Owing to consistent efforts by the SECP and synergy with stakeholders, the pace of corporatisation in the country has gained momentum over the last decade.
Snapshot of corporate portfolio:
However, there is still enormous untapped potential for growth of corporate sector as there are only 60,000 registered corporate entities as compared to more than 3 million businesses in the country thereby corporate mapping constituting of mere 2% of business entities. Interestingly, these 2% of businesses contribute 63% of direct and indirect taxes to the government. Though change to the business environment has been witnessed during the past few years, the paradigm shift of business, ie, from conventional non-documented businesses to registered corporate entities has been rather vigour less. In essence, corporatisation is aimed at facilitating companies so as to improve competitiveness and access to capital borrowing in the local and global market. This, besides providing growth opportunities to businesses, entails in itself the perfect recipe for a thriving economy. For clarity, synopsis of a few benefits of corporatisation is evident through the features highlighted below:
i. Distinct legal entity:
Legal capacity to enter into a contract, company can sue or be sued in its name.
ii. Limited liability and protection of personal assets:
If a company becomes insolvent and is wound up, only the assets of the company can be used to clear its debts. The owners of the company have no personal liabilities, and thus are not made bankrupt. The shareholders of a company have the limited liabilities to the extent of their investment in share capital of the entity.
iii. Enhanced credibility with responsibility and accountability:
The status of being registered as a company adds credibility in the eyes of internal and external stakeholders particularly the equity holders as they believe that their interests shall be safeguarded owing to the presence of regulatory authorities and proper legal framework.
iv. Long life enterprises with perpetual succession:
A limited company is the most enduring legal business structure. The companies may continue on, regardless of what happens to its individual directors, officers, managers or shareholders unlike sole proprietorship or partnership. Critical circumstances are taken care of through legal documentation and process.
v. Easy transferable ownership/shares:
In case of a company, the process of transferring ownership/shares of the company, whether wholly or partly, is defined in statute, while in case of other forms of businesses difficulties arise.
vi. Raising finance:
The greatest benefit of corporatisation is the ability to raise capital through allotment of shares and/or obtaining debt from financial institutions unlike constraints faced by sole proprietorships and partnerships dependent hugely on personal liabilities.
vii. Separation of ownership from management:
The shareholders own the company but Board of Directors manages the company. The role and responsibilities of directors are defined and the rights of shareholders are exercised keeping in view the relevant statute.
viii. Defined legal framework:
The obligation of company to work within the ambit of a defined legal framework is of great importance and relief to all stakeholders. Each company must have a Memorandum of Association and Articles of Association prior to commencement of operations. Moreover, a company is obligated to run its affair within the regulatory ambit.
ix. Internal dispute resolution mechanism:
In case of a company, there is a reduced risk of unresolved conflict or dispute owing to predefined domains of operation and dispute resolution as defined by relevant corporate law. Contrary to that in other business forms, the risk of dispute is high due to arbitrary mechanism and is directly proportional to scale of business loss.
Despite the benefits accruing the corporate structure, empirical analysis of rather sluggish growth of corporate sector suggest that rigorous regulatory compliances like maintenance of complete set of books of accounts, conduct of audit, holding of various general and board meeting, election of directors etc are impeding the corporatisation process. Further, uniform reporting requirement for all types of business, irrespective of their sizes, is also hampering the way to smooth corporatisation.
Small businesses should be treated under a different category of regulatory regime while medium and large businesses must be subject to more stringent sets of regulatory requirements. Noteworthy is the consequences of higher tax rate for corporate sector otherwise than that for AOP, that virtually outweighs the benefits likely to accrue to the corporate entities. Needless to mention that tax evasion or avoidance is also difficult to be resorted to after corporatizing the business.
An essential for achieving corporatisation is the need for having a more structured corporate law, which could ensure a hassle-free operation for all type of businesses from large-scale units to small-size entities. For the aforesaid purpose, the SECP has established a task force, Corporate Law and Review Commission (CLRC), which is drafting a new law for the country after detailed study of global best practices, relevant laws of international jurisdiction as well as keeping local corporate culture and ground realities in mind. The new law is expected to be finalized soon. And public consultation will be part of the process. It is hoped that the new law will bring Pakistani corporate legal regime on a par with international norms and standards.
Despite constraints, the SECP has time and again focused its efforts on competitive growth of corporate sector in the country. The key initiatives, acting as catalyst for purpose of corporatisation are discussed below.
Despite constraints, the SECP has time and again focused its efforts on competitive growth of corporate sector in the country. The key initiatives, acting as catalyst for purpose of corporatisation are discussed below.
i. Fast Track Registration Services:
In order to facilitate prospective promoters, corporate consultants and management of the companies and in view of technological development, the Fast Track Registration Services (FTRS) for incorporation of companies have been recently introduced by the SECP. It ensures quick disposal of incorporation cases, ie, within four working hours and is available for both online and offline cases. The SECP has set an example, on a par with international jurisdictions by providing same day fast track company incorporation facility. This initiative is expected to promote corporatisation and in the longer run, shall promote investment, healthy growth of the corporate sector and development of economy.
ii. e-Services Project:
In order to promote transparency, paperless environment and an effective facilitation mechanism, e-Services project was launched in 2008. E-Services entails promoters/companies to file requisite returns/documents to the SECP through the internet. This project has effectively reduced turnaround time and has won accolades from its users and relevant domestic/international agencies alike.
iii. Companies Regularisation Scheme (CRS):
Time and again, the SECP rolls out major facilitation scheme known as Companies Regularization Scheme (CRS). The CRS provides defaulter companies an opportunity to file their overdue statutory returns and annual accounts with reduced additional filing fees and also absolves the defaulter companies from penalties imposed on filing of overdue documents. Through the CRS, the SECP foresees and has experienced enhanced compliance rate.
iv. Model Memorandum and Articles of Association:
The SECP took a major step towards facilitating promoters by placing model memorandum and articles of association on its website. The promoters can take model memorandum and articles of association, relate it to their industry and submit the same with the documents meant for incorporation.
v. Guidebooks:
Numerous guidebooks in different languages have been developed and drafted to facilitate promoters and corporate sector and for creating awareness regarding statutory requirements of the Companies Ordinance, 1984. All guides have been placed on the SECP's website.
vi. Facilitation Desks:
The facilitation desks have been set up at the regional offices to facilitate and provide information to all local and foreign promoters visiting the SECP's offices.
In conclusion, the way forward for the SECP is corporatisation of Pakistan. The SECP, as in the past, shall work with other law-enforcement agencies for removing the present and potential constraints in the way of corporatisation enable businesses to thrive in a competitive environment that fosters sustainable structure in the longer run and achieves the broader goal of documentation of economy. Nevertheless, the same shall help Pakistan to prominently place itself on the global business canvas.
The writer is Commissioner, Company Law Division, at the SECP. He has over 28 years of experience in accountancy, finance, administration of corporate laws, corporate governance and enforcement.