: 2
(a) Participant:
"Participant" means —
(a) An account-holder who is a member of a stock exchange; and
(b) Any other account-holder who meets the qualifications of a participant prescribed in the
regulations:
Provided that such account holders —
(i) Perform services for sub-account holders in accordance with the terms of an agreement entered
into between the central depository and each of the participants;
(ii) Transfer any securities to the central depository to the credit of any sub-accounts under their
respective accounts; and
(iii)Handle, on behalf of sub-account holders, the book-entry securities in the sub-accounts under
their respective accounts.
(b)
Responsibility of MTML
Responsibility of CDC
√
(i) Intimate to the CDC about the
declaration of Bonus
7 days before the Commencement
of Book Closure
---
√
(ii) Providing BOR
---
Within 2 business days of the
Commencement of Book Closure
(iii) Allotment of Bonus Shares to
the CDC
(iv) Credit to the above allowed to
respective account holders
√
---
---
√
Q: 3
What do you understand by the term “Central Depository System”? Explain the rights of the
shareholders registered as account holders in the system, to attend and vote at the general
meetings of the company.
(05 marks)
228
Answer to Q: 3
Central depository system: — (1) A central depository shall establish a central depository system
whereby, in accordance with the regulations,—
(a)
(i) Accounts may be opened and maintained with the central depository by the account-holders so
as to record the title of the account holders to book-entry securities entered in such accounts; or
(ii) Where the account holders are participants, sub-accounts may be opened and maintained, as
part of the accounts of the participants, with the central depository by the participants on behalf of
the sub-account holders so as to record the title of the sub-account holders to book-entry securities
entered in such sub-accounts;
(b) Transfers of such book-entry securities shall be effected electronically or by any similar means;
and
(c) Pledging of such book-entry securities may be effected in accordance with section 12.
The Rights of the Shareholders Registered as Account Holders in the System, to Attend and Vote
at the General Meetings of the Company:
(4) Notwithstanding anything contained in the Central Depository Act, 1997, an account-holder or a
sub-account holder, who is named in the central depository register, at the close of business hours
of the central depository on the day before the first day of the period of closure of register of
members of an issuer, as the holder of book-entry securities representing securities carrying voting
rights in the issuer, shall be regarded as a member of the issuer for the purpose of attending and
exercising all rights at a general meeting of the members of the issuer in respect of which the
register of members has been closed.
(5) Notwithstanding anything contained in this Act, an account-holder or a sub-account holder, who
is named in the central depository register, as at the close of business hours of the central
depository on the day before the first day of the period of closure of register of non-equity
securities of an issuer, as the owner of book-entry securities representing such securities of the
issuer, shall be regarded as an owner of such securities for the purpose of attending and exercising
all rights at a general meeting of the owners of such securities of the issuer in respect of which the
register of such securities has been closed.
Q: 4
“Once a company’s shares are declared eligible securities with CDS and a shareholder registers his
or her physical scripts with the CDS, the shareholder will stop receiving notices for company
meetings as the CDC will be the registered holder of shares in the company’s register of members.”
Comment on the statement.
Answer to Q: 4 I think the above statement is FALSE, judging from S – 9 of the CDC Act, 1997, which
says:
Central depository to supply information: — (1) Every issuer which is a company or other body
corporate and whose securities are entered in the central depository system of a central depository
shall request the central depository, at such times as may be prescribed in the regulations, for a
229
list of the names and other relevant details of the account holders and sub-account holders, holding
the book-entry securities of such issuer together with details of the book entry securities of such
issuer entered in the accounts of such account holders or sub-account holders, as the case may be
—
(a) for sending notices to any account-holders and sub-account holders of general meetings of the
holders of any securities of the issuer;
(b) for sending any other notices or documents to any account holders and sub-account holders
which are required to be sent by the issuer to holders of any securities of the issuer.
Q: 5
Identify the purposes for which the issuer of a security may request the CDC to provide a list of the
names and other relevant details of the account-holders and sub-account holders of its securities.
(06 marks)
Answer to Q: 5
Purposes to Use Beneficial Owner Report (BOR):
(1)
(2)
(3)
(4)
(5)
(6)
Bonus issue;
Allotment of unpaid Right Letter;
Allotment of Right Shares;
Dispatch of Dividend warrants;
Dispatch of Annual Reports; and
To perform any other corporate action conclusively, BOR is alternatively used as Members’
Register in the scenario where the company avails to provide the CDC as Member in the
Members’ Register.
230
Date: 01/11/2012
Notes from Notebook
Section – 62A: Issue of Securities Outside Pakistan:
+ This issue is the
Export of
Pakistan
securities under
Chapter 20 of
FERA [Foreign
Exchange
Manual]
SECP prior approval
Listing Regulation # 6
Public issue … Listed Company can offer “Overseas Pakistanis”
to participate in the Public Issue
For the purpose, overseas Pakistanis can be declared
as a separate category of issue, up to 20% of issue size
SBP Prior Approval
OR
General Exemption (to get
over the SBP prior approval) if
the issue is such which falls
under Regulation 6
Security issued elsewhere than in Pakistan
?
Place where the issue is being registered
Return of Allotment
MCB offered shares to Foreigners and got listing of the New York Stock Exchange.
National Bank of Kuwait – Public offering in Kuwait
= Since it is issued outside Pakistan, therefore, it is Foreign Security.
Because Return of Allotment or similar documentation is filed outside Pakistan
231
Pak Tobacco
Ltd. is Pakistan
security
because it is:
o
o
Issued in
Pakistan;
OR
Although
dividend is
being
remitted
outside
Pakistan,
but is being
paid in
Pakistan.
Pak Tobacco Ltd.
≈ 70% Shareholding in British Tobacco PLC
Dividend declared for the Year End 30.6.2012 @ 20%
Remitted outside Pakistan through appointed Bankers of British Tobacco PLC
STRATEGY TO START WITH FERA CHAPTER 20
(1) Identify an instrument as security;
(2) Distinguish security as:
(i) Foreign Security; or
(ii) Pakistan Security (other than Foreign Security)
(3) Establish the given transaction as:
Import of
Pakistan
security
Export of
Foreign
security
Pakistan
security
Foreign
security
(4) Establish whether the transaction is subject to:
(i) General Exemption; or
FERA Chapter 20
(ii) Special Permission
[In order to Import or Export … Prior approval of SBP is mandatory].
232
IMPORT OF SECURITIES
Meaning:
(1) Securities are issued outside Pakistan, but are being registered at an address in Pakistan; or
(2) Securities were previously registered at the address outside Pakistan, but are now being
registered at the address in Pakistan.
Mr. Saleem, during his secondment in Dubai, subscribed 500 shares of Mahara Group LLC, Dubai.
In the Form of Allotment, the address is DHA, Phase IV, Karachi
 X Power holds 30% shareholding of Hub Power Co. Ltd.
 An agreement was reached between Dawood Group and X Power, whereby X Power disposed
off the Shareholding to Dawood Group.
 Security was registered presently at the address outside Pakistan (in the name of X Power), but
is now being registered at the address: Dawood Centre, PIDC, Karachi
EXPORT OF SECURITIES
Meaning:
(1) Securities were issued in Pakistan, but are being registered at an address outside Pakistan; or
(2) Securities were presently / previously registered at an address in Pakistan, but are now being
registered at an address outside Pakistan; or
(3) Securities were registered at an address outside Pakistan and are now being registered at
another address outside Pakistan.
Export must be on the account of:
(i) Sale [Disposal against Cash Consideration];
(ii) Transfer [Collaterals]; and
(iii) Barter [Must be against Pakistan security].
Authorized Dealer
= Banks in Pakistan, which are allowed to undertake Foreign Currency related transactions, by the
SECP
233
Notes from Study Manual of Other Laws
FOREIGN EXCHANGE REGULATIONS – SECURITIES
Page 58
SECURITY
Security
Foreign Security
(i) Shares;
(ii) Stocks;
(iii) Bonds;
(iv) Debentures;
(v) Debenture stock;
(vi) Government Securities;
(vii) Deposit receipts in respect
of deposit of securities;
and
(viii)
Units or sub-units of
unit trusts [e.g. Mutual
Funds Units]
Security issued
elsewhere than
in Pakistan
Also includes:
 Coupons or warrants
representing dividends or
interest; and
 Life endowment insurance
policies.
Any security, the
principal of or
interest on which
is payable in any
Foreign Currency
or Elsewhere
than in Pakistan
Person Resident outside Pakistan
(Definition was made in 1948)
But does not include:
Bill of exchange or promissory
notes – other than
Government promissory notes
[Note: For the purpose of
FERA, this will not be called
“security”.
AND
It covers a:


Foreign national, including a foreign national
of Indo-Pakistan origin as also a Pakistani
holding dual nationality for the time being
resident in Pakistan; AND
Company registered in Pakistan which is
controlled directly or indirectly by a person
resident outside Pakistan.
234
(i) IMPORT OF SECURITIES:
There is no restriction, whether Pakistani or foreign.
(ii) EXPORT OF SECURITIES FOR SALE, TRANSFER, ETC.:
(1) Application to SBP through an Authorized Dealer (Banks in Pakistan, which are allowed to
undertake Foreign Currency related transactions, by the SECP) for necessary export license.
(2) Undertaking of Authorized Dealer that securities will be received back within a specified
time or sale proceeds in foreign currency will be repatriated to Pakistan.
(iii) EXCHANGE OF FOREIGN SHARES / SECURITIES HELD BY A RESIDENT WITH PAKISTANI SHARES /
SECURITIES HELD BY A RESIDENT ABROAD:
Apply SBP through a Authorized Dealer or stock broker.
Date: 03/11/2012
Notes from Study Manual of Other Laws
FOREIGN EXCHANGE REGULATIONS – SECURITIES (Page 59 – 62)
5. REQUIREMENTS FOR DEALER / COMPANIES:
Prior permission of SBP is also required for a dealer purchasing shares registered in Pakistan on
behalf of person resident outside Pakistan.
Companies are also required to obtain prior permission before registering a security in favour of
a person resident outside Pakistan.
6. GENERAL EXEMPTION:
ISSUE TRANSFER AND EXPORT OF PAKISTANI SECURITIES TO NON-RESIDENT ON REPATRIATION
BASIS:
(i) Issue price / purchase price is PAID IN FOREIGN EXCHANGE either:
(a) Remittance from abroad through normal banking channels; OR
(b) Out of foreign currency account maintained by subscriber / purchaser in Pakistan.
(Not applicable in case of bonus shares and transfer of shares as stated in case (v) of exemption)
(ii) Price of quoted shares (whether negotiated privately or otherwise) ≥ Price quoted on Stock
Exchange in case of listed securities and break-up value as certified by practicing Chartered
Accountant in case of unlisted securities.
235
ALLOWED TO:
(I) A Pakistan national resident outside Pakistan.
(II) A person who holds dual nationality including Pakistani nationality, whether living in or outside
Pakistan.
(III) A foreign national, whether living in or outside Pakistan.
(IV) A firm (including a partnership) or trust or mutual fund registered and functioning outside
Pakistan, excluding entities owned or controlled by a foreign government.
CASES IN WHICH ABOVE EXEMPTION IS APPLICABLE:
(I) Issue of shares including Modaraba Certificates / Trust and Fund Units out of new public offers,
irrespective of the nature of business of the company.
(II) Transfer of shares quoted on Stock Exchanges of the country, irrespective of the nature of
business of the company.
(III) Private placement of new / initial shares with foreign investors by a public or private limited
company, which is:
(a) a manufacturing company (for this purpose, power generation companies / energy related
infrastructure companies, producers of computer software and companies established to
set up software technology parks, i.e. technology centres for developing computer software
packages / programs are treated as manufacturing concerns).
(b) engaged in those activities in Service, Infrastructure, Social and Agriculture, etc. Sectors
which are open to foreign investors as per prevalent Investment Policy of the Government
provided the conditions prescribed therein have been fulfilled and ‘Entitlement Certificate’
certifying the value of foreign investment obtained from the State Bank of Pakistan.
Summary of Point (III) above:
Private placement of Public or Private Companies:
Where:
(i) Manufacturing companies including power generation or IT-related; or
(ii) Specified service sector companies open for investor by Financial Investor in pursuance of
Entitlement Certificate of SBP.
(IV) Transfer of shares of companies covered by sub-para (III).
(V) Transfer of Pakistani securities held by a “person resident outside Pakistan” on repatriable basis
to other eligible ‘persons resident outside Pakistan’ on the same basis against payment outside
236
Pakistan, provided a certificate to this effect is given by the transferee to the company
concerned.
(VI) Issue of right shares and bonus shares in all those cases where shares are held on repatriable
basis by ‘persons resident outside Pakistan’ in accordance with the general or special
permission of the State Bank of Pakistan.
(VII) Issue of Government securities to persons mentioned in sub-para (A) (III).
(VIII) Issue / transfer of rupee denominated corporate debt instruments viz. Participation Term
Certificates / Term Finance Certificates, etc. and Registered WAPDA Bonds as permitted under
the relevant SRO governing issue and sale of such bonds.
(IX) Issue of NIT Units to persons mentioned in sub-para (A) (I, II & III).
7. PROCEDURE FOR ISSUE OF SHARES ON REPATRIABLE BASIS:
ISSUE OF SHARES ON REPATRIABLE BASIS:
 Foreign currency collection accounts with banks abroad for receiving subsidiary in foreign
currency.
 Repatriation of successful applicant’s amounts to Pakistan and closed within a week of
allotment of shares.
 Proceeds Realization Certificate from concerned Authorized Dealer in Pakistan.
 Submission of Proceeds Realization Certificate to banker designated for Remittance of dividend
and disinvestment proceeds along with list of allottees.
 Pass on list + Proceeds Realization Certificate to Foreign exchange Department of State Bank of
Pakistan (SBP) by Authorized Dealer.
EXPORT OF SHARES BY ISSUING / TRANSFERRING COMPANY & REMITTANCE OF DIVIDEND /
DISINVESTMENT PROCEEDS BY AUTHORIZED DEALER:
Dividend: Net of applicable tax.
Disinvestment Proceeds:
(i) Amount remitted ≤ Sale price certified by Stock Exchange broker or breakup value certificate by
practicing Chartered Accountant (Private and Unlisted).
(ii) Applicable tax has been paid.
237
8. TRADING OF QUOTED SHARES BY NON-RESIDENT:
(i) Can freely trade.
(ii) PROCEDURE:
(1) Open special convertible Rupee Account with any Authorized Dealer in Pakistan.
(2) Can be fed by:
(i) Remittance from abroad;
(ii) Transfer from Pakistan Foreign Currency Account.
(3) Purchase debited, Sales credited on production of stock broker’s memo.
(4) Funds available can be transferred to outside Pakistan or another Foreign Currency
account without prior approval of SBP.
(5) Can also be credited with dividend income.
(6) Transfer from one to another may also be made in case of transfer of shares between 2
accounts holders.
9. REGISTRATION OF FOREIGN SECURITIES:
All persons resident in Pakistan (not a foreigner residing in Pakistan), owner of security the
principle / interest / dividend in foreign currency (Payable) or option (acquire) in foreign
currency = RETURN to SBP within 1 month of acquisition.
10. UNDER WRITING OF SHARES, TFC & MODARABA CERTIFICATE BY FOREIGN BANKS SHARES:
General permission of SBP to the extent of:
(i) 30% of public offer; OR
(ii) 30% of own paid-up capital and Reserves, whichever is less.
PTC, TFC, MODARABA, CERTIFICATE if convertible at option, restriction of 30% apply.
238
Notes from Notebook
Export of Pakistan Securities
By Default prior approval
of SBP
Unless able to MANAGE or AVAIL
General Exemption (Regulation –
6 of Foreign Exchange Manual,
Chapter – 20)
Mode of
Payment
Structure of
Transaction
AND
Description of
+ Investor
Pricing Structure
As provided in the Rule
Listed
Unlisted
Private
Unlisted
Unilever Holding invested in shares of Unilever Pak. Ltd.
= Whether General Exemption might have been applied.
239
Description of
+ Investee
Repatriable Basis Issue
The Capital proceeds and
Dividend will be free to remit
without any restriction.
General Exemption would
also be designated as
“Repatriable Basis Issue”.
But, for the purpose, there
must be satisfactory
documentation, to satisfy
Authorized Dealer (AD).
On the other hand:
If issue (Export) with SBP approval, then SBP approval letter would provide whether the issue is:
(i) Repatriable basis; or
(ii) Non-repatriable basis
In order to avail general exemption, inter alia, price of the issue shall not be less than the
prevailing price on the Stock Exchange.
Right issue of Glaxo Pak to Foreign Shareholding being Foreign National.
Ex-Price: Rs. 50 as compared to Market Value of Rs. 60
240
Date: 04/11/2012
Notes from Study Manual of Companies Ordinance, 1984 – Page 22
Section 68 – Conditions of Allotment:
COMPANY ISSUES
PROSPECTUS
Minimum subscription in cash
received
+
*Separate Bank Account
+
Full nominal amount
COMPANY FILES STATEMENT
IN LIEU OF PROSPECTUS
[Sub-section (8)]
Minimum Subscription in cash
received as fixed in
Memorandum of Association /
Articles of Association +
specified in Statement in Lieu
of Prospectus OR Full nominal
amount of issue as agreed in
cash
+
*Separate Bank Account
+
Full nominal amount
PRIVATE COMPANY
Full nominal amount is
received.
Concept of minimum
subscription and separate bank
account for the subscription
money is not applicable here.
* Subscription money shall be deposited and kept in separate bank account till certificate of
commencement of business is obtained or earlier returned.
Note: Conditions of allotment except the condition of full nominal amount are not applicable in
relation to allotment subsequent to first issue to the public.
Section 69 – Statement in Lieu of Prospectus:
PREPARATION [SUB-SECTION (1)]
IN RELATION TO ALLOTMENT
(1) Company has not issued prospectus in
relation to its formation (i.e. company
has not offered its shares to general
public);
(2) Company has issued prospectus, but
has not proceeded to allot
In either of the above situations, the
statement is prepared for the
purpose of filing rather than to make
it available for public. The concept of
public availability, as applicable in
relation to prospectus, is not
applicable here. The statement is
required to be filed with Registrar at
least 3 days before the allotment.
241
OTHERWISE
Section – 45: Filing upon
conversation
FILING [Sub-section (2)]:
(i) Signed by every director / proposed director / agent; and
(ii) Statement of auditor – Statement of Adjustment & Reasons.
NON-APPLICABILITY OF SECTION [Sub-section (3)]:
o To Private Company.
o Effectively, also guaranteed without Share Capital.
CRIMINAL LIABILITY FOR UNTRUE STATEMENT [Sub-section (5)]:
o Signed or authorized Director, Proposed Director and/or Agent;
o 2 years imprisonment & fine of up to Rs. 10,000; and
o Immaterial & Reasonable grounds.
Notes from Notebook
TYPES OF ALLOTMENT
Valid and Regular
Allotment
Other Allotments
242
Void Allotment
Voidable or Irregular
Allotment
Non-Compliance of
Section – 72
Non-Compliance of
Sections 68 & 69
Subscription money,
now paid-up capital,
should be reclassified as current
liability
Subscription money,
now paid-up capital,
repayable to the
Allottee, if the
option of voidability
is exercised.
Section – 157
Companies Required to Hold Statutory Meeting
Private companies are not required to hold a statutory meeting.
However, Public Limited Companies (PLCs) will hold another Statutory Meeting.
Section – 146
Every PLC, after incorporation, must apply the Certificate of Commencement of Business to the
Registrar on:
(i) Form – 22: Company that issues Prospectus; and
(ii) Form – 23: Company that files Statement in Lieu of Prospectus
Where the Company’s allotment is on the basis of the Statement in Lieu of Prospectus
The concept of “Civil Liability” cannot arise as the Statement in Lieu of Prospectus is not a
document to invite the subscription (i.e. not addressed to any one), rather prepared for filing only.
The Prospectus will provide that the Listing Application has been made
OR
Will be made (effectively redundant as the listing application is required to be filed before the
issue of the Prospectus.
Deadline, after the issue, to apply for listing = Within 7 days after the issue date (Effectively, there
may be a situation where the company provided, in the Prospectus; listing application has been
made, but in fact was not made.
Question: How long will the Stock Exchange take to grant listing?
Answer: It will take 21 days from the deadline from the close of the subscription list
243
If no response is sent within 21 days
Company will issue letter to the applicant that the application for listing is still pending
On 42nd day from the close of subscription list
Company is in receipt of letter from the Stock
Section – 72 (5): Deemed
Exchange, that the application for listing it is
Refused; No response
under consideration
APPLICATION OF VOID ALLOTMENT CONCEPT
(1) Listing application is not filed within 7 days after the issue of Prospectus.
(2) It is filed but:
(i) Refused; or
(ii) Deemed to be refused
VOID ALLOTMENT AFTER LISTING REGULATIONS
(1) Prospectus states that the Listing application has been filed, but in fact was not filed.
(2) Listing application was filed but was refused after the Issue of Prospectus.
Listing Regulation # 8:
Public subscription against Prosperity must have been received from at least 500 subscribers.
244
Date: 05/11/2012
Section 72 – Allotment of Shares & Debentures to be dealt in on any Stock Exchange:
(1) Where a prospectus, whether issued generally or not, states that application has been or will be
made for permission for the shares or debentures offered thereby to be dealt in on any stock
exchange, any allotment made on an application in pursuance of the prospectus shall,
whenever made, be void if the permission has not been applied for before the 7 th day after the
first issue of the prospectus or if the permission has not been granted before the expiration of
21 days from the date of the closing of the subscription lists, or such longer period not
exceeding 42 days as the case may be, within the said 21 days, be notified to the applicant for
permission by or on behalf of the stock exchange. For the purpose of this section, permission
shall not be deemed to be refused if it is intimated that the application for it, though not at
present granted, will be given further consideration.
(2) Where the permission has not been applied for as aforesaid, or has not been granted as
aforesaid, the company shall forthwith repay without surcharge all money received from
applicants in pursuance of the prospectus, and if any such money is not repaid within 8 days
after the company becomes liable to repay it, the directors of the company shall be jointly and
severally liable to repay that money from the expiration of the 8th day, together with surcharge
at the rate of 1.5% for every month or a part thereof from the expiration of the 8 th day and, in
addition, to a fine not exceeding Rs. 5,000 and in the case of a continuing offence, to a further
fine of Rs. 100 for every day after the said 8th day on which the default continues:
Provided that a director shall not be liable if he proves that the default in the repayment of the
money was not due to any misconduct or negligence on his part.
(3) All moneys received as aforesaid shall be deposited and kept in separate bank account in a
scheduled bank so long as the company may become liable to repay it under sub-section (2);
and, if default is made in complying with this sub-section, the company and every officer of the
company who knowingly and willfully authorizes or permits the default shall be liable to a fine
not exceeding Rs. 5,000.
(4) Any condition purporting to require or bind any application for shares or debentures to waive
compliance with any requirement of this section shall be void.
(5) This section shall have effect –
(a) For underwriters as well and the underwriters will also be entitled in the like manner as the
section is applicable to other applicants.
(b) In relation to offer for sale but here the liability for repayment and surcharge, if any, will
devolve on the offerer rather than the company.
245
Section 73 – File return as to allotments: within 30 days file with the Registrar (Form – 3):
(I) If it consists other than cash, then copy of contract of sale, services or other consideration has
to be filed within 30 days with the Registrar;
(II) If issue is at discount, then copy of resolution and the SECP order has to be filed within 30 days
with the Registrar; and
(III) If there is a bonus issue, then only copy of resolution has to be filed within 30 days with the
Registrar.
Section 74 – Limitation of time for issue of certificate:
(1) Every company shall:
o Within 90 days after the allotment of any of its shares, debentures or debenture stock; and
o Within 45 days after the application for the registration of the transfer of any such shares,
debentures or debenture stock,
complete and have ready, for delivery, the certificates of all debenture stock allotted or
transferred, and unless sent by post or delivered to the person entitled thereto, within that
period, shall give notice of this fact to the shareholders or debenture-holders, as the case may
be, immediately thereafter in the manner prescribed, unless the conditions of issue of shares,
debentures or debenture stock otherwise provide:
Provided that, the company shall, within 5 days after an application is made for the registration
of the transfer of any shares, debentures or debenture stock to a central depository, register
such transfer in the name of the central depository.
Explanation: - The expression “transfer”, for the purposes of this sub-section, means a transfer
duly stamped and otherwise valid, and does not include such a transfer as the company is, for
any reason, entitled to refuse to register and does not register.
246
Date: 05/11/2012
Notes from Notebook
ALLOTMENT (continued)
Void Allotment results in:
 Recording of Subscription money as Liability
Point to record liability
S. No.
1. Listing
Regulation
2. Ordinance
3. Listing
Regulation
Ground of Void Allotment
Point to Record
Deadline to Pay
Liability
Immediately upon
8 days of recording or
receipt of subscription establishing the liability.
money.
Prospectus states that
application for listing has
been made, but was actually
not made.
7 days has elapsed since
Immediately upon
issue of the prospectus, but
receipt of subscription
the application for listing was money.
not filed.
Application for listing has
been refused:
 On the matter, 500
Upon refusal
applicants have not
deposited subscription
money;
 Deemed to be refused as
Upon deemed
the 42nd day has elapsed,
refusal
since the close of the
subscription list and there
is no response or update
from the Stock Exchange
about approval
Point to establish
Lifting of Veil
247
8 days of recording or
establishing the liability.
 8 days of receipt of
refusal letter.
 8 days of expiry of
42nd day.
 On 9th day of point
of Void Allotment.
Person
responsible
 Directors under joint
and several
Amount of Lifting
 Subscription Money
+
Surcharge @ 1.5% per
month or part thereof
Irregular allotment can also be termed as Regular or Valid Allotment.
Question: What is the situation?
Answer: When the timeline for exercising the option of voidability has elapsed.
Return of Allotment:
For every allotment:
Form – 3 is required to be filed – under Section 73.
ENCLOSURES OF FORM – 3
(FORM – 3 is required to be filed within 30 days of Allotment)
S. No.
1.
Situation of Allotment
Consideration other than cash
2.
3.
Section – 84:
Company can issue shares at
discount with Members Ordinary
Resolution + SECP Approval
Bonus Issue
4.
Other Situations
248
Enclosures of Form – 3
Contract of allotment in the order to ascertain
consideration other than Cash;
OR
Where the above contract is not in writing,
Form – 4 is to be enclosed in Form – 3, to
provide detail of consideration other than
Cash.
Members Resolution
+
SECP Approval
 Interim Bonus; and
 BOD Resolution
OR
 Final Bonus; and
 Members’ Resolution in AGM
No specific enclosure; Form – 3 is sufficient.
ISSUE OF SHARES [Sections 74 to 81]
In Relation to Allotment
(Acknowledgement of
Allotment)
Otherwise
CDC Act, 1997
Provisions of Sections
74 to 81, applicable for
Physical Share
Certificates only
(Not a real issue as there will be no
change in Issued and Paid-up
Capital; rather there will be a
Change in Member Registrar on
Pattern of Shareholding only).
For electronic shares,
procedures of CDC Act
are to be followed.
Issue of
Duplicate Share
Certificate
[Section 75]
Transfer of
Shares
Transmission (Transfer
of Shares under
Operation of Law)
[Section 74, 76,
77, 78A]
[Section 78A, 79, 80, 81]
Under Will
(Nomination)
Succession
Certificate
Law of
Insolvency
(Insolvency
Order of
Court)
Transferee
NEXT CLASS: Sunday – 10:30 am to 12:15 am
249
Nominee
Successor
Creditor or
Successor
Date: 11/11/2012
Notes from Notebook
In Relation to Allotment
Issuance of shares certificates is, in fact, acknowledgement of allotment
Successful
Within 90 days of allotment
Decision of
Applications
Unsuccessful
(Listing Regulation … 30 days)
Balloting
Listed Company = 30 days
FORM OF ISSUE
Other than Listed Company = 90 days
To CDC
OR
In physical = who
has not opted for
electronic form
Applicant who has opted to have shares in
electronic form
Form of
Allotment
Share Application
Form
250
Question: What should have been done in 30 days / 90 days?
Answer:
Ready for delivery
and dispatch
OR
Ready for delivery and
give notice that shares
can be collected
OR
Ready for delivery and to
make it deliver, follow
provision of Prospectus
Shares should be collected within __
(number of days) of decision from
bankers to issue in physical form as
electronic form shares will be
directly issued to CDC
GROUNDS OF REFUSAL OVER TRANSFER APPLICATION
(1) Transfer Deed is defective or invalid, including the fact that there is an absence of payment of
stamp duty [Section – 76].
(2) Shares are partly paid [Section – 77].
(3) Book closure is continuing [Section – 151].
(4) SECP has put a restriction on transfer for a maximum period of 1 year under Section – 279, for
fact finding in investigation of the company.
Concept of Transfer Deed
(1) Under Other Laws, for transfer of property, there must be free consent of transferor and
transferee, in written form, over transfer.
(2) Under Secretarial Practices of Transfer Deed (of a prescribed form) is taken for the purpose.
(3) Format:
Name of the Company
Duly executed
Name of Transferor
Duly stamped
Stamp duly paid
Company
Stamp
Name of Transferee
Signature of Transferor
Signature of Transferee
251
INQUIRY OVER ISSUE OF DUPLICATE SHARE CERTIFICATE
FIR Lodged for Lost
or Destroyed
Public Notice in Newspaper:
OR
(1) Lost;
(2) Destroyed; and
(3) Turnout, etc.
To invite objection over proposed
issue, within 7 days or 14 days
S – 204B for Listed Company
Transfer Agent appointment is mandatory = As per Rules, 2001
Appeal against Refusal of Transfer
To Court
To SECP
Section – 152
Section – 78A
No time line to appeal
Within 2 months
Grounds of Appeal
1. Not agreeing with reason of
refusal
2. No transfer within 45 days
and the company has not
refused
2 Months From
From receipt of refusal order
From expiry of 30 days of
lodgement of appeal for
transfer
252
o
o
o
o
Personal Entitled to Appeal
Transferor; or
Transferee
Transferor; or
Transferee
Where the person entitled in consequence of:
(i) Death; or
(ii) Insolvency;
And the company is not transferring within some time line of 45 days
Questions:
(1) Are they entitled to appeal to SECP?
Answer: Yes, they are entitled to appeal to the SECP.
(2) Who is entitled to appeal?
Answer: The person entitled for shares due to death or insolvency of the member is entitled to
appeal.
2 MONTHS
COUNTING AS ABOVE
= Company Secretary is under no obligation to inquire the Nominee or Successor of the Deceased
Member
Section – 79: Has put obligation on Nominee or Subscriber to apply to company for seeking
transfer.
However, for a particular company, Company Secretary is held responsible to inquire the fact.
Single Member Company (SMC)
Death of Single Member – Within 7 days of death, Company Secretary has to transfer to Nominee.
253
INVALIDITY OF NOMINATION
Happening of a
Contingency
Filed
Revocation
OR
Death of Nominee prior to
Death of Member
Another Nomination
Last subsisting Nomination
will prevail over all the
Nominations filed.
Notes from Study Manual of the Companies Ordinance, 1984 – page 23
DUPLICATE / TRANSFER / TRANSMISSION OF SHARES & DEBENTURES [SECTION 75 – 81]
Section – 75: Issue of Duplicate Certificates
(Shares, Debentures, Debenture Stock issued under Section – 74)
DUPLICATE
Within 45 days from the date of application, if the original:Proved to have been lost / destroyed; OR
Having been defaced / mutilated or torn, is surrendered to the company.
The company, after making such inquiry as to the loss, destruction, defacement or mutilation of the
original, as it may deem fit to make, shall, subject to such terms and conditions, if any, as it may
consider necessary, issue the duplicate. For the purpose, the company shall not charge fee
exceeding the sum prescribed and the actual expenses incurred on such inquiry.
If, for any reasonable cause, they are unable to issue the duplicate, they should notify this fact,
along with reason – within 30 days from the date of application.
254
Section – 76: Transfer of shares and debentures:
TRANSFER
(1) Application by transferor / transferee.
(2) No transfer unless proper instrument of transfer, duly stamped and executed by the transferor
and the transferee has been delivered to the company alongwith the script.
(3) Where the Transfer Deed is lost / destroyed / mutilated before its lodgment, the company may,
on an application made by the transferee and bearing the stamp required by an instrument of
transfer, register the transfer if transferee proves to the satisfaction of the director that the
Transfer Deed duly executed has been lost / destroyed / mutilated, but the company may ask
indemnity before transfer, as it thinks fit.
(4) Company maintains register of transfers at the registered office – it shall be open for the
inspection of members, as per Section – 150.
(5) The company shall, within 5 days after an application for the registration of transfer of any
shares, debentures or debenture stock to the Central Depository Company (CDC), register such
transfer in the name of the CDC.
(6) In the case of a public company, a Financial Institution duly approved by the SECP may be
appointed as the transfer agent on behalf of the company.
Section – 77: Directors not to refuse the transfer of fully paid shares or debentures:
 But, if transfer deed is, for any reason, is defective / invalid.
 Notify within 30 days of 5 days where transferee in CDC, of lodgment (Section – 78) along with
reasons.
 Transferee entitled to relodge after removing defect or invalidity.
Provisions of this section apply for a Private Company as per the Articles of Association.
Section – 78A: Appeal to the SECP against refusal of transfer:
TRANSMISSION
This may be filed within 2 months.
Section – 79: Transfer of shares or debentures from a deceased member or holder to nominee or
successor-in-interest:
 On application by such nominee or successor duly supported by a document evidencing
nomination of lawful award of the relevant property to such nominee or successor and
255
TRANSMISSION
(CONTINUED)
thereupon, the nominee or successor shall be entered as a member company may ask for
suitable indemnity.
Section – 80: Transfer to nominee of a deceased member:



Member may deposit with the company – nomination conferring 1 or more nominees in the
event of death of a member. If there is more than 1 nominee, the extent of the interest should
be stated.
On death of a member, nominee shall become entitled to the exclusion of all others.
Nomination may become invalid if, at any time, it is varied by another Nomination or it
becomes invalid on the happening of a contingency as specified therein. The Nomination shall
be allowed for not other than spouse, father, mother, brother, sister, daughter, son, and a step
or adopted child.
Section – 81: Transfer by nominee or legal representative: Valid as if he had been a member at the
time of execution of transfer.
256
Date: 15/11/2012
Notes from Study Manual of Companies Ordinance, 1984
Issue of Shares to Public at Premium by a Company – Page 100
1. Profitable operational record of at least 1 year is required.
2. The premium shall not exceed the amount of premium charged on placements with Foreign or
Local institutions and the names and addresses of such institutions shall be disclosed in the
prospectus.
3. The issue shall be fully under written and under writers, not being the associated companies,
shall include at least 2 financial institutions, including commercial and investments and the
under writers shall give full justification of the amount of premium in their independent Due
Diligence Report.
4. Due Diligence Report = Part of material contracts
Contracts related to appointment or
remuneration.
5. Employees of the company getting preferential allocation, if any, shall be charged premium at
the same rate as the public.
6. Full justification for premium shall be disclosed in the prospectus.
7. Any preferential allocation at par (i.e. same premium/equal) {it is not the same as “par value”}
= Not saleable for 2 years from the date of publication. The particulars of certificates issued to
the said person will be furnished to the ty respective stock exchange. After the expiry of the
period, the matter will also be informed to respective stock exchange.
Study Manual of the Companies Ordinance, 1984 – Page 25
(1) Where a company issues shares at a premium, whether in cash or otherwise, a sum equal to the
aggregate amount or the value of the premiums on those shares shall be transferred to an
account, to be called ‘the share premium account’. The amount of premium to be transferred to
‘Share Premium Account’.
(2) Notwithstanding anything in sub-section (1), the Share Premium shall be applied by the
company in the following ways:
(i) In writing off preliminary expenses; and
(ii) In writing off expenses of, or commission paid, or discount allowed on issue of shares and
debentures [underwriters’, and bankers’, and promoters’ commission].
(3) Premium payable on redemption of redeemable preference shares or debentures.
(4) Fully paid bonus shares – no dividend.
257
DISCOUNT:
Power to Issue Shares at a Discount {Section – 84}
(A) It is lawful to issue shares at a discount, subject to:
(1) The issue of shares at discount must be authorized by resolution in General Meeting and
sanctioned by SECP.
(2) There has to be a resolution specifying the maximum rate of discount.
(3) At least 1 year must have elapsed since the entitlement of commencement of business.
(4) Issue of shares at a discount must be done within 60 days of the date sanctioned by SECP or
within such extended time as may be allowed.
(B) The issue of shares at discount shall not be deemed to be a reduction of capital. The
Prospectus/Subsequent Balance Sheet shall contain particulars of the amount of discount
allowed or not written of at the date of the Prospectus / Balance Sheet.
SECP PRESS RELEASE – DATED 16/07/2004
(1) Under Section – 84, all Companies – whether Listed or Non-Listed, have to obtain approval from
the SECP for issuing shares at discount.
(2) Designed information for application … Injection of fresh capital
Improvement in profitability;
Discount will be amortized; and
Material facts shall be brought to the attention of the member for seeking approval.
(3) Issue of shares at a discount should not be used as a ‘device’ to increase the voting percentage
of directors.
(4) Preferential allotment of shares is not to be used by insiders as a means to obtain quick gains
through disinvestments.
Notes from Notebook
1st Issue of the Company Can’t be at Premium
= Normally … 1st issue is done to the promoter under the Statement in Lieu of Prospectus and this is
done after having (at least) 1 year of profitable operations.
This is known as “General Public Offering”
Where issue is at premium which falls under Rule – 4
Discrimination about the rate of premium is not allowed.
258
SRO 300 / 2001
It is allowed for a Public Limited Company (PLC)
To introduce Employees Stock Option Scheme (ESOS) in the company
As per ESOS Rules, 2001
= Shares so allocated (allotted) to employees
= Preferential allocation (allotment)
The rate of premium = Reserve per share
ESOS Rules, 2001
It allows the company to put a ‘lock-in period’ as decided by the company
This lock-in period shall be of at least 2 years from the date of the Prospectus, where the issue is
under ESOS in the scenario, where simultaneous public offering is at premium
Journal Entry:
DR
Preference Shares
DR
Share Premium Account
CR Cash
10
5
15
Issue at Discount
Circular 2 / 05:
Section – 84
“Guideline for issue at discount”
259
Members’ Meeting
Statutory
Meeting
Annual General
Meeting (AGM)
There is no
distinction for
Ordinary or Special
Business
Once in a year
Extra-Ordinary General
Meeting (EOGM)
Table – A: Every business
is special business.
Section – 160 (1) (b)
As and when required for a
(special) matter; it needs to
be applied for by a member
Once in a life
Special Business
Ordinary Business
Other than Ordinary Business,
such as:
(1) Preparation of accounts and
Directors’ and Auditors’ Report;
(2) Appointment of auditors and
fixation of their remuneration;
(3) Approval of Final Dividend; and
(4) Election of directors.
 Directors’ remuneration; or
 Increase in Authorized Capital.
Reason to Establish a Business as Special Business
Statement of material facts should be enclosed with the Notice of the Meeting, where a Special
Business is to be carried out in the meeting.
Explanation of
Special Business
TIME
Nature and Extent of Interest
of any Director, if any, in the
Special Business
If any document’s approval is the subject matter
of Special Business where the documents can be
inspected
260
+
PLACE
Requirements:
(1)
(2)
(3)
(4)
(5)
Issue at Discount – Circular 2 / 2005.
Employees Stock Option Scheme implementation.
Buy-back of shares of s listed company = Section – 95 A + Buy-back Rules, 1999.
Disposal of sizeable part or entire undertaking of a listed company = SRO 1227 / 05.
Investment in Associated Undertaking [Investment in Associated Undertaking Regulations,
2012].
Special Business … It may be carried out with Ordinary Business and requires Special Resolution.
Ordinary Business … It requires Ordinary Resolution.
Entitlement of Commencement of Business
Public Limited Company (PLC)
= Date of Certificate of Commencement of Business
Private Limited Company [(Pvt.) Ltd.]
= Date of Incorporation as mentioned on the Certificate of Incorporation
Face Value = 10
Issue Price = 5
Journal Entry:
DR
Cash
5
DR
Discount
5
CR Issued and paid-up capital
10
The rate of premium = Reserve per share up to 30.6.2005
Discount on issue of shares was required to be capitalized as “Deferred Cost”, amortizable over 5
years.
Since there is no longer capitalization, therefore, there is no matter to provide the following: “Not
yet written off”.
261
Effectively, issue at discount will be “Right Issue”
However, further issue can be “Other than Right”
Special Resolution
Federal Government
Approval
Existing capital … 10,000 shares @ Rs. 10 = Rs. 100,000
Proposed issue … 10,000 shares @ Rs. 10 with issue price of Rs. 5, to existing directors instead of all
members.
Existing shareholder of directors = 60% … 6,000 shares
Therefore:
Revised Shareholding or Proportion
=
6,000 + 10,000
x 100%
20,000 shares [Revised Capital]
= 16,000 x 100% = 80%
20,000
When issue is at Discount
Either
Right Issue
Other than Right, but beneficiary of other
than Right shall be other than Directors
Preferential Allotment = Employees Stock Option Scheme
How and When?
At Discount
At Premium
As per Circular 2 / 05
2 years from Date of
the Prospectus
262
Rule – 4
Date: 17/11/2012
Notes from Study Manual of the Companies Ordinance, 1984
GUIDELINES ON ISSUE OF SHARES AT DISCOUNT – Page 102 & 103
(Circular 2 of 2005 dated April 8, 2005)
1. Applicability:
Issue of shares at a discount by any company to which Companies (Issue of Capital) Rules, 1996,
apply.
2. Policy for SECP to consider Application for Issue of Shares at a Discount:
(a) As per financial projections – fresh capital will result in enough profits to amortize the
discount within 5 years.
(b) It is not allowed for companies in the financial sector where the issue is for minimum capital
requirements.
(c) The SECP may impose the following conditions upon grants under Section – 84:
(i) It is allotted to sponsors and directors – it shall not be disposed off for 3 years.
(ii) The % of directors shareholding – It shall not be increased where the allotment is
otherwise than right.
3. Documents for Application under Section – 84 (2):
S. No. A. ISSUE AT DISCOUNT TO EXISTING AS A
RIGHT
1. A statement signed by all directors,
except the nominee, that are present at
the meeting, stating – funds are essential
& all other avenues explores & last resort.
2. Details of issue (Par / Discount) during the
last 5 years, stating:
 Purpose;
 Utilization;
 Benefits;
 Amount injected; and
 Increase in profit before tax.
3. Certified copy of notice of General
Meeting (Published & circulated).
4. Copy of statement under Section – 160 (1)
(b), containing inter alia, the matters of
these guidelines.
5. Certified copy of Resolution.
263
ISSUE AT DISCOUNT OTHER THAN RIGHT
As per ‘A’ [i.e. Issue at discount to existing
as a right].
Significance of the project and its national
importance, if that forms the basis for the
application.
Arrangement if any
agreement / consent.
Copy of
6.
7.
8.
9.
10.
11.
12.
13.
14.
Certified copy of minutes indicating the
number of members present in person /
proxy.
Certified copy of underwriting
agreements with clause to subscribe, if
called within 15 days of call +
underwriters’ Due Diligence Report.
Copy of financial plan, projections & other
information as per Rule – 5 (ii) of the
Companies (Issue of Capital) Rules, 1996 +
Discount Amortization Schedule.
Where the discount > 10%, the copy of
the project appraisal report by the
Development Financial Institution /
Commercial Bank / Investment Bank is
required.
Breakup by the auditor at the end of the
last financial year. Where the discount >
10%, the breakup on Asset-based
valuation by a consulting engineer
registered with the Pakistan Engineering
Council may be provided.
Audited annual accounts of last 3 years +
latest half-yearly & quarterly accounts.
Shares – Turnover and market price
during the preceding 6 months.
Details of advances / loans to associated
companies and directors during the
preceding 3 years and the justification.
Latest pattern of shareholding and
variation in shareholding > 10% in the last
6 months and after the proposed issue.
REDEMPTION: --- Redemption of Preference Shares {Section – 85}: page 25:
Subject to the provisions of this section, a company limited by shares may redeem the preference
shares issued by it:
1. Out of profits which would otherwise be available for dividend / sinking fund for the purpose /
proceeds of fresh issue of shares made for the purposes of redemption / sale proceeds of
property.
2. The shares must be fully paid.
264
3. Unless redeemed out of fresh issue, the amount of profits which would otherwise have been
available for dividend should be transferred to the ‘Capital Redemption Reserve Fund’ (CRRF).
CRRF should be treated as paid-up share capital of the company for reduction of capital.
Redemption of shares under this section shall not be taken as reducing the amount of
authorized share capital.
4. Where out of fresh issue, the premium, if any, payable on redemption must have been provided
for out of the profits of the company before the shares are redeemed, or out of the share
premium account.
5. Subject to the provisions of this section, the redemption of preference shares thereunder may
be effected on such terms and in such manner as may be provided by the Articles of the
company.
Date: 17/11/2012
Amortization is no longer applicable as “Discount” cannot be capitalized.
Therefore, in the present scenario, incremental profit due to injection of equity is sufficiently
adequate to justify the issue of shares at discount.
Section – 160 (1) (b):
Statement of Material Facts
Essential Constituent of Notice of Meeting of General Meeting
Special Content of Statement of Material Facts:
o Business = Issue at Discount
(1) Directors explored all avenues, because the funds required are essential for the purpose of ____
and it appears that the issue at discount is the last resort.
(2) Details of issue of shares at discount for the last 5 years:
 Amount; and
 Benefits
Etc.
(3) Information of Rule – 5 (ii) of Capital Issue Rules, 1996:
 Purpose of Right Issue at Discount;


Likely benefits; and
3 years projection.
265
Reduction of
Issued and paid-up capital
Authorized Capital
“Reduction of Capital”
Cancellation of Shares not taken up
[Section – 92]
Alteration of Memorandum of
Association (MOA)
Redemption of
Preference Shares
[Section – 85]
Listed Company’s Buyback [Section – 95 A,
Buy-Back Rules, 1999]
Scheme of
Reduction under
Section – 96
[Authorized Capital – Clause]
Section – 2 (1) (30A):
Definition of Redeemable Capital
o
o
Preference Shares can be issued in
Redeemable form.
Ordinary Shares will always be in
Irredeemable form.
Redeemable Form:
Amount against shares will be repaid on a fixed date upon the expiry of a fixed period, as stipulated
at issue.
 Issuance of Preference Shares in Redeemable Form = Discretion of the company.
 Redemption
As per Articles of Association
(AOA) {Additional to Section – 85}
266
Condition of Section – 85
(Minimum condition)
MINIMUM CONDITIONS FOR REDUCTION
Procedures for Reduction:
(1) The company must be Limited by Shares.
(2) Scheme of Redemption:
(a) Revenue Reserves;
(b) Sinking Fund (Special fund – Reserve – that is created through profits to ensure that
redemption is on due date);
(c) Fresh issue [Swap against another issue of some kind / otherwise]; or
(d) Sale of Property.
(3) Shares must be fully paid-up.
Note: If partly paid-up, then the shares must be converted into fully paid-up shares and then,
the company shall proceed for Redemption.
(4) Transfer on amount equivalent to the Face Value of Shares Redeemed
Continued later on
From
To
Revenue Reserves or
Distributable Profits
Capital Redemption
Reserve Fund (CRRF)
This Special-purpose Reserve was
created, having the nature of Treated
Paid-up Capital, in order to restore the
paid-up capital that was otherwise
reduced due to redemption.
Question: Why is there no requirement to create CRRF where Reduction is out of Fresh Issue?
Answer:
There is no requirement to create CRRF where Reduction is out of fresh issue since the fresh issue is
the basis for redemption, therefore, there is no need to fill in the gap of Share Capital through
treated capital. The company is loss-making, i.e. Negative Net worth – Possibility of Redemption:
267
Since, in the situation, the company can’t transfer distributable profits to the CRRF, the only source
for redemption is Fresh Issue.
ENTRY FOR REDEMPTION:
CASE # 1: AT PAR:
DR Preference Shares
10
CR Cash
10
DR Sinking Fund
OR
10
DR Distributable Profits
CR Capital Redemption Reserve Fund
Sale of
Property
10
Revenue
Reserves
CASE # 2: AT PREMIUM OF RS. 1 / SHARE:
DR Preference Share Capital
DR Share Premium / Distributable Profits
10
1
CR Cash
11
Section – 83
268
PROCEDURE TO DE-RECOGNIZE CAPITAL REDEMPTION RESERVE FUND (CRRF) FOR BALANCE SHEET
Treated Issued and Paid-up Capital will remain till Share Capital remains in Balance Sheet
However, the procedure for the Redemption of Capital under the Ordinance can be used to derecognize {Schedule of Reduction can be proceeded to de-recognize}. Generally, it is considered
permissible to issue Bonus Shares out of CRRF. Now, the constructive or treated capital will be
converted into Share Capital.
(5) Whatever is the course of Redemption, the premium on Redemption will always be debited to:
 Share Premium Account; or
 Revenue Reserves.
Section – 85 provides the possibility of Redemption where the company is Limited by Shares and if
it is Limited by Guarantee.
FURTHER ISSUE OF CAPITAL
To Existing Members
With Consideration
(Right Issue)
S – 86
SRO 192 / 86
Other than Existing Members
Without Consideration
(Bonus Issue)
Rule – 5 of
Capital Issue
Rules, 1996
[Listed
Company]
o
o
Articles of
Association;
Rule – 6 of
Capital Issue
Rules, 1996
[Listed Company]
269
Every Company
(Section – 87)
Swap of liability
owed to Bank or
Financial
Institution against
Ordinary Shares
Public Limited
Company (PLC)
Based on:
o
o
Special
Resolution;
For
approval
(S – 86)
ESOS
(S – 86)
SRO 300
/ 2001
[ESOS
Rules]
Possibility for Private Company to make new member or to issue shares other than to existing
members
(1) Swap of liability against equity.
(2) Section – 65 (2): In a Private Company, issue other than to existing members.
Then, this is called “Public Issue” and public issue is prohibited for a Private Company.
Therefore, in order to make a new member, then issue shares at 1 st instance to the existing
members is that existing members will transfer, to the incoming member, in the manner of transfer
as per Articles of Association (AOA).
Date: 19/11/2012
BONUS ISSUE
= Further issue to existing members in proportion
of their holding, without any consideration
Interim Bonus
BOD
Resolution
+
Final Bonus
Compliance with
Rule – 6 of the
Capital Issue Rules,
1996
BOD
Resolution
(Section 196)
(If Listed Company)
Ordinary
Resolution of
Members in the
Annual General
Meeting (AGM)
Compliance
with Capital
Issue Rules,
1996
Secretarial
Practices
Listed
Company
(Rule – 6)
Page 101 of Study Manual
of the Companies
Ordinance, 1984
270
Post-Bonus Issue
At least 25% Maintenance of Free Reserves to Enhanced Capital
Issued or paid-up
prior to Bonus Issue
+
Bonus Issue
Interim Bonus = Quarterly / Half-Yearly
Latest Balance Sheet
Final Bonus = Annual
Capital and Revenue Reserves as per Balance Sheet
xxx
Less:
(a) Reserves for specific purposes
(b) Certain identified amount as per definition of Free Reserves,
if included in the above Reserves:
(xxx)
(xxx)
(i) Revaluation Reserve;
(ii) Capital Redemption Reserve Fund (CRRF);
(iii) Goodwill Reserve;
(iv) Development Allowance Under Income Tax Ordinance, 2001;
(v) Current and Deferred Tax;
(vi) Workers Welfare Fund (WWF);
(vii) Depreciation Reserve
(c) Intangibles
(d) Fictitious Assets
- Capitalized Expenditure
Free Reserves
(xxx)
(xxx)
xxx
Less: Contingencies and Commitments:


Disclosed in Latest Balance Sheet;
Created between:
Latest Balance Sheet date; and
Certificate date
(xxx)
(xxx)
Net Free Reserves
xxx
271
CALCULATION OF FREE RESERVES
Question:
Shareholders’ equity of a commercial bank as at December 31, 2011 is as follows:
in ‘000’)
(Rupees
Statutory Reserve
540,011
Revenue Reserve
28,370
Un-appropriated Profit
396,215
Share Premium
151,956
1,116,552
The ‘Assets’ side of the Balance Sheet, inter alia, includes:
Intangible assets
2,000
Based on the results of December 31, 2011, the Board of Directors (BOD) has proposed a bonus
issue of 18:100, thereby paid-up capital will be increased by Rs. 417,870,000.
Required:
1. Calculate Free Reserves as per Companies (Issue of Capital) Rules, 1996.
2. Comment upon the appropriateness of proposed bonus issue in the light of the Companies
(Issue of Capital) Rules, 1996.
272
Answer:
1. Reserves as per Latest Balance Sheet --- Balance Sheet of 31st December 2011:
Rupees in ‘000’
540,011
28,370
396,215
151,956
1,116,552
Statutory Reserves
Revenue Reserve
Un-appropriated Profit
Share Premium
Less:
Reserve for a Specific Purpose [Reserve for a Bonus Issue]
(417,870)
Certain excluded reserves
N/A
Intangibles
(2,000)
Fictitious Assets
---(419,870)
Free Reserves as per Companies (Issue of Capital) Rules, 1996 =
696,682
Assumptions: It is assumed that there are no balances for:
o Contingencies; and
o Commitments
On Balance Sheet Date: 31.12.2011
For the Period from 1.1.2012 to Certification Date
2. Appropriateness with respect to 25% Maintenance of Free Reserves as compared to Enhanced
Capital:
CALCULATION OF FREE RESERVES:
As above (1)
696,682,000
CALCULATION OF ENHANCED CAPITAL:
Existing Capital
Proposed Bonus Issue
Enhanced Capital
2,321,500,000
417,870,000
2,739,370,000
Ratio of Free Reserves to Enhanced Capital:
= (696,682,000 / 2,739,370,000) x 100%
= 25.4%
273
Free Reserves Maintenance Ratio is ensured and the decision of the Proposed Bonus Issue is
appropriate.
Question:
FGH is a listed company and has not declared any dividend or bonus shares during the past few
years. The Board of Directors (BOD) is now considering distribution of bonus shares.
The Balance Sheet of the company prior to the issuance of bonus shares depicts the following
position:
Rs. in million
60
40
30
20
10
200
Share Capital (6.0 million shares of Rs. 10 each)
General Reserves
Share Premium
Revaluation Reserves
Intangible Assets
Tangible Assets
(a) Advise the company whether it can issue 25% bonus shares out of the General Reserves, a part
of which was accumulated in prior years.
(04 marks)
(b) Can the bonus issue be made out of the Share Premium Account?
(04 marks)
Answer:
(a) Since it is a listed company, therefore, the appropriateness of Bonus Issue is required to be
tested with reference to 25% Maintenance of Free Reserves (under Rule – 6) to Enhanced
Capital.
Calculation of Free Reserves and its maintenance of 25% to enhanced capital is required to be
certified by the auditor and the certificate of the auditor is to be accompanied with the decision
of the Board of Directors (BOD), to circulate amongst:
(I) SECP; and
On the decision day
(II) Stock Exchange
274
Calculation of Free Reserves
As per latest Balance Sheet:
General Reserves
40
Share Premium
30
70
Intangible Assets
(10)
60
Less: Specific Reserves:
o Reserve for Bonus Issue (15)
Free Reserves
45
Assumption: Contingencies and Commitments:
ENHANCED CAPITAL:
Existing Capital
60
Proposed Bonus
15
Enhanced Capital
75
Ratio of Free Reserves to Enhanced Capital:
= 45 / 75
x
100% =
60%
Free Reserves Maintenance Ratio is ensured and so, the decision to issue 25% bonus shares out of
the General Reserves is appropriate.
(b) Section – 83 provides the possible utilization, inter alia, for Bonus Issue.
275
Right Issue
Rule – 5 of the Capital
Issue Rules, 1996
Section – 86
SRO 192 / 86
Listed Company
Format of Prospectus of
Right Issue
Companies Share Capital
Variation of Rights and
Privileges Rules, 2000
Where the Right is of
different kinds / classes
Normally, the decision of the Right Issue is of the Board of Directors (BOD).
Shareholders approval is not required.
(1) Right Issue is at discount [Section – 84]
= Ordinary Resolution
(2) Right Issue is of different kinds / classes
= Special Resolution
Besides Member Approval
Approval of SECP is also
required
Existing Capital:
10,000 Ordinary Shares @ Rs. 10
10,000 9% Preference Shares @ Rs. 10
Proposed Right:
100% in the form of 10% Preference Shares
Checklist of Steps:
(1) BOD Decision … Section – 86;
(2) Alteration of Memorandum of Association (MOA) – to provide Authorized Capital of 10%
Preference Shares;
(3) Alteration of Articles of Association (AOA) – to provide the Rights & Privileges of 10% shares;
(4) Special Resolution over Right Issue; and
(5) SECP Approval.
276
CALCULATION OF ENTITLEMENT OF EXISTING MEMBERS
The new issue of shares as Right:
Ordinary Shares
10,000
Preference Shares
10,000
20,000 x 100%
=
20,000
Section – 86 (SRO 192 / 86)
Format of Prospectus of Right Issue
Material information
about the company,
including the financials of
the last 3 years
Necessity of Issue
Particulars of Directors
Name
(1) Profit After Tax;
(2) Cash Dividend %; and
(3) Bonus Issue %
277
Other
Occupations
& Officers
Residential
Address
Fractional Entitlement
10% Right
A
B
C
D
X
10
5
5
15
5
1
0.5
0.5
1.5
0.5
= 0.5
Fractional Rights (Derivatives)
now consolidated
2.00
Proceeds realized
(Say) Rs. 25 x 2 = Rs. 50
D=
Rs. 12.5
X
Not entitled because it is not
accepted in the whole
B
Proceeds realized and paid to those
shareholders to whom the proceeds
relate, who have exercised the Right
for whole numbers.
278
C
Rs. 37.5: Generally to charity
Rs. 50
Date: 19/11/2012
Notes from Study Manual of the Companies Ordinance, 1984
FURTHER ISSUE OF CAPITAL (SECTIONS 86 – 88) - Page 26
Section – 86: Further issue of capital: Where the directors decide to increase the capital by the
issue of further shares, such shares shall be offered to members in proportion to existing holding,
irrespective of class. The offer shall be made by a notice specifying the number of shares to which
the member is entitled, and limiting a time limit within which the offer, if not accepted, will be
deemed to be declined. Fractional shares shall not be offered and all fractions less than a share
shall be consolidated and disposed of by the company and the proceeds from such disposition shall
be paid to such of the entitled shareholders as may have accepted such offer. The offer of new
shares shall be accompanied by a circular duly signed by the directors or an officer authorized by
them in this behalf in the form prescribed by SECP containing material information about the affairs
of the company, latest statement of the accounts and setting forth the necessity for issue of further
capital. A copy of the circular duly signed by the directors or an officer authorized as aforesaid shall
be filed with the Registrar before the circular is sent to shareholders. The circular shall specify a
date by which the offer, if not accepted, will be deemed to be declined: Provided that the Federal
Government may, on an application made by any Public Limited Company (PLC) on the basis of
Special Resolution allow such a company to raise its further capital without issue of right shares.
Provided further that a PLC may reserve a certain % of further issue under Employees Stock Option
Scheme (ESOS), to be approved by SECP under the rules.
If the whole or any part of the shares offered is declined, or is not subscribed, the directors may allot
and issue such shares in such a manner as they may deem fit.
Section – 87: Issue of shares in lieu of outstanding balance of any loans, etc.:
Notwithstanding anything in Section – 86, the Memorandum of Association (MOA) or Articles of
Association (AOA), a company may issue ordinary shares, or grant option to convert into ordinary
shares, the outstanding balance of any loans, advances or credit, as defined in the Banking
Companies Ordinance, 1962, or other non-interest bearing securities and obligations outstanding,
or having a term ≥ 3 years in the manner provided in any contract with any scheduled bank or a
financial institution to the extent of 20% of such balance.
Provided that such shares shall not be issued, or option to convert the outstanding balance shall
not be exercised, unless in any 2 of the preceding 3 years after the expiry of 2 years from the date
of commencement of commercial production, the return on such non-interest bearing securities,
279
obligations, loans, advances or credit has fallen below the minimum rate of return laid down by the
SBP for the said years.
Section – 88: Deposits not to be invited without issuing advertisement:
(1) The Federal Government may prescribe limits up to which, the manner in which and the
conditions subject to which deposits may be invited, accepted or retained by a company.
(2) Invitation of deposit should be in accordance with the rules and for the purpose, an
advertisement, including therein a statement showing the financial position of the company,
has been issued by the company in the prescribed form and manner.
(3) The provisions of the Companies Ordinance relating to a prospectus shall, so far as may be,
apply to a said advertisement.
(4) Deposit means any deposit of money with, and includes any amount borrowed by, a company,
but shall not include a loan raised by the issue of debentures, or a loan obtained from a banking
company or financial institution.
(5) This section is not applicable to a banking company, or such other class of companies as
specified by the SECP.
THE COMPANIES (ISSUE OF CAPITAL) RULES, 1996
Right Issue by a Listed Company – Page 100
1. There is not supposed to be any ‘Right’ issue within 1 year of Public Issue / Right Issue.
2. The announcement of right issue should contain:
(a) Purpose of the right issue;
(b) Benefits to the company; and
(c) Use of funds and financial projections for 3 years.
The financial plan and projections shall be signed by all the Directors who are present in the
meeting in which the right issue was approved.
3. The above decision shall be communicated to the SECP and the Stock Exchange on the day of
the decision.
4. The premium up to free reserve per share and the Auditors Certificate on ‘Free Reserves’, along
with the decision of the Board of Directors (BOD) for the Right Issue, shall be furnished to SECP
and Stock Exchange.
If the premium > Free Reserves, then:
(i) At least 40% of all the shareholders undertake to subscribe their portion of right issue; and
280
(ii) The remaining amount shall be fully underwritten and the underwriters, not being
associated companies, shall include at least 2 Financial Institutions, including Commercial
and Investment banks, who will give full justification of the amount of premium in their
independent Due Diligence Report.
5. ‘Right’ of Loss-making company, or a company whose market value per share < Face Value in
the preceding 6 months, shall be fully and firmly underwritten.
6. Book closure shall be done within 45 days of the announcement and there shall be no extension
in the last date of payment and renunciation unless the Stock Exchange respectively approves it.
7. If ‘Right’ and ‘Bonus’ are both done, then there should be a Board of Directors (BOD) Resolution
to specify whether ‘Bonus’ qualifies for ‘Right’.
PUBLIC COMPANIES (EMPLOYEES STOCK OPTION SCHEME RULES, 2001) – Page 104 & 105:
(1) ELIGIBILITY:
Regular employee on payroll of:
o Holding Company; and
o Subsidiary Company
are eligible, including the:
Chief Executive; and
Executive Director (but not the Non-Executive Director)
 In Pakistan; and
 Outside Pakistan
(2) CONSTITUTION OF COMPENSATION COMMITTEE:
 Appointment of the Compensation Committee may be done by the BOD.
 The task of this committee shall be for the designing, administration and supervision of the
Employees Stock Option Scheme (ESOS).
 Members of the committee may be any person other than the Executive Director of the
company.
(3) APPROVAL:
(Before implementation of the scheme)
SHAREHOLDERS
By way of Special
Resolution {Rules}
SECP {Section – 86}
Since it is a Special Business, therefore, the statement of Material Facts will be
required; Rules provide for the following contents of the statement (on the
next page)
281
Contents of Statement of Material Facts:
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Eligible employees;
Number of options;
Vesting period and conditions;
Exercise period;
Exercise price;
Lock in period; and
Other terms and conditions.
The company shall provide and undertaking that accounting
policies have been complied with as per Rule – 13.
(4) VOTING RIGHTS:
It will be available only after exercising the option.
(5) OPTION ALLOWED PRIOR TO PUBLIC OFFER:
This is for a PUBLIC UNLISTED COMPANY (Now, the company is going for public offering.)
Public offering document should
provide information about
Employees Stock Option Scheme
Promoters’ capital as
required
With respect to whether the
option was exercised
(6) TRANSFER OF OPTION:
If the employee is not interested, he may transfer the option to another “eligible employee”.
(7) VARIATION:
It is another Special Resolution.
(8) SEPARATE RESOLUTION:
If issued shares under a scheme in a
year are equal to, or exceed 1% of
issued capital
If being issued to:
282
o
o
Holding; or Employees
Subsidiary
(9) DEATH OF AN EMPLOYEE:
(10)
Grant but yet to be vested:
Vested:
(i) Immediate vesting; and
(ii) Exercise by Legal Heirs /
Nominees
Exercise by Legal Heirs /
Nominees
PERMANENT INCAPACITY DURING EMPLOYMENT:
In this case, it shall be vested immediately.
(11) RESIGNED / TERMINATED:
In this case, the option shall lapse on resignation / termination {Not to be vested}.
(12) AUDITORS CERTIFICATE (Each Annual General Meeting shall have a “Special Certificate”) –
where Employees Stock Option Scheme is in place:
(i) Scheme shall be implemented as approved; and
(ii) Accounting policies as per Rule – 13 shall be followed.
(13) DIRECTORS’ REPORT {Section – 236 for Annual Accounts}:
Subsequent to Implementation:
 Features are to be disclosed.
Notes from Notebook
Further Issue of Capital [Sections 86 – 88]
Free Reserves for Right
Free Reserves for Bonus
“Free Reserves” as per Definition
N/A
“Free Reserves” as per Definition
Less
Contingencies & Commitments
When the right is proposes at premium
It always should be calculated whenever there is
a proposal of Bonus.
283
Situation of Right Issue of Listed Company where the Appointment of Underwriter is Mandatory:
(1) Loss-making company;
(2) Market Value –
Face Value in the preceding 6 months of the issue;
(3) Premium is higher than Free Reserves per share.
100% of the issue
60% of the issue
SRO 975 / 2009
(For Listed Companies)
Right issue of the Listed Company, once announced, cannot be:
(i) Varied;
(ii) Charged / Changed;
(iii) Cancelled; and/or
(iv) Withdrawn.
BOD Meeting – 30.9.2012
10% Bonus
10% Right
Mr. A is holding 100 shares.
Possible Scenarios
Existing holding
+ Bonus
Right
Scenario – 1
100
Both are correct
BOD must
specify about
the applicability.
10
110
10 {100 x 10%}
120
284
Scenario – 2
100
10
110
11 {110 x 10%}
121
COMPANIES ORDINANCE, 1984
PRE-EMPTIVE RIGHT OF SHAREHOLDERS [Handout]
ABC Limited, a company listed on Karachi Stock Exchange (KSE), has the following outstanding
shares:


Ordinary shares
Ordinary shares
Class A
Class B
10,000 shares @ Rs. 10 each
10,000 shares @ Rs. 10 each
BOD in its meeting held on 28.1.2012, declared 20% right issue of preference 9% (at par).
Mr. Arman’s holding of shares is as follows:


Ordinary shares
Ordinary shares
Class A
Class B
100 shares
4 shares
Required:
S. No.
Question
Answer
(i)
Formalities to be fulfilled for right issue of
different class?
(ii)
Last date up to which the Book Closure should
commence?
(iii)
Total right shares to be issued?
(iv)
Mr. Arman’s entitlement to receive right letters?
(v)
Director’s option where Mr. Arman declined:
o Fully;
o Partially?
BOD’s course of action as regards to fractional
(vi)
285
(1) Alteration of Memorandum of Association
(MOA) – To provide authorized capital of 9%
Preference Shares.
(2) Alteration of Articles of Association (AOA) – To
provide Rights & Privileges of 9% Preference
Shares.
(3) Normally, the offer of Right Shares is a BOD
decision, but the situation is of a different kind,
so Special Resolution is required.
(4) SECP approval is required as per:
Rule – 30; and
Rule – 32.
The Book Closure should commence within 45 days of
decision, so as the decision to issue Right Shares is
made on 28.1.2012, so the last date up to which the
Book Closure should commence is 15.3.2012
Existing Capital = 10,000 + 10,000 = 20,000 shares
Right Issue = 20%
Total Right Shares to be issued = 20,000 x 20% = 4,000
Rights are declared irrespective of kinds / classes.
Mr. Arman’s Existing Holding 104 shares
(irrespective of class)
Entitlement @ 20% {104 x 20%} 20.8 shares
Less: Fractional entitlement
shall not be offered
(0.8 shares)
20.0 shares
BOD may dispose off in the manner as they please (or
as they think best).
Fractional entitlement of Mr. Arman shall be
entitlement of Mr. Arman?
considered with other fractional entitlement.
It shall be disposed off (in the form of derivation) in
order to realize the proceeds.
(vii) BOD realized Rs. 20 per offer letter (in respect of
a) Shareholders who have accepted the offer of
fractional entitlements that are consolidated)
whole number = Will be entitled for related
through disposing of it in stock exchange, so how
fractional entitlement proceeds.
should the proceeds be distributed?
b) Shareholders who have not accepted the offer of
whole numbers = Will not be entitled for related
fractional entitlement proceeds.
Generally, the proceeds so realized shall be disposed
off in the form of charity, based on:
(I) Provision in the Articles of Association (AOA); or
(II) Members’ Resolution in General Meeting.
(viii) Strategy for BOD where they are proposing to
Since it is a listed company, therefore, by virtue of
downward revise the right issue @ 10%?
SRO, the Right Issue’s announcement cannot be
varied.
(ix)
In the situation, whether the appointment of
Underwriter is supposed to be appointed judging
underwriters is mandatory?
from the following 3 conditions:
(I) Loss-making company;
(II) Market Value –
Face Value in preceding 6 months of the issue;
and
(III) Premium is higher than Free Reserves per share.
In this case, appointment of underwriters is not
mandatory.
(x)
Situation in which Auditors’ certificate on Free
Auditors’ certificate is required when Right Issue is at
Reserve is required in relation to Right Issue?
premium. In this case, this is NOT APPLICABLE.
We have to keep in mind the following:
(1) Guideline for issue of shares at discount; and
(2) Capital Issue Rules [Rule – 4].
CASE # 1:
Existing Capital --- 100 million
Public Offering --- 100 million
Revised Capital --- 200 million
Sponsors’ Minimum Shareholding {200 million x 25%} --- 50 million
Employees Stock Option Scheme is in place while making public offer of Rs. 100 million
Outstanding option:
100,000 entitled for 100,000 shares of Rs. 10 each.
CASE # 2:
Sponsors Minimum Shareholding
Capital as above --Add: Increase due to and
when option be exercised
100 million
100 million
200 million
52.5 million
200 million
1 million
201 million
x 25% = 50.25 million
286
Date: 22/11/2012
Notes from Study Manual of the Companies Ordinance, 1984
FURTHER ISSUE OF CAPITAL (SECTIONS 86 – 88) - Page 26
Section – 86: Further issue of capital: Where the directors decide to increase the capital by the
issue of further shares, such shares shall be offered to members in proportion to existing holding,
irrespective of class. The offer shall be made by a notice specifying the number of shares to which
the member is entitled, and limiting a time limit within which the offer, if not accepted, will be
deemed to be declined. Fractional shares shall not be offered and all fractions less than a share
shall be consolidated and disposed of by the company and the proceeds from such disposition shall
be paid to such of the entitled shareholders as may have accepted such offer. The offer of new
shares shall be accompanied by a circular duly signed by the directors or an officer authorized by
them in this behalf in the form prescribed by SECP containing material information about the affairs
of the company, latest statement of the accounts and setting forth the necessity for issue of further
capital. A copy of the circular duly signed by the directors or an officer authorized as aforesaid shall
be filed with the Registrar before the circular is sent to shareholders. The circular shall specify a
date by which the offer, if not accepted, will be deemed to be declined: Provided that the Federal
Government may, on an application made by any Public Limited Company (PLC) on the basis of
Special Resolution allow such a company to raise its further capital without issue of right shares.
Provided further that a PLC may reserve a certain % of further issue under Employees Stock Option
Scheme (ESOS), to be approved by SECP under the rules.
If the whole or any part of the shares offered is declined, or is not subscribed, the directors may allot
and issue such shares in such a manner as they may deem fit.
Section – 87: Issue of shares in lieu of outstanding balance of any loans, etc.:
Notwithstanding anything in Section – 86, the Memorandum of Association (MOA) or Articles of
Association (AOA), a company may issue ordinary shares, or grant option to convert into ordinary
shares, the outstanding balance of any loans, advances or credit, as defined in the Banking
Companies Ordinance, 1962, or other non-interest bearing securities and obligations outstanding,
or having a term ≥ 3 years in the manner provided in any contract with any scheduled bank or a
financial institution to the extent of 20% of such balance.
Provided that such shares shall not be issued, or option to convert the outstanding balance shall
not be exercised, unless in any 2 of the preceding 3 years after the expiry of 2 years from the date
of commencement of commercial production, the return on such non-interest bearing securities,
287
obligations, loans, advances or credit has fallen below the minimum rate of return laid down by the
SBP for the said years.
Section – 88: Deposits not to be invited without issuing advertisement:
(6) The Federal Government may prescribe limits up to which, the manner in which and the
conditions subject to which deposits may be invited, accepted or retained by a company.
(7) Invitation of deposit should be in accordance with the rules and for the purpose, an
advertisement, including therein a statement showing the financial position of the company,
has been issued by the company in the prescribed form and manner.
(8) The provisions of the Companies Ordinance relating to a prospectus shall, so far as may be,
apply to a said advertisement.
(9) Deposit means any deposit of money with, and includes any amount borrowed by, a company,
but shall not include a loan raised by the issue of debentures, or a loan obtained from a banking
company or financial institution.
(10) This section is not applicable to a banking company, or such other class of companies as
specified by the SECP.
Notes from Notebook
Issue of Shares in Lieu of Loan, etc., of Section – 87
(Swap of Loan against Equity)
= Further issue otherwise than Right
Section – 86 (1) Proviso
= Special Resolution + Federal
Government (SECP) approval
= Public Limited Company (PLC)
= Employees Stock Option Scheme
(ESOS)
= PLC
Section – 87
= Further issue’s situation is having an overriding effect over:
(i) Memorandum of Association:
Irrespective of non-availability or insufficiency of authorized
capital (Section – 87) can be applied for making further issue.
(ii) Articles of Association:
Power of Board of Directors (BOD) for the purpose [BOD
Resolution is not essential for further issue.
(iii) Section – 86:
Although other than to existing member, but approval of:
Special Resolution; and
Not Applicable
Federal Government
288
Conditions of Further Issue under Section – 87 in order to claim overriding effect over:
(i) Section – 86;
(ii) Memorandum of Association (MOA); and
(iii) Articles of Association (AOA)
(1) Instrument of Swap
= Ordinary Share
(2) Obligation or Loan:
Owed to the Bank or Financial Institution
Interest – Based
Non-Interest Based
(Debentures)
(Redeemable Capital)
(3) Term of Loan:
(i) 3 years or more; or
(ii) Less than 3 years, but outstanding for 3 years or more.
(4) Maximum Extent of Conversion (Swap)
= Outstanding but at *20%
Question: How many shares can be issued and how should the pricing of the shares be done?
Answer: The issue of the shares and their pricing shall be done as agreed between the borrower
and the lender.
(5) Section – 87’s Non-Applicability
= In first 3 years of Commercial Production
(6) Loan’s pricing
= Loan or obligation must have been proved as concessional in at least 2 years out of the
proceeding 3 years of conversion, after 2 years of the start of commercial production.
289
Section – 92 (3A):
Notwithstanding anything in:
(i) Memorandum of Association;
(ii) Articles of Association;
(iii) Other Laws; and
(iv) The Companies Ordinance, 1984,
where the company is about to issue shares to the Bank / Financial Institution in pursuance of an
obligation; and
The Capital is insufficient to cater for further issue (issuance)
increase, to the extent, to cater for further issue.
Capital shall be deemed to
CONVERSION OF LOAN INTO SHARE CAPITAL
{Scenario-Based Exercises}
Question No. 1
A company is required to issue shares to a financial institution under the terms of the agreement
within the next 3 days of the happening of the certain event. Now, the event has happened and the
Company has to issue the shares, but the authorized capital is fully subscribed. Advise the company
(how) to avoid non-compliance with the terms of the agreement as well as the provisions of the
Companies Ordinance, 1984.
Answer to Q: 1
It is no matter to follow the requirement to provide for an Increase in Authorized Capital in order to
become able for further issue, because the Authorized Capital is deemed to have been increased as
further issue is to the Financial Institution, in pursuance of the obligation.
Question No. 2
A public company has provided you the following details as at 31.12.2011:
Rupees



Paid up capital
100 million
Loan 1 – payable to HBL 30 million
Loan 2 – payable to MCB 30 million
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(i) Loan 1 was stipulated for 1 year, but on this date it is overdue by 4 years.
(ii) Loan 2 is disbursed in the current year with 5 years repayment terms.
BOD passed a resolution in their meeting held on 2.1.2012 to convert the following proportion of
outstanding amount of each of the loan into equity:
20% of loan for HBL – swap against ordinary shares; and
25% of loan for MCB – swap against preference shares.
BOD is of the view that the matter can be handled without any approval of members meeting for
the purpose.
Advise on further proceedings for the purpose.
Answer to Q: 2
Notes:
(1) Further issue to any person, including Lender, being other than an existing member, requires
member approval in the form of Special Resolution and the approval of the Federal
Government.
(2) The above possibility to provide the derivation of pre-emptive right, is possible only for a Public
Limited Company (PLC).
(3) However, if further issue is done to the Lender and the issue is such that on which all the
conditions of Section – 87 are satisfied, then in pursuance of the said section, the overriding
effect, inter alia, can be claimed over the requirement of (1) above.
(4) Analysis of both of the loans in terms of the requirement of Section – 87 is as follows:
(i) Two years of Commercial
Production must have been
elapsed.
(ii) Term of outstanding loan:
o 3 years or more
(iii) Loan must be owed to the Bank
/ Financial Institution
(iv) Maximum Extent of conversion:
o In terms of amount of loan
of 20% [In the manner
provided in the agreement]
(v) Loan must have been proved
concessional in at least 2 years
out of the proceeding 3 years
(vi) Instrument of Swap:
o Ordinary Shares
Loan owed / payable to HBL
Loan owed / payable to MCB
Assumed to have been elapsed
Assumed to have been elapsed
√
√
√
√
×
Assumed
It can’t be applied or assumed as
disbursement in the Current Year
√
×
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Conclusion: On the basis of the above analysis (on the previous page):
(i) Issue to the HBL can be proceeded under Section – 87; and
(ii) Issue to the MCB shall be based on:
 Special Resolution; and
 Federal Government approval.
Question No. 3
A listed company’s indebtedness to a bank amounts to Rs. 100 million. The lenders are seeking to
convert part of their loan into equity. Advise the company if this would be possible, stating the
relevant conditions, etc., if any.
Question No. 4
ABC Ltd., being a listed company, is considering to swap the outstanding amount of directors’ loan
with further issuance of 9% non-voting preference shares of the company:
 Discuss the possibility.
 Change in answer where the company is a private limited company.
Answer to Q: 4
(i) Possibility of swapping the outstanding amount of directors’ loan with further issuance of 9%
non-voting preference shares of the company:
(1) Issue of shares to the directors in pursuance of loan obligation:
 Further issue otherwise than Right.
(2) For the purpose, the following are required:
 Special Resolution; and
 Federal Government approval.
To provide the above derivation of the Pre-Emptive Right of the Existing Members (Issue
otherwise than Right), the company must be a Public Limited Company (PLC).
(ii) Change in answer where the company is a private limited company:
If the Company is private, the further issue shall be to the existing members, or to provide
derivation thereto through Section – 87.
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