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SECP proposes changes in Modaraba Ordinance 1980

ISLAMABAD (January 10 2009): The Securities and Exchange Commission of Pakistan (SECP) has decided to amend Modaraba Ordinance 1980 to empower the registrars for issuing directives, circulars, codes and guidelines to the Modaraba management companies to safeguard the interests of the investors.

The SECP is also planning to introduce the concept of appointment of 'Trustee' for Modarabas through an amendment in the Ordinance. The SECP on Friday referred the draft of Modaraba Companies and Modaraba (Floatation and Control) (Amendment) Bill 2009 to National Assembly standing committee on finance to amend the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980.

The SECP wanted to incorporate three new sections in the Modaraba Ordinance for improving regulatory framework of the Modaraba sector, empowering the commission to issue regulations for this sector. The SECP would be empowered to impose fine up to Rs 100,000 on Modaraba Companies in case of violation of the proposed regulations. In case contravention continues, Rs 1000 per day would also be imposed as fine on the company.

The Bill seeks to empower the Commission to make regulations and to issue directives, circulars, codes and guidelines, for the purposes of the Modaraba Ordinance. It further seeks to empower the registrar to issue directions to the modarabas and modaraba management companies for the purpose of the Ordinance. The proposed amendments would safeguard the interest of the modaraba investors; bring efficiency in the modaraba management through enhanced operational flexibility; and strengthen the non-banking finance companies sector.

According to the proposed bill, yet to be approved by the standing committee, a new section 18A (Power to issue directions) seeks to would be added in the Modaraba Ordinance 1980. The new section 18A seeks to empower the Registrar to issue directions to modarabas and modaraba management companies in the public interest, etc. Presently, the provisions of the Modaraba Ordinance do not provide such power to the Registrar.

The addition of new section 41A “Power to make regulations” would empower the SECP to make regulations and to issue directives, circulars, codes and guidelines, for the purposes of the Modaraba Ordinance. Presently, the Commission does possess the power of making regulations for modarabas.

Similarly, SECP has also proposed addition of a new section 41B and “Power to issue directives, circulars, codes, guidelines, etc. The addition seeks to empower the Commission to issue such directives, circulars, codes, guidelines or notifications as are necessary to be issued in the public interest. Presently, the Modaraba Ordinance does not contain such provisions empowering the Commission for this purpose.

To remove the practical difficulties and redundancies, the SECP is in the process of finalising a comprehensive review/amendments of the Modaraba Ordinance, including various amendments. The Commission is also planning to introduce the concept of appointment of “Trustee” for Modarabas through amendment in the Modaraba Ordinance. All these amendments will be moved through the Ministry of Finance, subsequent to this Bill. The views of the industry association (Modaraba Association of Pakistan) and the stakeholders have been solicited for the purpose.

Details revealed that the Modaraba Companies and Modaraba (Floatation & Control) Ordinance was promulgated in 1980 to provide the statutory framework for organising business enterprises according to the injunctions of Islam. The Modaraba Companies and Modaraba Rules were framed later in 1981.

Modaraba is a kind of partnership, wherein one party provides finance to the other for the purpose of carrying business. The party, who provides the finance, is called the “Rabb-ul-Mal”, whereas the other party who puts its management skills for the Modaraba is called the “Modarib” (working partner).

Initially the Modarib is required to establish and incorporate a Company under the Companies Ordinance, 1984. After incorporation of the Company, the Modarib applies for registration of the Company as a Modaraba Company (MC) with the Registrar of Modaraba, SECP. After the registration the MC floats a Modaraba which is thereafter listed on the stock exchanges.

The rules/regulations and the regulatory framework applicable to Modaraba and the Modaraba Companies included Modaraba Companies and Modaraba (Floatation & Control) Ordinance, 1980. The Modaraba Companies & Modaraba Rules, 1981. Prudential Regulations for Modaraba.

FOLLOWING IS THE TEXT OF THE PROPOSED BILL WHEREAS it is expedient further to amend the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980 (XXXI of 1980) for the purpose hereinafter appearing;

It is hereby enacted as follows:-

1. Short title and commencement – (1) This Act may be called the Modaraba Companies and Modaraba (Floatation and Control) (Amendment) Act, 2008.

(2) It shall come into force at once.

2. Insertion of new sections, Ordinance XXXI of 1980. In the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 2008 (XXXI of 1980), the following amendments shall be made, namely: –

(i) After section 18, the following new section shall be inserted, namely:-

“18A. Power to issue directions:- (I) Notwithstanding anything. contained in any other provision of this Ordinance, where the Registrar is satisfied that it is necessary and expedient so to do –

a) in the public interest; or

b) to prevent the affairs of any Modaraba from being conducted in a manner detrimental to the interest of holders of Modaraba Certificates; or

c) to secure the proper management of any modaraba generally,

He may issue such directions to a modaraba company or the modaraba companies generally, as he may deem fit, and the modaraba company or its management shall be bound to comply with such directions.

(2) The Registrar may, on a representation made to him or on his own motion, modify or withdraw any direction issued under sub-section (1), and in so modifying or cancelling any direction may impose such conditions as he thinks fit.”

(ii) after section 41, the following new sections shall be inserted, namely: -.

“41A. Power to make regulations.- (1), The Commission may, by notification in official Gazette, make 'such regulations as are necessary to carry out the purposes of this Ordinance:

Provided that the power to make regulations conferred by this section shall be subject to the condition of previous publication and before making any regulations the draft thereof shall be published in the manner considered most appropriate by the Commission for eliciting public opinion thereon within a period of not less than fourteen days from the date of publication.

2) Any regulation made under sub-section (1) may provide that a contravention thereof shall be punishable with a fine which may extend to one hundred thousand rupees and, where the contravention is a continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which such contravention continues.

41B Power to issue directives, circulars, codes, guidelines, etc. The Commission may issue such directives, circulars, codes, guidelines or notifications as are necessary to carry out the purposes of this Ordinance and the rules and regulations made thereunder.”

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