3. Legal Regime
Transparency of the Regulatory System
SECP is the regulatory body for foreign companies in Pakistan. However, SECP is not the sole regulator. Company financial transactions are regulated by SBP, labor by the Social Welfare or Employees Old Age Benefits Institute, and specialized functions are overseen by bodies such as the National Electric Power Regulatory Authority or Alternate Energy Development Board. Each body is overseen by autonomous management but all are required to go through the Ministry of Law and Justice before submitting their policies and laws to parliament or, in some cases, the executive branch. Parliament or the Prime Minister is the final authority for any operational or policy related legal changes.
SECP is technically empowered to notify accounting standards to companies in Pakistan. Pakistan has adopted most, though not all, International Financial Reporting Standards. Though most of Pakistan’s legal, regulatory, and accounting systems are transparent and consistent with international norms, execution and implementation is inefficient and opaque.
Most draft legislation is made available for public comment but there is no centralized body to collect public responses. The relevant authority gathers public comments, if deemed necessary, otherwise legislation is directly submitted to the legislative branch. For business and investment laws and regulations, the Ministry of Commerce collects feedback from local chambers and associations – such as the American Business Council and Overseas Investors Chamber of Commerce and Industry (OICCI). Rather than publishing regulations online for public review, the Ministry relies on stakeholder discussion forums for comment.
Judicial activism addressing enforcement process and regulatory mechanisms is increasing in Pakistan. In January 2018, the Sindh High Court overturned regulatory duties imposed by FBR on the basis that the Finance Minister was not empowered to impose these duties under Section 18(3) of the 2017 Finance Act. Similarly, in February 2018, Pakistan’s Supreme Court took independent action against drug price increases announced by Drug Regulatory Authority of Pakistan (DRAP), declaring the Court will determine annual increase in the price of medicines.
International Regulatory Considerations
Pakistan has bilateral trade agreements with China, Indonesia, Iran, Malaysia, Mauritius, and Sri Lanka, although most are limited to a few hundred tariff lines and do not cover all trade. It is negotiating additional trade agreements with Turkey and Thailand, and is a member of the South Asia Free Trade Area, SAARC, the Central Asia Regional Economic Cooperation (CAREC), and Economic Cooperation Organization (ECO).
Pakistan has been a World Trade Organization (WTO) member since January 1, 1995, and provides most favored nation (MFN) treatment to all member states, except India and Israel. Since 2012, the government has maintained a “negative” list of products that cannot be imported from India. The list contains approximately 1,200 products. Pakistan does not recognize the State of Israel and thus does not trade with Israel.
In October 2015, Pakistan ratified the WTO’s Trade Facilitation Agreement (TFA). Pakistan is one of 23 WTO countries negotiating the Trade in Services Agreement. Pakistan notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade.
Legal System and Judicial Independence
Most international norms and standards incorporated in Pakistan’s regulatory system are influenced by British laws. Laws governing domestic or personal matters are strongly influenced by Islamic Sharia Law. Of the two courts – superior (high) courts and the subordinate (lower) courts – the superior judiciary is composed of the Supreme Court, the Federal Sharia Court, and five High Courts (Lahore High Court, Sindh High Court, Balochistan High Court, Islamabad High Court, and Peshawar High Court), and decisions have national standing. The Supreme Court is Pakistan’s highest court and has jurisdiction over the provincial courts, referrals from the federal government, and cases involving disputes among provinces or between a province and the federal government. Neither the Supreme Court nor a High Court has jurisdiction in matters relating to Pakistan’s Federally Administered Tribal Areas, except in limited circumstances. A 2015 constitutional amendment allows military courts to try civilians for terrorism, sectarian violence, and other charges; this authority was renewed in January 2017 for an additional two years. The government may also use special civilian terrorism courts to try a wide range of cases, not necessarily limited to terrorism, including any crimes involving violence and acts or speech deemed by the government to foment religious hatred, including blasphemy. The lower courts are composed of civil and criminal district courts, as well as various specialized courts, including courts devoted to banking, intellectual property, customs and excise, smuggling, drug trafficking, terrorism, tax law, environmental law, consumer protection, insurance, and cases of corruption. Pakistan’s judiciary is influenced by the government and other stakeholders. The lower judiciary is influenced by the executive branch and seen as lacking competence and fairness.
Pakistan has a written contractual/commercial law with the Contract Act of 1872 as the main source for regulating Pakistani contracts. English decisions, where relevant, are also cited in courts.
Laws and Regulations on Foreign Direct Investment
Pakistan’s investment and corporate laws permit wholly-owned subsidiaries with 100 percent foreign equity in all sectors of the economy. A majority of foreign companies operating in Pakistan are “private limited companies,” which are incorporated with a minimum of two shareholders and two directors registered with the SECP.
While there are no regulatory requirements on the residency status of company directors, the chief executive must reside in Pakistan to conduct day-to-day operations. If they are not a Pakistani national, they are required to obtain a multiple entry work visa. Companies operating in Pakistan are statutorily required to retain full-time audit services and legal representation. Companies must also register any changes to the name, address, directors, shareholders, CEO, auditors/lawyers, etc. to the SECP within 15 days of the change.
To address long process delays, in 2013, the SECP introduced the issuance of a provisional Certificate of Incorporation prior to the final issuance of a No Objection Certificate (NOC). The Certificate includes a provision noting that company shares will be transferred to another shareholder if the foreign shareholder(s) and/or director(s) fails to obtain a NOC.
Pakistan’s judicial system allows specialized tribunals as a means of alternative dispute resolution. Special tribunals are able to address taxation, banking, labor, and IPR enforcement disputes. However, due to an active but weak and inefficient judiciary, most foreign investors include contract provisions that provide for international arbitration to avoid protracted disputes.
Competition and Anti-Trust Laws
Established in 2007, the Competition Commission of Pakistan (CCP) ensures private and public sector organizations are not involved in any anti-competitive or monopolistic practices. Complaints regarding anti-competition practices can be lodged with CCP, which conducts the investigation and is legally empowered to award penalties; complaints are reviewable by the CCP appellate tribunal in Islamabad and the Supreme Court of Pakistan. The CCP appellate tribunal is required to issue decisions on any anti-competition practice within six months from the date in which it becomes aware of the practice. There were no anti-competition investigations involving foreign investors in 2017.
Expropriation and Compensation
Two Acts, the Protection of Economic Reforms Act (1992) and the Foreign Private Investment Promotion and Protection Act (1976), protect foreign investment in Pakistan from expropriation, while the 2013 Investment Policy reinforced the government’s commitment to protect foreign investor interests. Pakistan does not have a strong history of expropriation.
Pakistan is a member of the International Center for the Settlement of Investment Disputes (ICSID). Pakistan ratified the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention) in 2005.
Even so, foreign investors lament the lack of clear, transparent, and timely investment dispute mechanisms. Protracted arbitration cases are a major concern. Pakistan’s Arbitration Act of 1940 provides guidance for arbitration in commercial disputes, but cases typically take years to resolve. To mitigate such risks, most foreign investors include contract provisions that provide for international arbitration.
Pakistan is not a signatory of any treaty or investment agreement in which binding international arbitration of investment disputes is required. With the exception of arbitration, there is no alternative dispute resolution (ADR) mechanism available as a means for settling disputes between two private parties.
In 2008, the Pakistani government instituted a Rental Power Plant (RPP) plan to help alleviate the chronic power shortages throughout the country. The Walters Power International Limited (WPIL) was a participant in three RPP plants and brought the power generation equipment into Pakistan to service these plants. Subsequently, in 2010, the Supreme Court of Pakistan nullified all RPP contracts due to widespread corruption in cash advances made to RPP operators. The Walters Power International Limited settled with the Pakistan’s National Accountability Bureau (NAB) and the Central Power Generation Company Ltd by returning advance payments plus interest. In mid-2012, NAB formally acknowledged that settlement with the WPIL had been made, which under Pakistani law released the WPIL from any further liability, criminal or civil, and should have permitted re-export of equipment.
However, the Government of Pakistan has (a) refused to allow for the plant to be exported so that some salvage value could be obtained, and (b) prevented the plant to operate despite critical need for power in the country. This plant was internationally advertised in a competitive bidding process and went through seven levels of regulatory approvals. Despite repeated efforts by Walters Power, NAB has declined to instruct the appropriate parties to issue a Notice of Clearance to Pakistan Customs to allow the re-export of the equipment. Walters Power alleges that the unreasonable delay in permitting re-export of equipment following settlement constitutes expropriation. The case is still pending with NAB.
Pakistan is ranked 82 of 190 for ease of resolving insolvency rankings in the World Bank’s Ease of Doing Business Report. On average, Pakistan requires 2.6 years to resolve insolvency issues and has a recovery rate of 44.5 percent. In contrast, India is ranked 103 of 190 and on average requires 4.3 years.
Pakistan does not have a single, comprehensive bankruptcy law. Foreclosures are governed under the Companies Ordinance of 1984 and administered by the SECP, while the Banking Companies Ordinance of 1962 governs liquidations of banks and financial institutions. Court-appointed liquidators auction bankrupt companies’ property and organize the actual bankruptcy process, which can take years to complete.
The Companies Ordinance of 1984 regulates mergers and acquisitions. Mergers are allowed between international companies, as well as between international and local companies. In 2012, the government enacted legislation for friendly and hostile takeovers. The law requires companies to disclose any concentration of share ownership over 25 percent. There are no laws or regulations authorizing private firms to adopt articles of incorporation discriminating against foreign investment.
Pakistan has no dedicated credit monitoring authority. However, SBP has authority to monitor and investigate the quality of the credit commercial banks extend.