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SECP Proposes Major Amendments to Companies Act to Assist Startups

The Securities and Exchange Commission of Pakistan (SECP) has proposed amendments to the Companies Act, aimed to simplify the incorporation process and facilitating startups.
According to the draft, SECP’s plans to promote growth in the startup sector of Pakistan, which is why it is necessary to make relevant changes in Company Law to facilitate the incorporation process and provide a conducive regulatory environment.
Here are the proposed changes in the Parent legislation (Companies Act):

Definition of Startups

The draft stated that in the third schedule of the Companies Act, the following category is proposed to be added:

An entity shall be considered as a Startup:
  • Up to a period of 10 years from the date of incorporation/registration.
  • Turnover of the entity for any of the financial years since incorporation/registration is not greater than 100 million rupees.
  • The entity is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.
In addition, an entity formed by splitting up or reconstruction of an existing entity or a separate company with similar objects and ownership shall not be considered a startup.

Amendment in Section 83

Through this amendment, further issue of capital to offer “Employee Stock Option Scheme (ESOS)” shall help address the employee retention and reward issues being faced by startups.
The following new proviso is proposed to be added:
Provided that the directors of a private limited company may allot the declined or unsubscribed shares to its employees under “Employees Stock Option Scheme”, on such conditions, as may be specified.

Amendment in Clause 88

The amendment in clause 88 “Power of a company to purchase its own shares” shall facilitate the ESOS option and shall facilitate buyback of shares by companies, since they do not have a secondary market.
It will also facilitate startups in case any founding member needs to exit from the company by allowing the return of shares to a company.

Changes Required in Companies (Further Issue of Shares) Regulations 2018

The proposed amendment in the clause 7 “Application to the Commission for issue of shares other than right” is a consequential change whereby no application for approval shall be required to be made to the commission under section 83 of the act by a private company, and shall only be required to maintain and file the documents with the commission no later than two months from the decision to issue such shares, as specified in sub-regulation.

Conditions for Issuing shares With Differential Rights

The draft further stated that the requirement for the company not defaulted in filing financial statements and annual returns for three financial years immediately is being changed to the preceding financial year in which it decided to issue such shares.
Furthermore, for a private limited company, the valuation mechanism of non-cash consideration and further conditions, if any, will be amended in Companies (Further Issues of Shares) Regulations 2018.

Introduction of a Regulatory Sandbox

The regulator shared more info about the Regulatory Sandbox, which was introduced earlier.
SECP had introduced the ‘Regulatory Sandbox Environment’ for companies to conduct limited scale live tests of new products, services or business models in a controlled environment. The objective of these guidelines is to purposefully meet the above.
The regulatory sandbox is primarily applicable for new products, services or business models which have not been addressed under existing laws and regulations, or if the new ideas bring an innovative approach to the market and there exists considerable uncertainty in terms of unexpected adverse outcomes or existing regulatory framework does not fully address the solutions proposed to be experimented through the regulatory sandbox.

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