Securities and Exchange Commission of Pakistan

April 20, 2000 – Prudential Regulations for Modarabas
PRUDENTIAL REGULATIONS FOR MODARABAS

1.   Short title and commencement:- (1) These additional conditions shall be  deemed to be part of the conditions of the certificate granted for authorization to float a modaraba in terms of powers conferred by Section 11 of the Modaraba Companies and Modaraba (Floatation  & Control) Ordinance, 1980 read with rule 3 (2) (e) of Modaraba Companies and Modaraba Rules, 1981 and may be called as Prudential Regulations for Modarabas

(2) These regulations shall be applicable at once.

2.   Definitions.- (1)  All terms and expressions used but not defined in these regulations shall have the same meanings as in the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980 (Ordinance XXXI of 1980) and the Companies Ordinance 1984 (XLVII of 1984).

(2) In these regulations, unless there is any thing repugnant in the subject or context,

(a)   “documents” include vouchers, bills, promissory notes, securities for leases/advances and claims by or against the modaraba and other documents supporting entries in the books of the Modaraba.

(b)   “equity” includes Modaraba Fund (free of losses),  reserves and un-appropriated profits.

(c)   “exposure” would include fund and non-fund based facilities.

(d)   “facilities” include 'fund based' and 'non-fund based facilities'.

(e)  “lease Key Money” means lease security deposit.

(f)   “major "share holder” would mean any person holding 5% or more of the paid up share capital.

(g)   "modaraba" means a Modaraba as defined in the Modaraba Companies & Modaraba (Floatation and Control) Ordinance, 1980.

(h)  “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.

            (i)  “records” include ledgers, day books, cash books and all other manuals or magnetic records used in the
                          business of Modaraba.

3.  Creation and Building up of Reserve - Modarabas shall create a reserve fund to which shall  be credited :

(a)  an amount not less than 10% of its after tax accounting profit till such time the reserve fund equals 100% of the paid up fund; and

(b) thereafter a sum not less than 5% of its 'after tax accounting profit'.

4.   Limits on Exposure.- Liabilities, including contingent liabilities of a Modaraba for the first two years of its operation shall not exceed seven times of its equity.  In the subsequent years the liabilities shall not exceed ten times of the equity of the Modaraba.

5.   Limit on Modaraba Exposure. - (1) The total exposure of a Modaraba to any single person or group shall not at any point of time exceed 20 percent of the  equity of the Modaraba; provided that this limit may be enhanced on a case to case basis with the approval of Registrar Modaraba.

(2) In arriving at per party exposure, 90% of  the following shall be deducted:

(a)  certificates of Deposit/Certificates of Investment/ Certificates of Musharaka of the borrower  under lien with the Modaraba;

(b)   face value of FIBs lodged by the borrower as collateral; and

(c)   repayment guarantees issued by a bank, with investment grade rating not lower than BBB.

6.   Conditions for Granting Facilities.- (1) While granting any facilities, Modarabas shall ensure that the total facilities availed by any borrower from Modarabas, Leasing Companies, Non-Bank Financial Institutions and Banks do not exceed ten times of the capital and reserves (free of losses) of the borrower as disclosed in its accounts. Every Modaraba shall, at the time of granting any facility, obtain copy of accounts relating to the business of each of its borrower for analysis and record in the following manner :-

(2) Modarabas shall ensure that current asset to current liability ratio of the borrower does not fall below 1:1

Explanation: Current maturities of long term debt not yet due for payment may be excluded from the current liabilities while lease rental receivable of the borrower within the next twelve months as disclosed in the accounts shall be treated as current assets for the purpose of calculating this ratio.

(3) Fresh/additional accommodation in the form of long term facilities shall be provided on the basis of  debt equity ratio not exceeding 60:40:

     Provided that where a different debt equity ratio has been laid down by the Government such ratio will be applicable.

(4) When considering proposals for facilities, Modarabas shall give due weightage to credit report relating to the borrower and his group obtained from Credit Information Bureau of the State Bank of Pakistan but in no case defaulter be financed.

7. Maintenance of minimum margins - Guarantees, Shares/ colleterals and certificates of deposits COIs/COMs and Trading stocks.__(1) All guarantees shall be backed by 100% realizable securities: Provided that.

(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;

(b)   in case of guarantees issued against mobilization 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 mobilization advance shall be released by the beneficiary through the guarantor Modaraba only; and

ii) at the time of issuing such a guarantee, the beneficiary should sign an agreement with the Modaraba that releases out of mobilization advance would be covered by it by realizable assets; and

(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 Modaraba shall provide unsecured facilities to finance subscription towards floatations of share capital of public limited companies, or allow facilities against its own certificates or shares/certificates of its associated undertakings and subsidiaries thereof or shares of companies not listed on  Stock Exchange. Facilities against shares of listed companies  shall be subject to  minimum margin of 30% of its average market value of the preceding 12 months.  The modarabas are, however, free to get  higher margin requirements, keeping in view other factors:

      Provided that no Modaraba shall hold shares in any Company as pledgee or mortgagee of an amount exceeding thirty percent of its own equity or 30% of the paid up capital of that company whichever is less.

(3)            Certificates of Deposit of Banks with investment grade rating but not lower than BBB will be subject to a margin of 15% and COIs/COMs/TFCs with investment grade rating but not lower than BBB will be subject to a margin of 25% of face value or market value whichever is less.

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

(5) Facilities against hypothecation shall be subject to a margin of 50 %.

8.   Restriction on certain types of transactions.- (1) No Modaraba shall allow facilities of any kind to its modaraba company or any of its chief executive, directors or their spouses or relatives or major share holders. No Modaraba shall allow facilities to individuals, firms or companies in which the above referred persons are interested as guarantors, partners, directors, chief executive or major shareholder, of the investee concerns without the approval of the majority of the directors of the Modaraba excluding the directors having interest as illustrated above.

EXPLANATION : Approval of the majority of the remaining directors excluding the directors concerned   must constitute a quorum in accordance with the company’s Articles of Association.

(2) No Modaraba shall allow unsecured facilities or facilities   secured only by guarantees other than bank guarantee of banks having rating grade not lower than BBB.

(3) No Modaraba shall grant unsecured facilities to or allow facilities on the guarantees of.-

(a) any of its directors, their spouses and relatives; and 
(b) any firm or Company in which Modaraba or any of the person referred to in (a) is interested as director, proprietor or partner.

(4) No modaraba shall allow facilities for speculative business.

(5) Modarabas shall not without the prior approval of the Registrar enter into leasing, renting and sale/purchase of any kind with their directors or persons who either individually or in concert with relatives beneficially owns 10 percent or more of the paid up capital of the Modaraba Company.

(6) Modarabas may make investment in  shares of un-listed companies  subject to fulfillment of the following conditions:-

(i)  Total exposure in such companies does not exceed 5% of the modaraba's equity;

(ii) the directors of the modaraba company have no direct or indirect interest in the investee company; and

(iii)the investee company must have operational track record of three profitable consecutive  years preceding the decision:

  Provided that where a modaraba is engaged in Venture Capital Financing as set out in its prospectus, this regulation may be waived on an application made to the Registrar.

(7)     The investment of modaraba fund in listed securities shall not be  more than 20% of the equity of the modaraba. However, this restriction shall not apply  where the modaraba has taken up the shares as consequence of underwriting obligation, or the modaraba became the absolute owner due to default of its borrowers.

  Provided that in exceptional cases the Registrar may relax this condition.

(8) No modaraba shall make investment in the shares of a listed company  of an amount exceeding 5% of its own equity or 10% of paid up capital of that company whichever is less:

  Provided that these limits may be exceeded on an application made to the Registrar.

(9) No investment in stock market shall be made by a modaraba except in its own name.

9.   Provisioning for non-performing Asset: - Every Modaraba shall follow prudential guidelines in the matter of classification of its assets and provisioning there against as given hereunder:-

A.  Murabaha/Musharika

      (Commercial Funding-Working capital/short term/long term  advances)

NOTES.

1.   Where profit is overdue (past due) by 90 days or more from the due date, unrealized profit shall be put in a Suspense Account and shall not be credited to Income Account.

B.  OPERATING LEASE.

NOTE.

     Where profit/finance income/principal and lease rentals are overdue (past due) by 180 days or more from the due date, unrealized profit/finance income shall be put in a Suspense Account and shall not be credited to Income Account.

EXPLANATORY NOTES.

1.   In the operating lease accounting depreciation/amortization suffixes the provisions required as in case of Finance lease.

2.   The provision in the operating lease can not exceed the overdue lease rentals. Once the lease rentals are suspended no more lease receivables will be created.

10. REMOVAL OF RECORDS:- No Modaraba shall remove from Pakistan to a place outside Pakistan, any of its records or documents relating to its business without the prior permission of the Registrar.

11. APPOINTMENT OF SPECIAL AUDITORS.- The Registrar may require special audit of any Modaraba in addition to statutory audit, inquiry/ inspection by the Registrar, at any time and may appoint special auditors, the cost of which shall be borne by the Modaraba.

12. APPOINTMENT OF CHIEF EXECUTIVE.- Except with the approval of the Registrar no person can represent more than one modaraba company as  Chief Executive.

13. PLACES OF BUSINESS. - (1) A Modaraba may open further places of business and it shall intimate the same to the Registrar  within 15 days.

(2) The Modaraba shall intimate to the Registrar the closure of any of its branches within 15 days.

14. CODE OF CONDUCT. - Every Modaraba shall acquire and maintain membership of Modaraba Association of Pakistan (MAP) and will follow the Code of Conduct prescribed by the Modaraba Association of Pakistan.

15. INTERNAL CONTROL.- The auditors of the Modaraba shall point out in their report whether or not the modaraba has an effective system of internal control.

16. OVERDUES AND DEFAULTS - RECOVERY THEREOF. - Every Modaraba shall furnish the Registrar with a list of defaulters and their overdues as per format prescribed.  A list of rescheduled and restructured facilities would also be submitted to the Registrar in the similar manner as per the format prescribed. A person, whether natural or juridical, shall be deemed to be in overdue and/or default 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 Modaraba 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 in case of overdues and 365 days in case of default, from the date  on which he was required to make the payment or to do or perform the act.

17. MANAGEMENT FEE. - (1)  The management fee of a modaraba company in respect of a modaraba floated by it shall not exceed 10% of the net annual profits of the modaraba before charging such management fee. For the purpose of calculation of management fee payable to the modaraba company, the net profit of the year as shown in the audited profit and loss account of the modaraba shall form the basis.

(2) The management company shall provide office space for the Modaraba free of any charges.

18. DISTRIBUTION OF PROFIT. - The Modarabas shall distribute 90% of their net annual profits after appropriation to reserve, if any, as stipulated in regulation 4: 

Provided that dividend for any year may be omitted or passed on if the distribution of dividend is un-economical and hence is not in the interest of certificate holders.

EXPLANATION:    Un-economical distribution of dividend here means such percentage of dividend declared by the modaraba company which is not likely to be in the benefit of certificate holders after certain deductions of tax, zakat and bank charges etc.

19. PERIODICAL STATEMENTS. - Each Modaraba  shall file  such periodical statements  as  may  be  prescribed  by Registrar from time to time under  these  regulations.

20. ANNUAL REVIEW MEETING.- (1) Each Modaraba shall hold an annual review meeting of its certificate holders in the town where the registered office of the modaraba company is situated, to review performance of the modaraba.

(2) There will be no voting right of the certificate holders in the annual review meeting.

(3) For the purpose of notice for the meeting, the provisions relating to notice of the meeting as provided in the Companies Ordinance, 1984 shall mutatis-mutandis apply to the notice issued by the Modarabas to the certificate holders for the annual review  meeting.

21. COMPLIANCE.- The modarabas shall bring their affairs and business operations in full conformity with these Regulations, by June 30, 2000.