Companies (Investment in Associated Companies or Associated Undertakings) Regulations 2017
This blog is written by Mr. Nauman Ul Qadeer, Senior Manager Consultancy. Please read this detailed blog on Corporate Matter of essential relevance and provide your valued comments.
These regulations were issued by Securities and Exchange Commission of Pakistan (SECP) on 6th of December 2017 vide SRO # S. R. O. 1240(I)/2017. Before elaborating the procedural requirements of these regulations, we need to understand the terms used, which are as follows:-
“Investment” means shall include equity investment, loans, advances, guarantees, by whatever name called, except trade transaction(s) carried out on arms-length and in accordance with the trade policy of the company.
“Equity Investment” includes investment in the shares of a company.
“Associated companies and associated undertakings” in broader terms means any two or more companies or undertakings, or a company and an undertaking, interconnected with each other that i) they are under common management / Control ii) If the owner / partner / director of one company / undertaking, holds or controls not less than twenty percent shares / voting power, is also the owner / partner / director of another company or undertaking and holds or controls not less than twenty percent shares / voting power. (Complete definition may be observed under clause (4) of sub-section (1) of section 2 of the Companies Act 2017).
Initial Requirements for Investment in Associated Companies or Associated undertakings:
Basic Requirement of the Companies Act 2017, for making investment in Associated Companies or Associated Undertakings is that “No investment shall be made unless authorized by a special resolution which shall indicate the nature, period, amount of investment and terms and conditions attached thereto”.
In case of investment though loan / advance, written agreement shall contain the repayment plan, and rate of return which shall not be less than the borrowing cost of the investee. Further directors of the investing company shall certify that the investment is made after due diligence and financial health of the borrowing company is such that it has the ability to repay the loan as per the agreement. Due Diligence shall be made available to members for inspection during the meeting.
Notice of Meeting and Information to Members for Passing of Special Resolution:
In a General Meeting called for considering decision for investment in Associated Companies or Associated Undertakings, the information required to present to the members is defined under chapter II of the regulations. Regulations require disclosure of the information to the members of the investing company in 03 categories, the extracts of which are as follows: –
1 – General Disclosures:-
- basis of relationship;
- earnings per share for the last three years;
- break-up value per share, based on latest audited financial statements;
- financial position, including main items of statement of financial position and profit and loss account on the basis of its latest financial statements; and
- in case of investment in relation to a project of associated company or associated undertaking that has not commenced operations, following further information, namely,-
- description of the project and its history since conceptualization;
- starting date and expected date of completion of work;
- time by which such project shall become commercially operational;
- expected time by which the project shall start paying return on investment; and
- funds invested or to be invested by the promoters, sponsors, associated company or associated undertaking distinguishing between cash and non-cash amounts;
- maximum amount of investment to be made
- purpose, benefits likely to accrue to the investing company and its members from such investment and period of investment;
- sources of funds to be utilized for investment and where the investment is intended to be made using borrowed funds, justification for investment through borrowings;
- detail of collateral, guarantees provided and assets pledged for obtaining such funds; and
- cost benefit analysis,
- salient features of the agreement(s), if any, with associated company or associated undertaking with regards to the proposed investment,
- direct or indirect interest of directors, sponsors, majority shareholders and their relatives, if any, in the associated company or associated undertaking or the transaction under consideration; and
- in case any investment in associated company or associated undertaking has already been made, the performance review of such investment including complete information/justification for any impairment or write offs; and any other important details necessary for the members to understand the transaction;
2 – Disclosures in case of Equity Investments
Following disclosures in addition general disclosures shall be made:
- maximum price at which securities will be acquired;
- in case the purchase price is higher than market value in case of listed securities and fair value in case of unlisted securities, justification thereof;
- maximum number of securities to be acquired;
- number of securities and percentage thereof held before and after the proposed investment;
- current and preceding twelve weeks’ weighted average market price where investment is proposed to be made in listed securities; and
- fair value determined by a person having such qualifications and experience and registered as a valuer in such manner and on such terms and conditions as may be specified by the Commission.
3 – Disclosure for investments in the form of loans, advances and guarantees,
Following disclosures in addition general disclosures shall be made:
- category-wise amount of investment;
- average borrowing cost of the investing company, the Karachi Inter Bank Offered Rate (KIBOR) for the relevant period, rate of return for Shariah compliant products and
- rate of return for unfunded facilities, as the case may be, for the relevant period;
- rate of interest, mark up, profit, fees or commission etc. to be charged by investing company;
- particulars of collateral or security to be obtained in relation to the proposed investment;
- if the investment carries conversion feature i.e. it is convertible into securities, this fact along with terms and conditions including conversion formula, circumstances in which the conversion may take place and the time when the conversion may be exercisable; and
- repayment schedule and terms and conditions of loans or advances to be given to the associated company or associated undertaking.
Listed company shall simultaneously dispatch a copy of aforesaid notice and the statement of material facts to the head office of the Securities and Exchange Commission of Pakistan, through fax or email and courier service on the same day it is dispatched to the members.
The directors of the investing company while presenting the special resolution for making investment in an associated company or associated undertaking shall certify to the members of the investing company that they have carried out necessary due diligence for the proposed investment before recommending it for members’ approval.
In case any decision to make investment under the authority of a resolution passed is not fully implemented in line with the approval of members till the holding of subsequent general meeting, the status of the decision shall be explained to the members through a statement having the following details namely,-
(a) total investment approved;
(b) amount of investment made to date;
(c) reasons for deviations from the approved timeline of investment, where investment decision was to be implemented in specified time; and
(d) material change in financial statements of associated company or associated undertaking since date of the resolution passed for approval of investment.
MAINTENANCE OF RECORD
An Investing company shall maintain a register in the specified Form (as prescribed under these regulations) and shall enter therein the particulars of its investments in associated company or associated undertakings.
Nauman Ul Qadeer