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SECURITIES AND EXCHANGE COMMISSION OF PAKISTANNEWSLETTERSPRING EDITION | FEBRUARY 2015Editor: Syed Nazir BokhariEditor Production: Sajid GondalSenior Graphic Designer: Stephanie WongEVENTS WORKSHOPS OTHERSFinance Minister Senator Ishaq Dar Finer Points of Professionalism SECP Paperless Initiative2nd Table Tennis Tournament Limited Liability Partnership Act IOSCO Webinar

NEWSLETTER 2015CONTENTS3 Finance Minister Ishaq Dar5 Limited Liability Partnership Act7 Social business and social capital markets8 SECP News bulletin13 SECP officers benefit from IOSCO webinar13 Corporate Governance Workshop14 Second SECP Table Tennis Tournament16 Dua for the martyrs of the Peshawar Army Public School16 Orientation session for students of University of Science and Technology Bannu17 In-house workshop on ‘the finer points of professionalism’18 SECP’s initiatives for paperless environment19 Insights on Islamic finance

Federal Minister Senator Muhammad Ishaq Dar addressing SECP EmployeesFinance Minister Muhammad IshaqDar appreciate SECP initiativesF ederal Minister for Finance, Revenue and Statistics Senator the SECP’s efforts highlighted the they will continue the current pace of Muhammad Ishaq Dar has immense potential of the NBFIs and work.emphatically asked the Securities Insurance Sector. He desired detailedand Exchange Commission of presentations on these sectors In this connection, he especiallyPakistan (SECP) to adopt policy of based on the ideas presented so that mentioned the SECP’s recent initiativeszero tolerance against insider trading includings development of Sukukand set example by identifying andpenalizing black sheep in stock necessary steps can be agreed and Regulations, Book Building Regulations,market so that it serves as deterrence implemented for the development of Unit Link Rules for Life Insurance,and the menace is curbed. these crucial segments. approval of REITs etc. He expressed Later, while addressing the SECP his concern that the full potential of the Pakistan Mercantile Exchange Limited was not being realized andHe said that incidents of insider hoped that the SECP Chairman would take necessary measures for thetrading and market manipulation like development of the commoditiesprice manipulation, blank selling, front market in Pakistan.running etc. severely damage the small While advising the SECP toinvestors and must be curbed for the submit its tax proposals on priorityprotection of investors’ interest. he cited example of tax avoidance in employees he said that the role of relation to tax levied on bonus shares.On his visit to the secp office here SECP is not limited to regulate the He assured his confidence that thison February 16, detailed presentations corporate and capital sector, but also issue will be settled in favour of thewere delivered by the SECP chairman to facilitate and protect small investors. government.and commissioners in relation to He complemented the SECP Chairman While giving future guidelines,the SECP reform agenda and areas Mr Zafar Hijazi and his team for their the Finance Minister said thatrequiring the government’s support. excellent performance and enhancing Pakistan had to go a long way for theThe Finance Minister while appreciating SECP’s regulatory role and hoped that development of financial institutionsSECP SPRING 2015 - Newsletter 3

for long term funding as commercial institutions were fearing that the their jobs and were making their best efforts to meet public expectations.banks cannot fulfil the financial needs Pakistan would default by 2014, but He said that the SECP is very firm in its mission of the development of afor the development of industrial now with positive and sincere steps, transparent and vibrant capital market, efficient and compliant insurance,sector. not only the financial credibility of NBFC and corporate sectors.He referred to the laudable Pakistan has increased but the foreignservices of SECP’s reserves which earlierprevious chairmen who He said that the stood at $7.5 billion arebuilt the organization. now in the range of $16In this connection government billion.he said the founding had taken The FinanceChairman of the SECP Minister agreed withMr. Shamim Ahmad measures to the Chairman SECP’sKhan worked hard to make Pakistan request for havingput the SECP on sound its own building andfootings and making economically assured his supportit a credible regulatory a sovereign in this regard. Heauthority. Likewise, the also assured his fullservices of former SECP country. support in expeditingChairman Tariq Hasan enactment of variousand Khalid Mirza are also legislations crucial forpraiseworthy. the development of sectors underHe said that the government SECP preview.had taken measures to make Pakistan The Chairman SECP Mr. Zafareconomically a sovereign country. He Hijazi while welcoming the Financesaid when the present government Minister assured him that the SECPtook over, all the international financial employees were totally committed to4 SECP SPRING 2015- Newsletter

The Much Awaited LimitedLiability Partnership ActShane Coelho been moved, which will provide formed with the objects of welfare. an enabling environment for the LLP is a hybrid businessIn pursuit of achieving its cardinal growth and regulation of professional objectives as embodied in the services sector. It is envisaged that model combing the characteristics mission statement and to remain in the proposed law to broaden the of a ‘corporation’, ‘company’ andsync with global business practices, corporate sector by bringing this ‘partnership’, blending together thethe Securities and Exchange large and unregulated segment benefits of these business forms.Commission of Pakistan has taken yet under the regulatory framework. This The LLP is a partnership in which allanother initiative, which is directed business structure shall appeal to partners have limited liability in anat the growth and regulation of the lawyers, chartered accountants, cost incorporated entity and the legalPakistani corporate sector. accountants even small entrepreneurs entity is separate from its partners. The or other professionals perhaps doctors concept of limited liability partnership At present, the options available and engineers for carrying out their was introduced for the first time in theunder the 1984 Companies Ordinance professional practice while enjoying United States in the 1990s. The ideafor the formation of a legal entity are a the benefits of limited liability. of LLP was well taken and many other“public company”, “private company”, countries such as the UK, Singapore,“single member company”, “association It is an ideal opportunity for India, Japan, South Africa, introducednot for profit” and “guarantee limited small entrepreneurs to reassess their laws for governing”. With the passage of time, business structure and reorganize it inthe professional services sector has a smart manner under the LLP regime. One of the key differencesshown an appreciable growth. The Small entrepreneurs can reap financial between a general partnership and LLPonly option currently available is for a benefits such as setting up the business is that whilst in a general partnershipfew professionals is to join and form at a lower cost, registering higher individual partners are personallya general partnership. However, a profit margins, with reduced chances liable for the partnership’s debts andgeneral partnership does not have a of facing legal consequences. The obligations, a LLP provides each of itslegal personality. It merely comprises law aims to make these professionalsof its partners, unlike a company, globally competitive and by having awhich is an artificial person, it cannot corporate identity their contributioncreate a charge on its assets, contract shall be recorded in the nation’sin its own name or hold property. In economic growth.fact, contracts made are enforcedagainst partners either individually or However, an LLP cannot bejointly with each other. Without the formed for charitable purposespartners, therefore, a partnership has because it has been designed forno existence of its own. mutual benefit and profit earning through commercial purpose, whereas Hence, the bill on “The Limited a charitable organization or trust areLiability Partnership Act 2014” hasSECP SPRING 2015 - Newsletter 5

individual members the protection partners. that have been found viable are listedagainst personal liability for certain • The LLP will have perpetual here below:partnership liabilities and limits theliability of each partner. succession. • The act will entail consequential • The LLP shall be governed by an amendments in the 1961 An LLP can be formed Chartered Accountants Ordinance when two or more agreement between the partners persons enter into a or between the LLP. • Requirement and significance of business relationship • The LLP shall be liable to the full financial capital versus intellectual with a view to making extent of its assets with the liability capital at the time of incorporation profit. of the partners being limited to their agreed contribution in the • Level of contribution required As the name suggests, it has the LLP. by each partner at the time offeatures to protect the partners’liability. • No partner shall be liable to the incorporation/entry into the LLP;Any debts and obligations of the LLP independent or unauthorizedwill be borne by the assets of the LLP action of the other partners or • Methodology for distribution ofand not that of its partners. their misconduct. profits; • Every LLP shall have at least one In a company, the constitutional partner as designated/managing • Taxation issues on amalgamationdocument is the Memorandum and partner whose duties and and merger, earnings, etc.Articles of Association, which binds all obligations shall be provided inshareholders and directors. However, the law. He shall be a resident in • Taking the provincial governmentsunder an LLP the rights and duties of Pakistan. on board to avert delay inthe partners of an LLP and is the LLP shall • Lesser compliance requirements. promulgating the actbe governed by the LLP agreement. • Easy registration (payment ofUnlike a company, which is subject to a flat fee, statement by every • Factors/determinants of solvencystringent compliance requirements person who is to be partner of and measures to mitigate theof the law, an LLP shall be provided the LLP, partnership agreement possibility of insolvency.with flexibility of organizational containing the proposed namearrangement and comparatively fewer of the LLP, nature of business to • The act will entail consequentialregulatory compliance requirements. be transacted, physical existence/ amendments in the 1961 registered office, details of all Chartered Accountants OrdinanceThe Salient Features of a Limited partners /designated partner,Liability Partnership are: minimum capital requirement • Requirement and significance of and minimum contribution by the financial capital versus intellectual• The LLP is a body corporate and partner(s)) capital at the time of incorporation legal entity separate from its • Easy exit • Transfer of ownership (legal heirs • Level of contribution required to assume partnership by each partner at the time of • Provides for conversion of existing incorporation/entry into the LLP; status • Exemption from audit • Methodology for distribution of • Income tax to be charged in the profits; hands of the LLP and not in the hand of the individual partners • Taxation issues on amalgamation • Maintaining solvency and merger, earnings, etc. • Foreign investment allowed in LLP subject to approval by the Interior • Taking the provincial governments Ministry on board to avert delay in promulgating the act Feedback/Comments: • Factors/determinants of solvency At present, the draft has been and measures to mitigate the disseminated and the SECP has invited possibility of insolvency. public opinion and comments, which shall be considered and incorporated This concept of Limited Liability in the act, prior to its promulgation. Partnership shall have far-reaching Some of the feedback/suggestions impact particularly in the context of emerging and changing global economic trends which will not only enable investments but also provide an opportunity to LLPs to compete internationally. --------------------------------------------------- The writer is a senior executive secretary, currently working with the in charge, CRO, Karachi. She is a graduate in humanities from Karachi University.6 SECP SPRING 2015- Newsletter

Social business and social collect, standardize or compare data thatcapital markets deduces results regarding social impact. Also, the ongoing pressure for procuring‘When greed is good’ funds for projects often makes non- profit organizations more vulnerable toZohra Sarwar Khan their major donors’ special preferences and demands, distracting them fromC onventionally, capital markets connect investors who have money with their core mission and potentially entrepreneurs who have ideas but less money. Specialized institutions compromising future performance. The facilitate this exchange of capital and information between investors traditional financial expense ratio makes and businesses. Financial reports, financial analyst, research reports and the traditional profit market appear financial intermediaries further assist efficient and effective allocations of better managed than the non-profit capital from investors to companies. organization. The mechanism for guiding funds to non-profits is rather less developed. However, slowly a new breed Although nonprofit produce audited annual statements but mostly such report of donors is changing the terrain, i.e. reveals virtually nothing about its effectiveness or efficiency in creating social successful internet gurus, entrepreneurs value. The links between the outcome and management’s decisions and strategy and other business leaders look at is lacking in financial reports. There are no public databases or experts that how they can create value in the philanthropy as they have in traditional profit making market place. This has given way to renewed interest in using the philanthropic/charity funds as capital investment, i.e. while charitable, these funds are still capital investments of precious resources. The term social business and social capital markets therefore emerged as a consequence of this paradigm. Social business , as the term has been commonly used since, was defined by the Nobel Peace Prize laureate Prof. Muhammad Yunus and described as the new kind of capitalism that serves humanity’s most pressing needs. A social business is essentially financially self- sustainable and profits realized by the business are reinvested in the business itself (or used to start other social businesses), with the aim of increasing social impact. Unlike a profit-maximizingbusiness, the prime aim of a social business is not to maximize profits (although generating profits is desired). Furthermore,business owners are not receiving any dividend out of the business profits, if any. What is interesting is the fact that socialbusiness is not dependent on donations or on private or public grants to survive and to operate. As per Yunus’s quote, “Acharity dollar has only one life; a social business dollar can be invested over and over again.” Social entrepreneurs like Sabah Gul, CEO of the Pakistan-based Bags for BLISS , Business and Life Skills School, are makingthe best out of it . Her company brings in Pakistani girls who are forced to pick work over school to a classroom where theirwork is turned into income. It is a venture that is fraught with all sorts of obstacles and challenges. “When people see whatwe’re doing, they understand the financial return involved,” says Gul. It may not be immediately from the bags her companysells. Its yields are longerterm, in the educated girls and the communities that they’re a part of. An educated individual, Gulargues, is a financial return beyond measure. At this year’s SoCap she is hoping that others will see those dividends. “I’m hopingto work out some deals,” she says. For decades, there is perception that there is no precise way to measure value creation by non-profit/ social enterprise.But there are ways about value in terms that tell us whether or not we are moving in the right direction. Finding space andopportunities in social capital market and social business a concept still in infancy, is the way forward especially consideringthe fact that more and more traditional profits yielding organizations are entering nonprofit territory. Targeted business analysisfor investees and venture philanthropy must be essential part of social businesses. There is need to shun survival of operationsof social enterprises on the basis of charity or conditional funds. Self-sustaining social business and yielding returns based onmodels for social return on investment is a step in the right direction. While the right momentum is building, for once, GordonGekko, a character in the 1987 film Wall Street and its 2010 sequel Wall Street: Money Never Sleeps, would be glad to quote,“Greed has gone good.”---------------------------------------------------------------------------------------------------------------------------------------------------------------------- The writer is deputy director in the SECP’s Enforcement Department. A professional management accountant, she holds a certificate in poverty studies from the School of African and Oriental Studies (SOAS), London.SECP SPRING 2015 - Newsletter 7

SECP NEWS BULLETINOutstanding Performance of the In 2014, the KSE-100 Index gainedPakistani capital market in 2014 6,870 points thereby generating a handsome return of 27% (31% returnThe year 2014 was a year of growth and exuberance for the Pakistani in US$ terms). The year 2014 will also capital market. Throughout the year, the benchmark KSE-100 Index be remembered in the Pakistani capital of the Karachi Stock Exchange Limited (KSE), exhibited outstanding market history for mega public offeringsperformance and touched historic, unprecedented levels in terms of value led by sale of shares by the Governmentand volume. According to Bloomberg, Pakistan ranked third in 2014 amongst of Pakistan, and in terms of money raisedthe Top Ten Best Performing Markets in the world. Also, Pakistan has been through these offerings. Total offeringsable to secure a place amongst the Top Ten for the third consecutive year now. in the year 2014 reached 9 as comparedMoreover, in the MSCI Asian Frontier Markets, Pakistan ranked number one - to 3 in the year 2013. After a gap ofoutpacing Sri Lanka, Vietnam and Bangladesh by a big margin. seven years, Rs73 billion were raised through offerings in 2014 as compared to a meager Rs4 billion raised in 2013. Higher foreign inflows during the year can also be counted as a major market impetus. Foreign investors, that hold US$6.1 billion worth of Pakistani shares - which is 33% of the free-float (9% of market capitalization) - remained net buyers in 2014. This positive performance of the capital market can be attributed to a number of favorable factors, both at the political and economic front. As enumerated above, substantial foreign investments in the equity markets which captured considerable free float of the market, declining dollar-rupee disparity and Government of Pakistan’s secondary market offerings played a major role. Other key factors which can be seen as contributing to the market’s bull-run areGovernment’s business friendly reforms, improved macro-economic indicators including record forex reserve levels increasedconfidence shown by international donor agencies, Government’s energy sector initiatives, significant interest shown by Chinato invest in Pakistan, and Government’s plans and initiatives towards fast-track privatization. The Chairman of SECP Zafar Hijazi feels that Pakistan’s capital market should continue its topper’s position in the new yearas well, nevertheless should also qualify among the world’s most transparent and fair markets, providing the best opportunitiesto the investors. The incoming Chairman has already embarked on implementing a robust reforms agenda for the capital marketprimarily focusing on strengthening of the market monitoring and enforcement regime and introduction of structural reformsfor market development and its outreach. As one of the first major steps, the Chairman has immediately doubled the humanresources and infrastructure strength of Market Monitoring and Surveillance function, enhancing the scope by monitoring ofcapital market related discussions/programs/news on the print and electronic media including analysts’ recommendations,investing tips/strategies to their clients/general public. These preliminary actions reflect the apex regulator’s unwaveringcommitment towards protection of investors’ interest and rebuilding of a fair, efficient and vibrant marketplace which willcontinue to contribute positively towards the country’s economic growth in the years to come.SECP expeditesAppellate Bench HearingsThe Appellate bench of the Securities and Exchange Commission of Pakistan (SECP) has expedited the hearing of pending appeals.The Commission is determined to reduce the pendency of appeals to zero in next two months. There were about 162 appealspending at the Appellate Bench of the SECP. In the recent past, the process of the hearing of appeals was a bit slow at appellatebench due to shortage of Commissioners at the SECP. Following the appointment of Mr. Zafar Hijazi as Chairman SECP and Mr.Akif Saeed and Mr. Fida Huaaian Samoo as Commissioners, the Commission reached to its full strength. The Chairman SECPMr. Zafar Hijazi has appreciated the decision of the Appellate Bench to dispose of these appeals within two months by hearingthe appeals on daily basis. The two appellate benches have heard 17 cases on Thursday whereas 46 cases have been fixed fornext ten days.8 SECP SPRING 2015- Newsletter

Chairman SECP also advised launch e-Appellate Bench by the end Cost-cutting StepsCommissioners to give even ex-party of 2015. This will be the first electronicdecision in cases where the appellants appellate forum in Pakistan. The initiative SECP Chairmanare not appearing before the Appellate will facilitate the corporate sector by rationalizesBench despite several notices. He said enabling them to file appeals online. entitlements ofthat the investor confidence is key to the senior officersdevelopment of the capital market and he The Appellate Bench of the SECPhas been very particular about mitigating is mandated to hear appeals against the In pursuance of government’the investors’ difficulties through a system orders passed either by a Commissioner directives to all organization to cutof prompt disposal of their complaints. or any other officer authorized by the expenditures in order to reduce SECP. It comprises two Commissioners. burden on the national exchequer, Zafar Hijazi said that the SECP would the Chairman, Securities and Exchange Commission of PakistanSECP initiates (SECP) Mr. Zafar Hijazi has initiatedExamination of Prospectuses steps to curtail perks of senior officers to ensure optimumThe Securities and Exchange Commission of and business reengineering. Therefore, utilization of financial and humanPakistan (SECP) has drawn up a roadmap companies clearly state the purpose, review the operational performance benefit and utilization of the capital raisedand financial result over the years viz a viz from public subscription. Moreover, the The cost cutting measuresthe projections given in the prospectus forecast and projections made in the include significant reductionof companies. The exercise is aimed- prospectus foretell the tale of a successful in fuel, residential telephone,ensuring accountability sponsoring business model promising substantial mobile phone entitlements asdirectors of the companies whose profits and indicating attractive return in well as entertainment budgets ofperformance, in the years subsequent to the form of dividend. Chairman SECP, Commissioners,listing, could not match the tall claims Executive Directors and Directorsmade in the prospectus. In certain cases, however, in the of the SECP. It has been decided years subsequent to a successful public that the SECP officers, including It may be noted that the subscription, the operational and financial Executive Directors and Directorsrequirements for disclosure of material, performances of the Company reveal would only be entitled to travel inrelevant and complete information at losses and mismanagement, depriving economy class instead of economythe time of issuance of prospectus is investors from reasonable return on their plus.already very stringent in the Companies investment.Ordinance, 1984 and relevant rules In addition, the Commission hasmade thereunder. Any, omission and The accountability of directors of further tightened the delegationmisstatement of material facts in the company for prudently managing the of financial powers of officers. Asprospectus attracts penal provisions affairs of the Company and fulfillment of per new directions, all budgetaryunder the Ordinance. their statutory responsibility towards the expense, starting from one million shareholders is the key for assessing the rupee and above would only be Prospectus serves as the key tool performance of the Company. Therefore, approved by the Commission. Thefor prospective investors, particularly the in addition to consistent examination overall policies relating to payrollgeneral public, for raising capital from of annual and interim accounts, the structure, increment, bonuses andthe capital markets. Companies raise prospectus and allied information of terminal benefits of employees aresubstantial capital through public offer listed companies are being examined also being rationalized.for purpose of financing their capital and comparisons drawn with the currentexpenditure, aggressive expansion plans performance of such companies. Meanwhile, for better utilization of human resource, the HumanSECP Verify Promoters CNIC Resources Department has started work load assessment ofThe Securities and Exchange Commission of CNIC for verification of the genuineness of all employees. Consequently, thePakistan (SECP) has started verifying the the applicants. employees will be rewarded andcredentials of the promoters/directors their services would be betterof companies through the online CNIC The measure is aimed to ensure utilized in areas where they excel.(Computerized National Identity Card) authenticity of the information of the Besides, the purpose is that theVerification Service (VERISYS) of National promoters/directors filed during the money spent should give properDatabase and Registration Authority incorporation of companies through results.(NADRA). the statutory returns with the offices of the registrars. It will also be helpful 9 This verification will be made on in countering the fraudulent activitiesall new registrations of companies and committed through fake identity ofSection 42 companies. individuals who are at the helm of affairs to run a company. This is a web-based real-time activitydisplaying the front and rear image of the It will further bring in transparencySECP SPRING 2015 - Newsletter

and ensure validation of information, extended for validating information of SECP approvesbesides eliminating instances of fraud sponsors of companies in the non-profit first everand forgery. Not the least, it will be helpful sector while applying to the Commission REIT proposalin supporting the anti-terrorism efforts of for license as an association not for profitthe government by ensuring validity of under section 42 of the Companies The Securities and Exchangeidentity information. Ordinance, 1984. Commission of Pakistan (SECP) has approved a proposal for The verification service will also be launching the first ever ‘Real Estate Investment Trust (REIT)’ Scheme inSECP verified FBR data Pakistan. The REIT will be managedof compliant companies by Arif Habib REIT Management Company Limited.The Securities and Exchange Commission It emerged that about 62% ofof Pakistan (SECP) has responded to the companies, out of 7,444 companies, have With the advent of REIT SchemesFederal Board of Revenue’s query and filed their annual returns with the SECP in the Pakistan the capital marketapprised it about the companies that had in 2014. The lists of 4,641 compliant and enters into a new era where itsatisfied its compliance requirements but 2,803 non-compliant companies have will figure prominently amonghad not filed tax returns with the FBR. The been shared with the FBR. regional markets. REITs are aFBR wanted to confirm their filing status recognized investment vehicle inwith the SECP for the year 2014. The SECP carried out a many developed countries like comprehensive exercise to check the USA, UK, Australia, Malaysia, Japan, The FBR had shared a list of status of the said entities/companies etc.9,721 companies with the SECP. These through its online database. In a shortcompanies did not e-filed income tax span of 10 days, the SECP examined the Mutual funds, Modarabas,returns as of January 5, 2015, but had filed status of all companies provided in the corporates, banks and othertax returns for the tax year 2013. list. investors will have access to a new asset class (REIT Units) whichPakistan’s Mutual Fund Industry will enable them to diversifymanaging funds Worth Rs500 billion investments and manage risks. The assets of the REIT SchemeThe Chairman Securities and Exchange funds, government securities funds; with will be maintained in the nameCommission of Pakistan (SECP) Mr. Zafar high ethical standards. He also pointed of the Trustee and its affairs willHijazi expressed his satisfaction that out the pressing issues faced by the be managed by a licensed REITthe mutual funds industry of Pakistan is industry including the taxation regime, Management Company.showing strong growth and successfully among others.managing the public assets of more than The SECP has approved draftRs500 billion with a variety of investment The Chairman SECP said that the trust deed, business plan andvehicles including equity funds, income mutual funds industry of Pakistan has conditional valuation report offunds, money market funds, government great potential for growth and the mutual the scheme. Earlier, the SECP hadsecurities funds. funds association can play an important approved real estate, name and role for development and growth of trustee of the REIT scheme. He was talking to a delegation of the industry. He highlighted that coreMutual Funds Association of Pakistan investment in mutual funds should largely A regulator(MUFAP) led by its Chairman Mr. be based on the retail investors and the should watchMuhammad Shoaib and Senior Vice industry should play its role to inculcate a interests for theChairman Mr. Shahid Ghaffar. culture of savings in the country. man in street: Khalid Mirza The Chairman MUFAP gave a These investors can greatly benefitdetailed presentation on the mutual from the expert fund management Mr. Khalid Mirza, the formerfunds industry in Pakistan highlighting services offered by asset management Chairman of the Securities andthe growth witnessed by the industry companies. He also advised the industry Exchange Commission of Pakistandue to favorable investor sentiments and participants to focus on devising new (SECP), and the Competitionexcellent performance record of mutual products catering to the needs of the Commission of Pakistan (CCP) saidfunds over the past years. He informed investors. He described the various that all the actions and policiesthat asset management industry is measures taken by the SECP for facilitating of a regulator should protect themanaging public assets of more than the industry participants and assured that interests of the man in street.Rs.500 billion and manages variety of the issues faced by the industry would beinvestment vehicles including equity addressed. He was addressing seniorfunds, income funds, money market SECP SPRING 2015- Newsletter10

SECP recommends officials of the SECP. Referring toInsurance Tribunal in Islamabad the present set up of the SECP, he said that once again you have theThe SECP has written to the Law and Justice justice to the aggrieved policyholders, leadership and competence toDivision, recommending it to establish a the SECP is in favor of establishing develop the SECP into one of thespecialized and independent insurance independent and exclusive insurance best regulators of the developingtribunal in Islamabad in accordance with tribunals as envisaged under sections 121, world. He advised officials tothe provisions of the 2000 Insurance 122 and 123 of the Insurance Ordinance. perform their duties with highOrdinance to clear up the backlog of integrity so that no one can raisepending cases. The SECP has offered to provide finger on your actions. office space to specialized tribunals at its The SECP has pointed out to the law offices in Islamabad, Lahore, Peshawar, He said that only the bestministry that in 2006 with the approval of Faisalabad, Multan, Quetta and Karachi. professionals of a society deservethe chief justices of relevant High Courts, to become regulators and onlythe federal government had conferred The SECP has also pointed out that regulators with a deep sense ofthe powers of the insurance tribunal on it has no objection to the Law and Justice morality and integrity can adoptdistrict and sessions judges in Karachi, Division’s proposal to confer the powers of the policy of naming and shamingLahore and Peshawar. Yet due to heavy the insurance tribunal on the district and and bold enough not to beworkload in sessions courts the SECP’s sessions judge as an interim arrangement. captured by the market forces.complaints have been pending for thelast five years. “The desired results could Meanwhile, the SECP has started He appreciated thenot be achieved as no relief was provided formulating regulations for the small Chairman SECP Mr Zafar Hijazi forto the aggrieved policyholders.” dispute resolution committees. These initiating structural reforms and committees will arbitrate between taking courageous measures to Thus, in order to provide speedy insurance companies and the revive the SECP’s reputation. policyholders. Chairman HIjazi thankedSECP approved instrument of redeemable capital under Khalid Mirza for visiting the SECPSukuk Regulations Section 120 of the Ordinance mainly and sharing his thoughts in the through private placements. Beside light of his varied experience.As part of its mandate to develop the Section 120, no other specific regulatoryIslamic capital market and to facilitate framework existed for structuring and SECP warnsfund raising through Sharia Compliant issuance of Sukuk. Therefore, it had public aboutfinancial products, the Securities and become imperative to have a separate defunctExchange Commission of Pakistan (SECP) set of regulatory framework for issuance companieshas approved the Regulations for issuance of Sukuk. Major investors in Sukuk includeof Sukuk. the mutual funds, employees’ funds, The Securities and Exchange commercial banks both conventional Commission of Pakistan (SECP) The Sukuk Regulations, 2015 and Islamic and NBFCs which directly or has advised the public in their(the Regulations) has been made indirectly hold public funds. own interest, to be prudent whileunder Section 506A of the Companies dealing with companies whoseOrdinance, 1984 (the Ordinance). The draft The Regulations prescribe certain registration has been cancelled byof the Regulations was earlier notified for conditions to be met before issuance of the SECP.soliciting public comments thereon. Sukuk and the eligibility criteria for the issuers. The Regulations in addition to the The SECP has issued the list Islamic capital market is considered disclosure and reporting requirements of companies, which have ceasedas an important segment of a developed also require appointment of the Sharia to exist in the last five years. So,and broad-based capital market. A Advisor and Investment Agent. Sharia. they are no longer legal entities.developed Islamic capital market can playvital role in the economic growth of a These companies werecountry. struck off either on their own choice by availing themselves Currently Sukuk are issued as an of Company Easy Exit Scheme (CEES)/voluntary wind-up, or theirSECP organizes registration have been cancelledInvestor Awareness Seminars by the Registrar due to their non- operational/dormant status.The Securities and Exchange Commission of with engaging presentations and a livelyPakistan (SECP) to further its endeavor Q&A session. It was part of the SECP’s The said list, which containsof protecting retail investors, raising overall investor education program, over 6,000 companies, may beawareness about savings and investment which is aimed at enhancing financial viewed on the SECP’s website atand building investor confidence, literacy and providing easy access to awareness seminars in Lahore, financial instruments through setting up ceased_companies.asp.Karachi and Islamabad. of capital market hubs across major cities of Pakistan. 11 The seminars were well-attended,SECP SPRING 2015 - Newsletter

The seminars were designed to enlighten savings vehicles and initiatives taken by SECP amendsthe participants about capital markets, the SECP to safeguard investor interests. regulatorymutual and pension funds as investment/ framework for NBFCsSECP adopts StringentMeasures for Market Surveillance In continuation of the numerous steps taken to improve theThe Securities and Exchange Commission but monitoring of the entire spectrum, financial sector and to restoreof Pakistan (SECP) has strengthened its the confidence of the investors,monitoring and surveillance of trading including observing company the SECP under the leadershipactivity at the exchanges and restructured of Mr. Zafar Hijazi has approvedand reinforced its Market Surveillance and announcements, index movements, substantial amendments to theSpecial Initiatives Department. regulatory framework for the non- media reports, rumors and speculation. bank financial (NBF) sector inviting Stringent measures will be adopted public’s ensure integrity and fairness in the All of this strengthens the SECP’s positiontrading activity and to identify abusive, The idea is to improve accessmanipulative and irregular trading as a robust regulator and further instills to finance and promoting a culturepractices. With additional resources in of savings and investment, leadingplace, the department now consists of confidence within the capital markets. to increase in the participationthree separate wings, i.e. the Market of retail investors in the capitalSurveillance Wing, the Market Watch and This emphasis on the protection markets. The SECP intends toDevelopment Wing and the Media and promote housing finance andResearch Wing. of investors’ interests and curtailing enable NBFIs to play a key role in the development of formal This reorganization of Market market abuse has resulted in 30 actions housing finance sector.Surveillance department has enhancedthe SECP’s capacity and effectiveness this year. This represents over 50% of the The proposed regulatoryfor monitoring and surveillance of framework has also strengthenedPakistan’s capital markets, not just entire actions taken the previous year the fit and proper criteria forthrough monitoring trading activity the promoters and majority and almost equals the total number of shareholders of the NBFIs to ensure that the best suitable people are at actions taken the year before. In this the helm of affairs of the NBFIs. A balance has been struck between regard, 9 actions have been taken on the inherent risk in the operating structure of the NBFIs and the insider trading/front running, 2 orders level of regulatory oversight and conditions imposed upon them. have been passed under Section 22 of the In order to ensure the 1969 Securities and Exchange Ordinance management of NBFIs in line with the best practices, board of (SEO), 4 prohibitory orders under the SEO directors has been empowered to take ownership and act have been issued, along with 15 warning proactively. Moreover, to create specialization and focus on their letters to market participants. operations, the NBFCs are also being categorized as lendingSECP establishes NFBCs, fund management NBFCsIslamic Finance Department and advisory NBFCs.As part of its initiative to promote and changes to the 1962 Banking Companies The drafts of the proposeddevelop the Islamic financial market, the Ordinance and the promulgation of regulatory framework have beenSecurities and Exchange Commission of the 1980 Modaraba Companies and placed on the SECP’s website.Pakistan (SECP) has established an Islamic Modaraba (Floatation and Control) Comments from the public andFinance Department. The department Ordinance. Modarabas are the pioneering other stakeholders in this regardis mandated to carry out the functions Islamic financial institutions in Pakistan have been sought by March 19,of Shariah regulation and compliance, followed by the Islamic banks, takaful, 2015.product development, market awareness, Islamic mutual funds and Islamic pensionShariah securities market development funds. SECP SPRING 2015- Newsletterand international liaison and networking. At present the total Islamic financial The SECP is entrusted with assets of Pakistan have reached over Rs1.7regulating a spectrum of Shariah- trillion, constituting around 10% of theoriented companies, ranging from total banking assets of Pakistan. Out of themodarabas, non-banking finance, takaful total Islamic financial assets around 40%and non-financial companies. The assets are directly or indirectly regulatedIslamic Finance Department will act as by the SECP. They include mutual funds,a backbone for coordination between modarabas, pension funds, takaful andthe SECP’s operational departments with sukuk.the primary objective of regulating andpromoting Islamic finance and Shariahcompliance in the capital market.In the late 1970s the government ofPakistan took an initiative towardseliminating riba by introducing some12

ISOCO WEBINARIOSCO Asia Pacific Regional A c c o r d i ng ly , T&OD in on market intermediaries’ risk- Committee (APRC) Chair, the Hong based supervision programs Kong SFC, as part of our regional coordination with SDER organized and shared his expertise andcapacity building initiative, had experiences in this area. Theinvited the SECP to participate in a webinar on behalf of IOSCO APRC program covered intermediariesthe inaugural 2014 APRC webinar on such as brokers, fund managersrisk-based supervision. This was the on “risk-based supervision” on and financial planners. Further,first time that the APRC, and possibly there was a Q&A session duringIOSCO, was using technology November 10, 2014. Participants the last 30 minutes of the webinar,to stream real time training where Mr. Salman Hayat, AD, SDER,presentations over the Internet to from within the SECP in Karachi typed in views and questions andconnect with the members. the presenter responded verbally and Islamabad participated in the via live streaming. webinar. Mr. Stephen Po, Chair of 10SCO Committee 3 on the Regulation of Market Intermediaries and head of the Hong Kong SFC’s Intermediaries Supervision Department, made a presentation Corporate governance enforcement workshop with IFCIn coordination with the Chairman’s video conferencing connected interaction with the relevant our internal audiences from stakeholders, the need for trainingSecretariat, Training and Lahore, Karachi and Islamabad in corporate governance and how and relevant participants of the it may fund specific trainings inOrganizational Development Wing stock exchanges. this regard to help the SECP and market intermediaries.facilitated a focus group discussion The objective of this focus group was for IFC to assess throughconducted by representativesof the International FinanceCorporation (IFC). The event viaSECP SPRING 2015 - Newsletter 13

TT eanbnliesSecondSECP Tournament T he Department (T&OD) of Training and Organizational Development organized the second SECP Table Tennis Tournament 2014 in the months of November and December 2014 at the SECP’s head office. The objective behind organizing this tournament was to encourage healthy activities among employees and to provide employees with the opportunity to interact with each other in a casual and friendly environment. There was healthy participation in a competitive yet jovial atmosphere. At the grand finale of the tournament, Mr. Zafar Abdullah, the then Commissioner, SSD and SMD, graced the prize distribution ceremony and appreciated all the participants for their enthusiasm. He also emphasized the importance of conducting such events periodically to encourage health and fitness and interdepartmental networking at the SECP. The following players participated in the tournament Men’s singles category: Awais Ali, Mirza Arif Baig, Muhammad Younas, Imran Khan Baloch, Kamal Ali, Muhammad Asad Saeed, Shakil Chaudhary, Khurram Hasan, Hammad Ahmed, Haroon Rashid, Imran Saeed, Imran Hussain Minhas, Muhammad Afzal, Omer Gulzar, Rizwan Haroon, Usman Ahmad Malik, Talha Monis, Akif Saeed, Khawaja Ammad Masud Men’s double’s category: Awais Ali and Mirza Arif Baig, Imran Khan Baloch and Muhammad Younas, Kamal Ali and Muhammad Assad Saeed, Umar Yahya and Khawaja Ammad Masud, Haroon Rashid and Imran Saeed, Imran Hussain Minhas and Muhammad Afzal, Muhammad Azim and Hammad Ahmad, Talha Monis and Usman Ahmad Malik, Rizwan Haroon and Junaid Tariq, Aoun Abbas Zaidi and Khurram Shahzad, Arslan and Mirza Shoaib Baig. Women’s singles category: Nazish Zubair, Kashfa Mahmood14 SECP SPRING 2015- Newsletter

Champions and Runner-upsChampions Champion Men’s Singles Champion Women’s Singles Khurram Hassan Nazish ZubairRunner-ups Men’s Runner-up Women’s Runner-up Awais Ali Kashfa MahmoodChampions Champions Men’s Double Awais Ali & Arif BaigRunner-ups Champion Men’s SinglesSECP SPRING 2015 - Newsletter Kamal Ali & Khurram Hassan 15

DUA FOR THE MARTYRS On December 17, 2014 all the SECP’s employees gathered in the NIC Auditorium in Islamabad and prayed for the souls of deceased. Mourners Army Public School, Peshawar O n December 16, 2014, the Army Public School in Peshawar was subjected a gruesome terrorist attack, killing 145 people, including 132 schoolchildren. The heart-rending tragedy plunged the entire nation into a state of mourning and sadness. Orientation The SECP gladly accepted The event arranged by T&OD Session the request to fulfil its duty as a contributed immensely to the responsible corporate citizen, exposure of the visiting students The SECP received a request from because the UST is located in an who interacted openly with the the Bannu-based University of area stricken by terrorism and SECP’s senior representatives Science and Technology (UST) poverty, which borders North of various departments, who to organize an interactive orientation Waziristan. There is neither vibrant specially found time to formally session for their students at the SECP industry in its surroundings nor present an overview of their headquarters. any renowned financial institution departments’ operations. The that could provide its students event was held on December 15, the opportunity to see the world 2014, at the training room on of practice through the lens of the third floor. It was followed by theoretical knowledge. lunch for the visitors.16 SECP SPRING 2015- Newsletter

In-house workshop on ‘The Finer Points of Professionalism’ The T&OD Wing in the past had organized training programs on staff etiquette, personal hygiene and professional decorum for non-clerical staff of the SECP in Karachi, Lahore and in Islamabad. Following the success of these workshops, and upon numerous requests from various departments, T&OD proceeded to develop an advanced version of this workshop relevant to the SECP’s management cadre employees and rolled out its first workshop on this topic on December 2, 2014. This session too received highly positive feedback. The objectives of these training Participants benefited from the sessions were as follows. In this 3 hour workshop by learning about: session, participants learnt unique and interesting facts about: • Further improve their interpersonal communication • Claud Shannon and Warren Weaver’s world renowned “WOVEN” • Dress with more confidence in and its relevance to professional making a presentable appearance communication on a day to day basis and on special occasions such as conferences and • International and domestic meetings professional attire requirements for gentlemen and • Learn about international and local fine dining etiquette for better self- • Continental, American, Asian and management during professional subcontinental fine dining etiquette luncheons and dinners.SECP SPRING 2015 - Newsletter 17

SECP’s initiatives for paperless environment Shane Coelho • improving the quality of data management being more analytical A paperless environment compared to a paper-based environment leads to and informative greater operational efficiency, rising profitability and increased customer satisfaction. As digital technologies evolve with advanced capabilities, they • reduced fee structure in contrast to have proven to be more cost-effective. In order to achieve improvement in physical filing of documents and regulatory compliance, eliminating loads of paperwork has been one of the key objectives of every modern regulator. • secured data storage The companies registered under Since its inception in 2008, the e-Services project has been evolving. In fact, it has undergone significant transformation. The Securities and Exchange Commission the 1984 Companies Ordinance have of Pakistan (SECP) is continuously rethinking the governance standards to exhibited a receptive attitude towards establish a unified platform for filing, retrieval and dissemination of information of the various policies implemented by statutory returns, including quarterly, half yearly and annual accounts submitted the SECP. As a consequence of the by the registered corporate entities. new requirement, during the October- November period a phenomenal surge The project which was initially fashioned with a basic framework for online of documents (returns/accounts) were incorporation of companies and filing of statutory returns has now progressively submitted through e-filing. advanced in technology. Effective September 2014, vide S.R.O. 593(I)/2014, the SECP has implemented the mandatory submission of documents through e-filing By creating a decisive and by various companies registered entities under the 1984 Companies Ordinance. integrated electronic linkage will surely The requirement of mandatory online filing now extends to categories such as go a long way towards complementing public companies (listed and unlisted), private/single member companies having the efforts taken by the SECP in its quest paid-up capital of Rs50 million or more, all non-profit organizations registered to achieve its primary mission to develop under Section 42 and trade bodies, etc. Through the said statutory regulatory a robust regulatory system, which is order, it has now become mandatory for all of the above categories of companies imperative for the development of the to submit documents, returns, accounts and applications online through the corporate sector and ultimately for the eServices portal. growth of national economy. Being compatible with its intended user’s ability to use it easily and ----------------------------------------------------- successfully, the advantages of the requirement for mandatory online The writer is currently working with the in filing are manifold: charge of the Karachi CRO. She graduated in humanities from Karachi University. • providing solutions that will help companies, organizations, SOEs, institutions to achieve better operational efficiency bringing them at par with international best practices • increasing the regulatory compliance • enhancing efficiency in delivery of services18 SECP SPRING 2015- Newsletter

ISLAMIC FINANCE: Riba, the major for which primarily the state shall be and it has laid down comprehensivedriving force and key element in held responsible. It is true that the set of rules to run the social, politicalthe conventional banking, is one modern economies cannot survive and economic system. The subjectof those items which have been without a sound financial system, but it of Islamic economics, banking andstrictly forbidden and declared haram is not necessary that it should be based finance is covered under the muamulat.(forbidden) in Islam. The convention on conventional banking practices Ijma and qiyas are the methodologiesbanking and finance system is not and riba. A modern Shariah-compliant being used by the Shariah scholars tomeant for the Muslims. Practicing riba- solution of conventional financial provide Shariah-compliant solutions tobased banking and financial system is system is no longer a pipe dream. the financial problems of the modernsinful and destructive for the Muslims age. It is believed that the creation of Islam is a complete code of life,Insights on Islamic financeImran Hussain Minhas this world is based on goodness and alternative for the Muslim societies. • Business activity must be halal utility; and like Islam, every religion Islamic banking and finance (permitted) no funding to haram has goodness and utility as its basic or sinful activities. principles. Being Muslims we believe model is based on economic justice that whatever is declared haram by and is free from the element of riba, In the current situation the Islamic Allah, has no utility for the people in gharar, mysir, and support from banking has proven to be a suitable this world and the hereafter. And the haram business activities. In fact, alternative, which has been accepted one, who follows the forbidden path, the prohibition to engage in such worldwide. Today, there are more generates the curse of sins much transactions that extract surplus value than 600 Islamic financial institutions, greater than the utility he receives. in an unfair way with the elements of including government-run banks, riba and gharar stems from concerns private banks, investment companies, In order to address and eliminate of justice and fairness. For a financial mutual funds, takaful companies and riba from banking and financial system, or business transaction to be viable modarabas operating in more than 75 Islamic jurists have introduced the economically and ethically, Shariah countries. As of 2014 the total assets of Islamic banking and finance (IBF) system, measures may include the following around $2 trillion are Sharia-compliant which encourages entrepreneurship, principles: (The Economist). According to Ernst & trade and profits by discouraging riba. Young, from 2009 to 2013 the Islamic The IBF is the value system which is • Risk-sharing– The parties involved banking assets have grown at an annual governed by the principles and rules in a financial transaction must rate of 17.6% and they are expected to established by the Quran and Sunnah. share the risk of loss of the business grow by an average of 19.7% a year to In addition to the conventional good transaction as well. 2018. governance and risk management rules, it operates to implement and • Materiality– The financial History of Islamic finance materialize the economic and financial transaction must be linked to a ideology of Shariah. The IBF is allowed real economic transaction; History of Islamic finance is as old as the and approved by the Islamic jurists Islam is. Some of the products such as as a riba-free and Shariah-compliant • No exploitation– a financial modaraba and musharakah are being transaction should be exploitationSECP SPRING 2015 - Newsletter free; and 19

practiced before the era of the last on Shariah principles. on the subject of interest-free banking Prophet (PBUH). In addition, salam also In the 20th century, Islamic scholars was conducted in 1955 onwards. has endorsement of Muslims since the perceived ‘necessary evil’, and However, the basis of time of Holy Prophet (PBUH). proposed a banking system based modern Islamic banking and finance on the concept of mudaraba. In were provided by the first Shariah- An early form of Islamic 1920’s the ruler of Bahrain asked compliant savings bank, which was capitalism was developed between the Eastern Bank, the predecessor established in the Nile Delta town of the 8th and 12th centuries and the Standard Chartered, that they can Mit Ghamr, a rural area of the Egypt economy of the period was based on only open a branch on the island if it by an economist Ahmad Al Najjar in currency in the form of gold dinar and offers interest free transactions. At the 1963 as Mit Ghamr Savings Project. many forms and concepts of Islamic same time the National Handelsbank The idea was not advertised for fear enterprises apart from the state were of the Netherlands, the predecessor of being seen as a manifestation of also adopted. During the Ottoman rule, of ABN-Amro was allowed to provide Islamic fundamentalism during the the Middle Eastern traders practiced interest free money changing services Jamal Nasser regime. The Mit Ghamr financial transactions that were based in Jeddah to pilgrims. Specific work Savings Project was shut down by the In the 20th Century, Islamic Scholars proposed a banking system government in 1968. journey, through presidential orders, Modaraba Ordinance was not declared Later, in 1971, it was merged with and the 1980 Modaraba Companies un-Islamic. Against the order of the and Modaraba (Floatation and Control) FSC, a request was made in the Shariat the Nasser Social Bank. The bank failed Ordinance was promulgated which Appellate Bench (SAB) of the Supreme but the idea succeeded. Soon after the enabled business groups to set up SME Court to review the order. experience, many commercial banks in modarabas. It was a great breakthrough, On December 23, 1999, i.e. after eight Egypt started following Mit Ghamr. The which enable people to establish full years, the Supreme Court rejected the wave of modern Islamic banking also fledge Islamic financial institutions appeal by declaring the efforts towards started in other parts of the world. In under the Modaraba Ordinance. Islamic banking un-Islamic and that 1963 Malaysia introduced the Malaysian The specialized financial institutions the interest-based system shall cease Pilgrims Fund Board (Tabung Haji) as a such as the House Building Finance to have effect by June 30, 2001. The first Islamic investment fund. Islamic Corporation, National Investment Supreme Court gave its decision that Development Bank, with its head office Trust and Investment Corporation of currently interest-based system would in Jeddah, was also established in July Pakistan transformed their operations be shifted according to the principles 1975 to foster economic development in conformity with the Shariah in July of Shariah, as soon as possible. and social progress of member 1979. countries individually as well as jointly In 2001, on the appeal of United in accordance with the principles of The conventional banking Bank, the SAB extended its earlier Shariah. The first modern commercial converted into profit and loss sharing deadline to June 30, 2002. Islamic bank, Dubai Islamic Bank, also banking by making amendments started its operations in 1975. Islamic to the 1962 Banking Companies On June 24, 2002 the SAB Bank, also started its operations in 1975. Ordinance (BCO) and on January 1, reversed its own decision of 1999 and At the same time Pakistan achieved 1981, interest-free counters were remanded the case back to the FSC for fourth position in the globe to established in all the public and one re-determination. implement riba-free financial system foreign bank operating in Pakistan and in the country by taking the following their interest bearing deposits were In the meantime, the steps: converted into profit and loss sharing Government of Pakistan (GoP) formed deposits. But foreign currency deposit a Commission for Transformation The Council of Islamic Ideology and debts remained on conventional of Financial System (CTFS) under (CII) set up a panel of bankers and interest bearing system. the supervision of the State Bank economists on September 29, 1977, of Pakistan. The CTFS submitted its which prepared the blueprint for In November 1991 the Federal final recommendations in August interest-free economic system and Shariat Court (FSC) declared the system 2001, for creating a legal Shariah- submitted its report in February 1980, of profit and loss sharing adopted in compliant infrastructure for shifting of highlighting ways of eliminating the banking sector is not accordance the economy and conversion of the interest from economy. with the teachings of Islam. However, entire financial systems in accordance the regulatory framework under the with Shariah and interest free system The Islamic finance started its in a phased manner without causing20 SECP SPRING 2015- Newsletter

any disruptions to the economy and 1. In January 2002 first Islamic bank formed a ‘Steering Committee forbanking system. Separate Islamic banks of Pakistan got license and now promotion of Islamic Banking’ towere allowed to operate in parallel to there are five full-fledged Islamic speed up work on Islamizationconventional banks. In addition, the Banks and 15 conventional banks of financial system, banking andfollowing three institutional options are offering Islamic banking capital markets of Pakistan.were provided: services through their window or dedicated branch networks.• Setting up an independent and In 2014 the total assets of Islamic dedicated Islamic bank banking and finance of Pakistan have reached to over Rs1.5 trillion• Setting up an Islamic banking with the major share of Islamic subsidiary of a conventional bank banking which is over Rs1 trillion.• Setting up dedicated Islamic 2. Recently, in 2013 the GOP has banking branches of a conventional bankSECP SPRING 2015 - Newsletter 21

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