SECTION A- FORMS AND STRUCTURES OF AND SOURCES OF FINANCE FOR BUSINESS ORGANISATIONS

A1. Forms of business (enterprise) organisation

(a) What are the main form of business organisation for medium and large scale enterprises in this country?

The main forms of business organisation adopted by the private sector for the purposes of conducting medium and large scale enteprises are "limited liability companies"; "partnerships"; and "joint ventures". In the case of the public sector (i.e. where the Government wishes to undertake an enterprise), the common form of business organisation are "limit liability companies" and "statutory corporations". Out of these, "companies" are the principal form of business organisation for medium and large scale enterprises in Pakistan.

We briefly deal with each type of business organisation below:

Companies:

This is the most common form of business organisation. The regime for the establishment and regulation of corporate activity in Pakistan is governed by the Pakistan Companies Ordinance, 1984 (referred to as the "Companies Ordinance" throughout this Report) and is administered by the Securities and Exchange Commission of Pakistan (referred to as the "SEC" throughout this Report) and by the Registrar of Companies appointed by SEC in the Province of Pakistan in which the company is incorporated (referred to as the "Companies Registrar" throughout this Report). The Companies Ordinance provides that a company may be formed by persons associating for any lawful purpose by subscribing their name to a Memorandum of Association and complying with the requirements of the Companies Ordinance in respect of registration. The Companies Ordinance provides for the formation of three types of companies: (a) a company limited by shares, (b) a company limited by guarantee or (c) an unlimited 'liability' company. Companies limited by shares, private or public, are the most common vehicle for undertaking business in Pakistan, and wherever necessary, will be the focus in this Report. Not only does the Companies Ordinance provide for the formation of companies incorporated in Pakistan, but also for the registration of "foreign companies" incorporated in foreign jurisdictions as "branch offices" in Pakistan for the purposes of undertaking business or for the purposes of performing a specific project. A company is a body corporate having perpetual succession with only such limited liability on the part of members to contribute to the assets of the company in the event of its being wound-up as is mentioned in the Companies Ordinance.

Partnerships:

Parties desiring to retain a degree of flexibility as to structure and at the same time desiring to establish a formal relationship, create partnerships for undertaking a business. The law relating to partnerships is contained in Pakistan's Partnership Act, 1932 ("Partnership Act") which defines a "partnership" as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. A commercial business or professional partnership must not consist of more than twenty partners (except in certain specified cases, such as partnership created to undertake a practice as lawyers, accountants or any other practice where practice as a limited liability company is not permitted by law), otherwise it is required to be registered as a company under the Companies Ordinance. A Partnerhip may be registered or unregistered. Registration has certain consequences for litigation and tax treatment.

Statutory Corporations:

Statutory corporations are created by the Federal Government or a Provincial Government by Acts of Parliament or, as the case may be, by an Act of a Provincial Assembly. Each individual enactment governs the purpose, functions, management, legal status and matters connected to the individual corporation, including winding-up.

Joint Ventures:

In instances where two parties do not intend to create a separate entity to deal with an enterprise, but merely agree to act together in a specified manner in respect of a common venture (while continuing to retain their individual identities which could be in the form of a company or a partnership, within the venture), these parties enter into consortium or cooperation or joint venture operation agreement. Such agreement would set out the terms and govern the relationship of the parties in respect of the business intended to be conducted. Such joint ventures are common in the fields of oil, gas and construction.

(b) Is there a system of registration for these business organisations? If so, briefly describe.

Companies:

The Companies Ordinance provides for two types of limited liability Companys: a private limited company and a public limited company (which may be listed or unlisted). Companies both private and public are required to be registered under the Companies Ordinance. Under Section 15, any seven or more persons associated for any lawful purpose may by subscribing their names to a Memorandum of Association and complying with the requirement of the Companies Ordinance in respect of registration, form a public company and any two or more persons so associated, may form a private company. The Memorandum of Association alongwith an Articles of Association setting out the regulations of the company, is required to be filed with the Registrar of Companies in the Province in which the company is to be incorporated. Following the registration of the Memorandum of Association of a company with the Registrar of Companies, the Registrar of Companies issues a Certificate of Incorporation under Section 32. In the case of a public company, however, a further requirement has to be fulfilled under the Companies Ordinance. Under Section 146, a public company cannot commence any business or exercise any borrowing powers unless: (a) shares held subject to the payment of the whole amount thereof in cash have been alloted to an amount not less in the whole than the minimum subscription; (b) every director of the company has paid to the company the full amount on each of the shares taken or contracted to be taken by him and for which he is liable to pay in cash; (c) no money is or may become liable to be repaid to applicants for any shares or debentures which have been offered for public subscription by reason of any failure to apply for or to obtain permission for the shares or debentures to be dealt in on any stock exchange; (d) there has been filed with the Registrar of Companies a duly verified declaration by the chief executive or one of the directors and the secretary in the prescribed form that the aforesaid conditions have been complied with and the Registrar of Companies has issued a Certificate of Commencement of Business; and (e) in the case of a company which has not issued a prospectus inviting the public to subscribe for its shares, there has been filed with the Registrar of Companies, a statement in lieu of prospectus. On the filing of a duly verified declaration in respect of the above by the chief executive or one of the directors and the secretary in the prescribed form, the Registrar of Companies as stated in (d) above, issues a "Certificate of Commencement of Business" to the public company. To conclude, a public company must obtain a "certificate for commencement of business" from the Companies Registrar in order to be eligible for commencing business. This requirement does not apply to a private company and a private company is authorised to commence business immediately after incorporation. Apart from being required to fulfill the requirements of the Companies Ordinance, a public company wishing to have its shares listed on one the three stock exchanges of Pakistan (located in Karachi, Lahore and Islamabad) has to obtain permission for such dealing in accordance with the listing regulations of the relevant stock exchange. In Pakistan, a company is either a public listed or unlisted company. In the case of the latter, the company's shares are not quoted on a stock exchange in Pakistan, whilst the case of public listed company, such a company's shares can be quoted on and dealt with on the 'Karachi Stock Exchange', the 'Lahore Stock Exchange' or the 'Islamabad Stock Exchange', subject to fulfilling the requirments and obtaining permission from the relevant stock exchange.

Partnerships:

Partnerships may be registered under the Partnership Act with the Registrar of Firms. If the parties establishing a partnership firm wish to be registered with the Registrar of Firms (which is not a compulsory requirement), a statement in prescribed form is required to be delivered to the Registrar of Firms of the area in which any place of business of the Firm is situated or proposed to be situtaed, stating: (a) the firm name; (b) the place or principal place of business of the firm; (c) the names of any other places where the firm carries on business; (d) the date when each partner joined the firm; (e) the names in full and permanent addresses of the partners; and (f) the duration of the firm. The statement is to be signed by all the partners, or by their agents specially authorised in this behalf. Each person signing the statement is also required to verify it. When the Registrar of Firms is satisfied that the above provisions have been satisfied, he records an entry of the statement in a register called the Register of Firms and shall file the statement. Any alteration to the statement is required to be notified to the Registrar of Firms.

Statutory Corporations:

Statutory Corporations do not require any registration, as they are formed under Acts of Parliament or Act of a Provincial Assembly, which govern their functions and all matters incidental thereto.

Joint Venture Agreements:

There is no requirement under Pakistan law for the registration of such Agreements. However, the entities which form the Joint Venture, may themselves, be required to be registered. If the entities forming the Joint Venture are companies, then registration under the Companies Ordinance would be required. In the case of a partnership, if the partners wish to register the partnership firm, then they may be so under the Partnership Act.

Monopoly Law:

These business organisations may require registration under the monopoly law of Pakistan if the anti-trust provisions of the law relating to monopolies in Pakistan namely the Monopolies and Restrictive Trade Practices (Control and Prevention) Ordinance, 1970 are attracted. Section 16 of the Monopolies Ordinance provides for certain "undertakings", "individuals" and "agreements" to be registered with the Monopolies Control Authority or 'MCA'. These are as follows:

(a) An undertaking which, during the next preceding calendar year produced, distributed, sold or provided not less than one-third of the total production or supply of any goods or services.

(b) Associated undertakings engaged in the same line of business, which during the next preceding calendar year produced, distributed, sold or provided not less than one-third of the total production or supply of any goods or services.

(c) An undertaking which during the next preceding calendar year, by itself or together with its associated undertaking, both produced and distributed by wholesale or by retail or by both, not less than twenty per cent. of the total production and supply of any goods in any Province of Pakistan.

(d) An undertaking which is not owned by a public company and the total value of the assets of which is not less than fifty million rupees.

(e) An undertaking which, by agreement or otherwise, establishes minimum resale prices for retailers or wholesalers with regard to goods which it produces or distributes.

(f) An undertaking which, by itself or together with its associated undertaking, is the sole distributor or supplier for more than one undertakings of any goods or services.

(g) A bank, investment company or insurance company which, in relation to any other undertaking, is an associated undertaking.

(h) An individual who holds or controls, whether directly or indirectly, shares carrying not less than fifty per cent. of the voting power in undertakings owned by a public company the total value of the assets of which is not less than fifty million rupees.

(i) An agreement for any such acquisition or merger of undertakings constituting "unreasonable monopoly power" under the Monopolies Ordinance.

(j) An agreement constituting "unreasonably restrictive trade practices" under the Monopolies Ordinance.
(k) An agreement for the distribution or sale of any goods which directly or indirectly:-

(i) limits the areas in which, or the persons to whom, the product may be re-sold;
(ii) prohibits or restricts the distribution or sale of other goods by the distributor;
(iii) limits the persons through whom the distributor may distribute or sell such goods.

(l) Any licence of patents or technology which limits the freedom of the licensee to use such patents or technology in the manufacture of any goods or to sell the goods produced under such licence at such prices, in such areas, to such persons and for such uses as the licensee may choose, or which limits the freedom of the licensor to grant additional licences to such persons and on such terms as he may choose.

(m) Such other persons, undertakings, agreements or franchise as the MCA may by rule prescribe. As used above, the following definitions should be noted:
"associated undertakings" means any two or more undertakings interconnected with each other in the following manner, namely:-

(i) if a person who is the owner or a partner of an undertaking or who directly or indirectly holds or controls shares carrying not less than thirty percent of the voting power in such undertaking, is also the owner or a partner, of another undertaking or, directly or indirectly, holds or controls shares carrying not less than thirty percent of the voting power in that undertaking; or
(ii) if the undertakings are under common management or common control or one is the subsidiary of another.

"monopoly power" means the ability of one or more sellers in a market to set non-competitive prices or restrict output without losing a substantial share of the market or to exclude others from any part of the market.
"service" means provisions of board, lodging, transport, entertainment or amusement, or of facilities in connection with the supply of electrical or other energy, purveying of news, banking, insurance or investment.
"unreasonably restrictive trade practice" means a trade practice which has or may have the effect of unreasonably preventing, restraining or otherwise lessening competition in any manner.

(c) Are there any minimal capitalisation requirements for these enterprises?

There are no minimum capitlisation requirements under law for these enterprises. However, we would invite your attention to the Investment Policy of Pakistan, 1998 (as revised in April 1999), the of the Board of Investment, Government of Pakistan. The Investment Policy lays down the incentives offered by the Government for foreign direct investment in the manufacturing, service, infrastructure, social and agricultural sectors. In the service, infrastructure and social sectors, the amount of foreign equity investment by foreign investors in a company/project is required to be at least US$.0.5 million. Thus, where foreign investment is involved in a project of the types mentioned above, the Investment Policy requires the establishment of a company in which, the minimum capital will have to be at least US$.0.5 million.
The State Bank of Pakistan (which is the central bank of the country) has directed the banks operating in Pakistan to provide financial facilities to their customers on the basis of a 60:40 debt equity ratio, or such other debt equity ratio as may be prescribed by the State Bank for any specific project or specific class of projects. Therefore, companies and other business concerns are required to maintain their capital on the above basis.

(d) Briefly describe the main features of each type of these business organisations, by reference to public/private/state ownership and management; accounting and auditing responsibilities (particularly the standards which apply to accounting and auditing practices); director and management responsibility (including, if relevant, possible liability for debts); and the role of regulatory authorities regarding these enterprises.

Companies:

As described earlier in this Report, the regulation of corporate activity in Pakistan is governed by the Companies Ordinance and administered by the SEC established under the Securities and Exchange Commission of Pakistan Act, 1997 and the Registrar of Companies under the Companies Ordinance. Prior to the SEC, affairs of companies under the Companies Ordinance were administered by the "Corporate Law Authority", which was dissolved with effect from 1st January 1999 and substituted by the SEC as of that date.
Private companies are defined by the Companies Ordinance as those which limit the number of their shareholders to fifty, restrict the transfer of their shares and may not offer shares to the public. A private company may only have two subscribers to its Memorandum of Association. Public companies on the other hand do not have any limit on the number of their shareholders, are not permited to restrict the transfer of their shares and may offer their shares to the public. Public companies are required to have at least seven members and seven directors. Public companies may also seek listing on the Karachi, Lahore and Islamabad Stock Exchanges.
The most usual form that a company would take in Pakistan is that of a company limited by shares, which means that the liability of the members (as members) is limited to the amount unpaid on the shares held by them. The Companies Ordinance requires that all shares issued be fully paid up and therefore, in the winding-up scenario, the members will have liability.
The business of a company is managed by the Board of Directors, who may exercise all powers of the company as are not by the Companies Ordinance, or by the Articles of Association required to be exercised by the company in a general meeting. The first directors following the incorporation of a company hold office till the company's first annual general meeting, which is required to be held within eighteen months from the date of incorporation. Thereafter, directors hold office for a term of three years, whereafter a fresh election of directors takes place. Thus, election of Directors are held every third year. The day to day management of a company is carried out by a Chief Executive, who under the Companies Ordinance, is to be appointed within 14 days from the date of election of the directors of a company or from the date such office becomes vacant for whatsoever reason. A Chief Executive, if not already a director, is deemed to be a director. The Chief Executive holds office for upto a period of three years from the date of appointment, whereafter the Chief Executive is eligible for reappointment. It is a mandatory requirement of Pakistan law that every company must have a Chief Executive.
Under Section 157 of the Companies Ordinance, every company limited by shares is within a period of not less than 3 months and not more than 6 months, from the date on which the company is entitled to commence business, hold a general meeting of the members of the company, to be called "the statutory meeting". Every company, is required under Section 158, to hold in addition to any other meeting, an annual general meeting within 18 months from the date of its incorporation and thereafter once at least in every calendar year within a period of 6 months following the close of its financial year and not more than 15 months after the holding of its last annual general meeting.
Under Section 230 of the Companies Ordinance, every company is required to keep its registered office proper books of accounts with respect to (a) all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure take place; (b) all sales and purchases of goods by the company; (c) all assets of the company; (d) all liabilities of the company; and (e) in the case of a company engage in production, processing, manufacturing or mining activities; such particulars relating to utilisation of material or labor or to other inputs or items of cost as may be prescribed by the SEC.
The Companies Ordinance under Section 233, requires that the directors of every company shall not later within 18 months after incorporation of the company and subsequently, once at least in every calendar year lay before the company in an annual general meeting, a balance sheet and profit and loss account.
Under Section 233, copies of the balance sheet and profit and loss account have to be sent to the members of a company at least 21 days prior to the meeting at which the accounts are to be laid before the members and simultaneously, five copies each have to be sent to the SEC, the relevant Stock Exchange and the Registrar of Companies.
Under Section 234, every balance sheet of a company is to give a true and fair view of the state of affairs of the company as at the end of its financial year, and profit and loss account, is to give a true and fair view of the profit and loss account of the company for the financial year. Every item of expenditure fairly chargeable against the years income is to be brought into account. Further, under Section 234, the balance sheet and profit and loss account are: (i) in the case of listed companies, to comply with the requirements of the 4th Schedule of the Companies Ordinance; and (ii) in the case of any other company, to comply with the requirements of the 5th Schedule of the Companies Ordinance. The 4th and 5th Schedules of the Companies Ordinance referred to lay down comprehensively, the requirements of a balance sheet and profit and loss account of a listed companies and every company formed under the Companies Ordinance.
In the case of listed companies, Section 234 of the Companies Ordinance further provides that: (i) such International Accounting Standards and other standard shall be followed in regard to the accounts and preparation of the balance sheet and profit and loss account as are notified under the Companies Ordinance. The term 'International Accounting Standards' is explained under the Companies Ordinance as "the terms in which it is understood in the accounting circle"; (ii) a statement of changes in financial position or statement of sources and application of funds shall form part of the balance sheet and profit and loss account and; (iii) accounting policies of the company shall be stated and where there is any change in such policies, the auditor shall report whether he agrees with the change. The SEC has in addition to certain Statements of Standard Accounting practices issued by the Institute of Chartered Accountants of Pakistan, notified the applicability of the following International Accounting Standards issued by the International Accounting Standards Committee : 1, 2, 4 to 14, 16 to 21, 23 to 28 and 31 to 33.
Under Section 236, the directors of a company are required to make out and attach to every balance sheet a report with respect to the state of the company's affairs, the amounts, if any, which they recommend should be paid by way of dividend and amount, if any, which they propose to carry to the reserve fund, general reserve or reserve account to be shown specifically in the subsequent balance sheet. This Section further provides that private and public companies which are subsidiaries of a public company and required to include in the directors report certain additional matters, such as disclosure of any material changes and committments affecting the financial position of the company which have occurred between the end of the financial year of the company to which the balance sheet relates and the date of the report; and any changes that have occurred during the financial year concern the nature of the business of the company or of its subsidiaries or in the classes of business in which the company has interests.
Under Section 245 of the Companies Ordinance, every listed company is required to: (a) within two months of close of the first half of year of accounts prepare and transmit to its member and the Stock Exchange in which the shares of the company are listed, a profit and loss account for and balance sheet as at the end of the half year whether audited or otherwise; and (b) simultaneously file with the Registrar of Company and SEC, such number of copies thereof, not being less than five.
For the purposes of fulfilling its accounting responsibilities, every company under Section 252 of the Companies Ordinance is required at its annual general meeting to appoint an auditor(s) to hold office from the conclusion of that meeting until the conclusion of the next annual general meeting. The first auditor or auditors of the company are required to be appointed by the directors within 60 days of the date of the incorporation of the company and such auditor and auditors hold office until conclusion of the first annual general meeting. Under Section 255 every auditor of the company has a right of access at all time to the books, papers, accounts and vouchers of the company and is entitled to require from the company and the directors and other officers of the company, such information, explanation as he thinks necessary for the performance of the duties of the auditors. The auditor is required to make a report to the members of the company on the accounts and books of accounts of the company and on every balance sheet and profit and loss account in terms of the particulars prescribed by the Companies Ordinance.
Despite the applicability of international accounting standards and appointment of auditors, it is perceived that some companies are maintaining two sets of books of account: one set for tax authorities and non-controlling shareholders and the other reflecting the true position for the benefit of controlling shareholders. This is done to evade tax. Auditors are never shown the books of account reflecting actual position. Audit firms of repute do not, as a general rule, act as auditors of such companies. Secondly, local business companies of repute and multi-national companies are generally perceived to be not engaged in such activities.
As a general rule, directors and members of management are not liable for debts. However, as an exception, under Section 413 of the Companies Ordinance, should it come to light during the winding-up of a company that the business of the company had been carried on with intent to defraud creditors of the company or any other person or for any fraudulent purpose, the Court may, on the application of the liquidator or any creditor declare that any persons who were knowingly parties to the carrying on of business in the above manner shall be personally liable, without any limit, for all or any of the debts or other liabilities of the Company. The Court may also issue directions for giving effect to any such declaration. This matter is further discussed below.

Partnerships:

The law of Partnerships is contained in the Partnership Act. However, there is no regulatory authority for administering a partnership, other than the Registrar of firms, who is exclusively appointed for this purpose. The relationship of a Partnership arises from a contract and may be at will for a specified term or venture, or may be a general long term partnership for the pooling of resources and the carrying on of any business or profession. Within the limites prescribed by the Partnership Act, it is open to the partner to set out the parameters of their relationship by contractual means and thus considerable flexibility is available in relation to issues such as control, the overall business direction of the partnership and the dissolution of the partnership.
Partners are bound under the Partnership Act to carry on the business of the firm to the greatest common advantage, to be just and faithfull to each other and to render true accounts and full information of all things affecting the firm to any partner or his legal representative. Every partner is bound to indemnify the firm for any loss caused to it by his fraud in the conduct of the business of the firm. The act of a partner under the Partnership Act which is done to carry on, in the usual way, the business of the kind carried on by the firm, binds the firm. Every partner is liable jointly with all the other partners and also severally, for all acts of the firm done while he is a partner. Thus, in the case of the inability of a partnership to pay its debts, the Partners will be liable for such debts.
There are no prescribed accounting and auditing responsibilities under the Partnership Act, although most established firms do have their accounts audited in accordance with prudent standards.

Statutory Bodies/Corporations:

Statutory bodies/corporations are owned by the state and are governed by the statutes by which they are established. Provisions regarding their management etc are contained in each individual enactment and only the 'authority' specified by the enactment administers it's activities, such as a board of governors, chairman, etc. The specific enactment creating a statutory corporation usually contains provisions to the effect that such corporation cannot be wound-up except by the order of the Government and only in such manner and on such terms and conditions as the Government may direct.

Joint Ventures:

The entire relationship of the parties to the Joint Venture is governed by agreement and no relationship is created except as set out in the agreement. Thus, management responsibilities (including those related to auditing) and liabilities of the parties, are set out in the agreement. Whilst we have set out the main forms of business organisation adopted by medium and large scale enterprises, as mentioned above, the main form of business organisation predominantly established in Pakistan, are 'companies'. We understand from the questions posed (particularly in respect of Section R) and the answers to the Report prepared earlier, that the focus of the Report is on "companies", particularly since reference is made throughout to "corporates", "corporate borrower" and "corporate debtor" from Section B onwards. Accordingly, our answers hereinafter are geared towards 'companies' formed under the Companies Ordinance and we have adopted the terms "corporates", "corporate borrower" and "corporate debtor" instead of the term "company(s)" in this Report.

A2. Controls and influences

(a) Are there any relevant observations to make concerning political, social (powerful family), financier (bank equity or involvement) or cultural controls or influences in respect of these types of business organisation?

With some exception, most of the industries and businesses are either owned and controlled by powerful families, ethinic groups or the Government. Ethinic groups, such as "Memons", "Chinioties", "Bohris", "Aga Khanis", "Gujratis" control a substantial part of the industry and business in Pakistan.
With the nationalisation of banks in the seventies, issuance of credit on grounds of political pressure became common and this trend has continued unabated with the public sector/nationalised banks and Development Finance Institutions providing long and short term finances under political influence. As a consequence, a large part of their portfolio has become "non-performing" resulting in deterioration of the financial conditions of the banks and financial institutions in the public sector.

[Having identified the types of business organisation, they will now (for ease of reference) be referred to as 'corporates' and, thus, 'corporate borrower', 'corporate debtor' and so forth]