SEC Proposals Accepted as Part of Finance Bill, 2003

In order to facilitate the corporate sector in its business activities and remove certain irritants in the Income Tax Law, the Securities and Exchange Commission of Pakistan (SEC) made several recommendations to the Federal Government and Central Board of Revenue (CBR), which have been accepted by the Government through the Finance Bill, 2003. The proposals accepted by the Government include the following:

-    Capital gains arising out of investment in listed securities is presently exempt upto June 2004. This period has been extended upto tax year 2005.

-    Profit accruing on non-performing loans and advances was permissible as a deduction from income in case of banking companies. This facility has now been extended to Non-Bank Finance Companies (NBFC) i.e. leasing companies, investment banks etc.

-    National Investment Trust (NIT) and Investment Corporation of Pakistan (ICP) were exempt from withholding tax deduction on dividends, profit on debt and brokerage or commission under Sections 150, 151 and 233 of the Income Tax Ordinance, 1979. This facility has been extended to Modarabas and NBFC approved collective investment schemes.

-    In computing income of a person chargeable to tax under “income from property” deduction was allowed on account of share in rent paid to House Building Finance Corporation (HBFC). To facilitate private sector housing companies, this concession has been extended to private sector housing finance companies approved by SEC.

-    Tax credit was allowed to an assessee on insurance premium paid during the year for an amount of premium which was lower of 5% of total income or Rs. 100,000. To facilitate savings the limit has been increased to lower of 10% or Rs. 200,000. In addition to facilitation for insurance companies, salaried people will also benefit from this change.

The Government has also appreciated many other proposals of the SEC which have been incorporated in the relevant laws. These include:

1.       Amendments in the Securities and Exchange Ordinance, 1969

An amendment inserted in sub-Section (2) of Section 8 of the Ordinance, which shall save the small investors from colossal loss caused due to delisting of securities, is that a delisted security could be traded for a specified period to provide opportunity to the investors for disinvestment of their shareholdings. 

Although a Commodity Exchange had been established at Karachi about a year ago, it could not be operationalized due to the absence of a regulatory framework. In order to remove this difficulty, the following amendments have been proposed in the Securities and Exchange Ordinance, 1969:

i.         A new Section 32D has been inserted exclusively for the regulation of the business of “Commodity Exchange”.

ii.        The Forward and Futures Contracts being a prominent feature of trading in the Commodity Exchange, has been recognized as a    security, which would now be traded in the market like other securities i.e. shares, debentures and Term Finance Certificates (TFC).

2.       Amendments in the Securities and Exchange Commission of Pakistan Act, 1997 (SEC Act)

The SEC has been established under the SEC Act, 1997 and its responsibilities and sphere of work have been enshrined therein. The amendments made in the said Act include the following:

i.         The regulation of the Commodity Exchange has been brought within the jurisdiction of the SEC through an amendment in sub-Section (4) of Section 20 of the Act.

ii.        The regulation of Private Pension Schemes were already assigned to SEC through a Government administrative order, it would now become possible for regulating such Schemes and Funds in pursuance of the new amendment in sub-Section (4) of Section 20.

iii.       Under Section 5 of the SEC Act, the SEC may have not less than five and not more than seven Commissioners. Due to the resignation, removal and other unforeseen reasons, the minimum number of Commissioners of SEC may fall below the minimum. Such a situation could render the activities and proceedings of SEC challengeable. With a view to ensure the smooth working of SEC, a new sub-Section (5) has been inserted in said Section 5, providing that the proceedings of the Commission would be valid if due to some reasons, the number of Commissioners at certain point of time has fallen below the minimum.

IOSCO Meeting in Washington

A meeting of the Standing Committee No.3 of International Organization of Securities Commissions (IOSCO) was held on 25th and 26th June, 2003, at the offices of US Securities and Exchange Commission, Washington. Mr. Abdul Rehman Qureshi, Chairman, SEC attended the meeting in his capacity as Chairman of Working Group 3 of Emerging Markets Committee (EMC). Various important issues relating to regulation of capital markets were discussed in the meeting, including the following:

i.         Regulation of market intermediaries in a cross-border environment;

ii.        capital adequacy regime applied to securities firms;

iii.       principles of underlying financial reporting and current reporting practices; and

iv.       survey of regime for client asset protection.

During his stay in Washington, Chairman SEC, discussed some issues with his counterparts from other jurisdictions, regarding the role of IOSCO, with particular reference to the regulation of securities trade for development of capital markets and protection of investors.

Further, Chairman SEC had a detailed meeting with the Chairman, US Commodities Futures Trading Commission (CFTC) and discussed matters relating to operations and regulation of trading in commodities futures contracts. Chairman CFTC offered to extend his full support and cooperation to the SEC for training its officers in Commodities Markets Operations at the CFTC or sending representatives of CFTC to Pakistan for this purpose. Such an arrangement would go a long way in operationalization and regulation of the Commodity Exchange which has already been established at Karachi.

Launch of TMT-PKIC Incubation Fund

Bahrain Delegation Meets SEC

A delegation of senior officials from Bahrain, led by Mr. Khalid Al-Bassam, Deputy Governor, Bahrain Monetary Agency (BMA) met with Mr. Abdul Rehman Qureshi, Chairman, SEC and his team for a briefing on capital market reforms in Pakistan. The SEC team made a detailed presentation to the visiting delegation about the reform agenda of the SEC as well as the achievements to date. Measures introduced in the stock market to enhance transparency, improve governance as well as risk management were discussed. The delegation was also briefed about the recent resurgence in the economy as a result of these far-reaching reforms and about the positive impact on the level of investor confidence in the country. The visitors were further briefed about the recent transfer of regulatory jurisdiction over the remaining non-bank financial institutions from the State Bank of Pakistan (SBP) to the SEC as well as the concept of the newly introduced Non-Bank Finance Companies (NBFC). The delegation was, in particular, interested in learning about the experience of the leasing and insurance sectors within the country.

Members of the delegation expressed their appreciation for the comprehensive reform programme of the SEC and highlighted certain areas for mutual coordination and future cooperation. Cross-listings of Bahrain companies on the stock exchanges in Pakistan and of Pakistan blue chips on the Bahrain stock exchange was seen as an area of great potential. Given the successful experience in Pakistan with corporate bond issues (Term Finance Certificates), the visitors expressed an interest in introducing similar guidelines in Bahrain. Development of the National Clearing and Settlement System as well as the National Commodity Exchange elicited a lot of interest and future cooperation between the two countries was discussed at length. The Deputy Governor, BMA also hoped that the private sector companies would take the initiative of exploring avenues of expansion in Bahrain and bring the much needed knowledge and technical know-how into the country.

Seminar on “Private Pension Schemes in Pakistan”

The Pakistan Society of Actuaries held a seminar on “Regulation of Private Pension Schemes in Pakistan” in June. In his concluding address as chief guest at the seminar, Mr. Etrat Rizvi, Commissioner, SEC said, “There is a need for creating a regulatory environment in which pension schemes grow and at the same time conform to certain discipline, which ensures protection of participants. Taking on the encouragement aspect first, there are three areas which need to be looked at as a priority:

a)       Continue to allow the types of schemes prevalent today

b)       Allow the creation of delivery vehicles other than those prevalent today

c)        Provide fiscal incentives for retirement savings which are equitable.

These relate to both occupational schemes, where the benefit entitlement is related to employment, as well as individual savings schemes which provide an opportunity for individuals to arrange for their own retirement savings, either because they do not fall within any scheme or want to top up retirement benefits available from occupational schemes.”

Training Programme at the International Institute of Securities Market Development in Washington

The United States Securities and Exchange Commission (US SEC) held a training programme at their International Institute for Securities Market Development in Washington. Ms. Sadia Khan, Executive Director was nominated by the SEC to attend the training which was held from April 21 - May 1, 2003.

The Institute, which is the US SEC’s flagship global training programme, provides a dynamic forum where delegates and faculty learn from each other and work together to promote safe and efficient securities markets throughout the world.  This year, the training programme was attended by 96 delegates from 56 countries. The Institute provided an opportunity for participants to learn, from leading U.S. market regulators, securities professionals and from one another, different ways to develop strong regulatory systems that enhance the integrity of securities markets and thereby encourage economic opportunities and growth.

The two-week programme consisted of lectures, panels, and workshops that focused on the development, operation and regulation of securities markets. The faculty for the programme included senior SEC officials as well as representatives of other US governmental agencies, multilateral development institutions, securities exchanges and other key securities industry participants. While the course covered a diverse range of topics, some of the main topics included:

-    Managing a Securities Commission

-    Policies and Legal Framework for Capital Market Development

-    Overview and Structure of the US Securities Industry

-    Overview of Investment Management

-    Overview of Investment Programme

-    Accounting and Auditing Standards

-    Establishing Corporate Governance in Emerging Markets

-    Financial Crimes/Anti-Money Laundering - US Experience and International Insights

Reduction in Stamp Duty

In its efforts to develop the corporate sector, the SEC has been emphasizing upon the provincial governments to bring down the rates of stamp duty on the memorandum and articles of association of companies. On persuasion of the SEC, the government of Sindh and Baluchistan reduced the rates of stamp duty last year which resulted in increased formation of companies under the Companies Ordinance, 1984. The rates of stamp duty in the province of NWFP are already comparatively low.

During fiscal year 2002-2003, 560 and 17 companies were incorporated in Sindh and Baluchistan respectively against 448 companies in Sindh and 11 companies in Baluchistan during fiscal year 2001-2002.

The SEC is now endeavouring to convince the provincial governments for the abolishment of stamp duty altogether which will definitely encourage entrepreneurs to convert their businesses into corporate entities. It is a fact that affixation of adhesive stamps on the memorandum and articles of the companies involves a lengthy and troublesome procedure whereas total revenue collected by the provinces on this account is very insignificant.

In order to facilitate the general public, SEC is making every effort to minimize the time involved in the incorporation of companies. Presently, companies are being incorporated within a period of only two days compared to the previous two week period. The SEC is aiming to further cut down this period to one day by the end of the current year. One of the main hindrances in early incorporation of companies, is the requirement of affixing special adhesive stamps on memorandum and articles of association of the proposed companies. The SEC has taken up this issue with the Finance Ministers of Punjab and NWFP who are sympathetically considering this proposal. The SEC is also approaching the Finance Ministers of Sindh and Baluchistan to consider this proposal and remove this difficulty faced by the investors/promoters of companies.

Sharing of information via the internet is the most convenient and cost effective medium these days. This medium is being used by governments and corporate sectors all over the world. The SEC has, therefore, advised all listed companies to take necessary steps to maintain their website which should provide all relevant financial information to its shareholders, investors, creditors and others concerned.

The SEC is also considering a proposal to allow listed companies to place their quarterly accounts on their website instead of transmitting the same to the shareholders by post. This will definitely ensure timely supply of information to shareholders and will also address the concerns raised by management of listed companies regarding the increased cost and time required to file quarterly accounts.

In order to facilitate foreign investors and overseas Pakistanis in company incorporation matters, the SEC has set up special counters in three of its Company Registration Offices (CRO) - Karachi, Lahore and Islamabad. This step has been taken to encourage foreign investment in the country. The designated officers in the CROs will provide special assistance to international investors for company incorporation and other related regulatory requirements. These officers would also provide information pertaining to corporate laws and registration formalities.

The following officers have been designated for this assignment:

Mr. Zia-ul-Rashid Abbasi, Deputy Registrar, Karachi

Mr. Boo Ali, Deputy Registrar, Lahore; and

Ms. Shaista Bano, Junior Executive, Islamabad

In May, the Commission reassigned the portfolios for various Divisions of the SEC amongst the Executive Directors (ED) as follows:

The SEC and SBP have initiated a joint electronic newsletter series which would cover activities of their respective anti money laundering units. As both these institutions are sharing technical assistance from the World Bank, this newsletter is expected to enhance coordination between them.

The electronic newsletter will be circulated quarterly and will focus on the anti money laundering initiatives taken by the two organizations and other significant domestic and international developments on the subject.

The purpose of the APG is to facilitate the adoption, implementation and enforcement of internationally accepted anti-money laundering standards, in particular the Forty Recommendations of the FATF in the Asia/Pacific region. Pakistan is a member of the APG, and actively pursues its dictums and recommendations.

A seminar on Corporate Social Responsibility (CSR) was held under the auspices of the SEC-UNDP Project on Corporate Governance in Islamabad on June 13, 2003. The seminar focused on encouraging dialogue on and understanding of CSR. It was organized in the backdrop of the media launch of the U.N.’s Global Compact in Pakistan.  The event boasted an impressive turnout from companies representing a variety of sectors, such as banking, oil and gas, food products, insurance, health care, chemicals, stock exchanges, telecommunications, tobacco products, and paper products. Participants from multilateral agencies, academia, and accounting and law firms also contributed towards effective interaction and exchange of ideas. Ms. Aisha Khan, External Communications Officer of the Project, began the event with an “Introduction to CSR” which was followed by a presentation on a macroeconomic view of the topic with reference to Pakistan by Mr. Haroon Sharif, Executive Director, SEC. Developing an indigenous framework for CSR was the focus of the paper presented by Mr. Farrukh Moriani, consultant to the Asian Development Bank. The audience was also exposed to a company’s perspective on CSR as Mr. Leon Menezes, General Manager Human Resource of Shell Pakistan Limited, explained how his company extends the concept of CSR from theory to actual practice.  Chief guest at the occasion was Mr. Onder Yucer, Resident Representative of the UNDP. In his concluding address, Mr. Yucer pointed out that the business sector itself has begun to realize that CSR is no longer an option but a system for self-enhancing and benefiting both businesses and society.

Mr. Muhammad Nadeem, Assistant Director, SEC attended the South Asian Federation of Accountants (SAFA) International Conference titled “The Accounting Profession: Way Forward” in June 2003 in Karachi. The Conference was jointly organized by the Institute of Chartered Accountants of Pakistan and the Institute of Cost and Management Accountants of Pakistan. The event gave participants an opportunity to discuss future international trends particularly with reference to corporate governance and WTO, as well as the future of the accounting profession. Notable speakers from Pakistan, India, Sri Lanka and Bangladesh presented their thoughts on the topic.

Mr. Haroon Sharif, Executive Director, SEC, and Mr. Shahnawaz Mahmood, Research Officer represented the SEC at the Fourth International Conference on Corporate Governance. The event was held in the U.K. in May 2003 and hosted by the World Council for Corporate Governance. The theme of the conference was Corporate Governance: Challenges in Emerging Economies. It provided an opportunity to share experiences and initiate dialogue on contemporary developments in corporate governance issues around the world. The SEC representatives presented a paper on the “Role of Institutional Investors in the Promotion of Corporate Governance in Pakistan”, developed by the Corporate Governance Cell, at this forum.

The paper was well received by the participants and generated meaningful debate. Dr. Shamshad Akhtar, Deputy Director General, Asian Development Bank, who was chairing the session, appreciated the efforts of the SEC-UNDP Project on Corporate Governance for initiating this groundbreaking research work in her keynote address.

Mr. Haroon Sharif, Executive Director, SEC and Mr. Shahnawaz Mahmood, Research Officer met with officials of academia and research bodies in the U.K. in May 2003 in order to exchange ideas and obtain support for corporate governance initiatives in Pakistan.  Meetings were held with the Institute of Directors, the London Business School, the Adam Smith Institute, and the South Bank University. These organizations, well-known for conducting research on corporate governance and providing learning programmes on the topic, offered their research and assistance to the SEC for corporate governance initiatives.

In continuation of the initiative taken by the SEC-UNDP Project on Corporate Governance, two issues of the brief series were developed this quarter. These issues were circulated within the SEC as well as placed on the website for wider access. Issue No. 3 discusses the significance of audit committees in establishing fair and transparent reporting practices while Issue No. 4 analyzes the importance of efficient internal control system and directors’ responsibilities in this regard.

The Project has initiated research on specific aspects of corporate governance through short-term studies. These studies have been assigned to external consultants.

One of the studies focuses on harmonizing the Code of Corporate Governance with other laws and regulations in Pakistan. The main objectives of the research include reviewing the Code to establish overlap with other important laws governing the corporate sector; identifying conflicting and overlapping provisions in other laws and regulations with the Code; proposing amendments in the Code as well as in other laws to harmonize regulatory framework for corporate sector; and giving policy guidelines for effective implementation of the Code. The report recognizes that the recent amendments in the Companies Ordinance, 1984 further entrench and bolster some of the important provisions of the Code. Based on the recommendations of the research report, necessary actions are being contemplated.

Another short-term research study on evaluation of the state of corporate governance in Pakistan and study of the impact of the Code of Corporate Governance on the corporate sector is being conducted. The study seeks to evaluate the state of corporate governance in Pakistan. In addition, it will attempt to assess the effects of the Code on the organizational and operational efficiency of companies, and also determine the major complexities faced by companies in seeking compliance with the Code. Once finalized, it is expected that the outputs of the study will be instrumental in refining the Code to address the practical problems faced by the corporate sector and in improving the overall standard of corporate governance in the country. 

External consultants are also carrying out a feasibility of establishing an Institute of Corporate Governance in Pakistan, which will aid in implementing and enforcing good governance practices in the country. The Institute will be an independent professional organization focusing on corporate governance issues. It is expected that the Institute will, among other things, provide an independent forum for debate and dialogue between directors, stakeholders, academics and legislators; undertake public awareness campaigns; conduct educational seminars and information sessions; facilitate professional development of companies’ management through education and training; and advise on the formulation of corporate governance policy and development of best practices.

The U.N. Chronicle is a quarterly publication of the United Nations, which contains articles, features and interviews from researchers and experts on major political and social issues around the world. In this quarter’s issue (Issue No.2, 2003) the publication showcases the SEC-UNDP Project on Corporate Governance in an article by Mr. Shahnawaz Mahmood, Research Officer, called “Promoting Corporate Governance in Pakistan”. The article captures the steps being taken by the Project through SEC’s and UNDP’s partnership. The article is accessible through:

http://www.un.org/Pubs/chronicle/2003/issue2/0203cont.htm

The SEC-UNDP Project on Corporate Governance has published an Insurance Guide to enable the public to learn about the insurance industry and the various types of insurance offered in Pakistan. The SEC would like the insurance industry in Pakistan to be developed along modern lines. To facilitate this process, a number of market-based provisions to develop the insurance sector while protecting the rights of policy-holders have been introduced. The SEC has also formulated a Code of Corporate Governance for insurance companies to promote good business practices and bring uniformity across the insurance companies. The publication of the Guide, it is hoped, will create awareness on insurance among the general public and particularly the policy-holders.

The SEC-UNDP Project on Corporate Governance has developed and circulated an e-newsletter to highlight the activities of the Project and capture the developments in corporate governance in the country. In this regard, several messages of appreciation were received by the Corporate Governance Cell, a few of which are reproduced below.

“Thank you for keeping us abreast of developments in Pakistan.  We wish you continued success in your efforts.”

“Thank you for your email and the relevant attachments. I am very pleased to hear that you are making progress in the area of corporate governance. When [we] were investing in Pakistan some years ago, corporate governance, transparency, confidentiality of information and the protection of minority shareholders rights were massive issues that we had to grapple with constantly. I recall that is was impossible for us to put in an order to buy shares without EVERYONE in the market finding out every single detail of our order within a day or two and trading against us. It was a major reason why we stopped investing in Pakistan. We will certainly be reviewing the impact of the changes on investors shortly.”

“Thank you for sharing the first issue of the “The Corporate Governance Review” and the Code of Corporate Governance developed by the Securities and Exchange Commission of Pakistan (SECP).  I would like to congratulate SECP on these commendable initiatives.”