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Investment Companies and Investment Advisers Rules, 1971

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Investment Companies and Investment Advisers Rules, 1971

CONTENTS.
CHAPTER I.
PRELIMINARY
1. Short title and commencement.
2. Definitions.
CHAPTER II.
REGULATION OF THE BUSINESS OF INVESTMENT COMPANIES
3. No investment company to commence business without registration.
4. Eligibility for registration.
5. Registration.
6. Investment policy and diversification.
7. Sale of securities and cost thereof.
8. Prohibitions.
9. Transactions with directors, etc.
10. Appointment of investment adviser.
11. Remuneration payable to investment adviser.
12. Power of the Authority to give certain directions.
13. Amount distributable to shareholders.
14. Publication of portfolio securities.
15. Custody of securities.
16. Maintenance of books of account and other documents.
17. Periodical reports to shareholders, etc.
CHAPTER III.
REGULATION OF THE BUSINESS OF INVESTMENT ADVISERS
18. No person to commence business without registration.
19. Eligibility for registration.
20. Registration.
21. Maintenance of books of accounts, etc.
22. Submission of annual report to Authority.
23. Enquiry.
24. Cancellation of registration.
THE SCHEDULE

 

 

Investment Companies and Investment Advisers Rules, 1971

12th March 1971

S.R.O. 78 (1)/71. In exercise of the powers conferred by section 32 of the Securities and Exchange Ordinance, 1969 (XVII of 1969), the [Federal Government] is pleased to make the following rules to regulate the business of investment advisers and investment companies, namely:–

CHAPTER I.
PRELIMINARY

1. Short title and commencement. (1) These rules may be called the Investment Companies and Investment Advisers Rules, 1971.

(2) The shall come into force at once.

2. Definitions. In these rules, unless there is anything repugnant in the subject or context, –

(a) ‘Authority’ means the [Corporate Law Authority] of Pakistan;

(b) ‘closed-end company’, in relation to an investment company, means a company which does not continuously offer for sale a security which entitled the holder to such security on demand to receive his proportionate share of the net assets of the company;

(c) ‘custodian’ means a banking company within the meaning of the Banking Companies Ordinance, 1962 (LVII of 1962), which is appointed to be a custodian under these rules;

(d) ‘Form’ means a form set out in the Schedule;

(e) ‘net assets’, in relations to an Investment company, means the excess of assets over liabilities of the company, such excess being computed in the manner specified hereunder:’

(i) A security listed on a stock exchange shall be valued at its last sale price on such exchange on the date as of which it is valued, or if such exchange is not open on such date, then at its last sale price on the next preceding date on which such exchange was open and if no sale is reported for such date, the security shall be valued at an amount not higher than the closing asked price nor lower than the closing bid price.

(ii) An investment purchased and awaiting payment against delivery shall be included for valuation purposes as a security held, and the cash account of the company shall be adjusted to reflect the purchase price, including brokers’ commissions and other expenses incurred in the purchase thereof but not disbursed as of the valuation date.

(iii) An investment sold but not delivered pending receipt of proceeds shall be valued at the net sale price.

(iv) the value of any dividends, bonus, shares, or rights which may have been declared on securities in the portfolio but not received by the company as of the close of business on the valuation date shall be included as assets of the company, if the security upon which such dividends, bonuses or rights were declared is included in the assets and is valued ex-dividend, ex-bonus or ex-rights as the case may be,

(v) Interest accrued on any interest-bearing security in the portfolio shall be included as an asset of the company if such accrued interest in not otherwise included in the valuation of the security.

(vi) Any other income accrued up to the date on which computation was made shall also be included in the assets.

(vii) All liabilities, expenses, taxes and other charges due or accrued up to the date of computation which are chargeable under these rules, other than the paid-up capital of the company, shall be deducted from the value of the assets.

(viii)The remuneration accrued up to the date of computation payable to the investment adviser for providing management and other services shall be included as an expense;

(f) ‘net capital,’ in relation to an investment adviser, means an amount by which the current assets, namely cash in hand or in bank, money receivable within a period of twelve months from the date of the balance-sheet and such other assets, not being the value of securities referred to in sub-rule (2) of rules 5, as are so classified under generally accepted accounting principles, exceed the current liabilities, namely, money payable within a period of twelve months from the date of the balance-sheet and such other liabilities as are so classified under generally accepted accounting principles.

(g) ‘Ordinance’ means the Securities and Exchange Ordinance, 1969 (XVII of 1969).

CHAPTER II.
REGULATION OF THE BUSINESS OF INVESTMENT COMPANIES

3. No investment company to commence business without registration. No company shall commence business as an investment company unless it is registered with the Authority under these rules.

4. Eligibility for registration. A company proposing to commence business as an Investment company shall be eligible for registration under these rules if it fulfils or complies with the following conditions or requirements, namely;

(a) that such company is registered as a public limited company under the Companies Act, 1913 (VII of 1913);

(b) that it is to function as a closed-end investment company with a capital of not less than fifty lac rupees but not more than two crore rupees;

(c) that no director, officer or employee of such company has been convicted of fraud or breach of trust;

(d) that no director, officer of employee of such company has been adjudicated an insolvent or has suspended payment or has compounded with his creditors;

(e) that the promoters of such company are, in the opinion of the Authority, persons of means and integrity and have special knowledge of matters which the company may have to deal with as in investment company.

5. Registration. (1) Any company which is eligible for registration under rule 4 as an investment company may make an application in Form 1 to the Authority for registration under these rules.

(2) An application under sub-rule (1) shall, besides the other documents referred to in Form I, be accompanied by an undertaking by the investment adviser of the company that the investment adviser will at all times hold or beneficially own equity securities of the company of an amount which is neither more nor less than ten per cent of the paid up value of such securities.

(3) The Authority, if it is satisfied after such enquiry and after obtaining such further information as it may consider necessary,–

(i) that the applicant is eligible .for registration; and

(ii) that it would be in the interest of the capital market so to do, may grant a certificate of registration to such company in Form II.

6. Investment policy and diversification. (1) The investment policy of an investment company shall be clearly and concisely stated in its Memorandum and Articles of Association and the public offer for the sale of its securities.

(2) An investment company shall not enter into any transaction in any security other than a security which is listed on a stock exchange or for the listing of which an application has been made to a stock exchange.

(3) The investment of an investment company in any other company shall not, at any time, exceed an amount equal to five per cent. of the paid up capital of the investment company or an amount sufficient to acquire ten per cent of any class of the securities of that other company.

7. Sale of securities and cost thereof. (1) Securities representing ninety per cent, of the capital of an investment company shall be offered to the public at par; but no such offer shall be made-

(a) until the investment adviser of the investment company has made an . investment of the amount referred to in sub-rule (2) of rule 5; or

(b) unless the offer has. been underwritten by an underwriter appointed by the investment company with the prior approval in writing of the Authority. .

(2) An investment company shall not sell any securities for any consideration other than cash.

(3) All expenses incurred in connection with the incorporation of an investment company and the offer for sale of the securities of the company and the distribution of such securities, including commission payable to the underwriters, shall be borne by the investment adviser and shall be reimbursable to him by the company in equal amounts paid annually over a period of not less than five years.

(4) No interest shall be payable by the company in respect of the expenses referred to in sub-rule (3).

(5) The expenses referred to in sub-rule (3) shall be reported to the Authority giving their break-up under separate heads, as soon as the distribution of the securities is completed.

8. Prohibitions. No investment company shall—

(a) merge with, acquire or take over any other investment company, unless it has obtained the prior approval of the Authority in writing to the scheme of such merger, acquisition or takeover;

(b) hypothecate or mortgage any of the securities held or beneficially owned by it;

(c) make a loan or advance of money to any person except in connection with the normal business of the investment company;

(d) effect a short sale in any security;

(e) purchase any security in a forward contract;

(f) purchase any security on margin;

(g) participate in a joint account with others in any transaction;

(h) apply any part of its assets to real estate, commodities or commodities contracts;

(i) acquire any security of which another investment company is the issuer;

(j) make an investment in a company which has the effect of vesting the management, or control over the affairs, of such company in the investment company;

(k) employ as a broker, directly or indirectly, any director, officer or employee of the investment company or its investment adviser or any director, officer or employee thereof;

(l) issue at any time, without the prior approval of .the Authority in writing, a senior security which is either stock or represents indebtedness.

9. Transactions with directors, etc. No investment company shall, without the prior approval of the Authority in writing, purchase from, or sell to any director, officer or employee of the investment company or of the investment adviser thereof or a person who beneficially owns ten per cent., or more of the equity securities of the company or of its investment adviser.

10. Appointment of investment adviser. (1) No investment company shall appoint any person as an investment adviser except by a contract in writing the terms of which have been previously approved by the Authority in writing.

(2) The contract shall, initially or on renewal, be valid for a period not exceeding five years and shall not be renewed or modified unless such renewal or modification has been authorised by the share-holders of the investment company in general meeting and approved by the Authority.

(3) The contract shall, among other things provide that the investment adviser shall bear all expenditure in respect of the secretariat and office space of the company and professional management, including all administrative, accounting and legal services, and that the fee payable to the auditors and the custodian, taxes on income of the company brokerage, stamp duty and any other duties or taxes connected with the sale or purchase of securities shall be payable by the investment company.

11. Remuneration payable to investment adviser. The investment adviser of an investment company shall be entitled to be paid annually, after the accounts of the investment company have been audited, a remuneration of-

(a) an amount not exceeding one per cent. of the net assets of the investment company as at the end of its year of account; and

(b) an amount not exceeding one-half of the amount by which the dividend distributed by the investment company exceeds six percent.

12. Power of the Authority to give certain directions. The Authority, if it is satisfied that it is necessary or expedient so to do in the public interest or of the capital market in Pakistan, may by order in writing, direct an investment company, within such time as may be specified in the order,–

(a) to disinvest the whole or such part of its investment portfolio as may be so specified;

(b) to refrain from investing in or disinvesting such securities as may be so specified;

(c) to co-opt one or more person nominated by the Authority as members of the board of directors of the company with the same status, powers and rights as the other members of the board,

13. Amount distributable to shareholders. An investment company shall distribute by way of dividend to its shareholders not less than ninety per cent., of its income derived from interest, dividends received and capital gains arising from the acquisition and disposal of securities as reduced by such expenses as are chargeable to the company under these rules, including the remuneration payable to the investment adviser.

14. Publication of portfolio securities. Every investment company shall cause to be published, in the Bulletin or other such publication of the stock exchange on which its securities are listed, the names and the value of its portfolio securities as at the end of each half-year.

15. Custody of securities. (1) Every investment company shall place and maintain the securities owned or held by the company with a custodian appointed by it with the prior approval in writing of the Authority.

(2) The investment company shall settle with the custodian a scheme for the custody of securities which shall, among other matters, provide for the circumstances in which the securities may be released from custody.

(3) The custodian shall, if it feels that the nature of any release of a security from custody is contrary to the provisions of these rules, report the matter to the Authority forthwith.

16. Maintenance of books of account and other documents. (1) Every investment company shall maintain such books of accounts and other records as shall depict a true and fair picture of its state of affairs, including—

(a) journals, cash book and other records of original entry forming the basis of entry in any ledger;

(b) ledgers (or other comparable record) reflecting assets, liability, income and expense;

(c) ledgers (or other comparable record) showing at any time securities which are receivable or deliverable;

(d) record of transactions with the bank;

(e) register of transactions in securities; and

(f) record of the meeting of the board of directors.

(2) The books of account and other records to be maintained under sub-rule (1) shall be preserved for a period of not less than five years.

17. Periodical reports to shareholders, etc. (1) Every investment company shall transmit to its share-holders—

(a) an annual report, together with a copy of the balance-sheet and income and expenditure account and the auditor’s report, not less than fourteen days before the date of the general meeting at which it is to be laid before the share-holders; and

(b) a six-month report, within one month of the end of each half year.

(2) Such report, so far as may be applicable, shall be in accordance with the provisions of the Securities and Exchange Rules, 1971, and shall contain a statement showing the securities owned at the beginning of the relevant period, securities purchased or sold during such period, and the securities held at the end of such period together with the value (at cost and at market), the sale price and the capital gain or loss in each case and the percentage in relation to its own assets and the paid-up capital of the company whose securities are owned.

(3) The statement of income and expenditure of the investment company shall include a statement of income and expenditure of the investment adviser in relation to the investment company.

(4) A copy of annual report referred to in sub-rule (1), shall, within the time specified therein, be furnished to the Authority together with a statement containing the following information in respect of the investment company as at the end of the year:-

(a) Total number of security-holders.

(b) Particulars of persons holding five per cent, or more of the securities of the company at any time during the year.

(c) Names and number of securities held by directors and officers of the company,

(d) Any security of any other issue sold and then bought during any six-month period.

(e) Particulars of the personnel (executive, research and others) of the investment company.

(f) Remuneration paid to the investment adviser.

(g) Particulars of the personnel (executive, research and others) of the investment adviser.

(h) Fee paid to the auditors.

(i) The date, names of persons attending and minutes of each meeting of the board of directors.

(j) Particulars of transaction in which a broker was the principal.

(k) Highest brokerage paid to five brokers.

CHAPTER III.
REGULATION OF THE BUSINESS OF INVESTMENT ADVISERS

18. No person to commence business without registration. No person shall commence business as an investment adviser unless such person is registered with the Authority under these rules.

19. Eligibility for registration. Any person proposing to commence business as an investment adviser shall be eligible for registration under these rules if it fulfils or complies with following conditions or requirements, namely:–

(a) that such person is registered as a company under the Companies Act, 1913 (VII of 1913);

(b) that no director, officer or employee of such company has been convicted of fraud or breach of trust;

(c) that no director, officer or employee of such company has been adjudicated an insolvent or has suspended payment or has compounded with this creditors;

(d) that the directors of such company are, to the satisfaction of the Authority, persons of means and integrity and have special knowledge of the matters which the company may have to deal with as an investment adviser.

20. Registration. (1) Any person who is eligible for registration under rule 19 as an investment adviser may make an application in Form III to the Authority for registration under these rules.

(2) An application under sub-rule (1) shall, besides the other documents referred to in Form III, be accompanied by an undertaking that the company will at all times maintain a net capital balance in the capital account of an amount which is not less than one lac rupees.

(3) The Authority, if it is satisfied after such enquiry and after obtaining such further information as it may consider necessary,-

(i) that the applicant is eligible for registration; and

(ii) that it would be in interest of the capital market so to do, may grant a certificate of registration to such person in Form IV.

21. Maintenance of books of accounts, etc. (1) Every investment adviser shall maintain such books of accounts and other records as shall depict a true and fair picture of its state of affairs, including’

(a) journals, cash books and other records of original entry forming the basis of entry in any ledger;

(b) ledgers (or other comparable record) reflecting asset, liability, income and expense;

(c) ledgers (or other comparable record) showing securities in the portfolio;

(d) record of transaction with banks;

(e) record of the meetings of the board of directors; and

(f) original record of all reports, analysis and memoranda containing investment advice distributed.

(2) Such books of accounts and other records shall be preserved for a period of not less than five years.

22. Submission of annual report to Authority. Every investment adviser shall submit to the Authority an Annual report, together with a balance-sheet and income and expenditure account and the auditor’s report, within six months, of the close of its year of account.

23. Enquiry. (1) The Authority may cause an enquiry to be made by any person appointed in this behalf into the affairs of any investment adviser registered under these rules or any of its directors, managers or other officers.

(2) Where an enquiry under sub-rule (1) has been undertaken every director, manager or other officer of the investment adviser to which or to whose director, manager or other officer the enquiry relates and every other person who has had any dealing with such investment company, investment adviser, director, partner, manager or officer shall furnish such information in his custody or power or within his knowledge relating to or having bearing on the subject-matter of the enquiry as the person conducting the enquiry may by notice in writing require.

(3) The person conducting an enquiry under sub-rule (1) may call for, inspect and seize books of accounts and documents in possession of any such investment adviser or person.

24. Cancellation of registration. (1) Where the Authority is of the opinion that an investment adviser has contravened any provision, or has otherwise failed to comply with any requirement, of the Ordinance or of any rule or direction made or given thereunder, the Authority may, if it considers necessary in the public interest so to do by order in writing,’

(a) cancel the registration of the investment adviser; or

(b) remove the investment adviser from the office of investment adviser of an investment company;
Provided that no such order shall be made except after giving the investment adviser an opportunity of being heard.

(2) An investment adviser removed from office under clause (b) of sub-rule (1) shall not be entitled to or be paid any compensation or damages for loss or termination of office.

(3) An investment adviser of an investment company who is removed from office under clause (b) of sub-rule (1) shall not be appointed to such office of that company until after the expiration of a period of five years from the date of such removal.

(4) Where the investment adviser of an investment company is removed from that office under clause (b) of sub-rule (1) no director or officer of the investment adviser shall hold the office of director of the investment company or any other office connected with the conduct or management of the affairs of the investment company, until after the expiration of a period of five years from the date of such removal.

(5) Where the investment adviser is removed from office under clause (b) of sub-rule (1), the Authority may, by order in writing, appoint a person, hereinafter referred to as the Administrator, to manage the affairs of the investment company subject to such terms and conditions as may be specified in the order.

(6) The Administrator shall receive such remuneration from the investment company as the Authority may determine.

(7) The management of the affairs of the investment company shall, on and from the date of appointment of the Administrator, vest in him.

(8) If at any time it appears to the Authority that the purpose of the order appointing the Administrator has been fulfilled, it may permit the investment company to appoint another person to the office of investment adviser; and on the appointment of such investment adviser, the Administrator shall cease to hold office.

THE SCHEDULE
FORM I[See rule 5(1)]


FORM OF APPLICATION FOR REGISTRATION AS AN INVESTMENT COMPANY

To
The Securities and Exchange Authority of Pakistan
Islamabad.
Dear Sir,
We hereby apply for the registration of……………………………………………
………………………………………………………………………..(Name of the Investment Company under rule 5 of the Investment Companies and Investment Advisers Rules, 1971. . .
2. An undertaking (in original) from the investment .adviser in terms of rule 5(2) of the aforesaid Rules and four copies of each of the following documents are encloses:-
(i) Memorandum and Article of Association.
(ii) Investment Advisory Contract,
(iii) Custodial Agreement.
(iv) Underwriting Agreement.
3. We hereby undertake to take all steps necessary to have the securities issued by us listed on a stock exchange.
4. Necessary information required in the annex to this form is furnished. We undertake to keep the information up-to-date at all times.
Yours faithfully,
Signature of the Secretary
or a Director of the applicant company
Annex to Form I
1. Name, address and telephone number (s)
of the Company ……………………….. …………………………..
2. Date and place of incorporation. …………………………..
3. Name and addresses of directors, distinguishing
between promoter-directors and other directors ……….. …………………………..
4. Whether any director has been convicted of
fraud or breach of trust. …………………………..
5. Whether any director has been adjudicated an
insolvent or has suspended payment or has
compounded with his creditors ……… …………………………..
6. Names and addresses of officers and
employees ……………………………………. …………………………..
7. whether any office or employee has been
convicted for fraud or breach of trust…………………. …………………………..
8. Whether any officer or employee has been
adjudicate an involvement or has suspended
payment or has compounded with his creditors………. …………………………..
9. Names of the directors,-officers and employees
of the investment company and those of the
investment adviser thereof who are members
of a stock exchange ……………………………………… ———
10. Director’s interest, direct or indirect,
in any other investment company ………. ———
11.Previous experience of the promoters/
directors in the investment field. ………… ———
12.The financial standing of the promoters/
directors (Attach proof, if any) ……….. ———
13.(a) Authorised capital of the company ———
(b) Part of such capital proposed to be
raised through public offer. …………… ———
14.Name, address and telephone number
of the investment adviser ……………… ———
15. Name and address of the custodian ……. ———-
16. Name and address of the underwriter ———
17. Financial standing and resources of the underwriter …………………………….

FORM II[See rule 5(3)] CERTIFICATE OF REGISTRATION AS AN INVESTMENT COMPANY

 

Securities and Exchange Authority of Pakistan
346, Shalimar 6/3 Islamabad, the 197 .

The Securities and Exchange Authority of Pakistan having considered the application for registration under rule 5 of the Investment Companies and Investment Advisers Rules, 1971, by
(Name of the investment company)
and being satisfied that the said …………………………………………………………………….
(Name of the investment company)
is eligible for registration and that it would be in the interest of the capital market so to do, hereby grants, in exercise of the powers conferred by rule 5 of the Investment Companies and Investment Advisers Rules, 1971, registration to………………… subject
(Name of the investment company)
to the conditions stated hereinbelow or as may be prescribed or imposed hereafter.
2. The draft agreement between ……………………………………………………….
(Name of the investment company)
and ………………………………………………………….. is approved subject to the following conditions:-
3. The appointment of……………………………… is hereby approved subject to the following conditions:-
(Name of Custodian
4. The appointment of………………………………………………………… is hereby approved subject to the following conditions:-
(Name of underwriter
Signature of the Officer

FORM III[See rule 20(1)]
FORM OF APPLICATION FOR REGISTRATION AS INVESTMENT ADVISER

 

To
The Securities and Exchange
Authority of Pakistan
Islamabad.

Dear Sir,
We hereby apply for the grant of registration of………………………………….
(Name of the Investment adviser)
under rule 20 of the Investment Companies and Investment Advisers Rules, 1971
2. For copies of the Memorandum and Articles of Association are enclosed.
3. We hereby undertake to maintain at all times a net capital balance in the capital account of an amount which is not less than one lac rupees.
4. Necessary information required in the annex to this form is furnished. We undertake to keep this information up-to-date at all times.
Yours faithfully,
Signature of the Secretary or
a Director of the applicant.

ANNEX TO FORM III
1. Name, address and telephone number(s)
of the applicant ……………. __________________
2. Names and addresses of directors. __________________
3. Whether any director has been convicted of __________________
fraud or breach of trust.
4. Whether any director has been adjudicated an
insolvent or has suspended payment or has
compounded with his creditors ……… __________________
5. Names and addresses of officers and employees __________________
6. Whether any office or employee has
been convicted for fraud or breach of trust……………… __________________
7. Whether any officer or employee has been
adjudicate an involvement or has suspended
payment or has compounded with his creditors………. __________________
8. Whether any director or officer has any
interest in any investment company ………………….. __________________
9. What is the financial standing of the directors ………… __________________
10. Give a brief description of the kind of investment
advisory services proposed to be provided, the
organizational set up, previous professional
experience of directors/officers etc. ………………… __________________

FORM IV[See Rule 20(3)] CERTIFICATE OF REGISTRATION AS AN INVESTMENT ADVISER, [CORPORATE LAW AUTHORITY, GOVERNMENT OF PAKISTAN]

Islamabad, the ……………………………….19…….[The Corporate Law Authority, Government of Pakistan], having considered the application for registration under Rule 20 of the Investment Companies and Investment Advisers Rules, 1971, by…………………………………………………and being
Name of Adviser
satisfied that the said………………. is eligible for registration and that if would be
(Name of Adviser)
in the interest of the capital market so to do hereby grants, in exercise of the powers conferred by Rule 20 of the Investment Companies and Investment Advisers Rules, i971, registration to………………………………………………………..
(Name of the Adviser)
subject to the conditions stated herein below or as may be prescribed or imposed hereafter.
Signature of the Officer
1. Subs. for the words ‘The Securities and Exchange Authority of Pakistan, 3 1G, 6/3’ by Notification No. S.R.O. 1196(1)/83, dated 20th December, 1983.
2. Subs. for the words ‘The Securities and Exchange Authority of Pakistan’ by Notification No. S.R.O. 1196(1)/83, dated 20th December, 1983.

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