The Government has, in November 2016, promulgated the Companies Ordinance, 2016 replacing the Companies Ordinance, 1984. After various seminars, conferences, expert groups, discussions and debates, the Companies Ordinance, 2016 (the “2016 Ordinance”) was drafted, debated and promulgated. The new law encourages a movement towards simplifying certain procedures, enabling greater use of technology, and encouraging a paperless record keeping environment.
The constitution for companies and the backbone legislation for the economy has experienced a cardinal shift. The salient changes to the legislation are provided below and will be revised accordingly; the history of the law and the analysis and discussion on the projected effect will follow in a subsequent post.
- Classification of Companies as provided by Section 224 and the Third Schedule of the 2016 Ordinance.
The Third Schedule provides for Public Interest Companies and Large Sized Companies (“PILSCs”), Medium Sized Companies (“MSCs”); and Small Sized Companies (“SSCs”). Small Sized Companies, for example, shall include private companies having (1) paid up capital up to Rs. 10 million; (2) turnover not exceeding Rs. 100 million; or (3) employees not more than 250.
The classification of a company shall be based on the previous year’s audited financial statements and can be changed if it does not fall under the previous criteria for two consecutive years.
Special provisions are provided to facilitate small and medium companies.
The 2016 Ordinance also provides for relaxations for Free-Zone Companies (Section 454) and the establishment of an Investor Education and Awareness Fund (Section 245). The 2016 Ordinance further provides for companies that are “Inactive Companies” to seek such status from the registrar to avail limited procedural and accounting requirements (Section 424).
Moreover, the 2016 Ordinance provides for streamlining lengthy processes by introducing an efficient dispute resolution mechanism through the Mediation and Conciliation Panel (Section 276), passing of members’ resolution by circulation and simplified provisions for Mergers and Acquisitions.
- Memorandum of Association
The 2016 Ordinance requires that companies engage in such business that is the “principal line of business” (Section 26) to reduce the issues related to the doctrine of ultra vires whereby the company undertakes acts that are beyond its scope of work or powers. The principal line of business shall be mentioned in the memorandum of association or notified to the registrar.
- Conversion of Shares into Electronic Format.
Electronic or “demat” form is the concept of dematerialization in finance and financial law and refers to the substitution of paper-form securities by book-entry securities. This is a form of an indirect holding system which is used as an intermediary, such as a broker or a central securities depository and holds the records of the ownership of the shares in an electronic format. The Central Depository System in Pakistan, established under the Central Depositories Act, 1997 has a similar system of electronic filing, record and transfer for and of securities.
- Special provisions for Independent and Non-Executive Directors (Section 166).
The 2016 Ordinance provides for the inclusion of independent directors and non-executive directors on the Board including provisions for the manner of selection and maintenance of the data bank of such directors.
- Increased provisions for Disclosure of Directors, and Beneficial Owners and Increased Transparency by local and foreign companies.
The 2016 Ordinance provides for increased disclosure by companies to the regulatory. It further provides for the companies to maintain a Companies’ Global Register of Beneficial Ownership (Section 452) for every substantial shareholder or officer of a company incorporated under the 2016 Ordinance, having ten percent (10%) or more shares in a foreign company or body corporate.
There is increased regulatory control vis-à-vis fraud, terrorist or corrupt financing, and money laundering.
- Certificate of Shariah Compliance.
Section 451 enables companies to seek for a Shariah compliance certificate from the Securities and Exchange Commission of Pakistan. No company shall be permitted to be called “Shariah compliant” unless it is conducting business according to the principles of Shariah and has been so certified by the Commission.
- Agriculture Promotion Companies (Section 457).
The 2016 Ordinance enables the registration of agriculture promotion companies for the development and enabling of the agriculture sector.
- Table of Fees, amended, to be Paid to the Registrar.
The Seventh Schedule updates the Table of Fees to be paid to the Registrar (Section 462 and 469).