7._Support_for_legal_framework_5_Aug_2013_(1).pdf

USAID FIRMS PROJECT

SME Policy: Support for Legal Framework

February 2013

This report and its contents are made possible by the support of the American people through the United States Agency for International Development (USAID). The contents are the sole responsibility of Chemonics International Inc. and do not necessarily reflect the views of USAID or the United States Government.

SME Policy: Support for Legal Framework

DISCLAIMER

The author’s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government.

Data Page

Contract Number: Task Order No. EEM-I-00-07-00008-00

Contractor Name: Chemonics International, Inc.

USAID Technical Office: Office of Economic Opportunities, USAID Pakistan Date of Report: February 12, 2013 Document Title: SME Policy: Support for Legal Framework Author’s Name: Ali.M.

SOW No and Title SOW#1922, SME Policy: Support for Legal Framework Work Plan Level No: Level # 33400, Action # 6455

Name of Component:

Author: Ali. M, Practice Area: Business enabling environment Key words: Business enabling environment – SME policy: SME Legal framework- Review of SME Legal framework in Pakistan- Review of SME Bill – Recommendations for reform

A. Abstract

Enterprises take a number of legal shapes in Pakistan like sole proprietorship, partnership, society or a company. Depending on their size and/or structure enterprises are subject to varying requirements with regard to enforcement of obligations, administrative compliances, labor and employee benefits and taxation.

Legal and regulatory frameworks relevant to SMEs are many and include licensing and registration requirements, labor and employee related legislation, taxation and business entry and exit requirements. Legal and regulatory frameworks impact businesses both positively and negatively, thus while they increase the cost of doing business by increasing administrative burdens they also assist businesses in accessing funds, allowing third parties to enforce, promote efficient enforcement of contracts and so on and so forth. Legal and regulatory factors that impact businesses in a major way are licensing requirements, market entry and exit procedures, insolvency and bankruptcy provisions, labor laws, contract enforcement procedures and tax rates and administration. While there are substantial issues of coverage and adequacy of regulations, key issue appears to be uneven administration of laws and regulations, absence of a state guaranteed title to land, multiplicity of institutions and poor institutional coordination.

Specifically reporting requirements regarding firms are insufficient, provisions related to creditor and debtor rights are imbalanced and not comprehensive, case management in courts is weak and title insufficiently protected.

Uneven and ineffective enforcement allows many businesses to remain unregulated and/or undocumented thus reducing the potential of growth and/or improvement in terms of quality and turnovers. Poor quality of services and products and smaller turnovers in turn affect access to wider markets, reduced profits and ability to grow.

The SME sector has also been adversely impacted by the absence of a clear institutional leader, which can coordinate policies, encourage corporatization/record keeping, and otherwise bring clarity in the legal and regulatory regime. While SMEDA can take up this role it will have to be remodeled and re-structured. The changes that need be brought in SMEDA for the purpose include making its Board more representative, capacitating SMEDA and granting a more formal consultative role to it in matters pertaining to formulation and implementation of policies relating to small and medium enterprises.

B. Definition of key terms

Demutualization: The process by which a customer-owned mutual organization changes legal form to a joint stock company

Firm A term of general usage in the US including both companies and partnerships. Traditionally it is applied to partnerships as opposed to companies

Prudential Regulations Statutory instruments which regulate the conduct of deposit taking institutions. The aim of prudential regulation is to ensure the safety of depositors' funds and keep the stability of the financial system

Venture Capital: Money provided by investors to high potential and high risk start-up firms and small businesses

Inchoate legal right A legal right or entitlement that is in progress and is neither ripe, vested nor perfected.

http://en.wikipedia.org/wiki/Mutual_organization http://en.wikipedia.org/wiki/Joint_stock_company

C. Abbreviations

ADP Annual Development Program

CEO Chief Executive Officer

FBR Federal Board of Revenue

FY Financial year

ICT Islamabad Capital Territory

IFC International Finance Corporation

NCSME National Committee for Small and Medium Enterprises

NIRC National Industrial Relations Commission

SECP Securities and Exchange Commission of Pakistan

SME Small and Medium Enterprise

SMC Single Member Company

SMEDA Small and Medium Enterprise Development Authority

USAID United Stated Agency for International Development

VCC Venture Capital Companies

VCF Venture Capital Funds

Table of contents

A. Abstract 4

B. Definition of key terms 5

C. Abbreviations 6

1. Introduction and scope of work 9

2. Licensing and Registration Requirements 11

3. Enforcement of obligations, insolvency and bankruptcy 13

4. Labor and Employee benefits 15

5. Taxation 19

6. Business entry and exit requirements 19

7. Policy making and facilitation 19

8. Conclusions and Reform recommendations 24

Appendix I: List of Persons consulted 27

Appendix II: Literature reviewed/cited 28

Appendix III: Laws/rules reviewed 29

Annex 1: Data on companies and firms 30

Number of Firms and societies in Punjab by 2012 30

1. Introduction and scope of work

Small and medium enterprises and for that matter all businesses in Pakistan take the shape of proprietorships, partnerships or companies. Depending on their size and/or structure businesses are subject to varying legal requirements in terms of licensing and registration, contract enforcement, employee and labor related benefits, taxation, and business entry and exit requirements.

The legal framework of the SME sector can be studied from six different perspectives. First, licensing and registration requirements, second, laws relating to enforcement of contracts including insolvency and related matters, third, labor and employee related legislation, fourth taxation, fifth, entry and exit requirements for specific businesses and sixth frameworks for provision of support to businesses. We shall deal with the first four and frameworks for support of businesses in detail and only partially address the fifth being out of scope of this work.

This report looks at the legal and regulatory framework impacting Small and Medium Enterprise with a view to:

a) Identify deficiencies and distortions in the current SME law

b) Impact of legal and regulatory barriers in SME development

c) Strengthen and increase effectiveness of SMEDA

d) Develop the SME bill as an instrument of development and implementation of SME policy

e) Support the implementation of the SME development policy 2007

f) Identify constraints in the institutional set-up required to implement regulatory/policy framework governing the SME sector

g) Design an advocacy strategy for the concerned ministry to enable acceptance amongst stakeholders and support FIRMS project in implementing the strategy referred

2. Licensing and Registration Requirements

As noted above businesses take the shape of proprietorships, societies, partnerships and/or companies for conduct of business in Pakistan. Irrespective of the need to register and/or obtain a license for doing specific businesses, all entities other than proprietorships or statutory corporations need to register and obtain a license from their respective regulatory bodies. The three main laws in this regard are the Partnership Act, the Societies Registration Act, 1860 and the Companies Ordinance, 1984.

a) Partnership Act, 1932

The Partnership Act is a Federal Act administered by the four provincial governments. The Act establishes the office of Registrar of Firms. Registration duties are currently devolved to districts where the District Officer, Enterprises and Promotion Investment perform this function. The Act explains the obligation and rights of partners’ vis-à-vis each other and third parties. Rule -making powers under the Act are vested in the provincial government.1The Act requires the following compliances:

i) Information rendering compliances - Section 60 requires firms to inform the registrar regarding alteration of name and place of business.2

b) Societies Registration Act, 1860

The Societies Registration Act, 1860 was originally a Federal Act, which is now a provincial statute. It allows seven or more persons associated for any literary, scientific or charitable purpose to form a society. The Act explains the method of incorporation, dissolution and governance structure. Registration of Societies under the Act is done by Executive Officers (Finance and Planning). The Act requires the following compliances:

i) Information rendering compliances - Section 2 and 4 requires societies to file their memorandum of associations and annual list of managing bodies

c) Companies Ordinance, 1984

The Companies Ordinance, 1984 explains the procedure of incorporation, governance structure of companies, compliances required of companies and other related matters. The Act is administered by the Securities and Exchange Commission of Pakistan - a body established under the Security and Exchange Commission Ordinance Act of 1997, and the provincial High Courts.

Table 1: Summary of licensing and registration requirements

Type Regulating statute and registering body Restrictions Membership and other requirements Proprietorship None Trading in stocks after the demutualization Act, Banking, One person

1 Section 71, Partnership Act, 1932 2 Section 60, Partnership Act, 1932

Insurance Partnership (firm)

Partnership Act, 1932 Registrar of Firms

Trading in stocks after the demutualization Act, Banking, Insurance

Members: 2-20 persons (Partnerships having > 20 members must register as companies3)

Private company

Companies Ordinance, Security and Exchange Commission of Pakistan

(SECP)

Provision of legal and accounting services

Members: 2-50 persons4; No invitations to the public for subscriptions allowed

Public company

Companies Ordinance, SECP

Provision of Legal and accounting services

Members: 3 or more persons5

Single Member Company 6

(SMC)

Companies Ordinance, 1984 and Securities and Exchange Commission Act of Pakistan, 19977

Banking and Insurance services; Services which are not permitted to be provided by limited liability companies

One person

Enforcement of licensing and registration requirements

The enforcement of the above-noted statutes in uneven and generally ineffective except for public companies registered on the three stock exchanges in the country (which in most cases are not small or medium sized enterprises). The lack of focus on enforcement of procedures vis-a-vis SMEs is due both to their small size and lack of resources and capacity amongst the regulator/registering authorities – the Registrar of Firms and SECP. The result is that most SMEs either do not register or do not comply with record keeping and procedural requirements, which in turn impacts their ability to access finance and determine costs.

3 See section 14, Companies Ordinance, 1984 4 See section 15 read with Section 2(1) clause 28, Companies Ordinance, 1984 and section 47, Companies Ordinance, 1984 5 Section 15, Companies Ordinance, 1984 6 See section 15(1), Companies Ordinance, 1984 7 See Single Member Companies Rules, 2003

3. Enforcement of obligations, insolvency and bankruptcy

Contract enforcement procedures in Pakistan are contained in the civil procedure code, the Specific Relief Act, the Financial Institutions (Recovery of Finances) Ordinance, 2001 and the Small Causes and Minor Offences Ordinance 2001. Contract enforcement procedures are not uniform - there are special dispensations available for banking companies and small credit holders. While there is nothing wrong with special dispensations, these dispensations are an outcome of a generally ineffective and inefficient civil court system - enforcing a contract in Pakistan requires up to 46 procedures, 976 days and costs 23.8% of the value of the claim8.

Thus while Pakistan scores 6 on the strength of Legal Rights Index of the IFC Doing Business Report 9, which provides a measure of the strength of protection of rights of borrowers and lenders, it stands at number 154 in the ranking of 183Economies of the world in ease-of-enforcing contracts10.

Pakistan insolvency and bankruptcy regime is contained in the Provincial Insolvency Act, 1920 and Part IX and Part XI of the Companies Ordinance, 1984. Details of insolvency and bankruptcy legislation is as follows:

a) Provincial Insolvency Act, 1920

The provincial Insolvency Act, 1920 deals with non-corporate entities. The Act is administered by the District Court although the provincial government can invest a lower court with insolvency jurisdiction. The Act defines acts of insolvency and conditions in which petitions of insolvency may be filed. Secured creditors are barred from filing creditor petitions unless they forego their security for the benefit of creditors11. The Act allows a debtor to apply to the court for a protection order against arrest and detention12.

b) Part IX and Part XI of the Companies Ordinance, 1984

These two parts deal with schemes of rehabilitation and corporate insolvency. Part XI of the Ordinance explains the conditions in which a company may be wound up and the liability of members in case of dissolution.

Pakistan’s insolvency legislation suffers from a number of issues: first it is not comprehensive;

second it is not balanced13. For instance Insolvency practitioners are not regulated and/or involved in liquidation or rehabilitation arrangements. Imbalance between creditor and debtor rights can be gauged from the fact that while Financial Institutions (Recovery of Finances) Ordinance 2001 imposes a duty on customers to fulfil their obligations to financial institutions there is no corresponding duty on financial institutions14. Other instances of imbalance are absence of penalties for banks obtaining signatures of customers on documents containing blanks15.

8 Page 86, Doing Business in Pakistan, World Bank and IFC, 2012 9 Page 53, Doing Business in Pakistan, World Bank and IFC, 2012 10 See page 86, Ibid 11 Section 9, Provincial Insolvency Act, 1920 12 Section 31, Provincial Insolvency Act, 1920 13 See Batra, Sumant, Insolvency Laws in South Asia: Recent Trends and Developments, 2006, p 3 14 See section 3(1), Financial Institutions (Recovery of Finance) Ordinance, 2001 15 See section 18, Financial Institutions (Recovery of Finances) Ordinance, 2001

4. Labor and Employee benefits

The law relating to labor and employee benefits in Pakistan is not only spread over a large number of statutes but is also administered by scores of institutions. The sheer number of these laws and the uneven and selective enforcement of these statutes may in fact be a key disincentive against registration and/or corporatization of small and medium sized enterprises. A summary of key Pakistani laws affecting labor and employee benefits is as follows:

Title Status Applicability Institutions established by the statute

Objectives

Industrial Relations Act, Federal Ordinance

Employers, workmen, trade unions

Registrar of Trade Unions (Institution is administered by the Provincial Government)

Regulates relations between employers and workmen;

Provides for establishment of trade unions and employers associations;

provides for a dispute settlement system

Labor courts NIRC (now abolished)16

Industrial and Commercial Employment (Standing Orders) Ordinance, Federal Ordinance

Every establishment employing 20 or more workmen

Provides for classification of workmen, regulates holidays, publication of wage rates, regulates attendance and leaves, payment of bonus, notices for termination of employment, eviction from residential accommodation etc

Factories Act, Federal Act

Factories Inspector of Factories (Institution is administered by the Provincial Government)

Regulates health and safety in factories, hours of work and holidays, Payment of Wages Act, Federal Act

Factories, industrial or commercial establishments

Regulates times for payment of wages;

fixes responsibility for payment of wages;

Provides for deductions which may be made in wages

16 The Commission was entrusted with registration of industry wide trade unions and adjudication and determination of disputes to which an industry wide trade union was a party

Workmen Compensation Act, 1923

Federal Act

Employers (whether incorporated or not)

Commissioner for work compensation (Institution administered by the Provincial Government)

Provides for payment of compensation in case of injury or disease caused during work

Employees Social Security Ordinance, Provincial

Enterprises engaged in notified businesses and/or working in specified areas17

Social Security Institution

Provides for payment of contribution for sickness, maternity and injury benefits

Shops and Establishment s Ordinance, Provincial Ordinance

Shops and Establishments except one man shops

Regulates opening and closing of shops;

Holidays; Termination of employment

Employees Old Age Benefits Act, Federal Act

Enterprises employing 5 or more persons18

Employees Old Age Benefits Institution

(EOBI)

Provides for payment of Insurance for monthly old age pension19

Workers Welfare Fund Ordinance, Industrial establishments earning Rupees

0.5 million per year20

Workers Welfare Fund

Provides and regulates contribution b Employers for Workers Welfare21

Companies Profit (Worker’s participation) Act, 1968

Federal Act

Companies and institutions, organizations or associations declared to be a company for the purposes of the Act22

Provides and regulates payment of profit to workers 23

Workers Children (Education) Ordinance, employing 10 or more persons24

Provides for payment of a cess for education of worker’s children 25

Employees Cost of Living (Relief) Act, Federal Act

Establishments within the meaning of the

Provides for payment of a cost of living allowance

17 Section 1(3), Provincial Employees Social Security Ordinance, 1965 18 Section 1(4)(i), Employees Old-Age Benefits Act, 1976 19 Section 9(1), Employees Old-Age Benefits Act, 1976 20 Section 2(f), 4(1), Workers Welfare Fund Ordinance, 1971 21 Section 4(1), Workers Welfare Fund Ordinance, 1971 22 Section 2(b) and 3, Companies Profits (Worker’s Participation) Act, 1968 23 See section 3(1)(b), Companies Profits (Worker’s Participation) Act, 1968 24 Section 3, Workers Children (Education) Ordinance, 1972 25 Section 3, Workers Children (Education) Ordinance, 1972

1973 Shops and Establishments Ordinance, factories as defined in the Factories Act, Mines etc

Minimum Wages Ordinance, Extends to workers employed for skilled, technical or manual work except coal and agricultural workers

Minimum Wages Board (established and administered by the Provincial Governments)

Provision of minimum wages for an industry for which no adequate machinery exists for effective regulation of wages

Minimum Wages for unskilled workers Ordinance, Provincial Ordinance

Commercial and Industrial establishments

Provides for minimum rates of wages for unskilled workers employed in commercial and industrial establishments. This law overlaps the Minimum Wages Ordinance.

5. Taxation

While Pakistan has one of the lowest tax burdens in South Asia, the associated administrative burden is one of the highest in the world. A high administrative burden means that businesses are frequently unable or unwilling to fulfill these requirements thus leading to evasion/non payment of taxes, poor book keeping and other related issues, which makes the business environment uneven and non-competitive for many enterprises. The Doing Business report, 2012 indicated the following tax rates and administrative burdens in Pakistan26:

Indicator Pakistan South Asia OECD High

Income

Payments (number per year) 47 28 13 Time (hours per year) 560 261 186 Profit tax (%) 17.9 18.6 15.4 Labor tax and contributions

15.1 7.7 24.0

Other taxes (%) 2.3 18.2 3.2 Total Tax rate (%) 35.3 44.4 42.7

Major taxes and contributions payable by small and medium enterprises are:

i) Corporate income tax (where SMEs are incorporated)

ii) Social security and employee related contributions (as indicated in the section on employee and labor benefits)

iii) Professional Tax27, and

iv) General Sales Tax (on products and services)

6. Business entry and exit requirements

As compared to incorporation requirements (both with regard to firms and companies), registration and licensing requirements for undertaking particular businesses are more uneven, scattered and ineffective. In fact many key businesses, which are regulated through licensing systems in other parts of the world are not regulated at all. Thus there are no licensing requirements for livestock farms or hospitals and clinics28. While soft and absent regulation makes it easy for businesses to become and/or remain operational, it also creates a situation in which poor quality goods and services are produced and/or sold.

7. Policy making and facilitation

Coordination and support:

Due to the many factors that affect SMEs and the large number of institutions, which operate in

26 Page 74, Doing Business in Pakistan, World Bank and IFC, 2012 27 A provincial tax imposed by the Finance Act, 1977. It is a flat tax collected from persons, engaged in particular trades and professions, and Companies 28 Except Punjab where they are required to be registered under the Punjab Healthcare commission Act, 2010 (section 13) the SME sector, the sector requires a body which provides SMEs with a voice and helps inform SME policies. There is however no well-defined leader in the sector. This section looks at the working of the only public sector organization – the Small and Medium Enterprise Development Authority, which can take up this role.

Small and Medium Enterprise Development Authority (SMEDA)

The institution charged with assisting and facilitating SMEs is SMEDA. The Authority is a statutory corporation established under the Small and Medium Enterprise Development Authority Ordinance, 2002. The Ordinance defines the functions and powers of the Authority, its internal governance and working. It does not provide any regulatory powers to the Authority over small and medium scale enterprises. General control, supervision and provision of strategic direction are vested in a Board of 12 members (six of which belong to the private sector). A Chief Executive Officer manages day-to-day working of the Authority. The Ordinance does not provide any statutory definition of an SME but allows the federal government to declare an entity as an SME. The Ordinance does not provide any formal consultative mechanism with regard to formulation of SME policy. A broad analysis of the SMEDA governance framework is as follows:

Indicator Textual analysis Remarks

Whether Board is representative and autonomous in decision making

6 Members (other than ex-officio members) are to be appointed in consultation with the Chairman. There is no requirement to have members with particular skills. The performance of the Board can be reviewed by the Chairman29

The composition of the Board needs to be modified to make it more representative and capacitated. The SMEDA board needs to include more private sector members.

Is the Authority subject to the orders of the Federal Government

The Government can issue policy guidelines30

Is the Chief Executive Officer appointed by the Board or in consultation with the Board

The Government appoints the

CEO31

The Government should appoint the CEO in consultation with the Board

Are the qualifications and experience of the CEO sufficiently delineated

Only broad qualifications and experience is stated32

Are there any limitations on delegation of powers by the Board

None except what the Board may itself impose33

Inappropriate

29 Section 11(3), SMEDA Ordinance, 2002 30 Section 30, SMEDA Ordinance, 2002 31 Section 12, SMEDA Ordinance, 2002 32 Section 13 & 14, SMEDA Ordinance, 2002 33 Section 16, SMEDA Ordinance, 2002

Is SMEDA autonomous in decision making

The Authority is bound by Federal procurement and financial rules and directions issued by MoF from time to time

May affect ability of SMEDA to enter into public private partnerships, sponsor research or take

Bodies/committees proposed by SME Bill

In 2007 SMEDA proposed the SME bill to support the development and implementation of policies concerning small and medium sized enterprises. The SME bill proposed four bodies/committees for reviewing, developing and implementing SME policy. These bodies and their remit is as follows:

Body Type Composition Mandate Remarks

Federal

SME

Promotion Council

Council

- To be registered as a not-for-profit body under the

SMEDA

Ordinance

SME bill does not provide for composition

Act as a certification body in order to enable them to avail any incentives announced by the Federal Government

Certification services frequently entail inspection and audit, which the Council cannot provide. In case the council is registered as a section 42 company (a not-for-profit company), there is no need to provide for statutory provisions regarding its mandate

Formulation of recommendations, articulation and advocacy on SME issues for consideration of

NCSME

Duplication with NCSME mandate

Facilitation and arbitration

Duplication with SMEDA mandate

Provincial

SME

Promotion Council

Council –

To be registered as a not for profit body under

SMEDA

Ordinance

SME bill does not provide composition

Act as a certification body in order to enable them to avail any incentives announced by the Federal Government

See remarks above

Formulation of recommendations, articulation and advocacy on SME

See remarks above issues for consideration of

NCSME

Facilitation and arbitration

See remarks above

National Committee for Small and medium enterprises

Committee

SMEDA to provide secretariat services

Federal Minister for Industries, Minister of State for Economic Affairs, 4 provincial Ministers for Industries, Governor SBP, Federal Secretaries MOI, Federal Secretary Mo Commerce, Federal Secretary Mo F, Federal Secretary Mo Labor, Federal Secretary Mo Statistics, Federal Secretary Mo Women Development, Chairman FBR, CEO SMEDA, President Federation of Pakistan Chambers of Commerce & Industry, 4 Presidents of Chambers of Commerce and Industries of Lahore, Karachi, Peshawar and Quetta, 7 representatives of SME sectors, Committee may co-opt additional members

Examine the factors affecting the promotion and development of Small and Medium

Take cognizance of the policies and programs of the Federal Government with regard to measures announced and taken under the SME Act for development and enhancement of competitiveness of SMEs and their impact on such enterprises

Make recommendations with regard to the above noted

Develop a 5 year roll over plan for SME sector development

Monitor, review and suggest improvements and corrective measures in SME policy implementation in light of periodic surveys

Develop and articulate recommendations for the benefits and promotion of SMEs, for consideration in the ADP and budgetary planning process of the Federal Government

Review and approve Annual report on Small and Medium Enterprises by SMEDA for presentation to Parliament

Provincial committee on small and medium enterprises

Committee

SMEDA

Provincial offices to provide secretariat services

SME bill does not provide composition except that it will be headed by the Chief Minister

Support NCMSE by gathering information and preparing recommendations for approval of NSCME

In the presence of provincial representation on the NCSME and provincial SMEDA offices this work can be done either by SMEDA or by NCSME itself

Facilitating access to capital

Access to capital is recognized as a key issue by the SME policy. While access to capital/ finance has a strong link to availability of collateral it has also got a close link to book keeping/record keeping practices and availability of finance on relaxed and easy terms. One way to access capital is through venture capital. Venture capital is an important funding source for high-potential high-growth start up firms in many western countries. It is estimated that venture backed revenue accounts for 21% of US GDP34. However venture capital appeared in Pakistan rather late with SECP only issuing its Venture Capital Companies and Venture Capital Fund Rules in 200135.

SECP Venture Capital Rules require venture capital companies to be public limited companies with a minimum paid-up share capital of five million rupees. VC companies are barred from exposing more than 40% of their equity to any single group of companies36. Similarly Venture Capital Funds are required to register as companies, have a minimum paid-up capital of fifty million rupees and enter into a management contract with a venture capital company37. The number of venture capital funds is very low in Pakistan and this number was reported to be 3 in 200738.

34 Venture Impact (5 ed), A Joint Study by National Venture Capital Association and IHS Global Insight. 2009, p 2 35 SECP Notification No S.R.O. 867(I)/2008 dated 20 August 2008 36 Rule 5, VCC and VCF Rules, 2001 37 Rule 9, VCC and VCF Rules, 2001 38 Sara Akhtar, Venture Capital in Pakistan

8. Conclusions and Reform recommendations

Like most other frameworks, the legal and regulatory framework in the SME sector has multiple purposes: protection of rights, enforcement of obligations, enabling people to take decisions, revenue collection, transparency, documentation for the above noted etc. However the framework, as it now stands, does not significantly contribute to the achievement of these very valid objectives. This is because of both legal policy issues and poor enforcement.

While reform possibilities exist in every aspect of the legal and regulatory framework, reform will only come through increased understanding of the issues involved and the importance frameworks play in supporting and sustaining businesses. A very brief overview of key reform interventions is as follows:

a) Consolidation of Labor and employee legislation

There are currently up to 14 laws and nine institutions charged with administration of employee and labor related laws which clearly indicate the high need for consolidation and reduction in the number of enforcing bodies. This will not only reduce administrative burdens on small and medium enterprises but will also increase enforcement of labor and employee related legislation. Better enforcement of labor and employee related legislation is important from the perspective of competitiveness as it provides a level playing field to enterprises.

b) Improve land titling and establishing land cadastres

Land title is not guaranteed by the state and title documents are not conclusive proof of ownership and/or title in Pakistan. This means that banks look for multiple securities and guarantees while giving out loans. It is therefore important that land cadastre/registries are established which record all claims to title and rights which affect title so that persons dealing with a piece of land are aware of all competing claims and claims cannot be set up subsequently.

c) Review and reform insolvency/bankruptcy laws

As indicated earlier, insolvency/bankruptcy laws need to be reviewed with a view to: improve transparency in matters of appointment of receivers, regulate working of Insolvency practitioners and otherwise make the law comprehensive.

d) Improve effectiveness and institutional capacity of SECP and Registrar of Firms

A review of capacity of SECP and Registrars of Firms clearly shows that current resources are not enough to ensure implementation of licensing and registration requirements. This means that protections available to third parties through access to information or otherwise are not cosmetic and safeguards built into registration and licensing are ineffective

e) Encourage registration and certification of enterprises

Registration and licensing of enterprises is important from a number of perspectives. Its key benefits are information and transparency, which helps others to deal with them and make decisions. It is therefore important that registration and licensing is easy, friendly but effective.

f) Make dispute resolution efficient and effective through improved case management and reformed ADR procedures

Dispute resolution procedures and time taken to resolve disputes impacts businesses in many ways. Most importantly it allows businesses to sell on credit, attract investors and enter into partnerships – all key elements of expanding businesses. Dispute resolution procedures therefore need to be effective and efficient.

g) Entrust leadership of the SMEs sector to one organization which can coordinate policy development and implementation

Enterprise development involves diverse actions ranging from ground level operational support to policy coordination at the highest level. The SME sector however lacks a voice and a representative body, which can articulate the concerns and needs of the Sector. It is important that one organization takes up this role and is recognized within the government as’ the SME organization’. If SMEDA is to effectively discharge this role it will have to be remodeled, granted a consultative position and equipped with the knowledge and skill required for this role. Detailed recommendations regarding the governance structure of SMEDA can be seen in section 7.

Table: Framework for Legal reform

Subject Reform Objective Area Proposed content of reform

Labor and employee legislation

Reduce overlaps and inconsistencies in the legal framework

Consolidation • Reduce the number of Labor and employee legislations to < 4.

• Reduce the number of institutions

• Exemptions must be clearly articulated and based on sound reasoning

Reduce administrative burdens Make enforcement uniform

Provision of collateral

Improve access to capital

Land titling and cadastres

• Establish land cadastres

• Require disclosure of charges and inchoate rights

• Gradually move towards guaranteed title

Reduce litigation

Debtor and Creditor rights

Improve balance between debtor and creditor rights

Review and reform insolvency and bankruptcy laws

• Improve balance between debtor and creditor rights

• Improve procedures in insolvency/bankruptcy courts Improve acceptance of failures

Enforcement of licensing and registration Regulations

Improve confidence in companies

Improve effectiveness and institutional capacity of SECP and

• Improve enforcement

Registrar of Firms

Encourage Registration

Improve confidence in enterprises

Make registration simple and easy

• Require registration as a pre-requisite for entry into certain business

• Simplify updating of information

• Provide for electronic filing of information

Improve access to capital Reduce disincentives to registration Increased collection and availability of information

Improve Dispute Resolution

Improved contract enforcement

Case management

• Provide for mandatory diversion of certain types of cases to ADR

• Legislate to improve connection between informal ADR and formal justice system

• Issue case management regulations

Reformed

ADR

procedures

SME

facilitation

Provide for leadership of SMEs

Improved governance framework of

SMEDA

• Improve representation of the private sector on the SMEDA board

• Provide a role to the SMEDA board in the appointment of the CEO

• Provide a consultative role to SMEDA regarding policies which directly impact small and medium enterprises

Appendix I: List of Persons consulted

Name Designation Institution

Yousaf Naseem Khokhar Chief Executive SMEDA

Ahmad Nawaz Sukhera Chief Executive SMEDA

Khurram Khan General Manager SMEDA Nadia Jehangir Seth Deputy General Manager SMEDA Dr.Ali Cheema Economist IDEAS

Siddique Sheikh Director Industries

Industries Department, Government of Punjab

Suleman Ghani Senior Policy Advisor FIRMS Project Farrukh Khan Component Leader Private Sector Development FIRMS Project

Mubarika Aijazuddin Business Enabling Environment Specialist FIRMS Project

Appendix II: Literature reviewed/cited

1. Annual Report, 2011, SECP

2. Batra, Sumant, Insolvency Laws in South Asia: Recent Trends and Developments, 2006

3. SME policy, 2007

4. SME development report (Urdu), 2007-08

5. Report of the consultative session with SMEDA, September 7, 2012

6. Venture Capital in Pakistan, Sara Akhtar

7. Venture Impact ( 5 ed). A Joint Study by National Venture Capital Association and IHS

Global Insight. 2009

Appendix III: Laws/rules reviewed

1. Companies Ordinance, 1984

2. Companies Profit (Worker’s participation) Act, 1968

3. Employees Cost of Living (Relief) Act, 1973

4. Employees Old Age Benefits Act, 1976

5. Employees Social Security Ordinance, 1965

6. Factories Act, 1934

7. Industrial and Commercial Employment (Standing Orders) Ordinance, 1968

8. Industrial Relations Act, 2010

9. Minimum Wages Ordinance, 1961

10. Minimum Wages for unskilled workers Ordinance, 1969

11. Partnership Act, 1932

12. Payment of Wages Act, 1936

13. Shops and Establishments Ordinance, 1969

14. Small and Medium Enterprise Development Authority Ordinance, 2002

15. Workers Children (Education) Ordinance, 1972

16. Workers Welfare Fund Ordinance, 1971

17. Workmen Compensation Act, 1923

Annex 1: Data on companies and firms

Total number of companies in Pakistan

Companies listed by shares Companies incorporated

July 2010-June 2011 Total as on June 30, 2011

Public listed - 648 Public unlisted 32 2,207 Private 3,056 53,750

SMC 214 1,225

Total Companies limited by shares 3,302 57,830 Companies limited by guarantee under section 43

4 73

Not for profit associations u/s 42 57 713 Foreign companies 22 798 Unlimited companies - 3 Total companies 3,385 59,417

Regional Representation of Companies

Province Percentage Punjab 41% Khyber Pakhtunkhawa 7% Sindh 33% Baluchistan 2%

ICT 17%

Number of Firms and societies in Punjab by 2012

Province Registered Firms Registered societies Punjab 335,275 16,569