The government has geared up its working to provide maximum ease to entrepreneurs by introducing sweeping simplification and modernisation of the Companies Act 2017 (amendment) as it has become rigid, outdated, over-controlling, costly for corporate entities and unfit to support a more entrepreneurial society with faster economic growth, more innovation and new forms of business investment.
“Some weeks back, top policymakers of the government in a high-level meeting, observed that Pakistan has been suffering from stunted corporate growth, from the smallest businesses to the largest corporations. The meeting recommended to the prime minister that Pakistan should follow the lead of other countries based in the UK corporate law traditions (such as Australia and Canada, and the UK itself), and revise its corporate governance for private companies from the top-down based on the principle which says for unlisted corporate entities of any size, corporate governance should be mostly determined by the directors and shareholders, with key regulatory protections for minority shareholders, and oversight and vigilance by the Securities and Exchange Commission of Pakistan (SECP) of criminal, fraudulent, and abusive activity,” top officials privy to the development told The News.
“Enterprises employ different legal business forms to structure their organisations, from partnership forms to limited liability companies and joint stock companies, which means that corporate governance cannot fit into a single mould. These corporate entities today should be regulated by their terms of association and shareholder agreements, which are customised to their specific needs.
“At this stage, we are not proposing any reforms for listed (public) companies. These reforms, based on the model of directors’ conduct rather than the more regulated tradition of the current Act, are for unlisted corporate entities of all sizes and types,” they said.
A corporate entity includes all forms of shareholding structures provided under the Companies Act, 2017 for incorporation i.e. single member company, private limited company, public company and limited liability partnership.
Pakistan suffers from stunted corporate growth, from the smallest businesses to the largest corporations. The arc of business growth from the single person with a good idea to an international unicorn faces numerous barriers, such as increasingly heavy regulatory burdens as a corporate entity grows (often triggered by arbitrary changes in revenues, employees, capital, and other metrics); over-control of company activities and its own corporate governance that reduces risk-taking and effectively excludes innovative financing; and high levels of complexity intimidate small corporate entities that want to get bigger.
These problems, in turn, discourage investment in corporations, and particularly foreign investment. Today, there are only 2,500 unlisted large companies in Pakistan. Only 252,321 companies are registered in the federal registry operated by SECP (the US has 33.2 million corporate entities registered, and Canada, with 1/6th the population, has 1.3 million). Many companies are registered as firms at the district level but never migrate to the federal registry. Most businesses never register at all. This translates into poor performance at the top.
The Pakistan Stock Exchange lists only 523 companies. Pakistan has about 2 listed companies per million people and by contrast, the United Kingdom has 68, Canada has 103, Australia has 74.03, and Singapore has 80.73.
“Other countries have revised their corporate governance frameworks based on the principle that corporate governance should be managed by private companies themselves, with minimal paperwork and control by the regulators, except key regulatory protections for minority shareholders. Directors should be empowered to manage the corporation. This principle is promoted by the G-20, the Organisation for Economic Cooperation and Development (OECD), the World Bank, the US Sarbanes-Oxley Act of 2002, and the Institute of Directors around the world. The OECD, for example, recommended that companies should have the discretion to voluntarily, through contracts, adopt their own governance structure and shape internal mechanisms that reflect how they want to organise their business,” the officials said.
According to them, the current Act places excessive reliance on special resolutions that slow down routine corporate decisions and even requires SECP approval of shareholder votes in many cases where the company should be empowered to decide. The solution is to reduce special resolutions to matters of significant shareholder consequence; routine decisions should be either governed by the corporate by-laws, shareholding agreements, contract law or delegated to the Board of Directors.
“Rigid thresholds for forming and operating various types of corporate entities, and unnecessary compliance costs that do not align with the risk or size of the company. For example, under the Act, a private company must have between 2 and 50 members, but if its shareholder count exceeds 50, it must convert into a public company, a much more costly corporate form. There is no rationale for such a conversion.
“The solution is to eliminate arbitrary thresholds for company formation growth and greatly increase exemptions for unlisted companies from paperwork such as audited financial statements and financial reporting. This will create a smoother path to rapid growth.
“In the US, the largest private company, Cargill, is worth 3 times the capitalisation of the entire Pakistan Stock Exchange but is regulated by the SECP simply as a private company. Other countries have allowed flexibility for different business types, allowing easier market entry and innovation for newer forms,” the officials said.
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