The Securities and Exchange Commission of Pakistan (SECP) has placed new restrictions on the Modaraba companies and also imposed new conditions for providing finance to their customers. In this regard, the SECP released Modaraba Regulations 2021 on Friday.
The commission has issued requirements on certain types of transactions of the Modaraba companies: A modaraba shall not provide finance against equity and debt security issued by it or its group companies or provide finance against unlisted debt security and unlisted equity security. A modaraba company shall not provide finance to any company against equity and debt security of that company or group companies of that company or provide finance against shares in the physical form of a listed company.
A modaraba company shall not take exposure against unsecured debt security or instrument, non-rated debt security or instrument, and debt security or instrument rated below A- by a credit rating agency registered with the Commission. Provided that a modaraba may take exposure against unsecured debt security issued by scheduled banks rated A- and above by a credit rating agency registered with the Commission.
A modaraba company shall not provide finance against shares of the sponsor or major shareholders or certificate holders (issued in their own name or in the name of their close relatives) of a financial institution; (vii) hold shares on an aggregate basis, whether as pledgee or absolute owner, of an amount exceeding 15% of the paid-up share capital of that company or 15% of its own equity, whichever is less.
A modaraba company shall not provide finance to its modaraba company, major shareholders, chief executives, directors, key executives, firms or companies in which it or any of the chief executive, directors, key executives, or their close relatives, as defined in the Companies Act 2017 are interested as a partner, director, guarantor or major shareholder: Provided that finance extended to employees of a modaraba as a part of employee service policy duly approved by the board of directors shall not fall in this category.
A modaraba company shall not allow finance on the guarantee of chief executive, directors, key executives or major shareholders, or by their close relatives; or allow finance to any person for speculative purposes; or make the investment to form a subsidiary company except with the prior approval of the Commission.
A modaraba company shall not hold, deal, or trade-in real estate except for the use of the modaraba itself or where specified by the Commission by notification in the official gazette: Provided that properties acquired by a lending modaraba in satisfaction of its claims shall be disposed of within a maximum period of three years from the date of acquisition.
A modaraba company shall not allow unsecured finances or finances that are not backed by bank guarantees: Provided that the bank providing the guarantee shall have a minimum investment grade credit rating; (xiv) make or hold investments in listed securities other than its own name, and hold its investments in listed securities physically and all the investment in listed securities shall be credited into its CDC account, SECP added.