The Counsel

Constitution (Eighteenth Amendment) Act 2010

The passage of the historic Eighteenth Amendment Act (Act) has been reported extensively in the media with great emphasis on its impact on the body politic of Pakistan. The following is a summary of the Amendments to the Constitution made through the Act as they relate to the corporate sector in Pakistan.

Article 19A - Freedom of Information
A new Article has been inserted giving every citizen the right to have access to information in all matters of public importance subject to regulation and reasonable restrictions imposed by law. It is expected that this Article would have far reaching implications in light of the proliferation of media and especially television news channels in Pakistan. It is hoped that appropriate measures are taken to provide the requisite legal framework for the implementation of enabling legislation and regulation of this fundamental right.

Article 25A – Right to Education
This is a welcome development in that under this Article the State shall provide free and compulsory education to all children of ages 5 to 16 years. With an ever increasing role of services in our national economy, this right is expected to greatly enhance the human resource potential in long run given that there is the political will to implement same effectively.

Article 89 – Power of the President to promulgate Ordinances
By virtue of an amendment in this Article, it has been provided that once the President promulgates (or arguably re-promulgates) an Ordinance, the National Assembly or either House may extend it by a resolution for a further period of 120 days. However, it has been expressly provided that this extension may be made only once. This amendment is a welcome development as hitherto the practice of legislating through the Presidency is neither desirable nor effective as Ordinances inevitably lapse causing great hardship, confusion and uncertainty in its stead. It is hoped that the Parliament would play a pro-active role in passing legislation especially in light of the possibility that several important pieces of legislation may expire or lapse at the end of its 120 day term. Examples include the Competition Ordinance 2010, the Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Ordinance, 2010 and the Arbitration (International Investment Disputes) Ordinance, 2010.

Article 161 – Natural Gas
The net proceeds of the Federal Excise Duty levy on oil at the well-head shall be paid to the Province in which the well-head is situated, instead of to the Federal Government as had been the case in the past.

Article 167 – Borrowing by Provincial Government
A new Clause 4 has been added to this Article enabling a Province to raise domestic or international loans or give guarantees subject to conditions as may be specified by the National Economic Council.

Article 172 – Rights to Minerals, Oil and Natural Gas
In a significant development, all new rights to minerals, oil and natural gas situated within a Province or its adjacent territorial waters shall vest jointly and equally in that Province and the Federal Government. This will be subject to the existing commitments and obligations. In this background, it is expected that the Provincial Governments will take effective measures to establish authorities / ministries so that the much needed and on-going process of exploration and exploitation of minerals, oil and natural gas is not hampered.

Concurrent List - Omitted
Perhaps the most fundamental and far-reaching amendment vis-à-vis Provincial autonomy is the omission of the Concurrent List. Important legislative subjects such as bankruptcy and insolvency, evidence and oath, contracts, trusts, partnerships, newspapers and books shall now belong wholly in the Provincial sphere. Further, with the amendment of Article 142(c) of the Constitution, the Provincial Assemblies have the exclusive power to make laws with respect to matters not included in the Federal Legislative List. It is therefore hoped that the transition and capacity building of the Provinces is given priority so that they are able to effectively deal with this groundbreaking development.

Fourth Schedule - Federal Legislative List
Entry 32 has been added specifically granting the Federal Government the power to sign and ratify international treaties, conventions and agreements, including international arbitration. Further, it is important that some of the legislative subjects from the omitted Concurrent List have been retained while others inserted such, such as, electricity,  major ports, all regulatory authorities established by the Federal Government, national planning and national economic coordination, supervision and management of public debt and the census.

Labour Policy 2010

Labour Day, May 1, 2010, saw the Government of Pakistan announce a new Labour Policy, i.e. Labour Policy 2010.  The aim of the Policy is to protect legitimate rights and interests of workers and employers and minimize the areas of friction which often cause disputes. Under the Policy, the Government plans to increase minimum wage from Rs.6000 to Rs.7000 along with regularising many of the contractual employees.  The new Policy envisages workers being provided medical treatment at private medical facilities where public sector hospitals do not exist along with increasing the pensions of workers at the same rate as that of retired Government officials.

Changes are expected to be seen in the Workers Welfare Fund Ordinance, 1971, with Labour colonies being established to provide housing to workers, legal aid of upto Rs.15000 being made available to dismissed or retrenched workers, introduction of a Matric-Tech scheme which would allow aid and scholarships to workers for education of their children for higher studies and marriage grants of Rs.70,000 for female workers and daughters of workers.  Furthermore, another change being introduced which is likely to have a significant impact is that all workers registered under the universal registration scheme of the employees old age benefits will be eligible to obtain benefits from the Workers Welfare Fund.

With regard to the Employees Old-Age Benefits Act, 1976, a review of the scheme has been announced and amendments are being considered in order to (amongst other things) (i) reduce the age of entitlement of old-age pension from 55 years to 50 years in case of mine workers, (ii) to make the Act applicable to contingent/project employees of such statutory bodies which are otherwise exempted (iii) decentralization of collection of contributions and recovery of arrears and (iv) to expand coverage and increase the benefits under the EOB Scheme.

In addition to the above, perhaps the most significant change being brought by the new Policy is the annulment of section 27B of the Banking Companies Ordinance, 1962.  Section 27B prohibits misuse of banks’ resources for union activities, prohibits carrying weapons in banks, bans carrying out union activities during office hours, prohibits subjecting bank officials to physical harassment or abuse and also prohibits non-employees to be office bearers of bank unions. With its annullement, outsiders may again become members of bank unions and the banks may witness a rise in union activities.

The Labour Policy promises much in terms of bringing change but what remains to be seen is how far it will be implemented.  The Government has announced in furtherance of the Labour Policy that it shall seek to consolidate the labour laws in Pakistan along with bringing changes that are aimed at rationalizing labour law into five core areas:

• Laws relating to industrial relations;
• Laws relating to employment and service conditions;
• Laws relating to occupational safety and health;
• Laws relating to human resource development; and
• Laws relating to labour welfare and social security

The new legislation, we are told, will do away with the complexity and over-lapping that has plagued the previous set of laws.  Watch this space for further updates on the matter.

Protection Against Harassment of Women at the Workplace Act, 2010

The Protection against Harassment of Women at the Workplace Act, 2010 (Act) came into force on March 9, 2010. The Act applies to employees generally and would apply to any employee, permanent or contractual of an organization as defined below. In other words, the protections against harassment in the Act are not specific to women, nor do they preclude a male from lodging a complaint.

This should be hailed as a positive step towards creating an equal and just society, where every person can enter the workplace free from harassment, and can continue to work in a safe and healthy environment.

Definitions
At the outset, the workplace is widely defined as an “organization”, which includes a Federal or Government Ministry, division or department, a corporation or any autonomous or semi autonomous body, educational institutes, medical facilities, established or controlled by the Federal or Provincial Government or District Government, or registered civil society associations, or privately managed commercial or industrial establishment or institution, or a company defined in the Companies Ordinance 1984 and includes any other registered private sector organization or institution. A positive feature of the Act is that it extends the definition of the workplace to any situation that is linked to official work or official activity outside the office.

This broad definition ensures that every type of organization is caught by the Act, but leaves the onus on each individual entity to come up with more specific, transparent guidelines, codes of conduct, etc., which fit their particular organizational structure and can promote harassment free environment and where employees are able to understand their rights and responsibilities under the Act.

“Harassment” is defined under the Act as any unwelcome sexual advance, request for sexual favours or other (unwelcome sexual) verbal or written communication, or physical conduct of a sexual nature or sexually demeaning attitudes, causing interference with work performance, or creating an intimidating, hostile or offensive work environment, or the attempt to punish the complainant for refusal to comply with such a request, or where compliance is made conditional upon employment.

The term ‘sexual’ appearing above is not defined, and the difficulty faced in other jurisdictions in construing an acceptable definition of this term is well documented. Therefore, it is submitted that the test for harassment should be confined to where a complainant has felt offended, threatened, demeaned, humiliated, or intimidated due to the conduct of a colleague or supervisor in the workplace. However, it may be noted that conduct should not be limited to physical touching as it is an accepted principle that assault can be verbal, most particularly sexual assault that results in feelings of intimidation, fear or creates an untenable or hostile environment.

Code of Conduct
The Schedule to the Act contains a Code of Conduct which has outlined three significant manifestations of harassment in the work environment (a) abuse of authority, (b) creating a hostile environment and (c) retaliation. It is stated that these are minimum standards not intended to be exhaustive or the only incidences where harassment can be said to have taken place. While these examples may have been included to provide some clarity, doing so may render the Act ineffective as many situations may arise and be overlooked. For example, verbal innuendo combined with lecherous or unwelcome comments could constitute harassment especially if it comes from a superior. This may not be in the form of a ‘sexual advance’ or entail physical conduct. Again, the danger of attempting to determine what constitutes a ‘sexual advance’ and the danger of leaving it to employees / management of the organization or in the final event, an ombudsman without a better understanding of the nature of harassment and its effect on women or other vulnerable groups in the workplace, demands that the Act mandate a more proactive approach on the part of organizations. The Act may not achieve the purpose of spelling out a comprehensive harassment policy that can be implemented uniformly to ensure a healthy, productive, safe workplace free of exploitation and gender bias. Therefore, recommendations should be sought from the private and public sector and interest groups on how to adequately educate employers and employees on the nature and dangers of harassment and the rights and responsibilities afforded to them to help prevent harassment from being practiced or tolerated at any level.

Procedure
The Act mandates that each organization as defined under the Act, shall constitute a three member Inquiry Committee within 30 days of its enactment. At least one of the three members of such committee must be a woman. The management of each organization must also designate a Competent Authority to which the Inquiry Committee will submit its findings, which will have the power to decide upon the complaint, and impose penalties, or refer the matter further to the designated Provincial ombudsman, who is to be appointed by the respective Provincial Governments. A person is eligible as an ombudsman if she is qualified to be Judge of the High Courts.
During the inquiry process, all statements and evidence shall be kept confidential under Section 3(a), however, the Act does not ensure that the fact of inquiry itself and the identity of the affected persons will likewise remain confidential. This should be necessary both to protect the complainants so they are able to file complaints without fear of reprisal and the reputation of the accused before the veracity of a complaint has been proved. This would also obviate the requirement for Section 3(d), which provides that an adverse action shall not be taken against the complainant or any witness.

A particularly invasive and alarming provision is the power held by the Inquiry Committee under Section 5(2) to get the complainant or the accused medically examined by an authorized doctor. These powers, if present at all should be limited and very strictly circumscribed.

Penalties
Penalties that may be imposed are divided into minor and major categories, without guidance as to what type of offences should fall into which category, again leaving a vacuum to be filled by practice. This will inevitably lead to dissimilar decisions and penalties being imposed across organizations leading to uncertainty and lack of standards. Penalties will be determined according to proclivities of particular managers and employees rather than in accordance with generally applicable guidelines.

Appeals
Both the complainant and the accused have the right to appeal the decision of the Competent Authority to the ombudsman, who once appointed shall also take over all appeals pending in the District Courts. The careful and speedy selection of a qualified ombudsman should be encouraged. However, any person aggrieved by an order of the ombudsman may make a representation to the Governor of a Province or the President of Pakistan within thirty (30) days of the order. In our politically charged society this may lead to abuse. It is submitted that the ultimate arbiter in such matters should be the Superior Courts of Pakistan and not the Executive.

Conclusion
It is submitted that the Code of Conduct is inadequate due to the sensitive nature of harassment and a lack of consensus as to what may be considered inappropriate or offensive conduct. The Code of Conduct also makes mention of the use of informal channels to resolve harassment complaints. It is hoped that this is not used to encourage employers to advocate for these more convenient methods of resolution or to pressure complainants to refrain from lodging a formal complaint.

Notwithstanding its drawbacks, the Act is a welcome development in our legal system that would lead to the protection of vulnerable groups in the workplace.

The Code of Corporate Governance

Recently, the Task Force constituted by the Pakistan Institute of Corporate Governance (1) has recommended amendments in the Code (Recommendations). The Recommendations have been circulated for comments after holding several consultations, round tables, focus groups etc. The following is a brief summary and analysis of the salient Recommendations:

1. It should be considered whether the Code be made enforceable by legislation possibly through amendment of the Companies Ordinance, 1984 as opposed to being made part of the Listing Regulations of the respective stock exchanges. This recommendation was initially made by the Corporate Law Review Commission an initiative of SECP and headed by Chief Justice of Pakistan (retired) Ajmal Mian.

2. The definition of a “public interest entity” has been introduced, which aims to capture all those bodies which would otherwise not fall into the category of a listed company but would be required to apply the provisions of the Code. More specifically, this proposed amendment seeks to apply the Code to a company or entity which (a) has non-resident equity investment wholly or partly comprising the paid up capital of a company; (b) is owned wholly or partly by the Federal or Provincial Governments; (c) is subject to a criterion based on capital and reserves (Rs.500 million or more), annual turn over (Rs. 1 billion or more) or total assets (exceeding Rs.1.5 billion).

This would difficult to implement especially given that the Code is intended to apply only to listed companies through the Listing Regulations. As an alternative, it is submitted that separate codes of governance should be drafted and implemented to meet the different requirements of stakeholders in organizations such as public unlisted companies, private companies, state owned enterprises, and non profit organizations. This is especially pertinent to state owned enterprises, as experiences of eminent professionals such as Mr. Zaffar A. Khan (KSE, PTCL, PIA) and Mr. Farooq Rehmatullah (CAA and OGDCL) illustrates that such organizations may require a separate code of governance to deal with matters peculiar to such organizations. Just across the border, such a step has been taken in India where recently (May 2010) the “Guidelines on Corporate Governance for Central Public Sector Enterprises 2010” have been made mandatory on both listed and unlisted public sector corporations (for more visit www.dpe.nic.in). Furthermore, regulating foreign equity holding companies would have negative impact on foreign investors wanting to invest in Pakistan and, if it is necessary to regulate these, a more flexible code may be evolved to encourage foreign investment.

3. In order to ensure balance between executive and non executive directors on the board of directors and promote independence of directors, the Recommendation proposes to restrict the number of executive directors (including the CEO) to 1/3 or 3, whichever is higher. Further, the term “independent director” has been defined with particularity and circumstances prescribed to test the independence of a director. The object of this proposed amendment to ensure that boards are not controlled by dominant stakeholders and the management by having more independent directors on the board to exercise independent judgment. However, the term of independent directors has been circumscribed to 3 consecutive terms.

4. In order to ensure that directors devote their time and commitment to companies, the Recommendations propose to limit the number of directorships an individual can hold in a listed company to 5. However, this eligibility criterion does not extend to directorships held in listed subsidiaries.

5. The Recommendations include an undertaking of individual and collective annual board evaluations in order to provide a forum for the board to assess its own performance and improve accountability. In this context, the offices of chairman and CEO are also proposed to be separated given their different roles in the company.

6. The Recommendations make it mandatory for directors of listed companies to attain certification under the “Board Development Series” offered by Pakistan Institute of Corporate Governance (PICG), or such other organization as may be accredited by PICG in this respect. There have been numerous objectives to this proposal. Whilst the objective is certainly laudable, concerns have been raised that other certification from established institutes of international repute should not be made subject to accreditation by PICG. Further, in case of multinationals and companies with significant foreign shareholding, some flexibility should be present for those non resident foreign directors who visit Pakistan to attend board meetings.

7. It has been recommended that the board create a human resources and remuneration committee of not less than three members including at least one independent director and the CEO (who shall not participate in proceedings relating to his own pay and performance). This is a positive recommendation which will help ensure transparency and accountability in the compensation structure of senior management.

However, despite the focus on governance and adherence to rules through the Code, the role of the in-house counsel is yet to be institutionalized in the Code. It is a fact that most large corporations have a team of in-house counsels to assist and advise on all kinds of legal issues and this trend is ever increasing. It is, therefore, submitted that the role of in-house counsels should be institutionalized through the Code, which would pave the way for creating a culture of conflict avoidance and conflict resolution and help mitigate legal costs and consequences . Currently, in the Code, the only role assigned to lawyers is the possibility of being appointed as a Company Secretary.

The Recommendations of the Task Force are the need of the hour as Pakistan is amongst the least efficient countries as regards the governance index. Any evaluation of the Code should be based on ground realities in Pakistan and should be cognizant of the fact that our corporate landscape consisting of some 700 listed companies comprises largely of subsidiaries of multinational, state owned enterprises and / or predominantly family owned or sponsored companies.

1 The Task Force is headed by Mr. Ebrahim Sidat (Managing Partner / CEO of Ernst and Young) and includes the following as its members:
1. Mr. Adnan Afridi, MD Karachi Stock Exchange.
2. Mr. Aftab Chaudhry, Secretary General, South Asian Federation of Exchanges.
3. Mr. Azam Faruque, CEO, Cherat Cement Company Ltd.
4. Mr. Fuad Azim Hashimi, President and CEO, Pakistan Institute of Corporate Governance (PICG).
5. Ms. Lubna Farooq Malik, Director (BSD), State Bank of Pakistan.
6. Mr. Masoud Naqvi, Chairman KMPG MESA & Senior Partner, KPMG Pakistan.
7. Mian Shakil Aslam, MD Lahore Stock Exchange.
8. Mr. Moin Fudda, Country Director, Center for International Private Enterprise (CIPE).
9. Mr. Pervez Ghias, CEO, Indus Motors Company Ltd.
10. Ms. Sadia Khan, Executive Director, Delta Shipping (Pvt.) Ltd.
11. Mr. Zaffar A. Khan, former director PICG. Former CEO Engro and Chairman PTCL, KSE and PIA.

Other Laws and Regulations

Details of enactments and regulations that are pertinent and impact the corporate sector are summarized as under:


1. Acts & Ordinances

Anti-Money Laundering Act, 2010
In a much awaited development, the Anti-Money Laundering Act, 2010 has been enacted into permanent legislation and received presidential assent on March 26, 2010. By way of validation (S.46), the Act retrospectively ratifies all acts, deeds, things etc. done by the Financial Monitoring Unit Commission since January 5, 2008.

Competition Ordinance, 2010
On April 18, 2010, the President of Pakistan re-promulgated the Competition Ordinance, 2010.  This Ordinance has been re-promulgated with effect from March 26, 2010, which is the date on which the Ordinance had previously lapsed. Given the Competition Ordinance is valid until August 16, 2010 and can only be extended once by ratification of the National Assembly (as per the amendment to Article 89 of the Constitution by Constitution (Eighteenth Amendment) Act, 2010) it is expected that the National Assembly will enact the Competition Bill, 2010 currently pending therein.

Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Ordinance, 2010 Arbitration (International Investment Disputes) Ordinance, 2010


2. Securities & Exchange Commission of Pakistan (Rules, Regulations, Circulars, Guidelines and Directions)

Draft Corporate Rehabilitation Act announced by SECP
In light of the corporate debt and non-performing loans (NPLs) growing at 10 to 12% per annum and despite the fact that, in recent years, the Government has legislated creditor friendly legislation, debt recovery continues to pose significant issues. This draft legislation seeks to inter alia strike an appropriate balance between debtor and creditor with a view to encourage rehabilitation where it is warranted.

Draft Real Estate Investment Trust Regulations, 2008 dated May 3, 2010 Comments and suggestions are sought by all those concerned and affected by the draft regulations.

Draft Companies (Investment in Associated Companies and Associated Undertakings) Regulations 2010 dated January 22, 2010 Comments and suggestions are sought by all those concerned and affected by the draft regulations.

Circular No. 35 of 2009 outlines mandatory certification requirements for sales agents of Assets Management Companies (AMCs) and Pension Fund Manager (PFMs).

Buy-Back of Shares
All listed companies are directed not to amend, withdraw, postpone or cancel the offer for the purchase / buy-back of shares by the company once approved by its members in terms Section 95A of the Companies Ordinance, 1984 and the Companies (Buy-Back of Shares) Rules, 1999. Further, it has been made obligatory for companies to issue tender notices within thirty (30) days following approval by shareholders in order to complete the process of buy-back within thirty (30) days of the tender notice. (S.R.O 192(I) of 2010 March 17, 2010)

Rights Issues
All listed companies are directed that any rights issue once announced by their boards shall not be varied, postponed, withdrawn or cancelled. (S.R.O. 975(I) 2009 November 10, 2009).

Corporate Social Responsibility (CSR)
There is an obligation to disclose descriptive and monetary aspects of CSR activities undertaken in each financial year. Such disclosures are also to be made in the director’s report to the shareholders. The following CSR activities have been set out but these are stated to be non-exhaustive: (i) corporate philanthropy (ii) energy conservation (iii) community investment (iv) consumer protection (v) national cause donations (vi) rural development measures (vii) contribution to national exchequer (viii) business ethics. (Companies (Corporate Social Responsibility) General Order 2009 November 16, 2009 S.R.O. 983(I) 2009)


3. Competition

Reports and Orders
The Commission has released an Enquiry Report on “Cartelization in Cellular Mobile Telecommunication Services Market” announced on January 26, 2010, in which it has been recommended that Show Cause Notices be issued to several mobile operators and their CEOs in their personal capacity for the alleged violations of the Competition Ordinance by inter alia colluding to fix prices for numerous cellular services.

By an Order dated February 23, 2010 a leading multinational engaged in manufacturing of beauty, household and healthcare products was held liable (“Company”) for violating the Competition Ordinance. The Commission’s appellate bench in exercising its suo motto jurisdiction has held the Company’s advertisement for one their hair products as violating Section 10 of the Competition Ordinance dealing with deceptive market practices. More particularly, it has been held that the Company’s advertisement, “100% dandruff free” was misleading. Accordingly, the Commission passed the following orders: (i) stop advertising in the current form; (ii) modify the advertisement “100% dandruff free” and (iii) to file compliance report with the Commission after implementing the above measures. 

The Commission issued an Order dated March 22, 2010 against a Steel Mill for abuse of its dominant position in the market. The Commission’s appellate bench was inter alia based on the Steel Mill refusing to supply billets to certain customers and at the same time supplying by preference to a certain other customers without any economic justification for doing so. It was held that such practice leads to distorting competition in the relevant market, however, given that Steel Mill had adopted a cooperative attitude and had indicated its willingness to comply with the Competition laws, a lesser fine of Rs. 25 million was levied.


4. Insurance

Levy of Supervision Fees by SECP
Amendments made to the Insurance Rules, 2000. The new Rule 7A inserted to introduce annual supervision fees payable by the every insurer initially at the rate of Rs. 1.50 per thousand of gross direct premium written in Pakistan subject to a maximum of Rs. 50 million. At the expiry of one year at the rate of Rs. 2.00 also subject to a maximum of Rs. 50 million. (SRO 1123(1) of 2009).

Draft amendments in the Securities and Exchange Commission (Insurance) Rules 2002 announced for circulation and comments.

Guidelines for Bancassurance
Bancassurance has evolved into an important distribution channel for insurance business and particularly for life insurance business, whereby a bank’s extensive branch network can be effectively leveraged extending insurance outreach and penetration. The Guidelines provide a framework for insurance companies partnering with banks in order to adopt a standardized approach. The Guidelines have been made applicable on all insurance companies and effective from February 1, 2010 and all new Bancassurance agreements are expected to comply from the effective date as above with existing agreements to be modified on or before April 30, 2010. (Circular No. 5 of 2010).