To ensure transparency/ accountability in the corporate sector and to safeguard the interests and rights of stakeholders, it is imperative to establish a good corporate governance system.

Furthermore, good corporate governance practices attract foreign investment and enhance commercial access to capital which is crucial for widening the corporate base in the country.

As the governance code prescribes standards applicable to companies, it must be compiled keeping in view the international best practices.

Since the Companies Ordinance 1984 was too old to meet the requirement of businesses working in an evolving economic environment, the government enacted, on 31 May, the Companies Act 2017 (the Act) that replaces the existing 33-year old Companies Ordinance 1984.

The most significant legal reforms introduced in the Act are set out below.

a) Pursuant to section 30 of the Act, the memorandum and articles of a company empowers it to enter into any arrangement for obtaining loans, advances, finances or credit. Previously, companies were not entitled to borrow money because their object clause did not contain any borrowing power.

b) Pursuant to section 153 (h) of the Act, a person will not be eligible for appointment as a director of a company unless he holds a National Tax Number (NTN) as per provisions of the Income Tax Ordinance 2001.

However, on 8 June, Circular No. 15 of 2017 was issued by the Security and Exchange Commission of Pakistan (SECP) providing general exemption for two years to all Small Sized Companies (SCC) including Agriculture Promotion Companies from the NTN requirement.

To qualify for a company to be a SCC, its paid-up capital must not be greater than Rs10 million, turnover not exceeding Rs100m and its number of employee should not be more than 250.

Highlighting the most significant legal reforms introduced in the new Companies Act 2017

c) Companies may allow one or more members to attend and participate in a general meeting through a video-link. Previously, this facility was not available to shareholders.

d) Pursuant to section 452 of the Act, every substantial shareholder or officer of a Pakistani company will have to report to their company any shareholding in a foreign company or corporate body. Subsequently, the company will have to report such information to the registrar along with the annual return.

e) The SECP will keep a record of the beneficial ownership of the shareholders and officers in the Companies’ Global Register of Beneficial Owners and will provide copies of the records to the Federal Board of Revenue (FBR) or any other agency pursuant to section 452 (8) of the Act.

f) Officials of all companies will be bound to check commission of fraud and money laundering including predicated offences under the Anti-Money Laundering Act 2010 pursuant to section 453 of the Act.

The SECP will conduct a joint investigation in serious fraud investigations pursuant to section 258 of the Act.

The SECP may revoke the license of the companies registered for a charitable and not for profit objective if found to be run and managed by persons involved in terrorist financing or money laundering pursuant to section 42(5) of the Act.

g) All companies that launch any real estate projects and that invite advances from the public for such projects will have to obtain the approval and permission of the SECP at different stages of project development including before:

i) an announcement of any real estate project, ii) making any publication or advertisement of real estate projects, iii) accepting any advances or deposits against any booking, before inviting persons to purchase any land, apartment or building and iv) before accepting a sum against purchase of the apartment, plot or building.

h) No company will be entitled to claim to be Shariah compliant and no security, listed or unlisted, will be Shariah compliant unless it is authenticated by the SECP pursuant to section 451.

The companies will not be allowed to appoint or engage any person for Shariah compliance, Shariah advisory or Shariah audit unless that person meets the criteria laid down by the SECP.

i) Pursuant to section 424 of the Act, any company that is already inactive or that has no significant accounting transaction, may apply to the registrar to obtain the formal status of an inactive company.

j) The Act provides an easy exit to a defunct company.

On receiving an application for dissolution from a defunct company, the registrar will dissolve that company by removing its name from the companies register after 90 days of publication of notice in the Official Gazette pursuant to section 426 of the Act.

k) Previously, mergers between two or more companies, demergers and approval of scheme of arrangements were to be approved by the High Court which took a long time for approval.

Under the Act, no formal approval is required from the High Court or the SECP for mergers between the holding company and its wholly owned company and companies owned by the same person.

The two companies’ merger can be effected after approval from the board only. For other mergers, it is the SECP not the High Court that is the sanctioning authority.

l) All companies have to inform the SECP about any change of more than 25pc in their shareholding pursuant to section 465 of the Act.

m) It is mandatory for a large public interest company to reserve 2pc special quota for employment of disabled persons pursuant to section 459 of the Act. The Act also encourages public interest companies to have female representation on their board.

n) Under the Act, any company, its management or its members or creditors may refer a dispute between them to the Mediation and Conciliation Panel setup by the SECP for resolution.

o) Last but not the least, the Act provides three slabs of penalties for each day of default of non-compliance or non-filing: Rs500, Rs1,000 and Rs500,000 with the aggregate penalty in each case of default stated to be a maximum of Rs25,000, Rs500,000 and Rs1000,000 pursuant to section 479 of the Act.

The writer is Additional Director Intelligence and Investigation (Inland Revenue) at the Federal Board of Revenue

Published in Dawn, The Business and Finance Weekly, July 10th, 2017