11.  Formation of Board Committees.—(1) The Board shall set up the following committees to support it in performing its functions efficiently, and for seeking assistance in the decision making process:

(a)      Audit Committee, for an effective and efficient internal and external financial reporting mechanism;

(b)     Risk Management Committee, in case of Public Sector Companies in the financial sector, to effectively review the risk function;

(c)      Human Resources Committee, to deal with all employee related matters including recruitment, training, remuneration, performance evaluation, succession planning, and measures for effective utilization of the employees of the PSC; and

(d)     Procurement Committee, to ensure transparency in procurement transactions and in dealing with the suppliers.

(2)  The Board committees shall be chaired by non-executive directors and the majority of their members shall be independent. However, the existence of such committees shall not absolve the board from its collective responsibility for all matters. Such committees shall have written terms of reference that define their duties, authority and composition, shall report to the full board, and the minutes of their meetings shall be circulated to all board members.

(3)  The committees formed by the board, shall also carry out the evaluation of their performance on annual basis and submit such assessment to the board. The Chairman of the Board shall take leadership role in the ensuring completion of such evaluation process.

(4)  The board shall concern itself with policy formulation and oversight and not the approval of individual transactions except which are of an extraordinary nature or involve materially large amount.

12.     Chief Financial Officer, Company Secretary and Chief Internal Auditor-appointment and removal.—(1) Every Public Sector Company shall appoint a chief financial officer, company secretary and chief internal auditor.

(2)     The appointment, remuneration and terms and conditions of employment of the chief financial officer, the company secretary and the chief internal auditor of Public Sector Companies shall be determined with the approval of the Board.

(3)     The chief financial officer, the company secretary, or the chief internal auditor of Public Sector Companies shall not be removed except with the approval of the Board.

13.     Role and qualification of Chief Financial Officer and Company Secretary.—(1) The chief financial officer shall be responsible for ensuring that appropriate advice is given to the Board on all financial matters, for keeping proper financial records and accounts, and for maintaining an effective system of internal financial control.

(2)     No person shall be appointed as the chief financial officer of a Public Sector Company unless he is:–

(a)      a member of a recognized body of professional accountants; or

(b)     a person holding a master degree in business administration or commerce from a university recognized by the Higher Education Commission with at least five years relevant experience.

(3)     The company secretary shall be responsible for ensuring that Board procedures are followed, and that all applicable statutes and regulation and other relevant statements of best practice are complied with. Where the company secretary is not separately appointed, the roleof Company Secretary and CFO may be combined or any other member of senior management.

(4)  No person shall be appointed as the company secretary of a Public Sector Company unless he is:

(a)      a member of a recognized body of professional accountants; or

(b)     a member of a recognized body of corporate or chartered secretaries; or

(c)      a person holding a master degree in business administration or commerce or being a law graduate from a university recognized by the Higher Education Commission with at least five years relevant experience: or

(5)  No person shall be appointed to the positions of the chief financial officer and company secretary unless he is fit and proper for the position.

14.  Requirement to attend Board Meetings.—(1) The chief financial officer and the company secretary of a Public Sector Company shall attend all meetings of the Board:

Provided that unless elected as a director, the chief financial officer and the company secretary shall not be deemed to be a director or entitled to cast a vote at meetings of the Board for the purposes of these Regulations:

Provided further that the chief financial officer and the company secretary shall not attend such part of a meeting of the Board, which involves consideration of an agenda item relating to them or that relating to the Chief Executive or any director.

(2)  In pursuance of sub-regulation (1), the Board shall ensure that the chief financial officer and the company secretary attend Board meetings, wherever required.

15.     Financial Reporting Framework.—Every Public Sector Company shall adopt International Financial Reporting Standards, as are notified by the Commission under clause (i) of sub-section (3) of Section 234 of the Ordinance.

16.     Directors' Report to the Shareholders.—(1) The Board shall submit an annual report to the shareholders.

(2)  The Board shall make the following statements and provide the following information in their report to the shareholders, prepared under Section 236 of the Ordinance:

(a)      that the Board has complied with the relevant principles of corporate governance, and has identified the regulations that have not been complied with, the period such non-compliance continued, and reasons for such non-compliance.

(b)     that the financial statements, prepared by the management of the Public Sector Company, present fairly its state of affairs, the result of its operations, cash flows and changes in equity.

(c)      that proper books of account of the Public Sector Company have been maintained.

(d)     that appropriate accounting policies have been consistently applied in preparation of financial statements and accounting estimates are based on reasonable and prudent judgment.

(e)      that they recognize their responsibility to establish and maintain sound system of internal control, which is regularly reviewed and monitored.

(g)     that the appointment of chairman and other members of Board and the terms of their appointment along with the remuneration policy adopted are in the best interests of the Public Sector Company as well as in line with the best practices.

(4)  The disclosure of an Executive's remuneration is an important aspect for Public Sector Companies. The annual report of a Public Sector Company shall contain a statement on the remuneration policy and details of the remuneration of members of the Board. Separate figures need to be shown for salary, fees, other benefits and other performance-related elements.

(5)  The directors' report of Public Sector Companies shall also include the following, where applicable:–

(a)      Where the Public Sector Company is reliant on a subsidy or other financial support from the Government, a detailed disclosure of the fact;

(b)     Significant deviations from last year in operating results of the Public Sector Company shall be highlighted and reasons thereof shall be explained;

(c)      Key operating and financial data of last six years shall be summarized;

(d)     Performance indicators of the Public Sector Company relating to its social objectives as outcomes which significantly reflect the work and impact of Public Sector Company, and a comparison of actual results with the budgeted figures. Such indicators shall focus on as how well the Public Sector Company has responded to accountability requirements, improved service delivery, reduced costs and adherence to the principles of environmental and corporate social responsibilities;

(e)      Where any statutory payment on account of taxes, duties, levies and charges is outstanding, the amount together with a brief description and reasons for the same shall be disclosed;

(f)      Significant plans and decisions, such as corporate restructuring, business expansion and discontinuance of operations, shall be outlined along with future prospects, risks and uncertainties surrounding the Public Sector Company;

(g)     A statement as to the value of investments of provident, gratuity and pension funds, based on their respective audited accounts, shall be included;

(h)     The number of Board meetings held during the year and attendance by each director shall be disclosed; and

(i)      The pattern of shareholding shall be reported to disclose the aggregate number of shares (along with name wise details, where stated below) held by:

          (i)      Government;

                   (ii)        associated companies, undertakings and related parties (name wise details);

          (iii)    NIT and ICP;

                   (iv)       directors, Chief Executive, and their spouse and minor children (name wise details);

          (v)     Executives;

          (vi)    Public Sector Companies and corporations;

                   (vii)      banks, development finance institutions, non-banking finance companies, insurance companies, modarabas and mutual funds; and

                   (viii)     shareholders holding ten percent or more voting rights in the Public Sector Company (name wise details).

17.  Disclosure of interests by Directors and Officers.—(1) Every director of a Public Sector Company, if he or his relative, is in any way, directly or indirectly, concerned or interested in any contract or arrangement entered into, or to be entered into, by or on behalf of the Public Sector Company shall disclose the nature of his concern or interest at a meeting of the directors.

(2)     Any other officer (including the Chief Executive and other Executives) of a Public Sector Company, if he or his relative, is in any way, directly or indirectly, concerned or interested in any proposed contract or arrangement by the company shall disclose to the Company through a communication to the company secretary, the nature and extent of his interest in the transaction. Such officer and the company shall ensure that such information is properly place and considered by any forum where the matter relating such proposed contract or arrangement is to be discussed and approved.

(3)     If a director or officer has an existing interest, before joining the Board, he shall disclose such interest to the Board, which shall take such facts into consideration for any current and future decision making.

18.     Directors' Remuneration.—(1) There shall be a formal and transparent procedure for fixing the remuneration packages of individual directors. No director shall be involved in deciding his own remuneration.

(2)     Directors' remuneration packages shall encourage value creation within the company, and shall align their interests with those of the company. These shall be subject to prior approval of shareholders / board as required by company's Articles of Association. Levels of remuneration shall be sufficient to attract and retain the directors needed to run the company successfully.

(3)     Subject to the provisions of the company's Articles of Association, the shareholders / board shall determine the scale of remuneration for non-executive directors. However, it shall not be at a level that could be perceived to compromise their independence.

(4)     The Company's Annual Report shall contain criteria and details of the Remuneration of each director, including salary, benefits and performance linked incentives.

19.     Responsibility for Financial Reporting and Corporate Compliance.—No Public Sector Company shall circulate its financial statements unless the Chief Executive and the chief financial officer, present the financial statements, duly certified under their respective signatures, for consideration and approval of the Audit Committee and the Board. The Board shall, after consideration and approval, authorize the signing of financial statements for issuance and circulation.

20.     Audit Committee.—(1) The Board of every Public Sector Company shall establish an audit committee, which shall comprise not less than three members, including the chairman. Members of the committee shall be financially literate and majority of them, including its chairman, shall be Independent Non-Executive Directors. The names of members of the audit committee shall be disclosed in each annual report of the Public Sector Company.

(2)     The chairman of the Board shall not be a member of the audit committee.

(3)     The chief financial officer, the chief internal auditor, and a representative of the external auditors shall attend all meetings of the audit committee at which issues relating to accounts and audit are discussed.

Provided that at least once a year, the audit committee shall meet the external auditors without the presence of the chief financial officer, the chief internal auditor and other executives being present, to ensure independent communication between the external auditors and the Audit Committee.

Provided further that at least once a year, the audit committee shall meet chief internal auditor and other members of the internal audit function without the chief financial officer and the external auditors being present.

(4)     The Board shall determine the terms of reference of the Audit Committee. The terms of reference shall be in writing, specifying the mandate of the Audit Committee. The Committee shall have full and explicit authority to investigate any matter within its terms of reference and shall be provided with adequate resources and access to all relevant information.

(5)     The audit committee shall, inter-alia, be responsible for recommending to the Board the appointment of external auditors by the Public Sector Company's shareholders and shall consider any questions of resignation or removal of external auditors, audit fees and provision by external auditors of any service to the Public Sector Company in addition to audit of its financial statements. In the absence of strong grounds to proceed otherwise, the Board shall act in accordance with the recommendations of the audit committee in all these matters. However, the Board shall not be deemed to absolve itself of its overall responsibility for the functions delegated to the audit committee.

(6)     The terms of reference of the audit committee may also include the following:

(a)      determination of appropriate measures to safeguard the Public Sector Company's assets;

(b)     review of preliminary announcements of results prior to publication;

(c)      review of quarterly, half-yearly and annual financial statements of the Public Sector Company, prior to their approval by the Board, focusing on:–

          (i)      major judgment areas;

          (ii)     significant adjustments resulting from the audit;

          (iii)    the going-concern assumption;

                   (iv)       any changes in accounting policies and practices; and

          (v)     compliance with applicable accounting standards.

                               Explanation.—The appropriateness of the use of the going concern assumption in the preparation of the financial statements is generally not in question when auditing Public Sector Company having funding arrangements backed by a Government. However, where such arrangements do not exist, or where Government funding of the Public Sector Company may be withdrawn and the existence of the Public Sector Company may be at risk, International Standards on Auditing provide useful guidance. This issue is increasingly important for Public Sector Companies which have been privatized.

(d)     facilitating the external audit and discussion with external auditors of major observations arising from interim and final audits and any matter that the auditors may wish to highlight (in the absence of management, where necessary);

(e)      review of management letter issued by external auditors and management's response thereto;

(f)      ensuring coordination between the internal and external auditors of the Public Sector Company;

(g)     review of the scope and extent of internal audit and ensuring that the internal audit function has adequate resources and is appropriately placed within the Public Sector Company;

(h)     consideration of major findings of internal investigations and management's response thereto;

(i)      ascertaining that the infernal control system including financial and operational controls, accounting system and reporting structure are adequate and effective;

(j)      review of the Public Sector Company's statement on internal control systems prior to endorsement by the Board;

(k)     recommending or approving the hiring or removal of the chief internal auditor;

(l)      instituting special projects, value for money studies or other investigations on any matter specified by the Board, in consultation with the Chief Executive and to consider remittance of any matter to the external auditors or to any other external body;

(m)    determination of compliance with relevant statutory requirements;

(n)     monitoring compliance with the best practices of corporate governance and identification of significant violations thereof;

(o)     overseeing whistle-blowing policy and protection mechanism; and

(p)     consideration of any other issue or matter as may be assigned by the Board.

(7)     The audit committee shall be responsible for managing the relationship of Public Sector Company with the external auditors. In managing the Public Sector Company's relationship with the external auditors on behalf of the Board, the audit committee's responsibilities include:–

(a)      suggesting the appointment of the external auditor to the Board, the audit fee, and any questions of resignation or dismissal;

(b)     considering the objectives and scope of any non-financial audit or consultancy work proposed to be undertaken by the external auditors, and reviewing the remuneration for this work;

(c)      discussing with the external auditor before the audit commences the scope of the audit and the extent of reliance on internal audit and other review agencies;

(d)     discussing with the external auditors any significant issues from the review of the financial statements by the management, and any other work undertaken or overseen by the audit committee;

(e)      reviewing and considering the external auditor's communication with management and management's response thereto; and

(f)      reviewing progress on accepted recommendations from the external auditors.

(8)     The recommendations of the audit committee for appointment of retiring auditors or otherwise, as mentioned in sub-regulation (7) above, shall be included in the directors report. In case of a recommendation for change of external auditors before the lapse of three consecutive financial years, the reasons for the same shall be included in the directors' report.

(9)  The audit committee of a Public Sector Company shall appoint a secretary of the Committee. The secretary shall circulate minutes of meetings of the audit committee to all members, directors and the chief financial officer, within fourteen days of the meeting.

21.  Internal Audit.—(1) There shall be an internal audit function in every Public Sector Company. The chief internal auditor, who is the head of the internal audit function in the company, needs to be accountable to the audit committee and have unrestricted access to the Audit Committee.

(2)     No person shall be appointed to the position of the chief internal auditor unless he is considered and approved as "fit and proper" for the position by the Audit Committee. No person shall be appointed as the Head of Internal Audit of a listed company unless he has 5 years of relevant experience in and is:

(a)      a member of a recognized body of professional accountants; or

(b)     a Certified Internal Auditor, or

(c)     a Certified Fraud Examiner, or

(d)     a Certified Internal Control Auditor

(3)     Every Public Sector Company shall ensure that internal audit reports are provided for the review of external auditors. The auditors shall discuss any major findings in relation to the reports with the audit committee, which shall report matters of significance to the Board.

(4)  The internal audit function shall have an audit charter, duly approved by the audit committee and shall work, as far as practicable, in accordance with the Standards for the Professional Practice of internal Auditors issued by the Institute of Internal Auditors Inc., the global professional organization of internal audit profession.

22.  External Auditors.—(1) Every Public Sector Company shall ensure that its annual accounts are audited by external auditors, as envisaged under Section 252 of the Ordinance. When carrying out audits of Public Sector Companies, the external auditor shall need to take into account the specific requirements of any other relevant regulations, ordinances or ministerial directives which affect the audit mandate and any special auditing requirements.

(2)     In assessing materiality, the external auditor of a Public Sector Company must, in addition to exercising professional judgment, consider any legislation or regulation which may impact that assessment.

(3)     The external auditors of a Public Sector Company shall independently report to the shareholders in accordance with statutory and professional requirements. They shall also report to the board and audit committee the matters of audit interest, as laid down in the international standards on auditing.

(4)     No Public Sector Company shall appoint as external auditors a firm of auditors which firm or a partner of which firm is non-compliant with the International Federation of Accountants' (1FAC) Guidelines on Code of Ethics, as adopted by the Institute of Chartered Accountants of Pakistan.

(5)     The external auditors shall observe applicable guidelines issued by the International Federation of Accountants with regard to restriction of non-audit services. The Audit Committee shall also ensure that the auditors do not perform management functions or make management decisions, responsibility for which remains with the Board and management of the Public Sector Company.

(6)     Every Public Sector Company in the financial sector shall change its external auditors every five years. Financial sector, for this purpose, means banks, non-banking finance companies, modarabas and insurance companies; whereas every Public Sector Company other than, those in the financial sector shall, at a minimum, rotate the engagement partner after every five years.

(7)     No Public Sector Company shall appoint a person as the Chief Executive, the chief financial officer, a chief internal auditor or a director of the Public Sector Company who was a partner of the firm of its external auditors (or an employee involved in the audit of the Public Sector Company) at any time during the two years preceding such appointment.

(8)     Every Public Sector Company shall require external auditors to furnish a management letter to its Board not later than 30 days from the date of audit report.

23.     Compliance with the Regulations.—(1) Every Public Sector Companies shall publish and circulate a statement along with its annual report to set out the status of its compliance with these Regulations, and shall also file with the Commission and the registrar concerned such statement alongwith its annual report.

(2)     Every Public Sector Company shall ensure that the statement of compliance with the Regulations is reviewed and certified by external auditors, where such compliance can be objectively verified, before publication by the Public Sector Company.

(3)     Where the Commission is satisfied that it is not practicable to comply with any of these Regulations, the Commission may, for reasons to be recorded, relax the same subject to such conditions as it may deem fit to impose.

24.     Penalty for contravention of the Regulations.—Whoever fails or refuses to comply with, or contravenes any provision of these Regulations, or knowingly and willfully authorises or permits such failure, refusal or contravention shall, in addition to any other liability under the Ordinance, he shall be punishable with fine and, in the case of continuing failure, to a further fine, as provided in sub-section (2) of Section 506A of the Ordinance.

ANNEXURE

CRITERIA FOR DETERMINING A 'FIT AND PROPER PERSON’

(1)  For the purpose of determining as to whether a person proposed to be appointed as director is a "fit and proper person', the Commission shall take into account any consideration as it deems fit, including but not limited to the following criteria—

(a)      is a reputed businessman or a recognised professional with relevant experience;

(b)     has financial integrity;

(c)     has no convictions or civil liabilities;

(d)     known to have competence;

(e)     has good reputation and character;

(f)      has the traits of efficiency and honesty;

(g)     does not suffer from any disqualification to act as a director stipulated in Companies Ordinance;

(h)     an order cancelling the certificate of registration granted to the person individually or collectively with others has not been passed by the SECP on the ground of its indulging in insider trading, fraudulent and unfair trade practices or market manipulation. illegal banking, forex or deposit taking business;

(i)      an order withdrawing or refusing to grant any license / approval to him which has a bearing on the capital market, has not been passed by the SECP or any other regulatory authority ;

(j)      is not a stock broker or agent of a broker;

(k)     does not suffer from a conflict of interest; this includes political office holders in a legislative role.

(2)  A person shall cease to be considered as a "fit and proper person" for the purpose, if he incurs any of the following disqualifications:–

(a)      he is convicted by a Court for any offence involving moral turpitude, economic offence, disregard of securities and company laws or fraud;

(b)     an order for winding up has been passed against a company of which he was the officer (as defined in Companies Ordinance 1984).

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