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Legal Updates


Afghan Transit Trade Agreement

After seven rounds of bilateral Joint Working Group meetings on trade and transit, the Commerce Ministers of Afghanistan and Pakistan signed the Afghanistan Pakistan Transit Trade Agreement (APTTA) on 29th October 2010.

Under the APTTA, Afghan trucks are allowed to carry Afghan transit export cargo to Pakistani ports and also to the Indian border. Pakistan will facilitate Afghan exports to India through the Wagah border crossing (near the city of Amritsar in Indian Punjab). Afghan trucks will be allowed to carry Afghan transit export cargo on designated routes to Pakistani sea ports and also up to the Indian border where Afghan cargo will be transferred on to Indian trucks. It was also agreed that no Indian exports to Afghanistan will be allowed through Wagah “at this stage”. However, it was decided that “a feasible proposal in this regard could be discussed at an appropriate time in the future”. For this purpose, “Pakistan will provide a side letter to Afghanistan giving this Understanding”. To make transportation economical on return, the Afghan trucks will be allowed to carry goods from Pakistan to Afghanistan. To tackle the issue of unauthorized trade, both countries have agreed to install tracking devices on transport units and customs to customs information sharing (IT data and others). In addition, it has been agreed that financial guarantees equal to the amount of import levies of Pakistan will have to be deposited by authorized brokers or customs clearing agents, which will be released after the goods exit Pakistan.

Currently, Afghan transit goods in Pakistan were being transferred under the Afghan Transit Trade Agreement (ATTA) signed by the two countries in 1965. Under the ATTA, five transit routes are available for transit trade from Pakistan: These are: 1) Peshawar-Torkham and vice versa; 2) Chaman-Spin boldak and vice versa; 3) Ghulam Khan Kelli; 4) Port Qasim; and 5) Karachi Port. Sheds and open spaces are earmarked in the Karachi Port area known as Afghan Transit Areas for handling Afghan Transit. Under the ATTA, Afghan goods transiting through Karachi port are exempt from Pakistani duties or customs tariffs. In addition, rail or other transportation charges are required to be the same as those charged for goods destined for Pakistan.

The major difference between the ATTA and the APTTA is that under the latters, Afghan exporters will be allowed to use their own trucks to carry exports to Pakistani sea ports and to the Wagah border. To the benefit of Pakistan, there are also many provisions to tackle the issue of unauthorized trade. Once implemented, the APTTA could provide a major boost to the Afghan economy and regional trade. According to the ADB Statistics, India has been the number one export market for Afghan products since 2005. The main exports to India are edible fruits, nuts and asafetida. Obviously, this deal will for the first time provide an opportunity for Afghan producers of fruits, dry fruits, carpets and marble to ship their goods across Pakistani territory to the vast consumer market of India and beyond. This is important for the long term sustainability of the Afghan economy through its own resources. Apart from internationally acceptable and verifiable standards of sealable trucks, the APTTA also allows export of perishable goods in transit in open trucks and other transport units. This is important as Afghanistan traditionally used to export plenty of fresh fruits like grapes, melons and pomegranates to India.

With the full implementation of the APTTA, it is expected according to recent news reports that the trade ties between Pakistan and Afghanistan could rise to US$ 5 billion by the year 2015, which would greatly contribute to brining stability in the region.

The Competition Act 2010

On 24th October 2010, the President of Pakistan signed the anti-trust bill formalizing it as an Act of Parliament, i.e. the Competition Act, 2010. The Act seeks to ensure fair competition for commercial (Act) and economic activities and aims at protecting consumers from monopolization, cartelization and other harmful activities. The Competition Commission of Pakistan (CCP) among other tasks, is entrusted with the responsibility of prohibiting commercial enterprises from unfairly using their dominant position in the market through unethical practices such as limiting production, price discrimination or fixing resale price maintenance, limiting technological development, refusal to deal, etc. The Act comes in place of the expired Competition Ordinance, which had initially been promulgated in 2007. Salient differences between the Act and the Ordinance are highlighted below.

The Act, 2010 has altered the right of appeal from the High Court as the court of appeal in relation to the decisions of the CCP to an independent three member Competition Tribunal, which would hear the appeals. Appeals against the decision of the Competition Tribunal would be heard by the Supreme Court of Pakistan. The Competition Tribunal would be located at Islamabad and formed within 30 days after the enactment of Competition Act, and shall comprise three members headed by a retired judge of the Suprence Court with two technical members who would assist the Tribunal on technical matters. The Competition Tribunal would be required to exclusively hear the appeals and decide the cases expeditiously and announce the decision within 6 months.

The Competition Tribunal The Act makes it mandatory for the CCP team to verbally inform the undertaking of a search operation at the time of visit and also inform in writing the reasons for the forcible entry into the office of the business undertaking.

The cap of Rs 50 million penalty prescribed has been raised to Rs 75 million for the businesses where annual turnover could not be determined. However, in case business entities where annual turnover can be determined the rate of penalty has been reduced from 15 percent of the annual turnover to 10 percent of the annual turnover.

According to the Act, revenue realised through imposition of penalties by the CCP would be deposited in the Federal Consolidated Fund, which was previously to be deposited in the CCP Fund. However, CCP Fund would remain intact and that would be financed through contributions from Federal and Provincial grants.

Revised Code of Corporate Governance

The Securities & Exchange Commission of Pakistan (SECP) has launched a consultation process on the revised Code of Corporate Governance, which is to be introduced by a revision of the listing regulations of the stock exchanges in Pakistan, which currently incorporates the Code of Corporate Governance, 2002. The proposed revised Code takes into account the lessons learnt from the practical issues and considerations relevant to listed companies and with a view to ensuring that it reflects changing governance concerns, practices and economic circumstances. The salient features of the revised Code were highlighted in Summer Issue, 2010 of The Counsel appearing under the “Legal Updates” section.

The following comments had been (to a large extent) prepared and submitted by Mr. Mahomed J. Jaffer (former Senior Partner, Orr, Dignam & Co.) to SECP for its considoration.
In considering amendments to the Code, it should be borne in mind that good governance is not an objective in itself but is a means to an objective. Ultimately, the objective of all businesses is to make profits in an ethical manner and create value for its shareholders. The purpose of corporate governance as indicated above is very well summarized by the then Governor of the State Bank of Pakistan, Dr. Shamshad Akhtar in her Institute of Bankers Pakistan, Convocation address in Lahore in March 2008:

“Corporate governance is critical to improving economic efficiency and growth. It serves as a deterrent to mismanagement and infuses discipline in the decision making process of boards of directors.”
For a better understanding of the parameters of corporate governance certain relevant factors need to be borne in mind:

1. The principal ground reality in Pakistan is that businesses have developed over the last few decades starting initially as limited family owned firms, gradually evolving into companies, and eventually major businesses have become public listed companies. However, unfortunately there are less than 700 public listed companies in Pakistan. Some such companies are subsidiaries of major international companies or are predominantly State owned enterprises or are predominantly family owned or are substantially owned and controlled by sponsors.

2. A further important distinction to be borne in mind in respect of the Code is that unlike companies in major developed countries ownership and management do not over-lap as in Pakistani companies. In fact their management is totally professional and rarely owns more than a fraction of the total capital of the company. Institutional shareholders and mutual funds, etc. constitute major shareholders. As a consequence, Codes of Corporate Governance as developed over the last 20 years or so are conditioned by these factors and not by the factors in Pakistan indicated above as ground realities.

3. A further important point of law to note is that unlike in most countries, a system of cumulative voting by shareholders for the election of the board of directors prevails which ensures their proportional representation. As a result, say in a board of 10 directors, a minority shareholder or shareholders together holding 10%, is guaranteed a seat on the board for 3 years (as an election of directors is triennial in Pakistan). This is a major safeguard and privilege of shareholders and a valuable right of ownership provided by law. Moreover, the Code of 2002 also specifically gives certain additional rights to a minority shareholder regarding proxies and solicitation of shareholders’ votes in respect of election for the board to facilitate their representation.
In light of the above, the following specific comments are pertinent:

A. Clause 35(i)(c) of the revised Code pertains to the balance of executive and non-executive directors. For greater participation of directors, the provision that executive directors should be not less than two and more than 1/3rd including the chief executive is an understandable proposal. However, having regard to investment by foreign companies, particularly multinationals and by local majority shareholders, the needs of a particular business may require a greater number of executive directors. This may be necessary, e.g., for career progression, for motivation and retention of key personnel, who aspire to the status of directorship. This seems to be recognized by the provision that in specific circumstances, this condition may be relaxed by the SECP.

B. The issue of independent directors has been taken up in Clause 35(i)(b) of the revised Code. As presently proposed, two-thirds of the directors will be non-executive directors. The draft Code specifies that one-third or 3, whichever is higher, of the total members of the board shall be independent directors, as defined in the Code. If the board of a public listed company has seven directors, (which is the minimum required by law), it would follow that out of a board of seven not less than three must be independent directors. This appears to seriously undermine the legal guarantee of proportionate representation of shareholders according to their shareholding, which is the purpose of the cumulative system of voting in force in Pakistan. If the draft Code is introduced in its current form, majority shareholders e.g. a multinational company having a shareholding of 75% would not get due representation on the board proportionate to its shareholding. The same would apply for large groups of Pakistani share holders.

C. The Explanation regarding the expression “independent director” is necessary and appropriate. The words used in Clause 35(vii), “The board of directors of a listed company shall exercise their powers and carry out their fiduciary duties with a sense of objective judgment and independence in the best interests of a listed company” are most appropriate and such words could be introduced in the Explanation to strengthen the ethical basis of the Code. However, the proviso in the Explanation in respect of ineligibility of independent directors listing eight bullet points appears to be unnecessary. Specifically (see clause 35(iii)) that no director should hold more than 5 directorships in listed companies would also apply to independent directors. The ineligibility of an independent director with significant links with other directors through involvement in other companies or bodies, will have negative repercussions. It is not unusual for listed companies to have cross directorships, particularly within a group. Even otherwise, independent directors holding several directorships bring to each company a wealth of external knowledge and experience, from which each company benefits immensely. A further point is that the right of a shareholder with requisite shareholding for due representation on a board will be unreasonably curtailed.

D. The bullet point that a shareholder holding more than 10% of the total voting rights in the company cannot be considered an independent director may also be unreasonable. According to law and the system of cumulative voting a person can get elected to the board, if he holds or can collect proxies for the minimum number of votes required for election. If elected such person has full rights to be a member of the board of directors, of course as a non-executive director, but in no sense could he be ineligible to be considered an independent director, if he otherwise satisfies the criteria laid down in the Explanation. Once elected, he is entitled to serve the full three year term, unless removed by due process of law.

E. The provision that no one shall be deemed to be an independent director after more than two consecutive terms appears to be unnecessary and may prove to be detrimental to the business of any company. This may be apparent from the provision that such director may again be considered an independent director, if re-elected after a lapse of one term. A newly elected independent director takes roughly the entire first term to fully comprehend and understand the nature of the company’s business, particularly if the company has multiple lines of business. It is only in a second term that he is fully able to comprehend and contribute meaningfully to the deliberations of the board. It is submitted that to make him ineligible to continue to serve subsequent terms is uncalled for and has negative repercussions on good governance. There is a strong need for continuity and knowledge of corporate history and functioning of the company is of immeasurable benefit to the deliberations of the board. With periodic changes of the chief executive and other executive directors, due to retirement, relocation or other reasons, which normally takes place in a company, a continuing non-executive independent director provides a valuable anchor of stability.
The ineligibility to serve more than two consecutive terms on the board as an independent director is also not recognised as best practice in major corporate jurisdictions such as the UK or the USA.

F. In regard to the responsibilities, Powers and Functions of Board of Directors, the relevant section in the revised Code is (viii)(d). This states that no later than 2 years from the coming in force of this Code a mechanism is put in place for undertaking annually an evaluation of the board’s own performance and of its committees, to enhance board performance. Evaluation is a useful requirement and would promote good governance. However, since the board of directors is elected for a 3 year term, this requirement needs to reconciled with the ground realties of the operations of a board.

G. The proviso regarding effective date for implementation of certain requirements of the Code requires that the clauses dealing with the mandatory number of independent directors, the number of executive directors, the restriction on holding of more than 5 directorships and the mandatory separation of the office of chairman and chief executives should be applicable and become effective, when the board of directors is next constituted on the expiry of its current term. This may appear to be too onerous for certain companies as such a time line may not afford them sufficient time for implementation of these provisions.

H. The revised Code requires that orientation Courses / Directors’ Educational Program be initiated. It is highly desirable that such a program should be instituted, and though it is phased for introduction its full implementation is likely to be difficult. This is particularly so because such programs presently available extend over several days. Many listed companies have foreign directors and non-resident directors, who are often advised by their respective governments not to travel to Pakistan at this time due to security considerations. Indeed, this could be one reason why board attendance by video conference or telephone conference is allowed.

I. On the matter of qualifications for eligibility for appointment as a company secretary, the revised Code requires that the company secretary be, amongst other things, a law graduate from a university recognized by the Higher Education Commission and having at least 2 years relevant experience. This requirement of a law degree with two years relevant experience would perhaps be better enhanced and make more sense if the SECP were to amend it to say an Advocate with at least 2 years relevant experience.

J. An important matter that the revised Code silent on is the role of in-house counsel in a public listed company. There are no specific requirements for legal advisers and in-house counsels for companies in Pakistan and unlike the corporate responsibility legislation in the US, i.e. Sarbanes-Oxley Act of 2002, the existing Code in Pakistan does not provide any rules of professional responsibility for Advocates. The role of the in-house counsel in helping companies cope with the ever-increasing regulatory environment has become more prominent and continues to be enhanced. In order to ensure good corporate governance, the SECP must take cognizance of this fact and ensure that the Code integrates for role of such importance as the in-house counsel.

K. On a final note, the revised Code will be introduced under the Rule-making power of the SECP by substitution of the existing Code in the listing regulations of the stock exchange and not by amendment of the relevant provisions of the Companies Ordinance. There is thus a potential for litigation by an aggrieved party affected by some of its provisions on the ground that it curtails freedom of association and / or is an unreasonable restraint on business activities. Reliance could be placed on the Constitution contending that certain provisions, e.g. ineligibility to continue as a director after a certain number of terms goes beyond the disqualifications laid down in the Companies Ordinance for directors.

Islamabad High Court Act, 2010

The Islamabad High Court Act, 2010 (“Act”) came into force on July 30, 2010. The Act provides for establishment of a High Court for Islamabad Capital Territory and effective functioning of the Islamabad High Court (“IHC”).

The Act should be considered as a landmark in the constitutional and legal history of Pakistan as it the first High Court to be established since the independence of Pakistan. The IHC shall consist of a Chief Justice and six other judges to be appointed from the provinces and other territories of Pakistan in accordance with the Constitution of Islamic Republic of Pakistan (“Constitution”). The IHC shall start functioning from the date to be appointed by the Federal Government for the purposes of this Act (“Appointed Date”) and the principal seat of IHC shall be at Islamabad. It is expected that the IHC shall provide an appropriate forum for litigation matters arising within the jurisdiction of Islamabad Capital Territory and legal experts forecast the IHC to attain greater significance as seat of Justice in the years to come. It has been reported that the Judicial Commission of Pakistan has nominated Justice Iqbal Hameed ur Rahman (son of former Chief Justice of Pakistan Hamood ur Rahman) as the new Chief Justice of the IHC (5th December 2010, The Daily Times).

The IHC shall have, in respect of the Islamabad Capital Territory, original, appellate, revisional and other jurisdiction as is exercised by the Lahore High Court in respect of the said territory. Moreover, the IHC shall have original jurisdiction in suits and proceedings having pecuniary value of ten million rupees or more.

Further, all subordinate civil, criminal and revenue courts and all other tribunals and special courts functioning in Islamabad Capital Territory, which were previously within the jurisdiction and under the superintendence and control of Lahore High Court before the commencement of the Act shall, as from the Appointed Date, fall within the jurisdiction and under the supervision and control of the IHC. In pursuance of the above, the IHC shall take necessary steps for establishing subordinate judiciary for the Islamabad Capital Territory within six months of the commencement of the Act. The Act further provides for two Sessions Divisions in the Islamabad Territory.

Practice and Procedure
The Act stipulates that all laws which were in force immediately before the commencement of the Act and applicable to the High Court of Sindh (including the Sindh Chief Court Rules) or any court sub-ordinate to it with respect to practice and procedure shall mutatis mutandis apply to the IHC. The said laws and rules shall continue to apply to the IHC until varied or revoked by rules or orders made by the IHC.

Continuity of Orders
Any order or decision made by the Lahore High Court before the Appointed Date in relation to Islamabad Capital Territory shall for all purposes be as effective and executable as if made by the IHC. Moreover, in case of an order or decision which has been confirmed, varied or reversed on appeal, review or review, the effect shall be given to the order or decision of the appellate court or that of the Lahore High Court as if the same was an order of the IHC.

The Alternate Energy Development Board Act, 2010

The Alternate Energy Development Board Act, 2010 (“Act”) came into force on May 21, 2010 and provides for the establishment of the Alternative Energy Development Board (“Board”) for the purpose of implementing various policies, programmes and projects in the field of alternative or renewable energy technologies in order to meet the ever-increasing energy needs of Pakistan. The objective of the Board is to assist and facilitate the development and generation of alternate or renewable energy resources in order to achieve sustainable growth through transfer of technology and achieving diversified energy generation. At the outset, the term “alternative or renewable energy” has been defined as energy that is produced by alternative or renewable resources as compared to the conventional methods or that are replenished naturally which do not deplete when consumed and are non-polluting and environment friendly.

Composition of the Board
The Act provides that a Chief Executive Officer (“CEO”) shall be appointed by the Federal Government who shall be an eminent engineering professional of known integrity, competence and expertise in handling alternative energy development projects. The CEO is answerable to the Board for all administrative, financial and technical matters of the Board. The Board may delegate such administrative and financial powers to the CEO for carrying out day to day affairs of the Board. Under the Act, the composition of the Board shall be as follows: (a) Chairman to be appointed by the Federal Government (b) Secretary, Finance Division or his nominee (c) Secretary, Ministry of Water and Power or his nominee (d) Secretary, Planning and Development Division or his nominee (e) Secretary, Ministry of Petroleum and Natural Resources or his nominee (f) Secretary, Ministry of Science and Technology or his nominee (g) Secretary of Environment or his nominee (h) Six Members from private sector, of whom at least three shall be experts on alternative energy, as full time Members to be appointed by the Prime Minister on the recommendation of the Board (i) Chief Secretaries of the Governments of Balochistan, Kyber Pakhtunkhwa, Punjab and Sindh or their nominees and (j) the CEO.

Functions and Powers of the Board
Under the Act, the Board is entrusted with carrying out various functions including the following following: (a) to develop national strategy, policies and plans for utilization of alternative and renewable energy resources (b) to act as a forum for evaluating, monitoring and certification of alternative or renewable energy projects and products and (c) to act as a coordinating agency for commercial application of alternative or renewable technology. Further , the Board is required to facilitate energy generation through alternative or renewable energy resources by (i) acting as one window facility for establishing, promoting and facilitating alternative or renewable energy projects based on wind, solar, micro-hydel, fuel cells, tidal, ocean, biogas, biomass, etc (ii) setting up alternative and renewable energy projects on its own or through joint venture or partnership with public or private entities in order to create awareness and motivation of the need to take such initiative for the benefit of general public as well as by evaluating concepts and technologies from technical and financial perspective (iii) conducting feasibility studies and surveys to identify opportunities for power generation and other application through alternative and renewable energy resources (iv) undertaking technical, financial and economic evaluation of the alternative or renewable energy proposals as well as providing assistance in filing of required licensing application and tariff petitions to National Electric Power Regulatory Authority established un the Regulation of Generation, Transmission and Distribution of Electric Power Act, 1997 (iv) interacting and coordinating with national and international agencies for promotion and development of alternative or renewable energy (v) assisting the development and implementation of plans with concerned authorities and provincial governments and special areas for off-grid electrification of rural areas and (vi) making legislative proposals to enforce use and installation of equipment utilizing renewable energy.

For the Act’s implementation and effectiveness, it is provided in Section 20 that all executive agencies in the Federation and the Provinces shall render such assistance to the Board as may be necessary for the execution of its programmes and projects carried out under the Act. It is further provided that the President of Pakistan shall have the power (through an order) to remove any difficulty that arises in giving effect to the provisions of the Act.

Institute of Alternative and Renewable Energy Technologies
The Act authorizes the Board establish an Institute of Renewable Energy Technologies (“Institute”) for carrying out its functions of commercial application of alternative or renewable energy and the corresponding human resource development in the area of alternative and renewable energy.

Alternative Energy Fund
The Act further provides for establishment of the “Alternative Energy Fund” that shall be a “non-lapsable fund” vesting in the Board for the purpose of meeting expenses in connection with the functions and operation of the Board in relation to the Institute and other projects and initiatives under this Act.

Given the acute and burgeoning energy needs of Pakistan, it is hoped that this Act will facilitate new alternate or renewable energy projects and accelerate the commissioning of pending projects so that appropriate alternate energy solutions can be made available to generate power. The challenges to the implementation of alternate or renewable energy resources have been candidly stated in the draft “Midterm Policy” of the Board:

“Experience the world over indicates that the benefits of alternative and renewable energy (ARE) are significant: It reduces local environmental damage, increases energy security by reducing the relative amount of energy imports, is insurance against petroleum price spikes, increases the flow of capital to the country in terms of the investment in new fields and in the form of Carbon Credits, reduces greenhouse gases, and can increase local employment. Despite these obvious benefits, the penetration of alternative and renewable energy (ARE) is well below optimal levels because of Government subsidies to fossil fuels, subsidized energy, entrenched Government corporations in conventional energy and market failures ranging from the availability of credit to the inability to reflect the full costs of using fossil fuels in their price and the full benefits of using ARE.”(For further information visit

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