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Relaxation in Section 208 & its tax implication - Printable Version

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Relaxation in Section 208 & its tax implication - Star - 07-18-2011

Dear All,

Business Recorder News 16-07-2011


In order to facilitate inter-corporate financing, the Securities and Exchange Commission of Pakistan (SECP) has relaxed the requirements of investments in associated companies for private and investment companies.

The SECP on its mission towards encouraging corporatisation has amended the provisions of Section 208 of the 1984 Companies Ordinance, and has abolished the requirements of the aforesaid provisions of law in case of private companies where no public interest exists.

The SECP had received concerns from various corporate entities that the application of Section 208 on private sector companies is leading to missing investment opportunity at times. Now the directors of the private companies are empowered to make investments and extend loans in their associated concerns. This relaxation will boost the economic activity and improve the financial stability of the companies.

Similarly, the SECP felt that the requirements of Section 208 are not feasible for investment companies whose core business is making investments. Considering that non-banking financial companies and the 2008 Notified Entities Regulations already provide limitations for the investment including investment in companies in which the directors of the asset management companies have interest, application of Section 208 to investment companies appears unjustified.

Therefore, SECP has relaxed investment made by an investment company, as defined in non-banking financial companies and Notified Entities Regulations in accordance with its investment policy given in the prospectus, from the provisions of Section 208. Another significant issue addressed by the SECP is that soliciting shareholders' approval before making routine deposits with associated financial institutions duly licensed by the State Bank of Pakistan, a NBFC duly licensed by the SECP and the Modaraba Management Company mean a cumbersome exercise for the companies.

The SECP, therefore, has done away with the requirements of Section 208 for such companies. However, such companies should ensure that the rate of return should not be less than prevailing market rate of return on similar deposits or borrowing cost of investing company.

Earlier, the SECP through its notification had granted exemption to class of companies from the requirement of Section 208 (1) to the extent of obtaining the authority of special resolution only. However, as per the proviso of Section 208 (1) these companies were required to charge return on investment in the form of loan, not less than the borrowing cost of the investing company.

Various queries have been received from the corporate sector with regard to the aforesaid. The SECP, therefore, in supersession to its earlier notification has notified that for all classes of companies, which have already been granted exemption from passing of special resolution, the matter of charging interest and the rate thereof has been left to companies' discretion.-PR


I wonder almost all the newspapers has released this news but SECP did not issue any notification in this regard.

After Notification from SECP, companies may extend loans to other group/other companies without special resolution and markup. The purpose of posting this thread is discuss the income tax implication of such interest free loans ?