President Alvi approves amendments in companies’ law to facilitate startups

LAHORE: President Dr Arif Alvi has approved amendments proposed in the companies’ law by the Securities and Exchange Commission of Pakistan (SECP) to facilitate startups, sources confirmed on Saturday.

On January 8, 2020, the SECP, with the objective of promoting growth in the startups sector of Pakistan, had introduced major changes to the companies’ law to facilitate startups.

As per the SECP, “In the third schedule of the Companies Act, the following category was proposed to be added in the definition of startups: i) An entity shall be considered as a startup to a period of 10 years from the date of incorporation/registration; ii) Turnover of the entity for any of the financial years since incorporation/registration is not greater than Rs100 million; and iii) 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.”

The commission clarified that 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 company”.

According to the SECP, amendment in the section 83 — further issue of capital to offer Employee Stock Option Scheme (ESOS) — shall help address employee retention issues as well as other problems being faced by startups.

The commission had proposed that “directors of a private limited company may allot the declined or unsubscribed shares to its employees under ESOS, on such conditions, as may be specified”.

The amendment in the clause 88 — power of a company to purchase its own shares — shall facilitate ESOS option as well as buy back of shares by companies, since they do not have a secondary market. It would also facilitate startups in case any founding member needs to exit from the company by allowing return of shares.

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 by a private company, and shall only be required to maintain and file the documents with the commission not later than two months from the decision to issue such shares, as specified in sub-regulation.

Moreover, under the conditions for ‘issuance of shares with differential rights’, 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 is decided to issue such shares.

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.

The SECP had further proposed addition of a Regulatory Sandbox, which is a tailored regulatory environment to conduct limited scale, live tests of innovative products, services, processes, and/ or business models in a controlled environment for a limited period of time so as to assess their viability to be launched on full-scale, and to determine the compatible and enabling regulatory environment that will be conducive for the innovative solutions.

The Regulatory Sandbox is primarily applicable for new products, services or business models which have not been addressed under existing laws and regulations; or these 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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