By enacting the Companies Act 2017 in Pakistan, the legislature has replaced the previous outdated Companies Ordinance 1984. The 2017 Act aligned the country’s corporate laws with the international standards which improved the business activities in the country. It aims to promote transparency, enhance corporate governance and provide a conducive environment to investors which helps growing business on wider scale.
The Companies Act 2017 PDF :
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Background of the Companies Act 2017:
The legislature enacted the Companies Act 2017 to meet the emerging needs of the country’s corporate sector and the international trends in corporate governance.
Though there was the Companies ordinance 1984 for the corporate activities in the country, however it was lacking to address present day challenges e.g. digitalization of whole system, corporate scams and frauds, and the intricacies of global trade.
National Assembly designed this act to fill all these lacunas, to protect the interest of stakeholders, and to promote corporate governance.
Key Objectives of the Companies Act 2017:
The main objectives are discussed below:-
1. Facilitating Business Operations:
There was dire need of simplifying and streamlining the procedures so as to make it easier for the individuals and entities to incorporate the companies with least administrative burden connected with the newly started business.
It not only fulfilled this purpose but also modernizes the processes for mergers, acquisitions, and winding up of companies, by making them more efficient and less time consuming. By introducing online registration and digital documentation. It also reduces bureaucratic hurdles, allowing businesses to focus on growth and development rather than navigating complex legal procedures.
2. Strengthening Corporate Governance:
The Companies Act, 2017, places a strong emphasis on enhancing corporate governance standards to ensure that companies operate with integrity and accountability. It introduces mechanisms such as the requirement for independent directors on company boards, the formation of audit committees, and stricter compliance with financial reporting standards.
These measures are designed to promote transparency in corporate management, to reduce the risk of fraud, and to ensure that the companies act is in the best interests of their stakeholders. By strengthening governance frameworks, it helps build trust among investors, regulators, and the public, fostering a more stable and credible corporate environment.
3. Protecting Investors and Shareholders:
It places significant emphasis on protecting the rights of investors and shareholders, particularly minority shareholders. It introduces special provisions regarding security of minority interests in crucial corporate decisions, such as mergers, acquisitions, and the sale of assets.
All shareholders have access to accurate and timely information about the company’s performance and activities, enabling them to make informed decisions. Additionally, legal remedies are available to the shareholders who may be adversely affected by the actions of the majority, promoting fairness and equity in corporate governance.
4. Encouraging Startups and Small Businesses:
There is no cavil to the crucial impact of startups and small businesses on economic growth. It includes provisions to strengthen these enterprise. It streamlines the incorporation process for startups and small businesses. It facilitates easier company establishment for entrepreneurs.
It offers incentives such as simplified compliance requirements and reduced financial reporting obligations to promote innovation and entrepreneurship. By creating a more supportive business environment, the growth of small and medium-sized enterprises (SMEs) is accelerated, which are essential for driving job creation, and economic progress in Pakistan.
Salient Features of the Companies Act 2017:
Following are its salient features:
1. Company Incorporation and Registration:
It provides a simple and easy process for the incorporation of a company , allowing for online registration and reducing the bureaucratic hurdles. It introduces the concept of a “single-member company” and a “startup company,” makes it easier for entrepreneurs to establish and operate businesses.
2. Corporate Governance:
The Companies Act, 2017, strengthens corporate governance by mandating stricter compliance requirements for companies. It introduces the concept of independent directors on the board, aiming to enhance the accountability and transparency of corporate management. It also requires companies to establish audit committees and other mechanisms to monitor internal controls and financial reporting.
3. Protection of Minority Shareholders:
It incorporates provisions to safeguard the rights of minority shareholders, ensuring they have a say in crucial decisions like mergers, acquisitions, and asset sales. It establishes mechanisms that allow minority shareholders to contest decisions that could negatively impact their interests, thereby promoting fairness and equity in corporate matters.
4. Corporate Social Responsibility :
For the first time in Pakistan, the Companies Act, 2017, introduces the concept of Corporate Social Responsibility. It encourages companies to contribute to social, environmental, and economic development by engaging in activities. Companies are encouraged to disclose their CSR policies and initiatives in their annual reports.
5. Mergers, Acquisitions, and Winding Up:
It simplifies the legal procedures related to mergers, acquisitions, and the winding up of companies. It introduces a fast-track merger process for wholly-owned subsidiaries, making it easier for businesses to restructure and consolidate.
Additionally, it provides clearer guidelines for the voluntary winding up of companies, ensuring that the rights of creditors and shareholders are protected during the process.
This law has made the procedures of mergers, acquisitions, and winding up of companies much easier and simple. Procedure of fast-track merger is available for wholly-owned subsidiaries. It makes the restructure and consolidation of the businesses much easier.
6. Digitalization and E-Governance under:
Recognizing the importance of digitalization, this enactment encourages the use of electronic communication and e-governance in corporate activities. Companies can now conduct virtual meetings, maintain electronic records, and issue electronic certificates. It helps in streamlining the corporate processes and reduces the reliance on paper-based working.
7. Corporate Reporting and Disclosures:
It makes the corporate reporting mandatory ensuring that accurate and timely information is being provided to shareholders and regulators. Companies are mandated to prepare financial statements that adhere to the standards set by the International Financial Reporting Standards (IFRS) and to disclose any material information that could impact the company’s financial position.
8. Regulation and Oversight:
It empowers the Securities and Exchange Commission of Pakistan (SECP) to ensure compliance of the act, conduct investigation regarding business misconduct, and take disciplinary actions against the delinquents and violators. It also provides financial support to the distressed companies by ensuring establishment of the Corporate Restructuring Company (CRC).
Impact and Significance of the Companies Act 2017:
The Companies Act 2017, has had a significant impact on the corporate sector in Pakistan. By modernizing the legal framework, it has made it easier for businesses to operate, attracting both local and foreign investment.
The introduction of independent directors and audit committees has strengthened corporate governance, reducing the risk of fraud and mismanagement.
Moreover, the emphasis on protecting minority shareholders and promoting transparency has improved investor confidence in the Pakistani market. Its provisions for CSR have also encouraged companies to contribute to social development, enhancing their role as responsible corporate citizens.
Challenges and Criticisms:
Despite its positive impact, the Companies Act 2017, has faced some challenges and criticisms:
Firstly, Some companies, have expressed concerns about the increased compliance costs associated with the new governance and reporting requirements.
Secondly, it effectiveness depends on the SECP’s ability to enforce its provisions. There have been instances where regulatory enforcement has been inconsistent, leading to concerns about the uniform application of the law.
Lastly, there is a need for greater awareness and education among businesses, particularly smaller enterprises, about the provisions of the act and how to comply with them effectively.
Conclusion:
The CompaniesAct 2017, is a progressive piece of legislation that aligns Pakistan’s corporate legislation with the global standards. It has encouraged a more business-friendly environment, fostered corporate governance and increased investor protection. Despite having challenges in application and compliance, this enactment holds vital importance in creating transparency, accountability, and a dynamic corporate sector in Pakistan.
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