Company law modernisation to save Rs250b

Express Tribune

2 days ago

The government has estimated annual cost savings of around Rs250.54 billion ($895 million) through the modernisation of Companies Act and regulatory reforms. Of the total, savings of around Rs176.96 billion ($632.2 million) will come from modernising the law and Rs73.58 billion ($262.8 million) from regulatory changes.
Sources said that it was informed in a recent meeting of the sub-committee on modernisation of Companies Act 2017, chaired by Special Assistant to Prime Minister on Industries and Production Haroon Akhtar Khan.
During the meeting, Haroon Akhtar stressed the need for simplifying the registration process for unlisted companies, noting that delays, excessive regulation and the lack of ease of doing business had become serious challenges being faced by the business community. The sub-committee noted that stunted corporate growth was due to increasing regulatory burdens, which come with growth of a corporate entity. "There is excessive control over company activities and exclusion of innovative corporate financing options. A high level of complexity compounds such issues," it said.
Pakistan has only 523 listed companies, which translates into two companies per million people.
A comprehensive review of the Companies Act 2017 is required through benchmarking it with international standards. Global standards suggest that the Act should focus on regulating listed companies and higher-risk firms such as state-owned enterprises (SOEs). Corporate governance for unlisted companies should primarily be handled through corporate bylaws, shareholder agreements and contract law.
The current one-size-fits-all approach is not suitable for the modern corporate environment. The Act imposes numerous thresholds, barriers and compliance costs that hinder the growth of unlisted businesses. It limits innovation in corporate forms and financing methods such as joint ventures, peer-to-peer lending, venture capital and crowdfunding.
What modernisation will do
It will promote faster growth of corporate entities by removing unnecessary restrictions, costs and risks. It will increase flexibility for organising and financing corporate entities to meet needs of a modern and dynamic economy.
Apart from these, the Securities and Exchange Commission of Pakistan's (SECP) enforcement efforts for listed companies will be strengthened. Its focus on education regarding good governance will be reinforced.
A review suggests that the 418-page Act can be substantially deregulated for unlisted companies to allow a smoother growth path from sole proprietors through limited liability companies (LLCs) and into the expansion phase using various financing forms. This shift will allow unlisted companies to grow faster and be more agile in responding to market opportunities by providing greater flexibility in governance.
Special resolutions
Special resolutions create thresholds that impose regulatory costs. There are mandatory provisions for unlisted companies. There is excessive reliance on special resolutions, which slows down routine decision-making. Routine decisions should be governed by corporate bylaws, shareholder agreements, contract law, or delegated to the board of directors.
Pakistan has 23 special resolutions, compared to nine in Canada and six in Delaware. The Board of Investment (BoI) recommends eliminating seven, simplifying 10 to allow more flexibility for directors and retaining six that align with international practices for protecting minority shareholders.
Rigid thresholds for forming and operating various types of corporate entities have resulted in unnecessary compliance costs. For example, a private company must have between two and 50 members. If the number exceeds 50, it must convert into a public company.
BOI recommends eliminating arbitrary thresholds and the classification of single-member companies as a separate corporate form. It also suggests abolishing the minimum and maximum shareholder requirements for both private and public companies.