REGULATION FOR CORPORATE GOVERNANCE IN PAKISTAN CAPITAL MARKETS

1. REGULATION FOR CORPORATE GOVERNANCE IN PAKISTAN CAPITAL MARKETS

2. INTRODUCTION • CORPORATE GOVERNANCE: • FAIRNESS • TRANSPARENCY/DISCLOSURE • ACCOUNTABILITY • Checks and Balances • Audits • 1. Internal • 2. External • RESPONSIBILITY/DIRECTION ADB Project TA 3696-PAK "Regulation for Corp. Gov."

3. BUT WHAT IF: • FRAUD/DECEIT/LIES • OPAQUENESS/LACK OF DISCLOSURE • UNTIMELY • INCOMPLETE • CONFLICTS OF INTEREST • SUBSTANDARD ACCOUNTING PRACTICES • SINGULAR CONTROL • LACK OF SHAREHOLDER RESPONSIBILITY • NO REGULATION OR ENFORCEMENT ADB Project TA 3696-PAK "Regulation for Corp. Gov."

4. Disclosure RECOMMENDATION to Companies, Stock Exchanges, and SECP: Disclosure should be disclosed…on web sites ADB Project TA 3696-PAK "Regulation for Corp. Gov."

5. Corporate Disclosure Policy—Basic Shareholder Rights • Immediate disclosure of material information • Response to unusual market activity • Clarification of rumors • Dealings by directors • Note on “Interlocking Directorates” ADB Project TA 3696-PAK "Regulation for Corp. Gov."

6. Immediate disclosure of material information--Code • Buying or selling of company’s shares, by Director, CEO, or executive (xxvi) • To Company Secretary within 4 days of transaction • “Closed period”/Insider trading • Results, business decisions, or news that may materially effect market price • To Exchange, review need for trading halts • Before news to media; during non-trading hours • RECOMMENDATION: during non-trading hours; to Exchanges BEFORE dissemination. ADB Project TA 3696-PAK "Regulation for Corp. Gov."

7. WINNERS LOSERSGOOD PRACTICES BAD PRACTICES • Shareholders • Stakeholders • Management • Directors • Company • Exchanges • SECP • Government/Economy • Shareholders • Stakeholders • Management • Directors • Company • Exchanges • SECP • Government/Economy ADB Project TA 3696-PAK "Regulation for Corp. Gov."

8. Immediate disclosure of material information—ACT-UP Elements • Accurate • Complete • Timely • UP-to-date ADB Project TA 3696-PAK "Regulation for Corp. Gov."

9. Other (Immediate) Disclosures • Related Party Transactions • Personal/Company Loans • Personal/Company Purchases/sales • Remuneration Package of Directors, Executives, and CEO (in Annual Report) • Including Stock options (off balance sheet) • Severance pay, bonuses, service contracts • Compliance with Code of Corp. Gov. • Need to explain non-compliance • Web site postings ADB Project TA 3696-PAK "Regulation for Corp. Gov."

10. Disclosure and Other Recommendations • Board approves related party transactions • Form Remuneration Committee…NEDs • Company must explain ANY non-compliance with Code • Company, SE, and SECP to post on web sites the compliance statement and explanations for non-compliance ADB Project TA 3696-PAK "Regulation for Corp. Gov."

11. Disclosure Policy--Response to unusual market activity and clarification of rumors • Material or not material? • Immediate Response • Refute or confirm or clarify • Research if necessary • Registered person as source? ADB Project TA 3696-PAK "Regulation for Corp. Gov."

12. Continuous Disclosure Requirements • Sufficient notice for shareholders meetings • Pre-emptive rights • Quarterly and annual accounts reporting • Compliance with accounting standards • Fixing of book closure dates • Whistleblowers…tips from public and professionals ADB Project TA 3696-PAK "Regulation for Corp. Gov."

13. Continuous Disclosure (cont.) • For Equitable Treatment of Shareholders • To Protect Share(Stake/Policy)holders’ Rights • At Annual Meetings • Notices • Voting • In Annual Report • Accounting practices ADB Project TA 3696-PAK "Regulation for Corp. Gov."

14. Shareholders’ (Customers’) Complaints • Written complaint to company • Response? • At annual meeting…heard? Satisfied? • Complaint to Stock Exchange • Satisfactory response? • Arbitration? • Complaint to SECP • Satisfactory response? • Court system remedy ADB Project TA 3696-PAK "Regulation for Corp. Gov."

15. Initiation of Customer Complaint Investigations • Company (Broker) compliance officer • Written complaint with documentation • Response from Company; accepted or rejected by customer? • If not accepted by customer, or resolved, Stock Exchange should be contacted (same time as SECP?) • RECOMMENDATION: SECP Brochure on web site re: Customer Complaints and Resolutions ADB Project TA 3696-PAK "Regulation for Corp. Gov."

16. Exchange Investigations: Sources of Customer Complaints • Determine Source: • Trading Practices • Sales Practices • Operational • Written • Research history of Brokerage Firm • Note repeat complaints ADB Project TA 3696-PAK "Regulation for Corp. Gov."

17. Customer Complaints…Review Documents in Firm’s Files • Customer files, new account information • Account statements • Commission reports • Broker or trader files • Advertising files • Correspondence files • Complaint files ADB Project TA 3696-PAK "Regulation for Corp. Gov."

18. Exchange Investigation Report • Gather evidence • Copies rather than originals • Document in report, facts and findings • Resolve…write to customer, or • Refer to SECP, or • Refer to Justice or Courts System ADB Project TA 3696-PAK "Regulation for Corp. Gov."

19. Continuous Disclosure (cont.) Need to Explain • Financials • Discrepancies or significant deviations in accounting practices or results • Lack of dividend declaration or payment • Significant tax liabilities • Shareholdings and Transactions • Operations: Past and Future • Significant risks, lawsuits • Going concern ADB Project TA 3696-PAK "Regulation for Corp. Gov."

20. Defects in Annual Reports (Meetings) • Shareholders’ meetings only once a year • Information presented reaches investors too late • Management may only be required to provide info on agenda points • Only shareholders, not potential investors or others, admitted to shareholder meetings Therefore need for continuous disclosure ADB Project TA 3696-PAK "Regulation for Corp. Gov."

21. Responsibility For Financial Reporting and Compliance • CEO and CFO must sign financial statements • Personal liability? • Company Secretary to furnish compliance certificate to registrar, along with list of shareholders • List of shareholders, public info? • Web site? ADB Project TA 3696-PAK "Regulation for Corp. Gov."

22. Regulatory Practices for Continuous Disclosures • SE/SECP monitoring of annual meetings • Whistleblowers? • Review of annual reports • Capable? • Reliance on auditors • Trained • Understanding of Capital Markets/Corp. Gov.? • Investigations of discrepancies or significant notes in annual reports ADB Project TA 3696-PAK "Regulation for Corp. Gov."

23. CIS Disclosure Issues • Is a CIS required to exercise voting rights? • Who should make decisions about voting and other rights attached to CIS? • Should a CIS provide information to its investors about how its rights as a shareholder will be exercised? • Questions above from IOSCO ADB Project TA 3696-PAK "Regulation for Corp. Gov."

24. CIS Guidelines and Practices • Act in best interests of CIS investors • Publish voting records • Disclose conflicts of interest • Vote according to investment objectives of CIS • Financial considerations • Social objectives ADB Project TA 3696-PAK "Regulation for Corp. Gov."

25. CIS Regulatory Techniques • Require regular disclosure of individual company holdings of CIS • Prospectus disclosure of top holdings • Limit CIS investing to a certain % in a company • Prohibit CIS investing for control of a company • Limits amount of CIS-group investing, again relating to control ADB Project TA 3696-PAK "Regulation for Corp. Gov."

26. Insurance Company Risk Disclosure Issues • Disclosures of exposure to financial risk and how it is managed • Market or trading risk, comparing risk to return • Funding liquidity risk, including funding provided by largest creditors • Credit risk, nature of exposures, e.g., replacement values…disclosure on non performing loans • Reserve adequacy and loss development ADB Project TA 3696-PAK "Regulation for Corp. Gov."

27. Role and Need of Independent External Auditors(Code) • Rating by ICAP • Compliant with Code of Ethics • Directors recommend appointment • No other services • Rotate auditors (or partner?) every 5 years • No prior affiliation or relation (2 years) • Partner to attend AGM ADB Project TA 3696-PAK "Regulation for Corp. Gov."

28. Enforcement Actions on Non-Compliant Disclosures • Stock Exchanges or other intermediaries to take enforcement action • SECP to take enforcement action • What actions? • Imposition of sanctions or penalties • publication of non-compliant companies and sanctions administered? ADB Project TA 3696-PAK "Regulation for Corp. Gov."

29. Best Practices:Exchange Sanctions for Non-Compliance of Listing Rules • Warning, non-public • Public statement of facts • Temporary halt of trading (issuer’s request) • Temporary suspension of trading, with explanation to market • Delisting, or cancellation of listing • Fines against companies and/or directors • Criminal sanctions…by SECP or Criminal Code • Or...‘Black list’/Defaulters’ Counter? ADB Project TA 3696-PAK "Regulation for Corp. Gov."

30. Continuous Disclosure Elements:ACT-UP • Accurate • Complete • Timely • UP-to-date ADB Project TA 3696-PAK "Regulation for Corp. Gov."

31. Corporate Governance Practice • Regulatory Framework • Statutory laws and regulations • Code of corporate governance • Standards of best practices, e.g. a due diligence guide or “Statement of Ethics and Business Practices” (viii.a) ADB Project TA 3696-PAK "Regulation for Corp. Gov."

32. Regulatory Framework (cont.) Top…Down • From Government Laws • To SECP Regulations • To Institutions’ Rules • To Intermediaries’ Policies and Procedures • To Boards’…Management’s…Employees’ Codes and Practices • To Individual actions…ethics ADB Project TA 3696-PAK "Regulation for Corp. Gov."

33. ETHICS WHAT IS ETHICS?

34. Corporate Governance Structure • Role of chairman, chief executive officer, non executive directors and audit committees • Roles, duties, and responsibilities of directors • Related party transactions • Insider trading • Prompt and adequate disclosures • Fair treatment of minority shareholders ADB Project TA 3696-PAK "Regulation for Corp. Gov."

35. Role of Chairman • Elected by Directors • Executive? • CEO? • Non-executive? • Presides over meetings of the Board • Ensures minutes of meetings recorded ADB Project TA 3696-PAK "Regulation for Corp. Gov."

36. Role of CEO • Chairman? Director? • Appointed and remunerated by Board of Directors • Appoints CFO, Company Secretary, and head of Internal Audit • Runs the day to day business of Company • Disclose good and bad developments ADB Project TA 3696-PAK "Regulation for Corp. Gov."

37. Role of NEDs • Transparency • Representation of minority shareholders? • Impartial checks and balances • No threat of job security • Majority on Audit and other committees…for NBFIs • Board investment committee • Remuneration committee ADB Project TA 3696-PAK "Regulation for Corp. Gov."

38. Role of Audit Committee • NEDs mostly • Quarterly meetings • Recommend to Board external auditors • Determine measures to safeguard assets • Review announcements prior to publication • Oversight of quarterly, annual finc’l statements • Considers major findings of internal investigations and management’s responses • Monitors internal control system ADB Project TA 3696-PAK "Regulation for Corp. Gov."

39. External Auditors • KEYS: • Independent • Board (Audit Committee) Oversight • Understanding • External auditors work for the shareholders, not for management • Other conflicting services, e.g., consulting? ADB Project TA 3696-PAK "Regulation for Corp. Gov."

40. Roles, Duties, and Responsibilities of Directors • “Direct” company in meeting its goals • Independent? NED? Broker-related? • Annual Statement of Ethics and Practices • Appoints and monitors management • Disclosure of information to shareholders • Review control issues of Audit Committee • Appoints external auditors ADB Project TA 3696-PAK "Regulation for Corp. Gov."

41. Significant Issues for Board Decisions and Review • Annual and long term business plans • Budgeting • Internal reports, including cases of fraud • Internal and external audits and financials • Joint venture or distributor agreements • Material regulatory review notices • Significant liability claims or judgments ADB Project TA 3696-PAK "Regulation for Corp. Gov."

42. Keys to Board Effectiveness: • Communications • Information • Expertise • Experience • Independence • Effective senior managementRecommendation: Board Manual ADB Project TA 3696-PAK "Regulation for Corp. Gov."

43. Supervisory Board • Split Board • Board for operations of company • Another board for shareholders rights and protections • Specialized boards • Interrelated • ACT-Up Information ADB Project TA 3696-PAK "Regulation for Corp. Gov."

44. Related Party Transactions • Transactions with/for company subsidiaries, directors, executives • May be legitimate or • At ‘higher than market’ rates or prices, or • At ‘lower than market’ rates or prices • Disclosure • Approvals needed? By Board? Shareholders? ADB Project TA 3696-PAK "Regulation for Corp. Gov."

45. Related Party Indicators • Borrowing or lending on an interest-free basis or at a rate of interest significantly above or below market rates prevailing at the time of the transaction. • Selling real estate at a price that differs significantly from its appraised value. • Exchanging property for similar property in a non-monetary transaction. • Making loans with no scheduled terms for when or how the funds will be repaid. • Purchase of assets at greater than fair market value • Loans at less than market interest rates ADB Project TA 3696-PAK "Regulation for Corp. Gov."

46. Determining the Existence of Related Parties (Auditing Procedures) • Evaluate the company's procedures for identifying and properly accounting for related party transactions. • Request from appropriate management personnel the names of all related parties and inquire whether there were any transactions with these parties during the period. ADB Project TA 3696-PAK "Regulation for Corp. Gov."

47. Identifying Transactions With Related Parties • (SECP or SE to) Provide audit personnel performing segments of the audit or auditing and reporting separately on the accounts of related components of the reporting entity with the names of known related parties so that they may become aware of transactions with such parties during their audits. ADB Project TA 3696-PAK "Regulation for Corp. Gov."

48. Identifying (continued) • Review the minutes of meetings of the board of directors and executive or operating committees for information about material transactions authorized or discussed at their meetings. • Review conflict-of-interests statements obtained by the company from its management.  ADB Project TA 3696-PAK "Regulation for Corp. Gov."

49. Identifying (continued) • Review the extent and nature of business transacted with major customers, suppliers, borrowers, and lenders for indications of previously undisclosed relationships. • Review accounting records for large, unusual, or nonrecurring transactions or balances, paying particular attention to transactions recognized at or near the end of the reporting period. ADB Project TA 3696-PAK "Regulation for Corp. Gov."

50. Examining Identified Related Party Transactions • Obtain an understanding of the business purpose of the transaction.  • Examine invoices, executed copies of agreements, contracts, and other pertinent documents, such as receiving reports and shipping documents. • Determine whether the transaction has been approved by the board of directors or other appropriate officials. ADB Project TA 3696-PAK "Regulation for Corp. Gov."