By Sohail Sarfraz

Copyright brecorder

ISLAMABAD: The Securities and Exchange Commission of Pakistan (SECP) has decided to address all major concerns of companies and Consultants to the Issue (CTIs) under the Companies (Further Issue of Shares) Regulations, 2020.

Under the Companies Act, 2017 (Act), companies may increase their share capital through rights issue, which grants existing shareholders the right to subscribe for additional shares in proportion to their current holdings. Presently, the Companies (Further Issue of Shares) Regulations, 2020 (the ‘Regulations’) require that the board of directors of a company shall ensure that the company issuing right shares and its sponsors, promoters, substantial shareholders and directors do not have overdues or defaults, irrespective of the amount appearing in the report obtained from Credit Information Bureau (CIB).

The SECP has issued a consultation paper to seek comments on the requirement for a company proceeding with the right issue to have a clean CIB, i.e., a CIB with no overdues or defaults, when making the right issue. The objective is to ensure that the regulatory environment supports corporate financing needs for listed companies through the capital market, while adequately protecting the rights of the shareholders.

Removing the clean CIB requirement for companies may allow companies facing liquidity problems to access equity markets rather than being locked out. In many cases, financial distress may be cyclical or temporary (e.g., delayed receivables, commodity price shocks, or seasonal downturns), the SECP proposed.

The SECP documents said that Companies and Consultants to the Issue (CTIs) have conveyed concerns to the SECP that under the existing Regulations, even a minor overdue liability can bar a company from raising capital through right issues. Furthermore, in some instances, a company may have temporary overdues or defaults due to market conditions, operational challenges, or ongoing restructurings, but these do not necessarily indicate long-term insolvency issues.

Also, even in the case of more severe financial distress, shareholders may be willing to bail out a company by putting up necessary financing, which the company, given its condition, may not have access to through normal banking or other channels. The requirement of a clean CIB for such a company, therefore, inhibits a company from revival, restructuring, resumption of operations, and ultimately challenges its survival, even when existing shareholders are committed to supporting the company in such circumstances.

Currently, the clean CIB requirement for an issuing company is required only in case of right issue, while preferential allotments by way of other than right offer and employee stock options are not subject to such a condition. This is foreseen as a major hurdle for right issues, which are otherwise perceived as an equitable method of raising capital in terms of maintaining existing shareholders’ interests.

Copyright Business Recorder, 2025