SECP Internship Report

INTERNSHIP REPORT
Submitted By Komal Shujaat
SECURITIES AND EXCHANGE COMMISSION OF PAKISTAN
Internship Report
Securities & Exchange Commission of Pakistan
EXECUTIVE SUMMARY
The Securities and Exchange Commission of Pakistan (SECP) is an autonomous body whose purpose is to develop a modern and efficient corporate sector and a capital market based on sound regulatory principles, in order to foster economic growth and prosperity in Pakistan.
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CHAPTER 1: BACKGROUND
OF
SECP
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Background of SECP
The Securities and Exchange Commission of Pakistan is regulated under the act of Securities and Exchange Commission of Pakistan, 1997. This act provides policies pertaining to all issues necessary for the regulation of SECP. SECP came into being with effect from 1 January 1999 through a loan agreement between GoP and Asian Development Bank (ADB) whereby $US 250 million was sanctioned for the development of the capital market in Pakistan after the dissolution of the Corporate Law Authority (CLA). The Corporate Law Authority (CLA) was an affiliated department Ministry of Finance and the regulatory arm of the Government of Pakistan (GOP) for the implementation of the companies legislation and the regulator of the anti-trust through the autonomous Monopoly Control Authority (MCA). Earlier SECPs areas of operation included only corporate sector and capital market. Later it widened to the administration and regulation of insurance companies, nonbanking finance companies and private pensions. Its scope of services also includes supervision of various peripheral service providers to the corporate and financial sectors, together with chartered accountants, credit rating agencies, corporate secretaries, brokers, surveyors etc. The contractual obligation for the SECP has increased than before because of diverse authorization.
Structure of SECP
The SECP was set up as three tiered organization consisting of: Security & Exchange Policy Board Security & Exchange Commission Chairman
Security and Exchange Policy Board

The Policy Board is entrusted with the responsibility to provide guidance to the Commission in all matters relating to its functions and to formulate policies in consultation with the Commission. In addition, it is responsible for advising the Government on matters falling within the purview of the Act and other corporate laws and to express its opinion on policy matters referred to it by the Government or the Commission. The Act provides that the Policy Board should consist of a maximum of nine members appointed by the Federal Government, including five (5) ex-officio members and four from the private sector. The ex-officio members are: 1. Secretary, Finance Division; 2. Secretary, Law, Justice and Human Rights Division; 4
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3. Secretary, Commerce Division; 4. Chairman of the Commission; and 5. Deputy Governor of the State Bank of Pakistan (SBP).
Security and Exchange Commission

The commission has full financial, administrative and operational autonomy and their main purpose is to assist the Chairman and coordinate with other departments of the SECP and external entities, as necessary, in achieving the objectives of the SECP in an efficient and holistic manner. The commissioners are appointed by the Federal government and are responsible for the division like securities exchange, investment company law and the most importantly, enforcement.
Chairman
Chairman is the Chief Executive Officer of the Securities and Exchange Commission of Pakistan and plays the most important role in SECP. He is a member of Security and Exchange Policy Board as well as Security and Exchange Commission.
Vision of SECP
The development of modern and efficient corporate sector and capital market, based on sound regulatory principles, that provide impetus for high economic growth and foster social harmony in the Country.
Mission of SECP
To develop a fair, efficient and transparent regulatory framework, based on international legal standards and best practices, for the protection of investors and mitigation of systemic risk aimed at fostering growth of a robust corporate sector and broad based capital market in Pakistan.
Strategy of SECP
To develop an efficient and dynamic regulatory body that fosters principles of good governance in the corporate sector, ensures proper risk management procedures in the capital market, and protects investors through responsive policy measures and effective enforcement practices.
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CHAPTER 2: SECURITIES MARKET DIVISION
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Securities Market Division

The regulation of securities market is a core function of a commission. For this purpose SECP has Securities Market Division which is responsible for the regulation of all aspects of the securities market including licensing and coordination, regulation of secondary market, public offerings, market intermediaries and market surveillance. It regulates the primary and secondary markets as well as market intermediaries through registration, surveillance, investigation, enforcement, and rule making, with the objective of protecting investors interest. SMD also processes and grants approvals to prospectuses for public offering of both debt and equity securities. In addition, it is entrusted with instituting appropriate regulatory reforms to develop and promote the market, engender investor confidence and instill transparency, effective risk management and good governance at the three Stock Exchanges, Pakistan Mercantile Exchange, Central Depository Company and National Clearing Company.
Departments of SMD
The division consists of the below mentioned departments: 1. Policy, Regulation and Development Department 2. Market Supervision and Capital Issues Department Securities Market Division
Policy, Regulation and Development Department
Market Supervision and Capital Issues Department
Stock Exchanges, Depository and Clearing Wing (SEDC)
Market Surveillance, Litigation and Advisory Wing Beneficial Ownership Wing
Commodities and Currencies Wing (CC)
Compliance and Inspection Wing Brokers Registration and Investor Complaints Wing Capital Issues Wing
Debt Capital Market Wing (DCM)
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Policy, Regulation and Development Department (PRDD)

Policy, Regulation and Development Department-PRDD (formerly Self Regulatory Organizations Department-SROD) is basically responsible for responsible for the development and review of policies and regulations governing Self Regulatory Organizations such as Karachi Stock Exchange, Lahore Stock Exchange, Islamabad Stock Exchange, Pakistan Mercantile Exchange, Central Depository Company of Pakistan and National Clearing Company of Pakistan. It is also responsible for improving the regulatory and operational efficiency of the Capital Market by providing a regulatory regime that conforms to international best standards and ensures compliance with the IOSCO principles. PRDD endeavors to base its regulatory philosophy on the principle of developmental regulation and places great emphasis on investor protection, improved risk management, market development and creating market conditions which boost investor confidence, transparency and foster growth of the Pakistani Capital Market. On June 10, 2011, SECP went through restructuring to exercise its powers effectively and efficiently and Self Regulatory Organizations Department (SROD) became Policy, Regulation and Development Department (PRDD) with the following wings: 1. Stock Exchanges, Depository and Clearing Wing 2. Commodities and Currency Wing 3. Debt Capital Market Wing
Functions of PRDD
PRDD regulates securities market by performing the following functions: 1. Issuing and Renewing Licenses to SROs: PRDD issues and renews licenses of stock exchanges, securities depositories and clearing companies after having a detail study of operations and financials of these companies. Currently it has issued license only to Central Depository Company of Pakistan Limited (CDC) as a depository company and to National Clearing Company Limited as a clearing company. Three stock exchanges are registered with SECP. 2. Approving Amendments to the Regulatory Framework: The main function of PRDD involves proposing and approving new rules and amendments to the existing rules and regulations of stock exchanges, CDC, NCCPL and commodity exchange. PRDD has proposed and approved necessary amendments in rules of CDC, NCCPL and stock exchanges to facilitate Automation of Securities, Margin Financing and SLB. PRDD is working to introduce System Audit Regulations and Regulations for implementing the concept of Market Makers of PMEX.
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3. Granting Approval to New Products, Systems and other Operational Activities: PRDD is responsible for approving new products in Capital Market. It is also responsible for grating approvals to systems and operational activities of SROs. It has already worked on Margin Trading, Financing and SLB and still working on to introduce other products such as Exchange Traded Funds (ETFs) and stock options in the Capital Market. On Commodity areas, it has recently approved sugar contracts ad cotton contracts. 4. Devising and Proposing Rules pertaining to these Entities for the Approval by the Federal Government: PRDD also devise and propose those rules of SROs which need to be approved by Federal Government. The Securities (Margin Financing, Lending, Borrowing and Pledging) Rules, 2010 were drafted by SECP but promulgated by the Federal Government. 5. Handling all Policy and Regulatory Matters of SROs PRDD handles all policy and regulatory matters relating to the stock and commodity exchanges, CDC and NCCPL. PRDD also deals with all queries asked by general public and brokers which involve regulatory framework of SROs. It also deals with issues and complaints related to the regulatory matters of the SROs. 6. Handling Governance Issues of SROs PRDD appoints non-member directors on the boards of stock exchanges, commodity exchange, CDC and NCCPL. It also determines fit and proper criteria for the board of directors of SROs. 7. Registering PMEX brokers Currently, PRDD is assigned the function of PMEX broker registration and their renewal. PRDD grants PMEX broker registrations after all the conditions are met and required documents are furnished. 8. Development of Debt Capital Market Development for secondary trading in Debt Market is also assigned to PRDD. PRDD has been instrumental in the introduction of Bonds Automated Trading System (BATS) which is automated trading system for corporate bonds at stock exchanges. It has constituted a committee of BATS to give recommendations for further development of secondary trading in Debt Capital Market.
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Regulatees (PRDDs) of PRDD

1. Depository Company (CDC) Central Depository System (CDS) was developed to remove physical securities management. The current prevailing system helps in transferring shares from one client account to another through an electronic book entry system (CDS). The main aim of the CDC is to act as a central depository of securities on behalf of all the financial institutions and investors.
2. Clearing Company (NCCPL) In the Capital Market development program, Asian Development bank gave recommendations to have a separate individual and centralized system for all three Stock Exchanges of Pakistan. So in replacement of the old system, a complete automated electronic settlement system was developed called the National Clearing & Settlement System (NCSS). Any security which becomes live in Central Depository System, on ready status, is inducted accordingly into the National Clearing & Settlement System (NCSS). The main purpose of the NCSS system is to act as clearing house for all Capital Market transactions. The system provides clearing and settlement services for all markets including Ready, Future, CFS, IPO, etc. The system caters and facilitates brokers, non brokers, and banks. This system is operated by National Clearing Company of Pakistan Limited (NCCPL), which has been registered as a separate legal entity.
3. Stock Exchanges (KSE, LSE & ISE) Pakistan has three stock exchanges; Karachi Stock Exchange (KSE), Lahore Stock Exchange (LSE) and Islamabad Stock Exchange (ISE). Karachi Stock Exchange (KSE) was formed in 1947 and is the biggest stock exchange with a turnover of 84% of shares. Lahore Stock Exchange (LSE) was formed in 1971 and is the second largest stock exchange with a turnover of 14 % of shares. Islamabad Stock Exchange (ISE) was formed in 1989 and is the youngest stock exchange with a turnover of only 1 % of shares.
4. Commodity Exchange (PMEX) Pakistan Mercantile Exchange Limited (PMEX) (formerly National Commodity Exchange Limited) is the first and only commodity exchange of Pakistan. It was incorporated in 2002 and started full trading activities on May 11, 2007. PMEX is still in the introductory phase. So most of PMEX functions including Broker Registration and Broker Registration Renewal are seen by PRDD.
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5. Secondary Debt Market (BATS) Presently the secondary trading in debt market consists of only Bonds Automated Trading System (BATS) of stock exchanges which is a platform for trading of corporate bonds.
Market Supervision and Capital Issues Department

I. Capital Issues Wing (CIW)
The Capital Issues Wing (CIW) of Securities Market Division (SMD) mainly deals with the cases regarding approval of prospectuses for public issue/offer of securities. The prospectus of any company inviting public subscription for its securities is required to be approved by the SECP under the Companies Ordinance, 1984 prior to its issue, circulation and publication. The CIW also processes cases regarding issue of securities outside Pakistan under Section 62-A of the Companies Ordinance, 1984, registration of Special Purpose Vehicles (SPV) under the Companies (Asset Backed Securitization) Rules, 1999, approving Employee Stock Options Schemes (ESOS) under the Public Companies (Employees Stock Option Scheme) Rules, 2001, regulating Credit Rating Companies under Credit Rating Companies Rules, 1995, monitor intermediaries through the Balloters, Transfer Agents and Underwriters Rules, 2001 and cases reported under Section 18-A of the Securities and Exchange Ordinance, 1969 which prohibits submission of more than one application by a single applicant for subscription of shares. Following are the main functions of Capital Issues Wing: 1. Approving Issuance of Securities to Public CIW holds the main responsibility for granting approval for issuance of securities such as shares, TFC, commercial papers, etc., to the public. According to section 53 (5) of the Companies Ordinance 1984, any application for shares and debentures cannot be issued unless it is accompanied by a prospectus and according to Section 57 a company cannot issue, circulate or publish any prospectus unless prior approval taken from Commission. 2. Approving Issuance of Securities outside Pakistan Section 62 (A) restricts issuance of securities outside Pakistan unless prior approval of Commission. CIW processes such cases. Till 8 October 2010, CIW had given approval to 14 companies for issuance of securities outside Pakistan. CIW checks if the company has a strong financial position of the company before giving approval. Company with a weak financial position is not granted approval for issuing securities outside Pakistan. 3. Issuing license to Special Purpose Vehicle CIW issues license to Special Purpose Vehicle to carry out the business of securitization. The Companies (Asset Backed Securitization) Rules, 1999 are followed by CIW for this purpose. 11
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The Companies (Asset Backed Securitization) Rules, 1999 defines "Special Purpose Vehicle" as a special purpose vehicle registered by the Commission for the purpose of Securitization and "Securitization" as a process whereby any Special Purpose Vehicle raises funds by issue of Term Finance Certificates or any other instruments with the approval of the Commission, for such purpose and uses such funds by making payment to the Originator and through such process acquires the title, property or right in the receivables or other assets in the form of actionable claims. 4. Approving Employees Stock Option Schemes Proviso is inserted by Finance Act, 1999 in section 86 of the Companies Ordinance 1984 that a public company may reserve a certain percentage of further issue of its employees under Employees Stock Option Scheme to be approved by the commission. CIW approves Employees Stock Option Scheme and works accordingly to the Public Companies (Employees Stock Option Scheme) Rules, 2001 for this purpose. 5. Regulate Credit Rating Companies Section 32-B of Securities and Exchange Ordinance 1968 implies that a company has to be registered from SECP before starting its functions. CIW follows Credit Rating Companies Rules, 1995, for this purpose and defines credit rating company as a company which intends to engage in or is so engaged primarily in the business of evaluation of credit risk through a recognized and formal process of assigning rating to present or proposed loan obligations of any business enterprise. CIW also reviews documents and reports filed by the credit rating companies and examine the legal framework for credit rating companies. Currently there are only two credit rating companies in Pakistan named PACRA and JCR-IVS Credit Rating Company Ltd. 6. Monitor Underwriters and Other Market Intermediaries According to Sub-rule 4 (d) of rule 20 of Securities and Exchange Commission Act, 1997, Commission is responsible for regulating and registering underwriters. This function also falls under CIW. The only available rules for this purpose are the Balloters, Transfer Agents and Underwriters Rules, 2001.
II.
Broker Registration and Investor Complaints Wing
The Broker Registration and Investor Complaints Wing (BR & ICW) is entrusted with the responsibilities of registration of brokers and agents and handling investor complaints. The registration of brokers and agents establishes a direct regulatory nexus for ensuring investor protection and observance of Code of Conduct annexed to the Brokers and Agents Registration Rules, 2001. The Wing also plays an instrumental role in ensuring effective redressal of investor complaints and grievances, particularly those of small investors. In an effort to ensure investor protection and provide relief to aggrieved investors, it works in close coordination with stock exchanges. In case of defaulting
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members, it works diligently in monitoring the default procedures to provide relief to investors aggrieved by such defaults. Following are the main functions of Broker Registration and Investor Complaints Wing: 1. Issuing and Renewing Certificates of Registration to Brokers BR & ICW registers and renews certificates of registration of stock exchange members. For broker registration, it works under Brokers and Agents Registration Rules, 2001. Rules 3-12 and Rule 18 of Brokers and Agents Registration Rules, 2001 are related to Broker Registration. 2. Issuing and Renewing Certificates of Registration to Agents Agents are given certificate of registration and these certificates are renewed by BR & ICW. Rules 13-17 of Brokers and Agents Registration Rules, 2001 apply to Agents Registration and renewal. 3. Redressing Investor Complaints received against the Brokers, Agents and Stock Exchanges BR & ICW redresses all sorts of investor complaints and grievances, including those of small investors. It works in close liaison with Investors complaints departments of stock exchanges to solve trade disputes of investors with brokers. It solves complaints of various natures including: i. Non-transfer of shares/non-payment of funds ii. Unauthorized trading iii. Fraudulent entries, incorrect commission/charges iv. Non-provision of statements/information v. Trading in wrong scripts, not following instructions of the client vi. Dealings with employees and clients (under the name of member/broker) vii. Holding other members account for dues of family members viii. Dispute with another investor ix. Delay in disposition of matter referred to in arbitration and appeals against the award of arbitration x. Private financing arrangements xi. Non-implementation of award announced by panel of arbitrators xii. Conflict of interest in reference to the panel of arbitrators and panel against award of arbitrators xiii. Settlement in reference to defaulted members xiv. Value loss during the period of dispute/claim of compensation Cases usually which usually involve disputes over trade matters are settled through stock exchanges. However, cases which involve regulatory violations are taken directly by BR & ICW. BR & ICW is also answerable if any investor files complaint in any of the legal courts.
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4. Monitoring and Initiation of Actions against Unregistered Brokerage Houses BR & ICW has been assigned the task to monitor and initiate actions against any unregistered or illegal brokerage house. BR & ICW ensures that a brokerage house which obtains membership of any stock exchange doesnt start the trading business without obtaining certificate of registration from Commission.
III.
Market Surveillance, Litigation and Advisory Wing
The Market Surveillance, Litigation and Advisory Wing is responsible for monitoring trading activities at the stock exchanges on realtime basis. The Market Surveillance, Litigation and Advisory Wing keeps a close watch on price movements of scrips, monitors abnormal prices and turnover, detects cases of market manipulation and insider trading and conducts detailed investigations in such cases. In order to foster a fair and transparent market and to ensure the compliance of prevalent regulatory framework, the Market Surveillance, Litigation and Advisory Wing takes an assertive and dedicated approach to identify any misappropriation or potential abuses in the stock markets. The SECP focuses on the detection of sophisticated schemes for market abuse, price manipulation, and insider trading along with brokers operational malpractices to safeguard investors interests. The main functions of Market Surveillance, Litigation and Advisory Wing are: 1. Monitoring and Surveillance of the Trading Activities of all the Market Participants The main function of Market Surveillance, Litigation and Advisory Wing is to monitor and observe all the trading activities of the market participants to keep in check any abnormal behavior and abuses in the market on real-time basis. These mainly involve intentional operational errors of the brokers such as wash trades, blank sales, etc. 2. Ensuring Compliance of the Trading Activities under Provisions of Law Market Surveillance, Litigation and Advisory Wing ensures that all trading activities carried out by market participants are in compliance with the rules and regulations. It detects violation of rules and regulations by market participants such as price manipulation, insider trading, etc. 3. Conducting Investigations/Enquiries on Detection of Market Abuse or Malpractices Whenever any abnormal or suspicious activity is found, Market Surveillance, Litigation and Advisory Wing staff starts investigation to found enough evidence to prove the offense. This investigation can involve obtaining account opening form from broker, bank account statement, etc., of the convicted. 14
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4. Issuance of Warning Letters & Show Cause Notices for Compliance of all the Prevalent Laws Once efficient evidence is found against the convicted, Market Surveillance, Litigation and Advisory Wing starts working towards the compliance of all prevalent laws and issues letter and show cause notice to the convicted.
IV.
Beneficial Ownership Wing
Beneficial Ownership Wing is responsible to monitor the trading activities of specified officers and more than ten percent shareholders of all listed companies in order to protect the interest of small shareholders of the listed companies. Such beneficial owners are discouraged to make windfall gain. Thus, incompliance of Section 222 of the Companies Ordinance every director, chief executive, chief accountant company secretary etc. and every person who is a beneficial owner of more than 10 ten percent of a listed equity security is required to file a return of beneficial ownership on Form-31 within 30 days of the attaining of status of beneficial owner and to report changes in shareholding on Form32 within 15 days of the change. The said returns of beneficial ownership are examined to detect the cases where the gain has been made on account of purchase and sale or sale and a purchase transaction made within the period of six months. Such amount of gain is recoverable as an arrear of land revenue.
V.
Compliance and Inspection Wing
This Wing ensures the compliance of relevant rules and regulations by the Stock Exchanges and other market intermediaries to strengthen the market oversight and enforcement through off-site inspection. The off-site inspection mostly comprises of reporting, as per prescribed format and frequency to the Commission by the regulated entities. Such reports are assessed and analyzed to identify and provide compliance status, which may lead to identify potential high-risk areas. In order to infuse discipline within stock exchanges and their members, the Wing also plans to undertake inspection of books and records of the members of the stock exchanges. On-site inspection entails a detailed and comprehensive review of policies, procedures and internal control systems, established to assure compliance with the rules and regulations and to assess financial health of the entity.
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CHAPTER 3: SPECIALIZED COMPANIES DIVISION
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Specialized Companies Division

The SCD strives to provide a regulatory environment which is conducive for development and promotion of a robust Non-Bank Financial (NBF) Sector. The NBF sector under SCDs preview comprises of Non Bank Finance Companies (NBFCs), Mutual Funds, Pension Funds, Real Estate Investment Trusts, Private Equity Funds, Modaraba Management Companies & Modarabas. The major functions performed by SCD for the NBF Sector include: licensing, registration, regulation, on-site inspection, off-site surveillance and enforcement. The underlying objective is to safeguard the interest of the stakeholders while at the same time facilitate diversification and innovation in products and services of NBF sector.
Wings of Specialized Companies Division

1. 2. 3. 4. 5. Asset Management Companies Wing NBFCs, Litigation and Advisory Wing Modaraba Wing REITS, Pensions and Private Equity Wing Monitoring & Inspection Wing Specialized Companies Division
NBFCs, Litigation and Advisory Wing
Asset Management Companies Wing
Modaraba Wing
REITS, Pensions and Private Equity Wing
Monitoring & Inspection Wing
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1. Asset Management Companies Wing

The Asset Management Companies Wing is entrusted with the responsibility for licensing, registering and regulating Non-Banking Finance Companies (NBFC) engaged in asset management and investment advisory services, and Open-end and Closed-end collective investment schemes (CIS). The wing is active in identifying and implementing policy and reform initiatives. In doing so, the Asset Management Companies Wing develops and maintains constructive and harmonious relationships with market participants.
Regulatory Framework
The governing regulatory framework includes: i) Non-Banking Finance Companies (Establishment & Regulation) Rules, 2003 (the Rules). ii) From Rules 1 to 11 and Rules 36 to 67 of Non-Banking Finance Companies & Notified Entities Regulations, 2008 (the Regulations). iii) The Companies Ordinance, 1984 (the Ordinance) and iv) Circulars and Directives issued by the SECP under the provisions of the Ordinance.
Functions of Asset Management Companies Wing

i) ii) iii) iv) v) By providing no-objection certificates for formation of an NBFC Issuing and renewing licenses to AMCs to provide Asset Management Services and IAs to provide Investment Advisory Services By registering open-end and closed-end mutual funds Monitoring, Inspection and Examining business operation and financial soundness Initiating enforcement actions
i)
By providing no-objection certificates for formation of an NBFC For formation of an NBFC, if has to submit application to Specialized Companies Division, SECP Headquarter Islamabad for obtaining permission to form a NBFC along with the following documents: Form I of the Rules along with all relevant supporting documents Fee with Form I (as per Schedule II of the Regulations) AMC Wing will provide NOC to an NBFC after its requirements are met. After its formation it will incorporate as a public limited company at the concerned CRO.
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Issuing and renewing licenses to AMCs to provide Asset Management Services and IAs to provide Investment Advisory Services After the incorporation of an AMC, it has to submit application to Specialized Companies Division, SECP Headquarter Islamabad for grant of license for to carry out Asset Management or Investment Advisory Services Form II of the Rules along with all relevant supporting documents Fee with Form II (as per Schedule II of the Regulations) AMC Wing will issue license to an AMC after its requirements are met. This license is valid for one year only and has to be renewed from AMC Wing every year.
iii)
By registering open-end and closed-end mutual funds Open-end funds are those funds in which the company can always issue more shares outstanding. This, in effect, adds to the net assets of the company whereas a closed-end fund (or publicly traded mutual fund) is one that is bought and sold just like the shares of a regular stock. The number of shares in a closed-end mutual fund stays fixed. AMC Wing registers both open-end and closed-end mutual funds.
iv)
Monitoring, Inspection and Examining business operation and financial soundness AMC Wing also monitors, inspects and examines business operations and financial soundness of Asset Management Companies.
v)
Initiating enforcement actions Incase of any violation of laws, AMC Wing also initiates enforcement actions against Asset Management Companies.
2. NBFCs, Litigation and Advisory Wing

The NBFCs, Litigation and Advisory Wing is responsible for licensing, regulation and enforcement actions pertaining to Non-Banking Finance Companies (NBFCs) carrying out the business of Investment Finance Services, Leasing Business and Housing Finance Services. Further this wing assists the division in prosecution, litigation and advisory on routine legal matters.
Regulatory Framework of NBFCs

The governing regulatory framework includes:
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Non-Banking Finance Companies (Establishment & Regulation) Rules, 2003 (the Rules). From rules 1 to 35 of Non-Banking Finance Companies & Notified Entities Regulations, 2008 (the Regulations). The Companies Ordinance, 1984 (the Ordinance) and Circulars and Directives issued by the SECP under the provisions of the Ordinance.
Functions of NBFCs, Litigation and Advisory Wing

i) ii) iii) iv) v) Issuing NOCs for formation of new NBFCs Issuing and renewing licenses Approving appointments of chief executives and directors and allowing mergers and acquisitions Initiating enforcement actions Issuing guidelines, circulars, amendments to rules and regulations governing the NBFC sector Issuing NOCs for formation of new NBFCs An NBFC has to take NOC from Specialized Division of SECP for formation of NBFC before incorporation as a public listed company. NBFCs, Litigation and Advisory Wing grant this NOC to such NBFC. ii) Issuing and renewing licenses NBFCs, Litigation and Advisory Wing issues and renew licenses of NBFCs. iii) Approving appointments of chief executives and directors and allowing mergers and acquisitions NBFCs, Litigation and Advisory Wing approves the appointments of chief executives and directors according to Rule 3 of NBFC (Establishment & Regulation) Rules, 2003 and Rule 10 of NBFC & NE Regulations, 2008 in accordance of their fitness and proprietary criteria to be fulfilled by directors and chief executives of NBFCs. iv) Initiating enforcement actions NBFCs, Litigation and Advisory Wing also initiates enforcement actions against NBFCs incase of violation
i)
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Issuing guidelines, circulars, amendments to rules and regulations governing the NBFC sector NBFCs, Litigation and Advisory Wing issues guidelines, circulars, amendments to rules and regulations governing the NBFC sector and other such directives according to Rule 282 D of Companies Ordinance, 1984.
3. Modaraba Wing
The Modaraba Wing is responsible for the registration, authorization, regulation and enforcement of regulatory provisions pertaining to Modaraba Management Companies and Modarabas. All the products and business activities of the Modaraba are approved by the Religious Board with the facilitation of the Modaraba Wing.
Legal Framework
Modaraba Companies and Modaraba (floatation & control) Ordinance was promulgated in 1980 to provide the statutory framework for organizing business enterprises according to the injunctions of Islam. This piece of legislation refined the Modaraba concept and brought it in conformity with the prevalent corporate structure. The Modaraba Companies and Modaraba Rules, 1981 have been framed under the Ordinance. Prudential Regulations for Modaraba Companies were promulgated in 2000 and amended in 2004.
Structure, Formation & Management

Modaraba sector is monitored and regulated by the Registrar (Modaraba Companies and Modarabas), Securities and Exchange Commission of Pakistan and Religious Board. The Mudarib establishes a Modaraba Management Company (MMC) with the approval of the Registrar of Modarabas. No modaraba company shall operate without registration with the Registrar. Modaraba Management Company means a company engaged in the business of floating and managing a Modaraba. Essentially the MMC is the Mudarib and can establish a series of Modarabas for different business ventures with the approval of the Registrar and the Religious Board, bearing in mind that each modaraba is separate and distinct from the other and also from the MMC. The Registrar scrutinizes the application and after he is satisfied, submits it to the Religious Board for approval. The Religious Board is constituted by the Federal Government and the role of its members shall be to examine and review the prospectus of a modaraba and certify that the business undertaken by the modaraba complies with Shariah principles, before the public offer is made. The Registrar may grant authorization certificate to float a modaraba only after clearance of the proposal by the Religious Board.
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Following registration of the MMC, the Mudarib applies to make a public offer of modaraba funds through a prospectus. The Modaraba cannot commence business till the minimum amount stated in the prospectus has been raised, the modaraba certificates thereof have been allotted and a prescribed declaration in this regard signed by Chief Executive has been filed with the Registrar. The Modaraba is a legal person and can sue and be sued in its own name through the MMC, and the assets and liabilities of each modaraba shall be separate and distinct from those of another modaraba as also from those of the MMC.
Functions of Modaraba Wing

i) ii) iii) By registering a corporate body as modaraba company Granting authorization to modaraba company to float and manage modaraba Issuing guidelines and circulars, under Modaraba Ordinance and pertinent Rules By registering a corporate body as modaraba company Modaraba Wing registers a corporate body as a modaraba company after it fulfills certain requirements according to Rule 4 of Modaraba Companies and Modaraba (floatation & control) Ordinance, 1980. ii) Granting authorization to modaraba company to float and manage modaraba Modaraba Wing according to Rule 8 and 11 of Modaraba Companies and Modaraba (floatation & control) Ordinance, 1980 grants authorization to modaraba company to float and manage modarba. For this purpose Modarba Wing also approves prospectus. iii) Issuing guidelines and circulars, under Modaraba Ordinance and pertinent Rules Modaraba Wing also issues guidelines and circulars under Modaraba Ordinance and pertinent rules as and when required.
i)
4. REITS, Pensions and Private Equity Wing

The REITs, Pensions and Private Equity Wing is responsible for licensing, registration and regulation of: (1) REIT Management Companies and REIT Schemes, (2) Pension Fund Managers and Private Pension Schemes and (3) Fund Management Companies and Private Equity and Venture Capital Funds in Pakistan.
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Regulatory Framework of REITs, Pensions and Private Equity

The governing regulatory framework includes: i) ii) iii) iv) REIT Regulations, 2008 Voluntary Pensions Scheme Rules, 2005 Private Equity & Venture Capital Fund Regulations, 2008 Companies Ordinance, 1984
Functions of REITs, Pensions and Private Equity Wing

i) Issuing license to NBFCs ii) Issuing certificate of registration iii) Issuing guidelines and circulars i) Issuing license to NBFCs REITs, Pensions and Private Equity Wing issues license to NBFCs performing the functions of REITs, Pensions and Private Equity ii) Issuing certificate of registration REITs, Pensions and Private Equity Wing issues certificate of registration to the eligible applicants and schemes of REITs, Pension and Private Equity. iii) Issuing guidelines and circulars REITs, Pensions and Private Equity Wing issues guidelines and circulars related to REITs, Pensions and Private Equity as and when required from time to time.
5. Monitoring & Inspection Wing

Monitoring & Inspection wing is primarily responsible for centralized on-site and off-site inspection of the entities licensed and regulated by SCD. On Site Inspection involves centralized on-site inspections of the entities licensed and regulated by SCD. Monitoring and Inspection wing conducts full scope inspections of the entities on regular basis according to the inspection plan chalked out for the entities regulated by the Division. Off-site surveillance involves centralized off-site surveillance of the entities licensed and regulated by SCD. To effectively discharge its functions, the wing obtains monthly online returns from NBFCs/Modarabas and compiles Sector Report. The wing provides its input/recommendations for renewal of NBFCs License and for mergers/acquisitions, to 23
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the Regulation Wings. Off- site surveillance wing also carries out off-site reviews of the entities on the basis of annual, half yearly and quarterly accounts.
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CHAPTER 4: ENFORCEMENT DEPARTMENT
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Enforcement Department
The Enforcement Department is responsible for regulation and enforcement of companies listed on stock exchanges, public un-listed and private companies having paid-up capital of Rs. 7.5 million and above and companies formed under section 42 of the Companies Ordinance, 1984 (except insurance companies, non-banking finance companies and modarabas) with relevant laws and applicable accounting standards through review of accounts, investigation, and prosecution. In case of non-compliances, necessary actions are taken against erring companies, their directors, management and auditors, as appropriate.
Wings of Enforcement Department

The Department is divided into five Wings and each wing is assigned the task of monitoring of companies in the corporate sector. Following are the brief details of each of these Wings:
Listed Companies I, Litigation and Advisory Wing Wing I is assigned the task of enforcement and monitoring of listed companies in the corporate sector. In addition to the companies allocated is also responsible for handling the cases related to the capital issues and Take over Ordinance, investor complaints relating to shares of listed companies. The wing assists the department in prosecution, litigation and advisory on routine legal matters.
Listed Companies Wing II & III Wing II and III are assigned the task of enforcement and monitoring of listed companies in the corporate sector. In addition to the companies allocated to them, Wings II and III are also responsible for handling the cases related to the capital issues and Take over Ordinance. Responsibility of appointment of cost auditors and subsequent compliance with regards to listed companies is with the Wing-III.
Non-Listed Companies Wing - I & II Non-listed Companies Wings I and II are assigned the task of enforcement and monitoring of un-listed and private companies with paid-up capital of not less than Rs 7.5 million and companies registered under section 42. CRO-wise allocation of public unlisted, foreign and private companies registered is as follows: Non-listed Companies Wing I Karachi, Sukkur, Quetta and Islamabad Non-listed Companies Wing II Lahore, Faisalabad, Peshawar and Multan
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Regulatees of Enforcement Department

1. 2. 3. 4. 5. Public Listed Companies* Public unlisted Companies* Private Limited Companies with a paid-up capital of Rs 7.5 million and above* Foreign Companies in Pakistan Companies registered in terms of provisions of sections 42 (Associations not for profit) and 43 (Companies limited by guarantee) of the Companies Ordinance, 1984
* excluding NBFCs and Notified Entities, REIT Schemes, Private Equity and Venture Funds, Modaraba, Insurance Companies and Stock Brokerage Houses
Functions of Enforcement Department

i) ii) iii) iv) v) vi) vii) Enforcement of Corporate Laws Monitoring of submission of reporting requirements and information disclosure to assure companies conduct according to rules and regulations Conducting routine inspections and special investigations and by taking administrative action against wrongdoers Facilitating inflow of capital by permitting issue of shares otherwise than right, preference shares and shares at a discount Providing relaxation of requirements of Companies (Issue of Capital) Rules, 1996 to facilitate equity issue by way of right Proposing and/or amending rules and regulations for authorization/operation/internal control of companies Examination of schemes of mergers, acquisition, take-over and group registration Enforcement of Corporate Laws
i)
The Enforcement Department monitors compliance of listed, un-listed and private companies with applicable laws, rules and regulations. The statutory frame work comprises of: Companies Ordinance, 1984 Companies (Issue of Capital) Rules, 1996 Companies (Audit of Cost Accounts) Rules, 1998 Companies Share Capital (variation in rights and privileges) Rules, 2000 Companies (General Provisions and Forms) Rules, 1985 Group Companies Registration Regulations, 2008 Listed Companies (Substantial Acquisition of voting shares and takeovers) Ordinance, 2002 Listed Companies (Substantial Acquisition of voting shares and takeovers) Regulation, 2008 27
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Monitoring of submission of reporting requirements and information disclosure to assure companies conduct according to rules and regulations
By enforcing corporate laws, the Department ensures timely holding of annual general meetings and circulation of annual and interim accounts to the shareholders, provision of adequate information by companies in the notices to the shareholders in the matter of listed companies. The department ensures that full disclosures are made by companies in their annual audited accounts in accordance with the International Financial Reporting Standards, Companies Ordinance, 1984, Accounting and Financial Reporting Standards (AFRS) issued by Institute of Chartered Accountants of Pakistan (ICAP) for Small and Medium Sized Entities (SMEs) and monitoring compliance with Code of Corporate Governance to minimize corporate abuse. iii) Conducting routine inspections and special investigations and by taking administrative action against wrongdoers
The department initiates and finalizes on-site and off-site inspections of books of accounts and papers of companies under Ordinance and Rules and where required investigate into the affairs of the companies making misrepresentations in financial statements, continuous deprivation of reasonable return to the shareholders and violation of statutory provisions of the Ordinance. iv) Facilitating inflow of capital by permitting issue of shares otherwise than right, preference shares and shares at a discount
Further, applications regarding issuance of Preference shares, shares otherwise than right and shares issued on discount are also dealt by the department in the matter of listed companies only. v) Providing relaxation of requirements of Companies (Issue of Capital) Rules, 1996 to facilitate equity issue by way of right
Enforcement department in order to facilitate equity issue by way of right, provides relaxation to issuers from the requirements of Rule 5 of Companies (Issue of Capital) Rules, 1996. vi) Proposing and/or amending rules and regulations authorization/operation/internal control of companies for
Enforcement department proposes amendments in rules and regulations to improve the operations and internal control of companies. 28
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vii)
Examination of schemes of mergers, acquisition, take-over and group registration
The examination of the schemes of arrangements with regard to mergers, acquisitions takeovers and Group Companies Registration and review of swap ratio calculation is also under the purview of the department in the matter of listed companies.
Process of Examination of Accounts/Returns Companies by Enforcement Department

1. 2. 3. Filing of documents by companies with concerned Registrar/Commission Examination of annual accounts by enforcement department Examination letter send by enforcement department demanding from company explanation incase any discrepancy or violation is found Reply analysis done by Enforcement department Issuance of warning letter to the company Issuance of show cause notice Issuance of Order based on the hearing or
4. 5. 6. 7.
Types of Administrative Sanctions Provided to Companies by Enforcement Department

1. Quarterly account placement on their website 2. Extension in time for holding of AGM pursuant to the provisions of the Ordinance 3. Holding of AGM in town other than registered office of the company is situated in the case of listed companies 4. Loans to Directors 5. Capital Issues 6. Appointment of sole purchase, sale or distribution agent
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9. Grant of exemption from attachment of consolidated financial statements to the financial statements of the company
RELEVANT PROVISIONS ON WHICH ACTION IS TAKEN BY ENFORCEMENT DEPARTMENT

Issue on which Action Taken Section of Companies Ordinance, 1984 under which penalized by Enforcement Department Section 86
Improper issuance of further shares
Non-holding of AGM/EOGM and non-publication Section 158-159 of notices AGM in newspapers Non-disclosure of information in case of special Section 160 business Non-filing of minutes of general meetings and Section 173 directors Non-compliance in appointment of chief executive Unauthorized inter-Corporate financing Investments not held in companies' own name Section 198-204 Section 208 Section 209
Disclosure of interest by director and participation Section 214 and 216 or voting in proceedings of directors Non-disclosure to members of directors interest in Section 218 contract appointing chief executive, managing agent or secretary Irregularities in Utilization of Amount of Security Section 226 & 229 Deposits received from Dealers Irregularities in Provident Fund Section 227 & 229
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Non-cooperation with registrar in inspection of Section 231 books and accounts of a company Wrong treatment of surplus arising out of Section 235 revaluation of fixed assets Non-attachment of consolidated financial Section 237 statements with the accounts of the company Improper issue, circulation or publication of Section 244 balance sheet or profit and loss account Non-circulation of quarterly accounts Dividend to be paid out of profits only Non-compliance by Auditors Default in complying with provisions of Ordinance Making of false/incorrect statements in documents Section 245 Section 249 Section 255-260 Section 472 Section 492
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CHAPTER 5: STRATEGY, DEVELOPMENT, LEGISLATION

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EXTERNAL RELATIONS DIVISION
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Strategy, Development, Legislation and External Relations (SDLER) Division

Strategy, Development, Legislation and External Relations Division (SDLERD) provides strategic analysis on internal and external matters related to the Securities and Exchange Commission of Pakistan (SECP), conducts research to frame policies and procedures for the growth and development of non-banking financial markets and preparation of all draft laws and regulations for the Commission. It has been mandated to prepare roadmaps, in light of international best regulatory and market practices and in consultation with stakeholders, for the development of debt market, derivatives market, commodities and currency exchange, mutual funds, non-banking financial sector including modaraba sector, insurance and equity market. In addition to above, SDLER is the focal point for multilateral agencies, international and local regulatory bodies, implementation of regulatory standards, AML regime, federal and provincial governments, local standard setting bodies, and investor education and complaints. It also maintains close liaison with the print and electronic media for dissemination of information relating to key regulatory measures and initiatives undertaken by the Commission.
Division Structure and its Functions

SDLER Division has been structured in the following manner to better align its functions and responsibilities: 1. Strategy, Development and External Relations Department 2. Legislation and General Counsel Department
1. Strategy, Development and External Relations Department

The Strategy, Development and External Relations Department is divided into following wings: i. Strategy and International Relations Strategy and Development Conduct strategic analysis of internal matters pertaining to the Commission. Conduct research and engage external stakeholders for the growth and development of debt market, mutual funds, non-banking financial sector including Modaraba sector and insurance sector. International Coordination Multilateral agencies: Lead negotiation and coordinate with Asian Development Bank, World Bank, International Finance Corporation, International Monetary Fund, etc. on various projects and programs 33
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Bilateral cooperation: Liaison and oversee bilateral agreements (MOU) with counterpart international regulatory authorities on cooperation, enforcement assistance and information sharing. International Assessments: Coordinate and work on international assessments such as Pakistans Financial Sector Assessment Program (FSAP), Report on the Observance of Standards and Codes (ROSC), Poverty Reduction Program, Asia Pacific Group (APG), etc.
Local standard setting bodies Coordinate with local standard setting bodies like Pakistan Institute of Corporate Governance, Institute of Capital Market, etc. Review Code of Corporate Governance. Implementation of existing SECP Corporate Social Responsibility (CSR) initiatives and assist the Commission in undertaking new CSR initiatives.
ii. Market Development and Investor Education Strategy and Development Conduct strategic analysis of external matters pertaining to the Commission Conduct research and engage external stakeholders for the growth and development of derivatives market, commodities and currency exchanges and equity market. Local Coordination Coordination on correspondence received from Federal and provincial governments, ministries and Parliament. Coordination with local regulatory bodies like State Bank of Pakistan, Federal Revenue Board, Competition Commission of Pakistan, etc. Implementation of AML regime. Matter related to Exit Control List. International Standard Setting Bodies Liaison with and oversee all the work related with regulatory standard bodies like International Organization of Securities Commission (IOSCO), International Organization of Pension Supervisors (IOPS) and International Association of Insurance Supervisors (IAIS) and Financial Action Task Force (FATF) for implementation of AML regime. Investor Education Develop and oversee Commissions investor education and awareness program along with investor complaint database in coordination with the operational divisions.
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Maintain a regular liaison with print and electronic media to provide information on the reforms introduced by the Commission. Organize regular press briefings on various reform measures. Work on the Commissions publications including the Annual Report, quarterly news letter and website. Provision of material for Economic Survey of Pakistan, Report on Quality Assurance Procedures, Report on Principles of Policy, Finance Ministers budget speech, and Prime Minister/Finance Minster messages for different forums.
2. Legislation and General Counsel Department

Legislation and General Counsel Department is divided into following wings: i. Legislation Wing The Commission, at the moment, is administering more than 44 primary and secondary laws. The Legislation Department is entrusted with drafting/amending and vetting all legislation for the Commission. It also provides its input, where sought, on notifications, circulars, directives etc issued by the operational Divisions. In addition, the department examines laws referred to the Commission by the Federal Government for its comments and feedback. ii. General Counsel Wing The General Counsel Wing is responsible to advise the Chairman, Commissioners, Divisions and Departments on any important legal issue referred to them.
Main Achievements of SDLERD

Multilateral Cooperation The Securities and Exchange Commission of Pakistan (SECP) took an important step forward in strengthening cooperation with securities markets supervisors worldwide and become a full signatory to the International Organization of Securities Commission (IOSCO)s Multilateral Memorandum of Understanding concerning Consultation, Cooperation and the Exchange of Information (MMoU). This will give the SECP an edge to combat cross-border crimes and to promote financial stability in the country. Bilateral Cooperation Securities and Exchange Commission of Pakistan (SECP) has been promoting cooperation with counterpart regulatory bodies of the capital market at the international level. SECP has established co-operative arrangements through Memorandum of 35
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understandings (MoUs) with counterpart regulatory authorities of Turkey, India, Maldives, Australia, Bhutan and Sri Lanka, Iran and China. World Bank Assistance for Capacity Building of SECP Under the Institutional Development Fund (IDF), the World Bank (the Bank) approved a grant of US$454,000 for the SECP in November 2005. It has to end in 2008 but at the SECPs request, the closing date of the grant was extended by one year to September 28, 2009. Following is the list of trainings and consultants supported under World Banks grant: i. For capacity building of SECP REITs team, a delegation was sent to the Securities Commission Malaysia. This gave the REITs team an opportunity to study the regulatory practices adopted in Malaysia for Real Estate Investment Trusts (REITs) and to engage in extensive discussions with key players of the real estate market. ii. A Malaysian consultant and an expert in the field was hired to provide training on valuation of properties that would fall under REITs. iii. For the capacity building of the officers of Specialized Companies Division in general and monitoring and inspection team in particular, an international consultant was hired. The consultancy resulted in an intensive training of the officers with regards to issues faced by mutual funds industry worldwide, international best practices in mutual fund management, tools and techniques used for monitoring and inspections, etc. iv. Optimization of SECP Disaster Recovery Solutions and IT, Audit / Governance. v. Consultant was hired for development of courses, syllabus, curriculum and question bank for Institute of Capital Markets. vi. Consultant was engaged to review existing regulatory framework and business models of Credit Rating Agencies to bring these in line with international best practices. vii. 12 Management Development Training Programs (MDP) were conducted for the officers of SECP. IOSCO EMC WG3 The SECP has been chairing the International Organization of Securities Commissions (IOSCO) Emerging Markets Committee (EMC) Working Group (WG) 3, since October 2003 when Pakistan got elected to chair this important international forum for the Regulation of Market Intermediaries with the Financial Supervisory Services (FSS) Korea. Being the co-chair, SECP has prepared an exhaustive set of guidelines through its report Efficient Regulation of Conflicts of Interest Facing Market Intermediaries, which was approved by the EMC on October 15 at the EMC Annual Conference in Istanbul and thereafter published as an IOSCO report.
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ADB Second Generation of the Capital Market Reforms Program ADB funded many projects in Pakistan for hiring of a number of international and local consultants for the development of various areas. The following projects were completed and their final reports were submitted: Harmonization of the regulatory framework governing capital markets in Pakistan for ensuring a rationalized regulatory frame-work submitted. Enforcement Manual and Guidelines outlining the processes and procedures necessary for enforcement actions like inspections, inquiry, investigation, cpecial audits, show cause proceedings, etc, done operational departments. Technical Assistance to ICM to improve public awareness of the Pakistan capital markets, strengthen program offering, develop a forum for business policy roundtables and procure books. International Pension Regulation for establishment of a unified supervisory and regulatory framework for occupational saving schemes for companies. Valuation methodology of corporate bonds and provisioning criteria for nonperforming debt securities for Collective Investment Schemes. Designing the terrorism insurance pool for Pakistan. Examination and recommendations on efficiency of the prevailing risk management regime in Pakistan relating to stock and commodity exchange traded product. Anti-Money Laundering Regime Pakistan has responded timely to the international requirements on countering money laundering and related activities and tremendous progress has been made in strengthening the AML regime both in banking and non-banking financial sectors. The two regulatory bodies, SEC and SBP, pending the enactment of the AML law, have proceeded to strengthen their existing regulatory regimes. The SEC has been in the forefront in adhering to international standards on money laundering and has led the way for other agencies to follow suit. It may be noted that objectives of AML coincide with the objective of SEC i.e., to create a fair, transparent and efficient market.
Future Plans/Targets of SDLERD

Strategic Analysis To review and analyze strategies of SECP at corporate, functional and operational level of all its departments and divisions. Roadmaps for development of various sectors in Pakistan Preparation of one and three year roadmaps for growth, development and outreach of: Debt Market Derivatives Market 37
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Commodities and Currency Exchange Mutual Funds Non-Bank Financial Sector and Modarabas Insurance Equity Market
Investor Education Creation of a comprehensive Investor Education and Awareness program for the SECP. The key components of the program would include: Educational Seminars Dedicated website for Investor Education Investor guides and relevant study material in English and Urdu for enhanced outreach Promotion of financial education through the use of media and social media Creating linkages with othesr Investor Education providers Effective Investor Complaints and Grievance handling procedures Public Dissemination of Enforcement Actions The SECP will set out a standard policy across the Commission for dissemination of enforcement actions. The policy will set out the SECPs approach towards disclosing publicly that an inquiry, investigation and enforcement action is taking place; highlight circumstances as to when such disclosure should be permitted and designate authorized spokespersons for the SECP who will be responsible for such disclosure. SECP Forum To effectively engage policy makers, businessmen, market experts and wider stakeholders in a dialogue for development of fair, orderly and efficient financial markets and a vibrant corporate sector, the SECP has formed the SECP-Financial Markets and Corporate Sector Development Forum (the SECP forum). The purpose of SECP Forum is to effectively achieve market development objectives through engaging major stakeholders and key decision makers in order to solicit their feedback and input on sector specific and policy issues. The areas within the scope of SECP Forum broadly cover financial markets segments such as equity, debt, REITs, mutual funds, commodities and currency futures, investment banks, leasing, modaraba and private equity & venture capital as well as corporatization, long term savings; insurance and private pensions, out-reach expansion of non-banking products, fiscal reforms and regulatory issues. The Forum will convene sessions on a monthly basis inviting participants from wider stakeholders ranging from industry, regulators, academia, media, sector associations, multilateral agencies, market participants, lawyers, chambers of commerce and other important players.
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Memorandum of Understandings (MoU) The SECP is in the process of signing MoU at a bilateral level with Jordan, Oman and Thailand. Further the SECP will also form joint working level committees with jurisdictions where MoUs have previously been signed. Furthermore, the SECP will also look to become a signatory to the International Association of Insurance Supervisors (IAIS) Multilateral Memorandum of Understanding (MMoU). In addition to bilateral MoUs the SECP is also in the process of signing MoUs at a domestic level with the Federal Board of Revenue (FBR) and Competition Commission of Pakistan (CCP). IOSCO Self Assessment The SECP initiated a process of undergoing a self assessment of IOSCOs objectives and principles in 2010 however due to IOSCO revising its principles and adopting a new set of 38 principles, the SECP delayed the assessment and will now undertake its self assessment based on the new IOSCO principles and objectives of securities regulation. Technical Assistance The SECP has made a proposal to seek technical assistance from various donors to conduct research and engage external stakeholders for the growth and development of debt market, mutual funds, non-banking financial sector including Modaraba sector, insurance sector, derivatives market, commodities and currency exchanges and equity market. Strengthening of AML Regime Circulars / directives are being formulated to strengthen the AML/CFT regime in the capital markets and Insurance Industry in light of the recommendations of the Mutual Evaluation Report and international best practices. The circular / directive will mainly focus on: Formulation and placement of a comprehensive CDD / KYC policy duly approved by the Board of Directors. Minimum information / set of documents to be obtained from various types of customers. Verification of the identity of beneficial owner. Guidance on customers being legal persons and Government. Set out rules for verification of documents received. Description of the types of customers that are likely to pose a higher than average risk and guidelines for conducting enhanced due diligence depending upon the customers background, country of origin, public or high profile position, nature of business, etc. Rules for record updation and retention.
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Steps will be taken for capacity building of the regulatees for ensuring the adequacy of internal AML/CFT compliance programs. Awareness generation workshops are being planned to be conducted in collaboration with the FMU for the Insurance Sector. Corporate Social Responsibility The SECP envisages the creation of a Corporate Social Responsibility strategy to enhance its role within the community and undertake new CSR initiatives.
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CHAPTER 6: FINANCE DEPARTMENT
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Finance Department
The Finance of SECP is responsible for directing and controlling the areas of accounting, facilitating overall operations of the SECP and ensuring its smooth functioning. It is responsible for directing and controlling the areas of accounting, treasury management, budgeting and preparation of periodic financial reports of the SECP.
Main Functions of Finance Department

The main functions of Finance Department of SECP are:
1. Maintaining General Accounts

Finance department is also responsible for maintaining proper books of accounts for the SECP. It maintains chart of accounts through Sidat Hyder-Financials which is the Accounting Software of SECP. Further processing in ledger and trial balance is done by that software automatically. Chart of Accounts contains codes of accounts and sub-codes for further explanation of accounts and these sub-codes can go upto the seven levels. Funds are represented by Code 1, liabilities by code 2, assets by code 3, expenses by code 5 and income by code 6. Cost centers are allocated separately in the software. Further access on software is allowed to three main CROs of Karachi, Lahore and Islamabad. Accounting of all the other CROs is done by head office.
2. Replenishing amount in Imprest Accounting

SECP has eight CROs in Karachi, Lahore, Islamabad, Faisalabad, Sukkur, Peshawar, Quetta and Multan. Imprest accounting system has been maintained on all these CROs to fulfill their accounting needs. Petty cash amount is replenished into their accounts when required.
3. Receiving Receipts
SECP is basically not a revenue generating entity but requires adequate funds for its survival. SECP mainly generate revenues from the following sources: i. Fees under Companies Ordinance 1984 ii. Fees under Modaraba Ordinance 1980 iii. Fees under Insurance Ordinance 2000 iv. Brokers Registration Fee (Stock Exchange Brokers & PMEX Brokers) v. Fees on transactions of stock exchanges vi. Non-Banking Finance Companies Fees vii. Credit Rating Companies fees
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For these sources, SECP take receipts through following three types of challans which are submitted on any branch of MCB: i. Pre-print: Pre-print challan is made on a pre-print paper available at banks and SECP CROs offices. ii. Manual: This challan is available on the website of SECP but will be discontinued from December 2011. iii. E-Challan: This challan is totally in electronic form filed through electronic system of SECP. MCB send initial data about the deposits of challan in the early morning of next day of deposits. Finance department uploads this data on the ERP to allow for further processing of cases of challans. Remaining entries which remained unverified are verified after the confirmed data is uploaded in the evening on ERP by finance department.
4. Processing Payments
The Finance Department gives payments to all the employees and other authorized transactions which involve payments for operating expenses such as rent, repairs and maintenance, travelling and lodging, telephone, postage and courier, utilities, printing and stationery, legal and professional charges, fees and subscriptions, human resource development, seminars and conference, insurance, advertisement, entertainment and audit fee, etc., while trying to keep check on the internal control which are explained in Delegation of Financial Authorities (DFA). For payments, it ensures that enough supporting documents including approvals are provided to support a particular payment. Payments are done through petty cash and cheques.
5. Bank Reconciliation
SECP is maintaining its main bank account with MCB in F-7 Super-market Islamabad and has a separate bank account for all of its CROs in different branches of different cities. Every month finance department reconcile its bank statements of all these accounts of different branches and report any discrepancies.
6. Preparing Financial Statements

Finance Department prepares the financial statements of SECP for every quarter, half yearly and at the end of the year and is responsible to get these statements audited by their respective Auditors. It also ensures submission of these financial statements to the Federal Government in a proper and timely manner.
7. Preparing Budgets
Finance Department prepares yearly budgets for each and every cost center of SECP. It starts its exercise of budget making in March of every year while taking into consideration previous year actual and current year actual estimates (9 43
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months actual, 3 months estimates). On basis of these data, finance department make estimates for next year. Budget of each cost center is send to the budget owner (executive directors of the cost center) for providing the estimates. After complete preparation of budget, finance department obtains approval from the Securities and Exchange Policy Board in this regard.
8. Preparing MIS Reports

Finance department compares revenues and expenses occurred from the budgeted estimates of every cost center for each month to monitor actual expenditure against budgeted limits. Monthly Management Information Reports (MIS) Reports are prepared by finance department for this purpose and distributed to budget owners of all cost centers.
9. Treasury Management
Finance department is responsible for the treasury management of SECP. Head Office has to maintain petty cash of Rs.250,000. Everyday finance department prepares the working capital management report. Surplus funds are usually invested in government securities with rating of AAA+ and AAA such as National Saving Bonds, T-bills, treasury bonds, etc.
10. CAPEX Control

In budgeting process, budgets for capital expenditure (CAPEX) are also prepared for each separate cost center. Specific controls have been made for CAPEX and certain approvals are required from authorities. A pre-printed CAPEX form is used for processing and approval of a particular CAPEX. A twenty percent variation from the budgeted amount is expected. However a variation further than this will require further approval. On execution of purchase and receipt of items, the Goods Receiving Note (GRN) is signed and cleared for payment.
11. Taxation
As a withholding agent, SECP withholds WHT tax while making payments to employees and suppliers and deposit this tax amount monthly into the government treasury. This function is performed by finance department who then also gives certificate of income tax deduction to the suppliers whose tax has been withheld by SECP.
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Financial Statement Analysis of Balance Sheet and Profit & Loss Account for years 2006-2010
Horizontal Analysis-Balance Sheet Property, plant and equipment Long term investments Long term loans to employees Current assets Advances, deposits, prepayments and other receivables Short term investments Cash and bank balances Current liabilities Accrued and other liabilities Net current assets Deferred tax liability Deferred grant Net assets Funds General Reserve Assets Acquisition Reserve Accumulated comprehensive surplus/(deficit) of income over expenditure Total Funds 2010 253% 195% 1523% 2009 301% 198% 1332% 2008 191% 1056% 637% 2007 153% 715% 118% 2006 100% 100% 100%
376% 138% 85% 147% 640% 126% -41% 58% 137%
269% 172% 12% 163% 387% 154% 66% 67% 127%
253% 0% 38% 18% 290% 6% 6% 78% 160%
138% 28% 64% 37% 78% 36% 0% 89% 135%
100% 100% 100% 100% 100% 100% 100% 100% 100%
200% 186%
200% 186%
200% 186%
200% 129%
100% 100%
-151% 137%
-221% 127%
1% 160%
84% 135%
100% 100%
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Horizontal Analysis-Income and Expenditure Account Income Fees and other recoveries Other income Expenditure Salaries, allowances and other benefits Operating expenses Depreciation Amortization of premium on Pakistan Investment Bonds Bank charges
2010
2009
2008
2007
2006
107.65% 363.57% 132.72%
89.19% 119.51% 101.07% 100.00% 275.94% 189.87% 147.35% 100.00% 107.49% 126.41% 105.60% 100.00%
227.57% 237.20% 553.59%
190.61% 163.30% 116.66% 100.00% 250.32% 187.76% 174.80% 100.00% 530.44% 288.25% 128.66% 100.00%
115.86% 115.86% 111.10% 98.01% 100.00% 2056.68% 1691.44% 569.52% 666.31% 100.00% 243.31% 221.10% 174.77% 133.04% 100.00%
Excess of income over expenditure Amortization of deferred grant Surplus of income over expenditure before tax
67.03% 2.26% 66.30%
40.00% 2.84% 39.58%
97.68% 2.88% 96.61%
89.31% 100.00% 2.88% 100.00% 88.33% 100.00%
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Vertical Analysis-Balance Sheet Property, plant and equipment Intangibles Long term investments Long term loans to employees Current assets Advances, deposits, prepayments and other receivables Short term investments Cash and bank balances Current liabilities Accrued and other liabilities Net current assets Provision for prior years' taxation Deferred tax liability Deferred liability Deferred grant Net assets Funds General Reserve Assets Acquisition Reserve Accumulated comprehensive surplus/(deficit) of income over expenditure Total Funds
2010 9.34% 0.63% 19.51% 1.05%
2009 12.07% 0.62% 21.48% 0.99%
2008 6.05% 0.64% 90.39% 0.37%
2007 5.73% 0.78% 72.60% 0.08%
2006 5.07% 0.00% 13.73% 0.09%
13.20% 10.25% 73.70% 99.58% 4.75% 0.73% 91.66% 110.56% -15.84% -10.39% 75.82% 100.17%
7.62% 0.00% 1.84% 9.45% -6.16% 3.30%
4.92% 15.20% 3.63% 23.75% -1.97% 21.78%
4.82% 73.29% 7.70% 85.80% -3.40% 82.40%
-5.22% -33.46% 0.00% 0.35% -0.62% -0.04% -1.42% -1.20% -0.64% -0.05% -0.06% -0.06% 100.00% 100.00% 100.00%
0.00% 0.00% 0.00% -1.18% -0.90% 0.00% -0.08% -0.12% 100.00% 100.00%
27.46% 89.24%
29.77% 96.76%
23.51% 76.41%
27.87% 62.70%
18.85% 65.96%
-16.70% -26.54% 0.07% 100.00% 100.00% 100.00%
9.43% 15.19% 100.00% 100.00%
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2010
2009
2008
2007
2006
73.16% 74.85% 85.29% 86.33% 26.84% 25.15% 14.71% 13.67% 100.00% 100.00% 100.00% 100.00%
90.20% 9.80% 100.00%
42.64% 18.25% 6.72% 0.49% 0.22% 68.31% 31.69% 0.01% 31.70% 11.89% -0.71% 11.18% 20.52% -5.61% 14.91%
44.10% 23.78% 7.95% 0.60% 0.22% 76.65%
32.13% 15.17% 3.67% 0.49% 0.06% 51.52% 48.48% 0.02% 48.50% 16.89% 0.09% 16.97% 31.52% 0.00% 31.52%
27.47% 16.90% 1.96% 0.52% 0.09% 46.94% 53.06% 0.02% 53.08% 0.00% 0.00% 0.00% 53.08% 0.00% 53.08%
24.87% 10.21% 1.61% 0.56% 0.01% 37.26% 62.74% 0.72% 63.45% 0.00% 0.00% 0.00% 63.45% 0.00% 63.45%
Excess of income over expenditure Amortization of deferred grant Surplus of income over expenditure before tax Taxation - Current - Deferred Surplus of income over expenditure after tax Provisison for prior years' taxation Surplus/(deficit) of income over expenditure after tax Other Comprehensive surplus/(deficit) of income over expenditure - net of tax Actuarial losses on staff retirement funds Tax credit related to actuarial losses on staff retirement funds Other comprehensive surplus/(deficit) of income over expenditure
0.02% 23.37% 4.44% 1.05% 5.49% 17.87% -63.50% -45.63%
-3.28% 1.15% -2.13%
-1.86% 0.65% -1.21%
0.00% 0.00% 0.00%
0.00% 0.00% 0.00%
0.00% 0.00% 0.00%
12.78%
-46.84%
31.52%
53.08%
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CHAPTER 7: CORPORATIZATION
AND
COMPLIANCE DEPARTMENT
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Internship Report
Corporatization and Compliance Department

One of the important functions of the SECP is the incorporation/registration of companies. This task has been entrusted to the Corporatization and Compliance Department. The Corporatization and compliance department is responsible for administration of the Companies Ordinance 1984, and the rules and regulations made there under along with other relevant laws. The Corporatization and compliance department supervises, coordinates, and monitors the workings of the eight Company Registration Offices (CROs) in Islamabad, Karachi, Lahore, Peshawar, Faisalabad, Quetta, Multan and Sukkur. CROs in different cities of Pakistan perform the primary functions on behalf of the corporatization and compliance department which includes registration of companies, regulating their statutory functions, and monitoring of corporate compliance through examination of statutory returns and accounts.
Wings of Corporatization and Compliance Department

1. Registration, Litigation and Advisory Wing
The Registration, Litigation and Advisory Wing is mainly responsible for supervision of Company Registration Offices (CROs). It monitors the working of CROs with respect to registration of companies, functioning of registered entities in terms of the statutory provisions, regulates corporate compliance and ensures filing of statutory returns by companies. Providing guidance to CROs and the general public and liaison with international organizations and other jurisdictions are also part of the functions of this wing. The wing assists the department in prosecution, litigation and advisory on routine legal matters.
2. Licensing and Regulating Wing

The Licensing and Regulating Wing is mainly responsible for issuance of licenses to not for profit associations under section 42 of the Companies Ordinance, 1984. It also performs investigations into the affairs of companies, inspection of books of accounts, special audits, group companies regulations and liaison with Government agencies.
3. Compliance and Complaints Wing

The Compliance and Complaints Wing is mainly responsible for implementation of cost accounts in related industries, capital issue matters, appeals, review and revision applications, adjudication under the jurisdiction of Corporatization & Compliance Department. A Complaint Cell has also been established within the Wing for efficient and effective disposal of complaints from the general public, corporate sector and investors.
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Internship Report
4. Corporate Legal Framework, Research and MIS Wing

The Corporate Legal Framework, Research and MIS Wing is responsible for undertaking research and preparing publications pertaining to the role of the Corporatization & Compliance Department. Its main tasks include development of corporate legal framework, guidance booklets for awareness and information dissemination on corporate matters. Research is also being carried out to further facilitate the corporate sector through development of standardized memorandum of association for various sectors of the economy. The wing also deals with budget related and CAPEX matters, internal audit reports of CROs and monitoring illegal activities of corporate and non corporate entities. The wing is also responsible for coordinating automation of CROs and the Corporatization & Compliance Department. Some of its many activities are handling e-sevices related matters, development and updating of the Companies Registration and Compliance System, website development and updating, creation of specific MIS reports, dissemination of information to different agencies, and onsite and off-site monitoring of CROs.
Main Functions Department
of
Corporatization
and
Compliance
1. Supervision and Monitoring of CROs 2. Grant of License to Associations Not for Profit 3. Performing Delegated Powers of the Commission 4. Performing Statutory Powers of Registrar of Companies 5. Processing of Appeals, Revision and Review of Applications 6. Liaison with other Jurisdictions 7. Development of Legal Framework 8. Improvement of Facilitation Mechanism including eServices
Regulatees of Corporatization and Compliance Department

1. Private Companies 2. Public Unlisted Companies
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Internship Report 3. Single Member Companies
4. Companies Limited by Guarantee 5. Associations-Not-for-Profit 6. Trade Associations 7. Foreign Companies
Company Registration Compliance Department
Offices
of
Corporatization
and
For the convenience of general public, promoters and directors of companies, SECP has established its eight CROs; one at Federal Capital, four at provincial capitals and three in other major cities i.e. Multan, Faisalabad and Sukkur. The main function of the CROs is to provide services and guidance in connection with the registration of new companies and also to ensure that their directors comply with the statutory requirements as provided under the Companies Ordinance 1984. Online facilities for incorporation of companies and filing of returns have been made available in the CROs. The record of companies maintained by the CROs is public record and the investors, shareholders, creditors and general public, may inspect the record of any company whenever they need and they may also obtain certified copy of any specific document in accordance with the prescribed procedure. The main functions performed by CROs are: 1. Registration of companies 2. Processing of mortgages/charges related matters 3. Issuance of certified true copies 4. Inspection of companies record 5. Issuance of certificate of commencement of business 6. Handling of alterations to Memorandum and Articles of Association 7. Grant of approvals and permissions 8. Examination and recording of statutory returns 9. Adjudication of defaults falling within the jurisdiction of CRO 52
Internship Report
10. Enforcement of compliance 11. Dissolution of companies 12. Implementation facilitation schemes
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INTERNSHIP REPORT

Submitted By Komal Shujaat

SECURITIES AND EXCHANGE COMMISSION OF PAKISTAN

Securities & Exchange Commission of Pakistan

Securities & Exchange Commission of Pakistan

Securities & Exchange Commission of Pakistan

Security and Exchange Policy Board

Securities & Exchange Commission of Pakistan

Security and Exchange Commission

Securities & Exchange Commission of Pakistan

CHAPTER 2: SECURITIES MARKET DIVISION

Securities & Exchange Commission of Pakistan

Securities Market Division

Policy, Regulation and Development Department

Market Supervision and Capital Issues Department

Stock Exchanges, Depository and Clearing Wing (SEDC)

Market Surveillance, Litigation and Advisory Wing Beneficial Ownership Wing

Commodities and Currencies Wing (CC)

Debt Capital Market Wing (DCM)

Securities & Exchange Commission of Pakistan

Policy, Regulation and Development Department (PRDD)

Securities & Exchange Commission of Pakistan

Securities & Exchange Commission of Pakistan

Regulatees (PRDDs) of PRDD

Securities & Exchange Commission of Pakistan

Market Supervision and Capital Issues Department

Securities & Exchange Commission of Pakistan

Broker Registration and Investor Complaints Wing

Securities & Exchange Commission of Pakistan

Securities & Exchange Commission of Pakistan

Market Surveillance, Litigation and Advisory Wing

Securities & Exchange Commission of Pakistan

Beneficial Ownership Wing

Compliance and Inspection Wing

Securities & Exchange Commission of Pakistan

CHAPTER 3: SPECIALIZED COMPANIES DIVISION

Securities & Exchange Commission of Pakistan

Specialized Companies Division

Wings of Specialized Companies Division

NBFCs, Litigation and Advisory Wing

Asset Management Companies Wing

REITS, Pensions and Private Equity Wing

Monitoring & Inspection Wing

Securities & Exchange Commission of Pakistan

1. Asset Management Companies Wing

Functions of Asset Management Companies Wing

Internship Report ii)

Securities & Exchange Commission of Pakistan

2. NBFCs, Litigation and Advisory Wing

Regulatory Framework of NBFCs

Internship Report i) ii) iii) iv)

Securities & Exchange Commission of Pakistan

Functions of NBFCs, Litigation and Advisory Wing

Securities & Exchange Commission of Pakistan

Structure, Formation & Management

Securities & Exchange Commission of Pakistan

Functions of Modaraba Wing

4. REITS, Pensions and Private Equity Wing

Securities & Exchange Commission of Pakistan

Regulatory Framework of REITs, Pensions and Private Equity

Functions of REITs, Pensions and Private Equity Wing

5. Monitoring & Inspection Wing

Securities & Exchange Commission of Pakistan