Introduction :

Companies, in order to expand their business, increase profits and undertake

innovative projects, sometimes opt to invest in associated companies and
undertakings. However there may arise certain situations in which the investment
may not be as rewarding as appears and have potential damaging effects on
overall profitability. Sometime, interested parties may manipulate the transaction
for their own interests, putting the ordinary shareholders/members to
disadvantage. Therefore, in order to curb any such attempt and to safeguard
interests of shareholders/members, law provides certain restrictions and
conditions in investment in associated companies and undertakings.

In Pakistan also, Companies Act, 2017 (2017 Act) adequately addresses this
matter. Section 199 of 2017 Act and regulations made there under provide the
law, procedure and disclosure requirements for investment in associated
companies and undertakings.

Before discussing the details of the procedure, it is imperative to know how

associated companies and undertakings are defined.

Associated Company :

“Associated companies” and “Associated undertakings” mean any two or more

companies or undertakings, or a company and an undertaking, interconnected
with each other in the following manner :

1. The companies or undertakings are under common management or control

or one is the subsidiary of another.
2. The undertaking is a modaraba managed by the company.

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 3. An owner, partner, director or other person, directly or indirectly, holding
or controlling shares (including shares held or controlled by the spouse or
minor children of the person) with at least 20% voting power in a company
or undertaking is also owner, partner, director or holding or controlling
shares with at least 20% voting power in the other company or
undertaking.1

Associated Person :

A person who is the owner of or a partner or director in a company or

undertaking or, who so holds or controls shares carrying not less than ten percent
of the voting power in a company or undertaking, shall be deemed to be an
"associated person"2.

Investment in Associated Companies :

 A company shall not make any investment in any of its associated

companies or associated undertakings except under the authority of a
special resolution which shall indicate the nature, period, amount of
investment and terms and conditions attached thereto3.

Investment :

1
Section 2 of Company Act 2017
2
Section 2 of Company Act 2017
3
Section 199 sub (1) of Company Act 2017

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In order to provide the law and regulate investment in associated companies and
undertakings, 2017 Act specifies the activities that will be considered as
investment. These activities include equity, loans, advances and guarantees, by
whatever name called. However, if the amount due is a normal trade credit,
arising out of an arms-length trade transaction and is in accordance with the
trade policy of the company, such transactions shall not be treated as investment
for the purpose of application of section 199. 4

 The company shall not invest in its associated company or associated

undertaking by way of loans or advances except in accordance with an
agreement in writing and such agreement shall inter-alia include the terms
and conditions specifying the nature, purpose, period of the loan, rate of
return, fees or commission, repayment schedule for principal and return,
penalty clause in case of default or late repayments and security, if any, for
the loan in accordance with the approval of the members in the general
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meeting.
 The Commission may :
(a) by notification in the official Gazette, specify the class of companies or
undertakings to which the restriction provided in sub-section (1) shall not
apply
(b) through regulations, specify such disclosure requirements, conditions
and restrictions on the nature, period, amount of investment and terms
and conditions attached thereto, and other ancillary matters.6

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Section 199 of Company Act 2017
5
Section 199 sub (2) of Company Act 2017
6
Section 199 sub (3) of Company Act 2017

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The Securities and Exchange Commision of Pakistan :

1. The Commission shall exercise such powers and perform such functions as
are conferred on it by or under this Act.

2. The powers and functions of the Commission under this Act shall be in
addition to and not in derogation to the powers and functions of the
Commission under the Securities and Exchange Commission of Pakistan Act,
1997 (XLII of 1997) 7 which states that :

“ its purpose is for the beneficial regulation of the capital markets,

superintendence and control of corporate entities and matters connected with
them”8.

The Securities and Exchange Commission of Pakistan (SECP) will make it

mandatory for the directors of investing company to present a special resolution
for making investment in an associated company and certify that due diligence
has been carried out for the proposed investment. The SECP has issued draft
Companies (Investment in Associated Companies or Associated Undertakings)
Regulations, 2017. It said that the directors of the investing company while
presenting the special resolution for making investment in an associated company
or associated undertaking shall certify to the members of the investing company
that they have carried out necessary due diligence for the proposed investment
before recommending it for members' approval and in case of investment
through loans, advances, etc, shall further certify that the financial health of the
associated company or associated undertaking is such that it has the ability to

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Section 7 of Company Act 2017
8
The Securities and Exchange Commission of Pakistan Act, 1997 (XLII of 1997)

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repay the loans, advances, etc, as per the agreement. Unless otherwise
specifically authorized by the members in the general meeting the special
resolution authorizing investment in an associated company or associated
undertaking shall be valid for a period of twelve months and shall stand lapsed
after such period.9

In case of investment though loan / advance, written agreement shall contain the
repayment plan, and rate of return which shall not be less than the borrowing
cost of the investee. Further directors of the investing company shall certify that
the investment is made after due diligence and financial health of the borrowing
company is such that it has the ability to repay the loan as per the agreement.
Due Diligence shall be made available to members for inspection during the
meeting.

Notice of Meeting and Information to Members for Passing of Special

Resolution:

In a General Meeting called for considering decision for investment in Associated

Companies or Associated Undertakings, the information required to present to
the members is defined under chapter II of the regulations. Regulations require
disclosure of the information to the members of the investing company in 03
categories, the extracts of which are as follows: –

1 – General Disclosures:-

1. Basis of relationship

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(Investment in Associated Companies or Associated Undertakings) Regulations Draft S. R. O. 1240(I)/2017 dated
December 06, 2017 issued by SECP.

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2. Earnings per share for the last three years ;

 Break-up value per share, based on latest audited financial statements;

1. Financial position, including main items of statement of financial position

and profit and loss account on the basis of its latest financial statements;
and

2. In case of investment in relation to a project of associated company or

associated undertaking that has not commenced operations, following
further information, namely ;

1. Description of the project and its history since conceptualization;

2. Starting date and expected date of completion of work;

3. Time by which such project shall become commercially operational;

4. Expected time by which the project shall start paying return on

investment; and

5. Funds invested or to be invested by the promoters, sponsors,

associated company or associated undertaking distinguishing
between cash and non-cash amounts;

3. Maximum amount of investment to be made

 Purpose, benefits likely to accrue to the investing company and its

members from such investment and period of investment;

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  Sources of funds to be utilized for investment and where the investment is
intended to be made using borrowed funds, justification for investment
through borrowings;

1. Detail of collateral, guarantees provided and assets pledged for obtaining

such funds; and

2. Cost benefit analysis,

3. Salient features of the agreement(s), if any, with associated company or

associated undertaking with regards to the proposed investment,

 Direct or indirect interest of directors, sponsors, majority shareholders and

their relatives, if any, in the associated company or associated undertaking
or the transaction under consideration; and

 In case any investment in associated company or associated undertaking

has already been made, the performance review of such investment
including complete information/justification for any impairment or write
offs; and any other important details necessary for the members to
understand the transaction;

2 – Disclosures in case of Equity Investments :

Following disclosures in addition general disclosures shall be made:

1. Maximum price at which securities will be acquired;

2. In case the purchase price is higher than market value in case of listed
securities and fair value in case of unlisted securities, justification thereof;

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  Maximum number of securities to be acquired;

1. Number of securities and percentage thereof held before and after the
proposed investment;

2. Current and preceding twelve weeks’ weighted average market price where
investment is proposed to be made in listed securities; and

3. Fair value determined by a person having such qualifications and

experience and registered as a valuer in such manner and on such terms
and conditions as may be specified by the Commission.

3 – Disclosure for investments in the form of loans, advances and guarantees;

Following disclosures in addition general disclosures shall be made:

1. Category-wise amount of investment;

2. Average borrowing cost of the investing company, the Karachi Inter Bank
Offered Rate (KIBOR) for the relevant period, rate of return for Shariah
compliant products and

 Rate of return for unfunded facilities, as the case may be, for the relevant
period :

1. Rate of interest, mark up, profit, fees or commission etc. to be charged by

investing company;

2. Particulars of collateral or security to be obtained in relation to the

proposed investment;

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 3. If the investment carries conversion feature i.e. it is convertible into
securities, this fact along with terms and conditions including conversion
formula, circumstances in which the conversion may take place and the
time when the conversion may be exercisable; and

 Repayment schedule and terms and conditions of loans or advances to be

given to the associated company or associated undertaking.

Listed company shall simultaneously dispatch a copy of aforesaid notice and the
statement of material facts to the head office of the Securities and Exchange
Commission of Pakistan, through fax or email and courier service on the same day
it is dispatched to the members.

The directors of the investing company while presenting the special resolution for
making investment in an associated company or associated undertaking shall
certify to the members of the investing company that they have carried out
necessary due diligence for the proposed investment before recommending it for
members’ approval.

In case any decision to make investment under the authority of a resolution

passed is not fully implemented in line with the approval of members till the
holding of subsequent general meeting, the status of the decision shall be
explained to the members through a statement having the following details
namely,-

(a) total investment approved;

(b) amount of investment made to date;

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(c) reasons for deviations from the approved timeline of investment, where
investment decision was to be implemented in specified time; and

(d) material change in financial statements of associated company or associated

undertaking since date of the resolution passed for approval of investment.

MAINTENANCE OF RECORD

An Investing company shall maintain a register in the specified Form (as

prescribed under these regulations) and shall enter therein the particulars of its
investments in associated company or associated undertakings.10

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(Investment in Associated Companies or Associated Undertakings) Regulations Draft S. R. O. 1240(I)/2017 dated
December 06, 2017 issued by SECP.

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