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RULES, 2013

PUBLIC SECTOR COMPANIES (CORPORATE GOVERNANCE) RULES, 2013

[Gazette of Pakistan, Extraordinary, Part-II, 8th March 2013]

S.R.O. 180 (I)/2013.—In exercise of the powers conferred by Section 506 of the Companies Ordinance, 1984 (XLVII of 1984) read with clause (b) of Section 43 of the Securities and Exchange Commission of Pakistan Act, 1997 (XLII of 1997), the Securities and Exchange Commission of Pakistan, with the approval of the Federal Government, is pleased to make the following rules, the same have been previously published vide Notification No. S.R.0.283(I)/2012 dated the 22nd March, 2012, namely:—

1.  Short title, commencement and applicability.—(1) These Rules may be called the Public Sector Companies (Corporate Governance) Rules, 2013.

(2)  They shall come into force after ninety days of the issuance of this notification.

(3)     These rules shall apply to all Public Sector Companies, as defined in clause (g) of Rule 2.

(4)     In the case of listed Public Sector Companies, where there is any inconsistency with the Code of Corporate Governance, the provisions of these rules shall prevail.

2.  Definitions.—(1) In these rules, unless there is anything repugnant in the subject or context:

(a)     "Board" means board of directors of a Public Sector Company;

(b)     "Commission" means the Securities and Exchange Commission of Pakistan established under the Securities and Exchange Commission of Pakistan Act, 1997 (XLII of 1997);

(c)     "Executive" means an employee of a Public Sector Company, who is entrusted with responsibilities of an administrative or managerial nature, including the Chief Executive and Executive Director;

(d)     "Independent Director" means a Non-Executive Director who is not in the service of Pakistan or of any statutory body or any body or institution owned or controlled by the Government and who is not connected or does not have any other relationship, whether pecuniary or otherwise, with the Public Sector Company, its associated companies, subsidiaries, holding company or directors. The test of independence principally emanates from the fact whether such person can be reasonably perceived as being able to exercise independent judgment without being subservient to any form of conflict of interest.

          A director shall not be considered independent if one or more of the following circumstances exist,—

          (i)      he has been an employee of the Public Sector Company, any of its subsidiaries, or holding company during the last two years;

          (ii)     he has, or has had within the last two years, a material business relationship with the Public Sector Company either directly or indirectly, or director of a body that has such a relationship with the Public Sector Company;

          (iii)    he has received remuneration in the two years preceding his appointment as a director or has received additional remuneration excluding retirement benefits from the Public Sector Company apart from director's fee or has participated in the Public Sector Company's share option or a performance-related pay scheme;

          (iv)    he is a close relative (spouse, lineal ascendants and descendants and brothers and sisters) of the company's promoters, directors or major shareholders;

          (v)     he holds cross-directorships or has significant links with other directors through involvement in other companies or bodies; or

          (vi)    he has served on the Board for more than two consecutive terms from the date of his first appointment provided that such person shall be deemed independent director after a lapse of one term;

(e)     "Non-Executive Director" means a director of a Public Sector Company who is not entrusted with responsibilities of an administrative or managerial nature;

(f)      "Ordinance" means the Companies Ordinance, 1984 (XLVII of 1984);

(g)     "Public Sector Company" means a company, whether public or private, which is directly or indirectly controlled, beneficially owned or not less than fifty percent of the voting securities or voting power of which are held by the Government or any instrumentality or agency of the Government or a statutory body, or in respect of which the Government or any instrumentality or agency of the Government or a statutory body, has otherwise power to elect, nominate or appoint majority of its directors, and includes a public sector association not for profit, licensed under Section 42 of the Ordinance.

(2)  All other terms and expressions used but not defined in these rules shall have the same meaning as are assigned to them in the Ordinance.

3.  Composition of the Board.—(1) The Board shall consists of executive and non-executive directors, including independent directors and those representing minority interests with the requisite range of skills, competence, knowledge, experience and approach so that the Board as a group includes core competencies and diversity considered relevant in the context of the Public Sector Company's operations.

(2)  The Board shall have forty percent of its total members as independent directors within the first two years of this notification, which shall be raised to a majority of independent directors in the next two years, and the majority shall be maintained subsequently. The Public Sector Company shall disclose in the annual report Non-executive, Executive and Independent directors.

(3)     No Independent Director shall participate in share options or any similar schemes of the Public Sector Company which entitle him to acquire any interest in the Public Sector Company.

(4)     Any casual vacancy in the Board shall be filled up by the directors at the earliest but not later than ninety days thereof.

(5)     No person shall be elected or nominated as a director of more than five Public Sector Companies and listed companies simultaneously, except their subsidiaries.

(6)     The Public Sector Company shall, where necessary, take necessary steps to ensure that the minority shareholders, as a class, are facilitated by proxy solicitation, for which purpose the Public Sector Company shall,—

(a)     annex with the notice issued under sub-section (4) of Section 178 of the Ordinance, a statement by a candidate from amongst the minority shareholders who seek to contest election to the Board, and it may include a profile of the candidate;

(b)     provide information regarding shareholding structure and copies of the register of members to the candidates representing minority shareholders; and

(c)     on a request by the candidates representing minority shareholders and at the cost of the company, annex to the notice issued under sub section (4) of Section 178 of the Ordinance an additional copy of proxy form duly filled in by such candidates.

(7)     The appointing authorities, including the Government and other shareholders, shall apply the fit and proper criteria given in the Annexure in making nominations of the persons for election as Board members under the provisions of the Ordinance.

4.  Role of the Chairman and Chief Executive and separation of the two positions.—(1) The office of the chairman shall be separate, and his responsibilities distinct, from those of the chief executive.

(2)     The chairman of the Board shall,—

(a)     ensure that the Board is properly working and all matters relevant to the governance of the Public Sector Company are placed on the agenda of Board meetings;

(b)     conduct the Board meeting including fixing the agenda; and

(c)     ensure that all the directors are enabled and encouraged to fully participate in the deliberations and decisions of the Board. The chairman has a responsibility to lead the Board and ensure its effective functioning and continuous development, he shall not be involved in day to day operations of the Public Sector Company.

(3)     The Chief Executive is responsible for the management of the Public Sector Company and for its procedures in financial and other matters, subject to the oversight and directions of the Board, in accordance with the Ordinance. His responsibilities include implementation of strategies and policies approved by the Board, making appropriate arrangements to ensure that funds and resources are properly safeguarded and are used economically, efficiently and effectively and in accordance with all statutory obligations.

(4)     The Board shall elect its chairman from amongst the independent directors so as to achieve an appropriate balance of power, increasing accountability, and improving the Board's capacity for exercising independent judgment.

5.  Responsibilities, powers and functions of the Board.—(1) The Board shall exercise its powers and carry out its fiduciary duties with a sense of objective judgment, and independence in the best interest of the company. This provision shall apply to all directors, including ex-officio directors. A director, once appointed or elected, shall hold office for a period of three years, unless he resigns or is removed in accordance with the provisions of the Ordinance. The removal of a director shall only take place in the event of misconduct or if the director has not performed upto the standard, determined through a performance evaluation.

Explanation: For the purpose of this clause, misconduct includes,—

(a)     indulging in a competing professional or personal conflict of interests' situation;

(b)     using the funds, assets and resources of the Public Sector Company without due diligence and care;

(c)     failing to treat the colleagues and the staff of the Public Sector Company with respect, or using harassment in any form of physical or verbal abuse;

(d)     making public statements without authorization by the Board;

(e)     receiving gifts or other benefits from any sources external to the Public Sector Company offered to him in connection with his duties on the Board; or

(f)      abusing or misusing his official position to gain undue advantage or assuming financial or other obligations in private institutions or for persons which may cause embarrassment in the performance of official duties or functions.

(2)     The Board shall evaluate the candidates based on the fit and proper criteria and the guidelines specified by the Commission for appointment to the position of the chief executive, and recommend at least three individuals to the Government for appointment as chief executive of the Public Sector Company. On receiving concurrence of the Government, the Board shall appoint the chief executive in accordance with the provisions of the Ordinance. The Board shall also be responsible for development and succession planning of the chief executive.

(3)     The Board shall ensure that obligations to all shareholders are fulfilled and they are duly informed in a timely manner of all material events through shareholder meetings and other communications as are considered necessary.

(4)     The Board shall ensure that professional standards and corporate values are in place that promotes integrity for the Board, senior management and other employees in the form of a "Code of Conduct". The code of conduct shall articulate acceptable and unacceptable behaviors. The Board shall ensure that appropriate steps are taken to communicate throughout the company the code of conduct it sets together with supporting policies and procedures, including posting the same on the company's website. The Board shall also ensure that adequate systems and controls are in place for the identification and redressal of grievances arising from unethical practices.

(5)     The Board shall establish a system of sound internal control, which shall be effectively implemented at all levels within the Public Sector Company, to ensure compliance with the fundamental principles of probity and propriety; objectivity, integrity and honesty and relationship with the stakeholders, in the following manner, namely:—

(a)     the principle of probity and propriety entails that company's assets and resources are not used for private advantage and due economy is exercised so as to reduce wastage. The principle shall be adhered to, especially with respect to the following, namely:—

          (i)      handling of public funds, assets, resources and confidential information by directors, executives and employees; and

          (ii)     claiming of expenses;

(b)     the principle of objectivity, integrity and honesty requires the following, namely:—

          (i)      the directors and executives of a Public Sector Company do not allow a conflict of interest to undermine their objectivity in any of their activities, both professional and private and that they do not use their position in the Public Sector Company to further their private gains in a social or business relationship outside the Public Sector Company. If a situation arise where an actual or potential conflict of interest exists, there shall be appropriate identification, disclosure and management of such conflict of interest;

          (ii)     An appropriate conflict of interest policy is developed and duly enforced. Such a policy shall clearly lay down circumstances or considerations when a person may be deemed to have actual or potential conflict of interest, and the procedure for disclosing such interest:

                   Explanation: For the purposes of this clause a person shall be deemed to have an interest in a matter if he has any stake, pecuniary or otherwise, in such matter which could reasonably be regarded as giving rise to a conflict between his duty to objectively perform his functions under these rules so that his ability to consider and decide any matter impartially or to give any advice without bias, may reasonably be regarded as impaired;

          (iii)    where a director, executive or other employee has a conflict of interest in a particular matter, such person shall play no part in the relevant discussion, decision or action;

          (iv)    a "register of interests" is maintained to record all relevant personal, financial and business interests, of directors and executives who have any decision making role in the company, and the same shall be made publicly available. Such interests may include, for instance, any significant political activity, including office holding, elected positions, public appearances and candidature for election, undertaken in the last five years;

          (v)     a declaration by the directors and executives that they shall not offer or accept any payment, bribe, favor or inducement which might influence, or appear to influence, their decisions and actions; and

          (vi)    the Board shall also develop and implement a policy on "anti-corruption" to minimize actual or perceived corruption in the company; and

(c)     the principle of relationship with stakeholders requires the following, namely—

          (i)      ensuring that the directors and executives uphold the reputation of the company by treating the general public, institutional investors and other stakeholders with Courtesy, integrity and efficiency, and ensuring service quality;

          (ii)     ensuring equality of opportunity by establishing open and fair procedures for making appointments and for determining terms and conditions of service. The Board may nominate a committee consisting of one of its members or senior Executives for investigating, where necessary on a confidential basis, any deviation from the company's code of conduct; and

          (iii)    ensuring compliance with the law and the Public Sector Company's internal rules and procedures relating to public procurement, tender regulations, purchasing and technical standards, when dealing with suppliers of goods and services. The Board shall ensure that quality standards are followed with due diligence and that suppliers comply with the standards specified and are paid for supplies or services within the time agreed.

(6)     The Board shall adopt a vision or mission statement and corporate strategy for the Public Sector Company.

(7)     The Board shall also formulate significant policies of the Public Sector Company, which may include the following, namely—

(a)     the formal approval and adoption of the annual report of the Public Sector Company, including the financial statements;

(b)     the implementation of an effective communication policy with all the stakeholders of the Public Sector Company;

(c)     the identification and monitoring of the principal risks and opportunities of the Public Sector Company and ensuring that appropriate systems are in place to manage these risks and opportunities, including, safeguarding the public reputation of the Public Sector Company;

(d)     procurement of goods and services so as to enhance transparency in procurement transactions;

(e)     marketing of goods to be sold or services to be rendered by the Public Sector Company;

(f)      determination of terms of credit and discount to customers;

(g)     write-off of bad or doubtful debts, advances and receivables;

(h)     acquisition or disposal of fixed assets and investments;

(i)      borrowing of moneys up to a specified limit, exceeding which the amounts shall be sanctioned or ratified by a general meeting of shareholders;

(j)      Corporate social responsibility initiatives including, donations, charities, contributions and other payments of a similar nature;

(k)     determination and delegation of financial powers to Executives and employees;

(l)      transactions or contracts with associated companies and related parties;

(m)    health, safety and environment;

(n)     development of whistle-blowing policy and protection mechanism;

(o)     capital expenditure planning and control;

(p)     protection of public interests; and

(q)     human resource policy including succession planning.

(8)     Any service delivered or goods sold by a Public Sector Company as a public service obligation where decisions are taken in fulfilling social objectives of the Government but are not in its commercial interests, outlay of such action shall be quantified and request for appropriate compensation there-for shall be submitted to the Government for consideration.

(9)     A complete record of particulars of the above-mentioned policies along with the dates on which they were approved or amended by the Board shall be maintained.

(10)   The Board shall define the level of materiality, keeping in view the specific context of the Public Sector Company and the recommendations of any committee of the Board that may be set up for the purpose.

6.  Meetings of the Board.—(1) The Board shall meet at least once, each quarter of a year to ensure that it discharges its duties and obligations to shareholders and other stakeholders efficiently and effectively. In case of non-compliance, the same shall be reported to the Commission with reasons of non-compliance, within fourteen days of the end of the quarter in which the meeting should have been held.

(2)     Written notices of meetings, including the agenda, duly approved by the Chairman, shall be circulated not less than seven days before the meetings, except in the case of emergency meetings, where the notice period may be reduced or waived by the Board.

(3)     The chairman of the Board shall ensure that minutes of meetings of the Board are appropriately recorded by approving them under his signature. The minutes of meetings shall be circulated after approval of the chairman, to directors and officers entitled to attend Board meetings, not later than fourteen days thereof, unless a shorter period is provided in the articles of association of the Public Sector Company.

(4)     In the event that a director of a Public Sector Company is of the view that his dissenting note has not been satisfactorily recorded in the minutes of a meeting of the Board, he may refer the matter to the company secretary, or the chairman of the Board. The director may require the note to be appended to the minutes, failing which he may file an objection with the Commission.

(5)  A Board meeting held and attended through video-conferencing shall be a valid meeting, as long as its proceedings are properly recorded and the requirements specified by the Commission for public companies for holding Board meetings through video-conferencing are met.

7.  Key information to be placed for decision by the Board.—(1) The Board shall establish appropriate arrangements to ensure it has access to all relevant information, advice and resources necessary to enable it to carry out its role effectively. Significant issues shall be placed before the Board for its information and consideration, in order to formalize and strengthen the corporate decision making process.

(2)  For the purpose of sub-rule (1), significant issues shall, inter-alia, include the following, namely:—

(a)     annual business plans, cash flow projections, forecasts and long term plans; budgets including capital, manpower and expenditure budgets, along with variance analyses;

(b)     internal audit reports, including cases of fraud or major irregularities;

(c)     management letters issued by the external auditors;

(d)     details of joint ventures or collaboration agreements or agreements with distributors, agents, etc;

(e)     promulgation or amendment of a law, rule or regulation or, enforcement of an accounting standard or such other matters as may affect the Public Sector Company;

(f)      status and implications of any lawsuit or judicial proceedings of material nature, filed by or against the Public Sector Company;

(g)     any show-cause, demand or prosecution notice received from any revenue or regulatory authority, which may be material;

(h)     material payments of government dues, including income tax, excise and customs duties, and other statutory dues including penal charges thereon;

(i)      inter-corporate investments in and loans to or from associated concerns in which the business group, of which the Public Sector Company is a part, has significant interest;

(j)      policies related to the award of contracts and purchase and sale of raw materials, finished goods, machinery etc;

(k)     default in payment of principal or interest, including penalties on late payments and other dues, to a creditor, bank or financial institution or default in payment of public deposit;

(l)      failure to recover material amounts of loans, advances, and deposits made by the Public Sector Company, including trade debts and intercorporate finances;

(m)    any significant accidents, dangerous occurrences and instances of pollution and environmental problems involving the Public Sector Company;

(n)     significant public or product liability claims made or likely to be made against the Public Sector Company, including any adverse judgment or order made on the conduct of the Public Sector Company or of any other company that may bear negatively on the Public Sector Company;

(o)     disputes with labor and their proposed solutions, any agreement with the labor union or collective bargaining agent and any charter of demands on the Public Sector Company;

(p)     payment for goodwill, brand equity or intellectual property;

(q)     annual, quarterly, monthly or other periodical accounts as are required to be approved by the Board for circulation amongst its members;

(r)      reports on governance, risk and compliance issues;

(s)      whistle-blower protection mechanism;

(t)      report on Corporate Social Responsibility (CSR) activities; and

(u)     related party transactions.

8.  Performance evaluation.—(1) The performance evaluation of the members of the Board including the chairman and the chief executive shall be undertaken for which the Board shall establish a process, based on specified criteria, and the chairman of the Board shall take ownership of such an evaluation. The committees shall also carry out their evaluation on an annual basis.

(2)  The Board shall monitor and assess the performance of senior management on a periodic basis, at least once a year, and hold them accountable for accomplishing objectives, goals and key performance indicators set for this purpose.

9.  Related party transactions.—(1) The details of all related party transactions shall be placed before the audit committee of the Public Sector Company and upon recommendations of the audit committee, the same shall be placed before the Board for review and approval.

(2)     The related party transactions which are not executed at arm's length price shall also be placed separately at each Board meeting along with necessary justification for consideration and approval of the Board on recommendation of the audit committee of the Public Sector Company.

(3)     The Board shall approve the pricing methods for related party transactions that were made on the terms equivalent to those that prevail in arm's length transaction only if such terms can be substantiated.

(4)     Every Public Sector Company shall maintain a party wise record of transactions, in each financial year, entered into with related parties in that year along with all such documents and explanations. The record of related party transaction shall include the following particulars in respect of each transaction, namely:—

(a)     name of related party;

(b)     nature of relationship with related party;

(c)     nature of transaction;

(d)     amount of transaction; and

(e)     terms and conditions of transaction, including the amount of consideration received or given.

(5)     The Public Sector Company may seek a general mandate from its members for recurrent related party transactions of revenue or trading nature or those necessary for its day-to-day operations such as the purchase and sale of supplies and materials, but not in respect of the purchase or sale of assets, undertakings or businesses. A general mandate is subject to annual renewal.

10.     Quarterly and Monthly Financial Statements and Annual Report.—(1) Every Public Sector Company shall, within one month of the close of first, second and third quarter of its year of account, prepare a profit and loss account for, and balance-sheet as at the end of, that quarter, whether audited or otherwise, for the Board's approval. Annual report including annual financial statements shall be placed on the Public Sector Company's website.

(2)  Every Public Sector Company shall also prepare monthly accounts, for circulation amongst the Board members.

11.     Board orientation and learning.—(1) Orientation courses shall be held by a Public Sector Company, to enable directors to better comprehend the specific context in which it operates, including its operations and environment, awareness of Public Sector Company's values and standards of probity and accountability as well as their duties as directors.

(2)     In order to ensure that the directors are well conversant with the corporate laws and practices, they are encouraged to have certification under unappropriate training or education program offered by any institution, local or foreign.

(3)     In order to acquaint the Board members with the wider scope of responsibilities concerning the use of public resources, to act in good faith and in the best interests of the Public Sector Company, at least one orientation course shall be arranged annually for the directors and the following information in writing, inter-alia,shall be provided, namely:—

(a)     Public Sector Company's aims and objectives;

(b)     control environment and control activities;

(c)     key policies and procedures;

(d)     risk management and internal control framework;

(e)     background of key personnel, including their job descriptions;

(f)      delegation of financial and administrative powers;

(g)     board and staff structure; and

(h)     budgeting, planning and performance evaluation systems.

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