Association With Charitable And Not-For-Profit Objects Regulations 2018

Association With Charitable And Not-For-Profit Objects Regulations 2018

The New Regulations

The Association with Charitable and Not for Profit Objects Regulations 2018 were issued by the Securities and Exchange Commission of Pakistan (SECP) on 7th June, 2018. They came into force at once, they apply to all companies licensed under section 42 of the Companies Act 2017 and Companies Ordinance 1984 and they have effect notwithstanding anything contained in the Articles, Memorandum, contract, agreement or resolution of the company. The SECP regulates licensing of charitable and not-for-profit companies under authority given to it by sections 512, 42 and 43 of the Companies Act 2017.

The Existing Law on Section 42 Companies

The Companies Act 2017 defines “section 42 companies” as limited companies that are formed “for promoting commerce, art, science, religion, health, education, research, sports, protection of environment, social welfare, charity or any other useful object” (s.42(1)(a)). These companies must apply their profits and all other income to promote their objects – no dividend can be paid out to the company’s members (s 42(1)(b)). Section 42 companies, if registered as public companies, may also be permitted by the SECP to dispense with having to write “Limited” or “Guarantee Limited” with their name (s 42(1)(c)). Therefore, by nature, s.42 companies are limited by guarantee and they may be public or private.

Licensing of Section 42 Companies under Companies Act 2017

Section 42(2) allows the SECP to grant licences for these companies on conditions that the SECP thinks fit. These conditions become part of the Memorandum and Articles of Association of the company. The SECP may revoke the licence under s.42(5) if any of the following occurs:

  1. The company fails to comply with terms and conditions of the licence.
  2. The company fails to comply with requirements of s.42 and any Regulations made thereunder.
  3. Affairs of the company are conducted in a prejudicial manner.
  4. The company defaults in financial reporting and annual returns for two (2) consecutive financial years.
  5. The company acts against the interest, sovereignty, integrity and security of Pakistan.
  6. The number of members falls below three (3).
  7. The company was formed for unlawful and fraudulent purposes.
  8. The company is being run by persons who fail to maintain records, commit fraud or misfeasance, are involved in terrorist activities or money laundering, do not act according to the Memorandum and Articles or fail to carry out directions of the SECP.
  9. The company is not carrying out business or is inoperative for one (1) year.
  10. It is just equitable that the company be revoked.

Structure of the Association with Charitable and Not-for-Profit Regulations 2018

The Regulations consist of four chapters and various forms. Chapter I deals with preliminary matters such as scope and definitions. Chapter II deals with the issuing of licences, while Chapter III with the revocation of licences and winding up of these companies. Chapter IV deals with miscellaneous matters.

The Regulations contain NFP Form 1 (application for a licence) along with Appendices A to E; NFP Form 2 (renewal of licence); NFP Form 3 (appointing a director or Chief Executive Officer, or appointing in case of a promoter wanting to quit as member); NFP Form 4 (transfer of assets to another section 42 company in case of revocation of license); NFP Form 5 (monthly report detailing funds received); and NFP Annexures 1 and 2 (statements for licence and renewal of licence).

Licensing Process

Regulation 4 states that an association wishing to become a s.42 company must send NFP Form 1 to the SECP, along with supporting documents mentioned therein and may apply with one or more objects. The Regulations go beyond the requirements of Companies Act 2017 and state that at least one of the promoters must have adequate experience in the proposed field/s laid down in the objects. Regulation 5 states that upon receiving the application, the SECP will grant a licence in the manner of NFP Annexture 1 under the following conditions:

  1. Promoters, proposed directors and the chief executive officer must comply with the fit and proper criteria in Regulation 10.
  2. All other requirements of grant of licence are fulfilled.
  3. Granting the licence is in the interest of public.
  4. All other conditions the SECP sees fit to impose.

Previously, the licence was granted to these companies for five (5) years but Regulation 5(3) now states that the license shall be granted for a duration of three (3) years only.

In case of refusal of licence, the SECP shall issue the refusal order and give the association a right to be heard. No definition of public interest has been given.

While the Companies Act 2017 allows a section 42 company to be private or public, Regulation 6 has made it compulsory for all new companies that receive a s.42 licence to incorporate themselves as public limited companies under provisions of the Companies Act 2017 within 60 days of receiving such licence, failing which may lead to the SECP revoking it. A prima facie reading of the Regulations leads one to think that existing companies shall remain as how ever they are incorporated, whether public or private. However, it remains to be seen whether SECP will ask existing private s.42 companies to become public as well.

Conditions for Licencing

Apart from and in addition to conditions laid down in Regulation 5, a licence shall be granted under further conditions laid down in Regulation 7. They include the following:

  1. All conditions imposed by the Regulation and additional conditions imposed by the SECP shall be deemed to be included in the Memorandum of the company.
  2. The company shall use all money, property, donations and income for the promotion of its objects – a limited amount of surplus has been allowed to be invested in instruments or securities.
  3. The company shall be a registered as a public limited company with at least three promoters.
  4. Liability of members shall not be less than PKR 100,000 or other amount notified by the SECP.
  5. Each promoter shall donate PKR 200,000 as start-up donation or other amount notified by the SECP, except for entity-nominated or government-nominated members.
  6. Directors and Chief Executive Officer shall only be reimbursed for actual expenses uncured for attending meetings.
  7. Directors and the Chief Executive Officer shall only be paid remuneration if they are full-time employees of the company.
  8. Members of the company and their close relatives cannot be paid any remuneration and this condition is applied till one year after a member quits from the membership of a company. No definition has been given as to who “close relatives” are.
  9. The Memorandum cannot be altered without the permission of SECP.
  10. Patronage of government, authorities or celebrities shall only be claimed after they have consented thereto in writing.
  11. The company shall not function as a trade organization.
  12. The company cannot offend or exploit religious susceptibilities of the public.
  13. The company shall not participate in political campaigns and contribute funds to political parties or individuals.
  14. Promoters shall quit as members only after permission from the SECP.
  15. All new members, directors and the chief executive officer would need to meet the fit and proper criteria in the Regulations. The fit and proper criteria would not apply in case of government nominees.
  16. The company shall not invest in its associated companies or undertakings.
  17. The company shall write itself as “A company set up under section 42 of the Companies Act 2017” on all its letterheads, documents, signboards and communication.
  18. No dividend shall be paid to members or close relatives – all income and profits shall be used for the promotion of the company’s objects.
  19. All licences, permissions and approvals necessary under other statutory regimes shall be obtained to carry out a specific object.
  20. The company will not ask for or accept donations from foreign sources except after obtaining permission from the SECP.
  21. All funds, donations and grants shall be received through proper banking channels. Amounts equal to or less than PKR 20,000 can be accepted in cash.
  22. None of the donations received can be redirected towards entities and individuals designated under the United Nations Security Council’s sanctions list.
  23. The company shall ensure a system of sound internal control.
  24. In addition to registers required to be maintained by the company under the Companies Act 2017, the company shall maintain a register of donors and donations and a register of donees and beneficiaries.
  25. The company shall comply with anti-money laundering laws and counter-financing of terrorism laws.
  26. The company shall comply with any conditions that the SECP sees fit to impose from time to time for grant and renewal.

Renewal of Licence

Regulation 8 deals with the renewal of licence. Application for the licence must be made within three months before expiration of the licence. The application must be made in the manner of NFP Form 2 and sent to the SECP with supporting documents and the original receipt of fee paid. The SECP shall grant renewal of licence to the company on the following conditions:

  1. Directors and the Chief Executive Officer meet the fit and proper criteria laid out in Regulation 10.
  2. Other requirements for renewal are fulfilled.
  3. It is in public interest to renew the licence.
  4. Any other conditions that the SECP may see fit to impose.

If the SECP thinks the company does not fulfill the requirements of the Companies Act 2017 or the Regulations or feels that it is not in public interest that the licence be renewed, it may refuse to renew the licence.

Fit and Proper Criteria

As mentioned above, Regulation 10 lays down the fit and proper criteria each promoter, director, chief executive officer and member must meet. The SECP shall determine fitness and propriety of promoters, directors and chief executives and the company itself shall determine fitness and propriety of members.

Fitness and propriety shall be assessed by taking the following facts in consideration:

  1. The person shall not be found involved in money laundering, terrorist financing and illegal banking activities. Additionally the person should be able to understand the company’s risks, including money laundering and terrorism financing risks in the locations that the company operates.
  2. The persons or companies that they are directors or major shareholders of are not tax defaulters.
  3. The persons or companies that they are directors or major shareholders of have not been found involved in fraudulent or illegal activities.
  4. The person has not been convicted of fraud, breach of trust or offence of moral turpitude in a court of law.
  5. The person has not been actively part of a company which has wound up or whose licence has been revoked due to financial irregularities or malpractices.
  6. The person has not been found involved in anti-state or other undesirable activities.
  7. The person has not been found involved in pyramid and Ponzi schemes.
  8. The person does not have prior overdue payments to a financial institution.
  9. The person should have the necessary experience and qualifications to act as a promoter, director or chief executive officer of the company.

All directors appointed, opted or elected to the Board of Directors shall fulfill the fit and proper criteria and seek permission to act as such from the SECP in the manner of NFP Form 3.

Revocation of Licence

Regulation 11 deals with revocation of the s.42 licence. In addition to grounds laid down in s.42(5), Companies Act 2017 stated above, if the company fails to abide by Regulation 10, fails to get the license renewed in time or violates any provision in the Regulations, the licence may be revoked by SECP by sending a notice in writing to the company’s registered office. The company shall immediately prepare audited financials, from the date of the last audited financials till the date of revocation. The directors shall, within 10 days of the notice by SECP, shortlist and finalise name of the transferee company which has concurred to receive assets of the company. After satisfaction of all debts and liabilities, the assets shall be transferred by agreement and the transferee company shall lay down roles and responsibilities of the transferor and transferee companies, details of assets and mechanism by which the transfer shall take place.

Subsequently, NFP Form 4 shall be sent to the SECP, along with an affidavit of compliance, latest audited financials, a copy of the minutes of the meeting in which the transferee company was shortlisted, a copy of the letter of concurrence from the transferee company, a copy of the agreement for asset transfer and a certificate confirming completion of transfer of assets.

From the Point of View of Stakeholders Other Than the SECP

For companies with charitable objects, the Regulations pose a threat of over-regulation resulting in time-consuming compliance regimes and wasteful form-filling. A standard section 42 company complies with at least 6 different compliance regimes including but not limited to corporate compliance required by the Companies Act 2017, taxation matters, endowment fund trust, provident fund trust and insurance matters involving a significant amount of reporting and returns, annually and monthly.

Licensing requirements are already strenuous. There are high civil and criminal penalties for default in compliance under the company law regime. In addition, internal governance has been complicated since all new charitable companies will need to be registered as public companies under the Regulations which is arguably ultra vires to the Companies Act 2017.

The government is able to monitor assets and income of these companies under the guise of “public interest” without a definition of public interest being circumscribed. Given the current problem with terrorism funding in Pakistan, strenuous regulation seems necessary and has in fact been demanded by the Financial Action Task Force (FATF) but separate rules should exist to deal with the situation targeting specific companies instead of swamping in compliance all charitable companies trying to do genuine work.

Many charitable companies were founded by families who want to work for the company. But families are unable to devote significant time to these companies professionally because the SECP requires that close relatives of Members not be remunerated for their work.

Additional requirements to maintain registers of donors, donations, donees and beneficiaries seems unnecessary as well, since a detailed annual financial reporting mechanism is already in place.

All in all, addition of the SECP’s Regulations to the existing onerous requirements of the Companies Act 2017 will lead to these companies spending a lot of time dealing with compliance and repeated reporting than devoting time to the actual objects of the company.


The views expressed in this article are those of the author and do not necessarily represent the views of or any organization with which she might be associated.

Zokhruf Ahmad

Author: Zokhruf Ahmad

The writer holds an LLM degree, Postgraduate Diploma and Postgraduate Certificate in Commercial and Corporate Law from the University of London with Distinctions in International Investment Law. She has been associated with teaching at the University of London International Programmes for the past 10 years. She currently provides consultancy services to companies, ranging from drafting policy documents, institutional rule-making, overseeing corporate secretarial work and compliance in financial reporting. She is also an Organizer of Legal Hackers Lahore chapter.