Regulation of Corporate Sector:
The corporate sector in Pakistan isregulated by the Securities and Exchange Commission of Pakistan (“SEC”). SEC was established through the Securities and Exchange Commission of Pakistan Act, 1997 (the “SEC Act”) which contains detailed provisions relating to the constitution, structure, powers and functions of the SEC. The SEC became operational in January 1999. Though this law and the establishment of SEC was premised on giving the new body complete autonomy, this aim however was largely not realized and the government retained control over the SEC.
The SEC consists of a Commission (“Commission”) and a Board, (The Securities and Exchange Policy Board) (“Board”). The Commission consists of five to seven Commissioners (“Commissioners”) who are appointed by the Federal Government while a majority are required to come from the private sector. The Federal Government has the authority to appoint the Chairman of SEC. The Board consists of nine members (“Members”) to be appointed by the Federal Government five of whom are ex-officio members taken from government departments the rest come from private sector.
The Members and the Commissioners can be removed only for cause. The Federal Government retains rule making power. Power to make regulations is shared by the Board and the Commission. The Commission can make regulations in consultation with the Board. Additionally, the Board can make regulations for the conduct of business on the recommendation of Commission and in consultation with the Federal Government.
The SECperforms numerousfunctions under the Companies Ordinance, 1984, the Securities and Exchange Ordinance, 1969, the Insurance Ordinance, 2000, the Modaraba Companies and Modaraba (Flotation and Control) Ordinance, 1980,andother Federal laws.
The Commission is responsible for, inter alia, following:
- Regulating the issue of securities;
- Regulating the business in stock exchanges, commodity exchanges and any other securities markets;
- Registering and regulating workings of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, underwriters, portfolio managers, investment advisers and such other intermediaries who may be associated with the securities markets in any manner;
- Proposing regulations for the registration and workings of collective investment schemes, including unit trust schemes;
- Promoting and regulating self-regulatory organizations in the securities industry and related fields such as stock exchanges and associations of mutual funds, leasing companies and other non bank financial institutions;
- Prohibiting fraudulent and unfair trade practices relating to securities markets;
- Regulating substantial acquisition of shares and the merger and takeover of companies; and
- Encouraging the organized development of insurance market in Pakistan.
The Commission also issues approvals to public companies incorporated in Pakistan intending to issue or offer securities for sale outside of Pakistan or listing such securities on a stock exchange outside Pakistan. All foreign firms interested in an issue or offering of securities to the public in Pakistan or to list such securities on astock exchange in Pakistan require an approval from the SEC. The Commission has wide powers to conduct investigations in respect of any matter, which is an offence under the SEC Act. A failure to cooperate with the Commission in this respect has been made a criminal offence, which may lead to imprisonment and/or a fine.
The Commission was initially tasked with the regulation of the corporate sector and the capital markets. Its mandate was then expanded to include supervision and regulation of insurance companies, non-banking finance companies, private pension funds and related entities. The Commission has also been entrusted with oversight of various service providers to the corporate and financial sectors, including chartered accountants, credit rating agencies, corporate secretaries, brokers, surveyors etc.
Regulation of the stock market and securities business in Pakistan is principally governed by the Securities and Exchange Ordinance, 1969, and the rules prescribed pursuant to it. The SEC is the regulatory body entrusted with the powers conferred on the Government under this law.
The SEC is responsible for supervising stock exchanges and their members. It also licenses investment advisers, regulates the contents of the prospectuses and enforces legislation pertaining to companies and corporate securities. Stock exchanges are also expected to self-regulate and to establish standards for listing and dealing in securities, regulating the conduct of stock exchange members, and organizing the smooth clearing and settlement of trades executed. Through a subsequent amendment the SEC now also regulates asset management companies, investment advisers, investment companies, venture capital companies, transfer agents, balloters and other ancillary businesses relating to stock market.
Acting as a dealer in a listed security outside the exchange where it is listed is prohibited. An amendment to this law was introduced to include within its purview insider trading. Under this amendment, the SEC takes cognizance of an insider trading and if, after a hearing, the accused could not satisfy SEC of his innocence he would compensate all those who suffered losses because of that dealing. In addition, upon a violation of this provision a fine—which may extend to ten million rupees or three times the amount of gain made or loss avoided by such person or loss suffered by another person, whichever is higher—shall be imposed.
The Karachi Stock Exchange (KSE) is the main exchange. The Lahore and Islamabad stock exchanges are much smaller in comparison to the KSE. These stock exchanges were previously operating as companies limited by guarantee. On 7 May 2012, the Stock Exchanges (Corporatisation, Demutualization and Integration) Act, 2012 (“2012 Act”) was enacted. The 2012 Act also requires the mandatory conversion of the stock exchanges from companies limited by guarantee to companies limited by shares and lays down a detailed mechanism for such conversion. The 2012 Act calls for mandatory segregation of majority ownership of each stock exchange from the right to trade on such stock exchange. Under the 2012 Act, majority ownership of a stock exchange may be held by an entity or institution approved by SEC. The shares of stock exchanges may be listed for trading. SEC is empowered to compel any person holding shares of astock exchange above certain prescribed limits to dispose of such shares in the manner specified by SEC.
There is no specific legislation in Pakistan solely for mergers. Some provisions of the company and the competition law, however, come into play in case of a potential merger.
Under the company law, a High Court invariably gets involved as it has the authority to “sanction” the agreement with regard to any compromise or arrangement reached by three-fourths in value of creditors or members of a company whereafter the High Court’s sanction becomes binding on the remaining creditors or members. A certified copy of the court’s order has to be filed with the Registrar of companies within 30 days in order for it to become effective.
Under the Competition Act, 2010 (the “Competition Law”), where an undertaking intends to acquire the shares or assets of another undertaking or two or more undertakings intend to merge the whole or part of their businesses, and meet the pre-merger notification thresholds stipulated by the Competition Commission of Pakistan (“CCOP”), such undertaking or undertakings shall obtain prior clearance of such transaction from the CCOP by filing a pre-merger application. A pre-merger application should be submitted to CCOP as soon as the parties agree in principle or sign a non-binding letter of intent to proceed with the merger. Parties must not proceed with the intended merger until they have received clearance from CCOP.
CCOP may prohibit consummation of a merger transaction if it comes to the conclusion that the proposed merger would substantially lessen competition by creating or strengthening a dominant position. However, CCOP may approve such transaction in certain exceptional circumstances. CCOP is empowered under the Competition Law to impose such conditions as it deems appropriate while permitting a merger transaction to consummate.
Under the Competition Law the merger parties may not be required to file an application for clearance from CCOP unless:
- The value of gross assets of the undertaking, excluding value of goodwill, is not less than three hundred million rupees and/or the combined value of the undertaking and the undertaking(s) the shares of which are proposed to be acquired or the undertakings being merged, is not less than one billion rupees;
- Annual turnover of the undertaking in the preceding year is not less than five hundred million rupees and/or the combined turnover of the undertaking and the undertaking(s) the shares of which are proposed to be acquired or the undertakings being merged is not less than one billion rupees;
- The transaction relates to acquisition of shares or assets of the value of one hundred million rupees or more;
- In case of acquisition of shares by an undertaking, if an acquirer acquires voting shares, which taken together with voting shares, if any ,held by the acquirer shall entitle the acquirer to more than 10% voting shares;
- In the case of an asset management company carrying out asset management services, its collective exposure for itself and in all of its collective investment schemes in a single entity is more than 25% of total voting rights; or
- The value of total assets under management of an asset management company is one billion rupees or more.
Similarly, following transactions are exempt from filing the pre-merger application:
- A transaction in which a holding company increases its stake in its subsidiary or the subsidiaries thereof, or if such subsidiaries acquire or increase their equity investment in each other;
- A transaction in which a holding company, merges, amalgamates, combines or ventures jointly with its subsidiary or the subsidiaries thereof merge, amalgamate, combine or venture jointly with each other;
- A transaction in which a bank, an insurance company or an investment company deal in trading of shares for their own accounts for the purpose of earning dividend income and capital gains and not with the intention of acquiring controlling interest in the investee company;
- Shares acquired by succession or inheritance or as a gift from spouse or shares acquired through will.
In case of a violation of the provisions of the Competition Law CCOP may impose a fine not exceeding seventy five million rupees or an amount not exceeding ten percent of the annual turnover of the undertaking. In case the violation is of continuing nature, CCOP may impose a further fine.
Failure to comply with an order of CCOP constitutes a criminal offence punishable with imprisonment for a term which may extend to one year or with fine which may extend to twenty five million rupees.
The Listed Companies (Substantial Acquisition of Voting Shares and Takeovers) Ordinance, 2002 (“Acquisition Ordinance”) lays down the procedure for acquisition of voting shares and take-overs of listed companies. The Acquisition Ordinance was promulgated with a view to protecting the minority shareholders and to boost investor confidence—as well as to help check market abuse and provide transparent and efficient system for substantial acquisition of voting shares and take-overs of listed companies.
Under the Acquisition Ordinance, any person acquiring either directly or indirectly voting shares in a listed company whichentitles such person to more than 10% voting shares in a listed company is required to disclose his shareholding to such company and to the relevant stock exchange.
In the case of an acquisition of 25% or more voting shares (but less than 51%) or control of a listed company, in addition to the disclosure in the manner mentioned above, the acquirer is obliged to follow the procedure laid down in the Acquisition Ordinance for such acquisition. This procedure, inter alia, includes the making of public announcements of intention to acquire and a public offer, furnishing of suitable security for performance of acquirer’s obligations, appointment of a manager to the offer, submission of public offer to the target company, the SEC and the relevant stock exchanges and its circulation amongst the members of the target company. A person wishing to make a competitive bid for acquisition of the same voting shares of the target company may also make a public announcement of his offer. The Acquisition Ordinance also defines the timelines within which acquisition proceedings must be completed.
The Listed Companies (Substantial Acquisition of Voting Shares and Takeovers) Regulations, 2008, lay down the mechanism for determining the minimum offer price and minimum number of voting shares which should be offered to be acquired pursuant to a public offer.
The Acquisition Ordinance does not apply to certain transactions. These include allotment of shares in pursuance of a pre-public or public or right issue, transfer of shares pursuant to a scheme of arrangement or reconstruction, acquisition of voting shares in a company whose securities are not listed on any of the stock exchanges in Pakistan, and sale of shares in consequence of privatization within the meaning of Privatization Commission Ordinance, 2000. An acquirer in an exempted transaction, however, may still be obliged to make a disclosure of its acquisition within two working days of the acquisition to the target company, the relevant stock exchanges and the SEC.