Draft Leasing Companies (Establishment and Regulation) Rules, 2000

4February 18, 2000

Draft Leasing Companies (Establishment and Regulation) Rules, 2000

SECURITIES & EXCHANGE

COMMISSION OF PAKISTAN

Islamabad

S.R.O. The following draft of the Leasing Companies (Establishment and Regulation) Rules, 1999 proposed to be made in exercise of powers conferred by section 506 of the Companies Ordinance, 1984 (XLVII of 1984) read with the Finance Division Notification No.S.R.O.698(I)/86, dated the 2nd July, 1986 is hereby published as required by sub-section(1) of section 506 of the said Ordinance for information of all persons likely to be affected thereby and notice is hereby given that the draft will be taken into consideration after fifteen days of its publication in the Official Gazette.

Any objection or suggestion which may be received from any person in respect of the said draft before the expiry of the said period will be considered by the Commission.

DRAFT LEASING COMPANIES (ESTABLISHMENT AND REGULATION) RULES, 2000

S.R.O. In exercise of the powers conferred by section 506 of the Companies Ordinance, 1984 (XLVII of 1984), read with the Finance Division Notification No.S.R.O. 698(I)/86, dated 2nd July, 1986, Securities & Exchange Commission of Pakistan hereby makes the following rules, namely:

DRAFT LEASING COMPANIES (ESTABLISHMENT AND REGULATION) RULES, 2000

1. Short title and commencement:- (1) These rules may be called the Leasing Companies (Establishment and Regulation) Rules, 2000

(2) They shall come into force at once.

2. Definitions:- In these rules, unless there is any thing repugnant in the subject or context.-

(a) “Certificate of investment” means a certificate of investment issued by a leasing company under these Rules,

(b) “Commission" means the Securities and Exchange Commission of Pakistan established under Securities and Exchange Commission of Pakistan Act (Act No. XLII of 1997);

(d) "Documents" include vouchers, bills, promissory notes, securities for leases, advances and claims by or against the company and other documents supporting entries in the books of the leasing company;

(e) "Equity" includes paid up share capital, free reserves, unappropriated profits and subordinated loans excluding deffered tax reserves;

(f) "Exposure/Facilities" include fund based and non fund based facilities.

(g) "Form" means the Form annexed to the Rules;

(h) "Government Securities" include such types of Pakistani rupee obligations of the Federal Government or of a Corporation wholly owned or controlled, by the Federal Government or Provincial Government and guaranteed by the Federal Government as the Federal Government may by notification in the Official Gazette, declare to the extent determined from time to time, to be Government securities

(i) "leasing company" means a company engaged wholly in the business of leasing or which invests in such business at any one time an amount equivalent to at least seventy percent of its assets.

Provided that cash and bank balances and investment in government securities shall be excluded to calculate investment in leasing business for purposes of this definition;

(j) "Lease Key Money" means lease security deposit;

(k) "Major Shareholder" means any person holding 5% or more of the paid-up share capital;

(l) "NBFI" means a Non-Bank Financial Institution and includes a DFI, Modaraba, Leasing Company, Housing Finance Company, Investment Bank, Discount House and Venture Capital Company.;

(m) “Ordinance” means the Companies Ordinance, l984 (XLVII of l984);

(n) "Person" includes an individual, a Hindu undivided family, a firm, an association or body of individuals whether incorporated or not, a company and every other juridical person;

(o) "Records" includes ledgers day books, cash books and all other manuals or magnetic records used in the business of the leasing company;

(p) "Small Entrepreneurs" mean individuals, firms and private limited companies having fixed assets excluding land and building of the value of not more than Rs. 20 million; and

(q) the words and expressions used in these rules but not defined shall have the same meanings as are assigned to them in the Companies Ordinance, 1984 (XLVII of 1984).

3. Eligibility conditions for the establishment of a leasing company:- A leasing company may be established if each of its sponsors, proposed directors, chief executive and chairman of the Board of Directors fulfills the following terms and conditions, namely:-

(a) he has not been associated with any illegal banking business, deposit taking or financial dealings;

(b) he and companies in which he is a director or major shareholder, have no over-due loans or installments outstanding towards banks or NBFIs;

(c) neither he nor the companies in which he is a director or major shareholder has defaulted in the payment of taxes as on the date of application;

(d) he has not been sponsor, director or chief executive of a defaulting cooperative finance society or finance company;

(e) he has never been convicted of fraud or breach of trust or of an offense involving moral turpitude or removed from service for misconduct;

(f) he has neither been adjudged as insolvent nor suspended payment of his debts nor has compounded with his creditors; and

(g) except for a nominee director, his net-worth is not less than twice the amount to be subscribed by him personally;

4. Permission to form a leasing company:- (1) A person desirous of forming a leasing company shall make an application to the Commission in Form-I providing information as given in Annexure thereto, alongwith all the relevant documents and receipt evidencing the payment of non-refundable processing fee amounting to one hundred thousand rupees.

(2) The Commission may, if it is satisfied that the persons seeking permission to form the leasing company has fulfilled the terms and conditions specified in rule 3, permit by an order in writing the establishment of a leasing company to such person.

(3) The permission granted under sub-rule (2) shall be valid for a period of six months unless extended for a maximum period of three months under special circumstances, on the application of the promoters made before the expiry of said six months.

5. Conditions for grant of licence:- A leasing company shall not be granted licence unless it fulfills the following conditions, namely;

(a) it is incorporated as a public limited company under the Ordinance;

(b) it has a minimum paid-up share capital of two hundred million rupees;

(d) its promoters and directors have given undertaking that they shall not dispose of their shares for a minimum period of three years except with the prior approval of the Commission;

(e) appoint its chief executive who does not holds such office in any bank or Non-Banking Financial Institution or insurance company;

(f) it has given an undertaking that no change in the Memorandum of Association and in the directors shall be made without prior authorisation of the Commission and that all conditions of rule 3 shall be complied with; and

(g) it has given undertaking that the conditions of operation set out in these Rules or specified by special order of Commission shall be complied.

6. Commencement of leasing operations:- (1) A leasing company shall commence business and its operations only after it has been issued a licence under these rules.

(2) A leasing company shall make an application for obtaining a licence in Form-II.

(3) The licence to carry on business as a leasing company shall be granted by the Commission in Form-III.

(4) Without prejudice to the terms and conditions set out in rule 7, the Commission may while granting licence or subsequently impose any other conditions as it may deem necessary.

7. Terms and conditions of operation:- A leasing company shall operate in accordance with the following conditions, namely:-

(1) It shall -

(i) invest its assets in leasing business as provided in rule 2(i);

(ii) appoint its chief executive and at least one of the directors having senior management level experience in financial preferaly in leasing sector for at least five years ;

(iii) appoint its chief accounting officer who is a chartered accountant or FCMA or a person having Master’s Degree in Commerce or Business Administration with finance specialisation and experience of at least seven years of accounting in a responsible position;

(iv) discolse all facilities exceeding 30% of its paid up share capital and free reserves in its accounts;

(v) maintain accounts of leasing operations having regard to the International Accounting Standard No. 17.

(vi) create reserve fund to which shall be credited:

(a) An amount not less than 20% of its after tax profits till such time the reserve fund equals the amount of the paid up capital; and

(b) Thereafter, a sum not less than 5% of its after tax profits:

Explanation: Issuance of bonus shares shall only be made from the reserves available after appropriation created under clause (b). Since such bonus shares will increase the paid up capital, the leasing company be required to transfer further amounts to the reserves in order to comply with condition of clause (a).

(vii) ensure, while granting any facilities, that total facilities availed by any borrower/lessee from Non-Bank Financial Institutions and Banks does not exceed 10 times of the equity of the borrower/lessee and obtain copy of accounts relating to the business of each of its borrower/lessee for analysis and record in the following manner:-

(a)	Where the exposure exceeds Rs. 10 million.	Accounts duly verified by a practicing Chartered Accountant.
(b)	Where the exposure exceeds Rs. 2 million but does not exceed Rs. 10 million.	Accounts duly signed by the borrower/lessee and countersigned by Chartered Accountant / Cost & Management Accountant.
(c)	Where the exposure exceeds Rs. 1 million but does not exceed Rs. 2 million.	Accounts duly signed by the borrower/lessee.
(d)	Where the exposure does not exceeds Rs. 1 million.	Such documentary evidence of the means and investment of the borrower/lessee as may be determined by the management of the leasing company.

Explanation: Surplus arising on revaluation of assets determined in accordance with International Accounting Standards by a firm of Chartered Accountants approved by the Commission for this purpose may be considered for the purpose of calculating the exposure limit under the rule. The surplus on revaluation of assets so determined is required to be reflected in the balance sheet of the borrower / lessee.

(viii) ensure while granting any facility that:-

(a) Current asset to current liabilities ratio of the borrower/lessee does not fall below 1:1: or any ratio as determined from time to time.

Provided that current maturities of long term debt not yet due for payment may be excluded from the current liabilities for the purpose of calculating this ratio;

(b) Long term debt equity ratio does not exceed 60:40.

Provided that where a different debt equity ratio has been laid down by Government, such ratio shall apply, and

(c) due weightage is given to credit report relating to the borrower/lessee and his group obtained from Credit Information Bureau of the State Bank of Pakistan. If the credit report indicates over exposure, further facilities shall be extended only after recording reasons to do so.

(ix) provide facilities at least 5% of its fund based facilities provide to small enterpreneurs.

(x) acquire and maintain membership of Leasing Association of Pakistan (LAP) and follow the code of conduct prescribed by the Association.

(xi) follow guidelines issued to safeguard leasing company against their involvement in money laundering activities and other unlawful trades. It will add to or reinforce the precautions. Leasing company may have been taking in this regard :

a) before extending their services, leasing company shall make reasonable efforts to determine the true identity of the customer. Particular care shall be taken to identify ownership of all accounts and those using safe custody facilities. Effective procedures shall be instituted for obtaining identification from new customers. An explicit policy shall be devised to ensure that significant business transactions are not conducted with customers who fail to provide evidence of their identity;

b) leasing company shall ensure that business is conducted in conformity with high ethical standards and that Leasing Companies Laws and regulations are adhered to. It is accepted that leasing company normally does not have effective means of knowing whether a transaction stems from or forms part of wrongful activity. Similarly, in an international context, it may be difficult to ensure that cross borer transactions on behalf of customers are in compliance with the regulations of another country. Nevertheless, leasing company shall not set out to offer services or provide active assistance in transactions which in their opinion are associated with money derived from illegal activities; and

c) specific procedures be established for ascertaining customer status and his sources of earning for monitoring of accounts on a regular basis for checking identities and bonafides of remitters and beneficiaries, for retaining internal record of transactions for future reference. The transactions which are out of character with the normal operation of the account involving high deposits/withdrawals/transfers shall be viewed with suspicion and property investigated.

(xii) keep the information upto date provided in Annexures to Form I and II by communicating changes and modification therein within 14 days of such change or modifications.

(xiii) provide the return on deposits on uniform basis paid out of and to the extent of profits of the company;

Provided that deposits etc. of listed companies, recognised charitable trusts and statutory bodies shall, however, be exempt.

(2) It shall not -

(i) make exposure to a single group for more than thirty per cent of the net investment in leasing finance.

(ii) allow facilities to any of its directors or to individuals, firms or companies in which it or any of its director is interested as partner, director or guarantor, as the case may be, its chief executive and its major shareholders, including their spouses, parents and children or to firms and companies in which they are interested as partners, directors or major shareholders of that concern without the approval by the directors of that leasing company:

Provided that the director who is seeking such approval shall not take part in the proceedings of the approval of the directors;

(iii) allow unsecured facilities or facilities secured only by guarantees except the facilities provided against bank guarantees, the end use of which will be verified by the leasing company to be productive;

(iv) grant unsecured facilities to or allow facilities on the guarantees of its chief executive, directors and major shareholders including their spouses, parents, and children or to firms and companies in which they are interested as partners, directors or major shareholders of that concern;

(v) appoint/elect more than twenty five percent of its directors from the same family, including spouse, dependent lineal ascendants and descendants and dependent brothers and sisters;

(vi) undertake the business of real estate or provide funds to the construction companies, builders and developers and companies dealing in real estate:

Provided that a leasing company may lease machinery, equipment and specialised vehicles to the construction companies;

(vii) hold, deal, or trade in real estate except for use of leasing company itself;

(viii) engage in leasing operations pertaining to -

(a) open land;

(b) buildings, other than factory building and office building located within or outside the factory premises to be used exclusively as such by a lessee, subject to a maximum of one hundred and twenty square feet per employee and residential undertaking and warehouses; and

Provided that the company may lease hard furniture, excluding carpets and curtains, upto five per cent of its portfolio ;

(ix) fix the period of lease for less than three years in the case of any lease agreement except in case of computers and other equipment used in information technology;

(x) remove any of its records or documents relating to its business from Pakistan to a place outside Pakistan without the prior permission of the Commission;

(xi) allow facilities for speculative purposes;

(xii) make change in its chief executive and board of directors excluding director nominated by creditors without prior approval of the Commission; and

(xiii) make investment in un-quoted shares of any company without the approval of the Commission

(3) The companies granted licence before the commencement of these Rules shall raise the paid up capital as prescribed by the Commission from time to time.

8. Limits on Exposure:- (1) Liabilities, excluding contingent liabilities, of a leasing company shall not exceed seven times of its equity during first two years of its operations and ten times of the equity in the subsequent years:

(2) Contingent Liabilities of a leasing company shall also not exceed seven times its equity during the first two years of its operations and ten times of the equity in the subsequent years.

9. Margin Against Facilities:- Following minimum margins shall be maintained against various facilities:-

(1) All guarantees will be backed by 100% realizable securities.

(a) in case of performance bonds, the condition of 100% cover of realizable securities may be relaxed subject to minimum compulsory realizable security cover equivalent to 20% of the amount of the performance bond; and

(b) in case of guarantees issued against mobilisation advance, the condition of 100% cover of realizable securities may be relaxed subject to the following conditions:-

(i) Guarantees issued should contain a clause that the mobilisation advance shall be released by the beneficiary through the guarantor leasing company only; and

(ii) at the time of issuing such a guarantee the beneficiary should sign an agreement with the leasing companies that releases out of mobilisation advance would be covered by realizable assets.

(c) in case of bid bonds issued on behalf of domestic consultancy firms bidding for international contracts where the consultancy fees are to be received in foreign exchange, the requirement of 100% cover by realizable securities may be waived off. This relaxation would also be available to all suppliers of goods and services bidding against international tenders.

(2) No leasing company shall provide unsecured facilities to finance subscription towards floatation of share capital of public limited companies or allow facilities against its own shares or shares of its associated undertaking and subsidiaries thereof or shares of companies not listed on the Stock Exchange. Shares of listed companies obtained as collateral shall be subject to the following minimum margins :-

(a) where the current market value does not exceed the preceding 12 months average market value, 20% of the current market value.

(b) where current market value exceeds the preceding 12 months' average market value but does not exceed twice the preceding 12 months' average market value, 40% of the current market value.

(c) Where the current market value exceeds twice the preceding 12 months' average current market value, 50% of the current market value.

Provided that no leasing company shall hold shares in any company as pledgee or mortgagee, of an amount exceeding thirty percent of its own equity or thirty percent of the paid-up capital of that company whichever is less.

(3) Certificates of Deposits, C.O.Is/COMs, TFCs etc. will be subject to a margin of 20% of face value or market value whichever is less.

(4) Facilities against trading stocks shall be subject to a margin of 25%.

10. Provisioning for Non-Performing Assets:- Every leasing company shall follow prudential guidelines in the matter of classification of its assets and provisioning there against as given hereunder:-

a. Short Term Facilities:-

NATURE OF CLASSIFICA-TION	FOR FINANCE LEASE/ OPERATING LEASE/ TERM LOANS	PROVISIONS TO BE MADE
1	2	3
1. Overdue	Where rentals/profit/ mark up or principal are overdue (past due) by 90 days or more from the due date.	No provision is to be made.
2. Substandard	Where rentals/profit/ mark up or principal are overdue by 180 days or more from the due date.	Provision of 20% of the difference resulting from the outstanding balance of net investment in lease finance, net investment in assets leased and principal less the amount of liquid assets realizable without recourse to a Court of Law.
3. Doubtful	Where rentals/profit/ mark up or principal are overdue beyond one year from the due date.	Provision of 50% of the difference resulting from the outstanding balance of net investment in lease finance, net investment in assets leased and principal less the amount of liquid assets realizable without recourse to a Court of Law.
4. Loss	Where rentals/profit/ mark up or principal are overdue beyond two years from the due date.	Provision of 100% of the difference resulting from the outstanding balance of net investment in lease finance, net investment in assets leased and principal less the amount of liquid assets realizable without recourse to a Court of Law.
	(b) Where trade bills (import, export or inland bills) are not paid/adjusted within 180 days or more of the due date.	As above

Note : Liquid assets means realisable amount of bank deposits, certificates of deposits, government securities, shares of listed companies, NIT Units, Certificates of Mutual funds, inventories pledged to the Bank with possession with 'perfected lien' duly supported with flawless documentation.

b. Long Term Facilities:-

NATURE OF CLASSIFICA-TION	FOR FINANCE LEASE/ OPERATING LEASE/ TERM LOANS	PROVISIONS TO BE MADE
1	2	3
1. Overdue	Where rentals/profit/ mark up or principal are overdue (past due) by 180 days or more from the due date.	No provision is to be made.
2. Substandard	Where rentals/profit/ mark up or principal are overdue by 1 year or more from the due date.	Provision of 20% of the difference resulting from the outstanding balance of net investment in lease finance, net investment in assets leased and principal less the amount of liquid assets realizable without recourse to a Court of Law.
3. Doubtful	Where rentals/profit/ mark up or principal are overdue beyond three years from the due date.	Provision of 50% of the difference resulting from the outstanding balance of net investment in lease finance, net investment in assets leased and principal less the amount of liquid assets realizable without recourse to a Court of Law.
4. Loss	Where rentals/profit/ mark up or principal are overdue beyond three years from the due date.	Provision of 100% of the difference resulting from the outstanding balance of net investment in lease finance, net investment in assets leased and principal less the amount of liquid assets realizable without recourse to a Court of Law.
	(b) Where trade bills (import, export or inland bills) are not paid/adjusted within one year of the due date.	As above

Note: 1. Where mark up/profit or lease rental or principal is overdue (past due) by 180 days or more from the due date, unrealised mark up / profit /lease rental/ finance income will be put in a Suspense Account and will not be credited to Income Account.

2. Liquid asset means realizable amount of bank deposits, certificates of deposits, government securities, shares of listed companies, NIT Units, Certificates of Mutual Funds, inventories pledged to the bank with possession with 'perfected lien' duly supported with flawless documentation.

3. Subjective evaluation of lease portfolio shall be made for risk assessment both for adjustment by way of down grading or upgrading the category of classification. The evaluation shall be carried out on the basis of adequacy of security inclusive of its realisable value, cash flow of borrower, his operation in the account, documentation covering advances and credit worthiness of the borrower etc. The assessment will be made by leasing companies as follows:-

(a) Where in a lease rental which was lastly callfied as loss, doubtful or substandard the lessee had been making regular repayments during the following yeear and continue even upto the time of finalisation of annual accounts of the leasing company, it may be put into upgraded category provided collaterals available with the leasing company are strong and/or of sufficient value to cover the outstanding amount and cash flow position justified.

(b) In case a classified account is upgraded and no regular rental was thereafter received for a consecutive period of six months or was irregular preceding next blance sheet date of the leasing company, the account be reclassified according to aging criteria.

(c) Only the realizable value of assets duly mortgaged/pledged against leasing company's llease rentals shall be considered while evaluating the assets and determining the category of classification. The auditors / inspectors shall determine the realizable value in accordance with the guidelines and criteria that may be laid down by the Commission from time to time.

4. In case of OAEM classification, no provision need be created and in case of sub-standard classification, provision will be credited at 20% of the difference resulting fro m the outstanding balance of principal less the amnount of liquid assets realizable without recourse to a court of law.

5. Deduction of liquid assets from provisioning requirements may also be allowed from lease retntals classified as "Loss" in line with other categories of classification. Further, bank guarantees from reputable international banks and pledged gold if any, may also be included in the definition of liquid assets.

11 Overdues and defaults - recovery thereof:- (1) Every leasing company shall furnish the Commission with a list of defaulters on prescribed format, on quarterly basis. A list of rescheduled and restructured facilities would also be submitted to the Commission in the similar manner on prescribed format. A person, whether natural or juridical, shall be deemed to be defaulter if he (or his dependent family members or concerns owned or controlled by him or concerns in which he or his dependent family members are major shareholders) has failed to pay off or liquidate any fiduciary obligation towards any leasing company in Pakistan as was agreed upon or required under the terms and conditions of availment of the financing facility or to do or perform an act agreed to or undertaken in writing to be done or performed by him and such failure has continued for a period of 90 days from the date on which he was required to make the payment or to do or perform the act.

(2) Every leasing company shall nominate an officer as recovery officer or constitute a section as recovery section depending upon the magnitude of defaults.

(3) Besides the measures presently instituted by each leasing company, the leasing company will set quarterly recovery targets as a percentage of the overdue obligations and communicate the same on quarterly basis to the Commission.

(4) A progress report on the recovery in relation to the targets shall be submitted to the Commission on quarterly basis. The leasing company will also be required to explain deficiency if any, in meeting the targets and the strategies evolved with a view to ensuring achievement of subsequent targets.

(5) Whereever considered legally appropriate by the leasing company, cases of default may be referred to the Courts and Revenue authorities for recovery or as arrears of land revenue. The list of such cases and progress of recovery shall also be sent to the Commission on a quarterly basis.

l2. Bar to certain transactions:- No leasing company shall -

(a) transfer ownership of controlling shares, merge with, acquire or take over any other leasing company unless it has obtained prior approval of the Commission to the scheme of such merger, acquisition or take over; or

(b) employ as a broker, directly or indirectly, any of its directors, officers, or employees, or a person who beneficially owns, whether individually or in association with close relatives more than ten percent either of the equity or other securities with voting rights, if any, issued by the leasing company.

13. Rate of mark up and fees:- A leasing company may charge mark up rate on its facilities in accordance with the prevailing rates:

Provided that where disbursement of facilities is held up by the company for any reasons, the commitment fee charged shall not exceed one percent of the un-disbursed amount of facilities.<