KPMG Corporate Publication On Significant Changes in COCG 2019

KPMG Taseer Hadi & Co.
Significant Changes in
Chartered Accountants
Listed Companies (Code of
Corporate Governance) Regulations,
2019 as Compared with 2017
Preliminary Independent Director (R.6)/
These regulations are called the Listed
Executive Directors (R.8)
Companies (Code of Corporate Governance) An explanation has been provided in sub-
Regulations, 2019 [“Regulations”] which is regulation (1) which provides that while
made effective from 25 September 2019 vide calculating one-third number, if there is any
SRO 1163 (I)/2019. fraction available, which has not been rounded
up as one, in such case, a company is required
These Regulations in respect of its non- to explain the reasons of it, in its compliance
mandatory provisions, work on “comply and report. In previous regulations there was no such
explain approach” under which companies requirement.
either comply with the requirements or
provide an explanation for not doing so. The
Responsibilities of Board of
directors are to act prudently while making the
decision. Directors [“BOD”] (R.10)
The provisions relating to investment and
We have covered non-mandatory clause in
divestment of funds, nature of loans, and level of
page number 4 along with our comments in
determination of materiality, as provided in
bold regulation 10(3)(vi)(vii) of the previous regulations
Penalty (R.37) has been excluded from the responsibilities of
BOD. The previous regulations has been
Contravention of any of mandatory provisions reproduced below:
namely: regulations 3, 6, 7, 8, 27, 32, 33 and 36
of these Regulations (refer page 3), be punishable The decisions of the board on the material
with a penalty of Rs.5 million and if the transactions or significant matters relating to:
contravention is a continuing one Rs.100,000 per • investment and disinvestment of funds where
day (section 512(2) of the Act). the maturity period of such investments is six
months or more;
Previously the penalty was for non compliance of • determination of the nature of loans and
all the requirements of Listed Companies (Code advances made by the company; and
of Corporate Governance) Regulations, 2017 • that BOD shall define the level of materiality,
[“previous regulations”]. keeping in view the specific circumstances of
the company.
Number of Directorship (R.3)
Conflict of Interest
No person can be a director of a listed company
(including as an alternate director) in more than 7 The previous regulations required that in case if a
listed companies (previously it was 5). director has any conflict of interest on any
transaction in addition to the requirement of
The directorship in listed subsidiaries of a listed section 207 and articles of association of the
holding company shall be excluded. company, the directors were to ensure that the
quorum should have at least two independent
As this provision is now deleted from the new directors – in absence quorum of the meeting
code, we believe that, directorship in listed shall not be considered as present.
subsidiaries of a listed parent will now be It transpires that in wake of difficulties being
counted while calculating the said limit faced by companies this provision has now been
excluded.
© 2018 KPMG International Cooperative ("KPMG International"), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no services to clients. No member firm has any authority to obligate or bind KPMG International or any other member
firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
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Document Classification: KPMG Public

KPMG Taseer Hadi & Co. Significant Changes in
Related party transactions (R.15) Composition of internal audit
It transpires that the previous regulations dealing function (R.31)
with transaction not carried out on arm’s length
basis has been excluded. In these Regulations outsourcing of internal
audit function to any associated company or
It transpires that in view of section 166(1)(f) is associated undertaking of external auditors is
quite exhaustive as it provides that in case where restricted.
a director or number of directors are interested in This is a very positive change as it will enhance
any transaction, in such case, the matter is the independence of external auditors which is
required to be referred to general meeting for its required as per auditing standards.
assent.
Rotation of auditors (R.33)

Determination of remuneration
(R.17) In these Regulations, if a sole proprietorship
audit firm completed five years as external
The previous regulations permitted for the auditors of a listed company, such audit firm
determination of director’s remuneration to should be changed.
engage consultant to recommend appropriate
level of remuneration for approval of the board.
This provision has been excluded.
Directors’ report (R.34)
The composition of directors appearing in
Directors’ Training (R.19) Directors’ Report now also includes the
category of Female director.
In the previous Regulations the directors’ training
was mandatory, however, in these Regulations In sub-regulation 3 of the aforesaid regulation
directors are being encouraged to undertake the companies are encouraged to provide details of
said training. It however requires that 50% of the remuneration of individual directors in annual
directors are required to complete the training by report.
or before 30 June 2020; 75% by 30 June 2021 In previous regulations there was no such
and 100% by 30 June 2022. requirement.
Audit Committee (R.27)

The following have been added in the explanation
of “financial literate”
c) has at least 10 years of experience as

audit committee member; or
d) at least 20 years of senior management
experience in overseeing of financial,
audit related matters.
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Disclosure of significant policies on
website (R.35) List of mandatory provisions
1. This regulation now provides the following list
of significant policies and synopsis of terms Regulation 3 – Deals with number of
of references which may be posted on the directorship in a listed company.
company’s website, namely:
Regulation 6 – Deals with number of
i. communication and disclosure policy;
Independent Director
ii. code of conduct for members of board of
directors, senior management and other Regulation 7 – Deals with number of
employees; Female Director
iii. risk management policy;
iv. internal control policy; Regulation 8 – Deals with number of
v. whistle blowing policy; and Executive Director
vi. corporate social responsibility/
sustainability/ environmental, social and Regulation 27 – Deals with the
governance related policy. constitution, meeting and terms of
references of Audit Committee
vii. brief synopsis of terms of reference of the Regulation 32 – Deals with terms of
Board’s committees including: appointment of external auditor
viii. Audit Committee;
ix. HR and Remuneration Committee; Regulation 33 – Deals with rotation of
x. Nomination Committee; and external auditors including where audit
xi. Risk Management Committee. firm is a sole proprietor
3. key elements of the directors’ remuneration Regulation 36 – Deals with circulation

policy. of Compliance Statement and review by
external auditor
In previous regulations no such list was provided.
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Non- Mandatory Provisions
The non-mandatory provisions of these Regulations Regulation 15 – Deals with placing the details of all
provides discretion to the company either to comply related party transactions before the audit committee
or otherwise explain diversion of good practices in and board and where majority of the directors are
its ‘Compliance Report’ under the “comply or interested in such transactions, placing the matter
explain approach”, which is relatively a new before the general meeting for approval.
concept for good practices in corporate governance. Therefore, RP transactions are not required to be
This new approach has now been accepted and placed before the BOD. RP transactions in which
adopted in many countries – which is contrary to the majority of the directors are interested is not
earlier one-size-fits-all approach. required to be disclosed to the members in the
In the previous regulations all provisions were AGM with an explanation in the compliance
mandatory – certain provisions in these Regulations report. This is the biggest change in the Code by
have been put in non-mandatory category hence its the regulator.
implementation is relaxed, this relaxation may
outwit the newly adopted approach and/or be abused Regulation 18 & 19 – States that all companies
through its flawed implementation. shall make appropriate arrangements to carry out
It may be noted that this SRO has been issued orientation and training for their directors to acquaint
under section 156 read with section 512 of the them with these Regulations, applicable laws, their
Companies Act 2017 [“Act”]. There should be a duties and responsibilities.
clarification from the regulator in respect of the Orientation is no more required with an
penalty if the explanation appended to these non- explanation.
mandatory provisions is not accepted by the
regulator.
Regulation 22,23 & 24 – These provisions deals
The following selected important non-mandatory with the qualification of CFO, Head of internal audit
provisions have been discussed below, namely: and Company Secretary.
Now the same person can be the company
Regulation 9 – States that the chairman and the secretary and the CFO, however, this non-
chief executive officer (CEO) of a company, shall not mandatory non-compliance needs to be disclosed
be the same person. along with the explanation.
Hence, both positions can be held by the same
individual with an explanation. Regulation 28 – Deals with the composition,
meetings and terms of references of human resource
Regulation 14 – States that chief executive officer and remuneration committee.
of a company shall place prescribed significant issues Regulation 31 – Deals with the composition of
for the information, consideration and decision of the internal audit function.
Board or its committees. Regulation 34 – Deals with the contents of
Means that significant issues are not required to directors’ report and publication of directors’ review
be disclosed to the board with an explanation for on the affairs of the company.
non-disclosure.
As stated above, non-mandatory provisions if
supported by an explanation may create space
and may be misused, abused and violated
substance of relation provided under this new
approach.
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Contact us
Karachi Office
Sheikh Sultan Trust Building No. 2
Beaumont Road
Karachi – 75530
Telephone 92 (21) 3568 5847
Telefax 92 (21) 3568 5095
e-Mail karachi@kpmg.com
Lahore Office
351, Shadman–1
Main Jail Road
Lahore 54000
Phone +92 (42) 111 576 484
Fax +92 (42) 3742 9907
E-Mail lahore@kpmg.com
Islamabad Office
Sixth Floor, State Life Building
Blue Area
Islamabad
Telephone 92 (51) 282 3558
Telefax 92 (51) 282 2671
e-Mail islamabad@kpmg.com
www.kpmg.com.pk
The information contained herein is of a general nature and is not intended to address
the circumstances of any particular individual or entity. Although we endeavour to
provide accurate and timely information, there can be no guarantee that such information
is accurate as of the date it is received or that it will continue to be accurate in the future.
No one should act on such information without appropriate professional advice after a
thorough examination of the particular situation.
© 2019 KPMG Taseer Hadi & Co., a Partnership firm registered in Pakistan and a
member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The KPMG name and logo are registered trademarks or trademarks of KPMG
International.
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KPMG Corporate Publication On Significant Changes in COCG 2019

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KPMG Taseer Hadi & Co.

Document Classification: KPMG Public

Rotation of auditors (R.33)

Audit Committee (R.27)

c) has at least 10 years of experience as

Document Classification: KPMG Public

3. key elements of the directors’ remuneration Regulation 36 – Deals with circulation

Document Classification: KPMG Public

Document Classification: KPMG Public

Document Classification: KPMG Public

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