Corporate Governance
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
06 December 2009
As i have already asked but can't convinced the expert to convey my question what i am desirabe. but now i am interested to guide me under these guidlined what parameter i may adopt to solve my problem. i will be thankful.
Borrowing Power of a company
1. Irresponsible borrowing has caused the closure of many companies in Pakistan and the world. Borrowing beyond a company’s means to service interest and repayments significantly increase its insolvency risk.
2. No law puts any limitation on the amount that company can borrow. There are generalized references to prudence in all decisions, but there is no specific law that forbids a company (or its board) to borrow beyond a particular amount.
3. Virtually no company is restrained by its Articles of Association to borrow beyond any specified limit.
4. There are restrictions imposed on financial institutions by State bank of pakistan that forbid them to lend a company beyond a certain percentage of its total equity, but these restrictions are for lenders, not borrowers.
5. Most listed companies in Pakistan are run by those who hold, directly or indirectly, more than 51 % of the equity. Such persons are liable to inflate the prices of a company’s assets to overstate their equity contribution-thereby circumventing SBP rules. Such companies end up insolvent more often than others.
6. Enhanced risk of insolvency is not the only undesirable consequence of imprudent borrowing. The interest of several stakeholders is adversely affected by company’s inability to service its debts.
In view of the situation as outlines above, assume that Securities & exchange commision has assigned you the task to frame a POICY DOCUMENT ON BORROWING POWERS OF PUBLIC LIMITED COMPANY. It is indented that this policy will lead to amendment in companies Act.
4. while framing your proposals give due regard to:
a. Putting an unjustified limit (in terms of amount or percentage of equity) on the maximum borrowing that a company can make may inhibit its growth and hence adversely impact the economy. Again imposing a uniform quantitative or percentage bar on the borrowing of All companies may not be advisable as companies differ in nature and types of capital structures required to run them
b. SBP’s insistence on asking all directors to submit personal liabilities for loans taken by the company is counter productive as it negates the concept of limited liability. Un scrupulous companies nominate persons with poor net worth as directors to dodge this provision and at the same time this provision deters genuine independent directors from accepting directorial appointments. Thus it does not protect the other stakeholders of the company.
c. Exempting non executive directors from responsibility for company’s liabilities appears logical when seen in context of limited liability companies, but it is liable to open up doors for misuse and abuse.
d. The ethical standards of those who run limited companies in Pakistan forbid any attempt to allow them to be self regulated however the scope of formalized self regulation by company boards has not yet been explored.
what i may do now?
Borrowing Power of a company
1. Irresponsible borrowing has caused the closure of many companies in Pakistan and the world. Borrowing beyond a company’s means to service interest and repayments significantly increase its insolvency risk.
2. No law puts any limitation on the amount that company can borrow. There are generalized references to prudence in all decisions, but there is no specific law that forbids a company (or its board) to borrow beyond a particular amount.
3. Virtually no company is restrained by its Articles of Association to borrow beyond any specified limit.
4. There are restrictions imposed on financial institutions by State bank of pakistan that forbid them to lend a company beyond a certain percentage of its total equity, but these restrictions are for lenders, not borrowers.
5. Most listed companies in Pakistan are run by those who hold, directly or indirectly, more than 51 % of the equity. Such persons are liable to inflate the prices of a company’s assets to overstate their equity contribution-thereby circumventing SBP rules. Such companies end up insolvent more often than others.
6. Enhanced risk of insolvency is not the only undesirable consequence of imprudent borrowing. The interest of several stakeholders is adversely affected by company’s inability to service its debts.
In view of the situation as outlines above, assume that Securities & exchange commision has assigned you the task to frame a POICY DOCUMENT ON BORROWING POWERS OF PUBLIC LIMITED COMPANY. It is indented that this policy will lead to amendment in companies Act.
4. while framing your proposals give due regard to:
a. Putting an unjustified limit (in terms of amount or percentage of equity) on the maximum borrowing that a company can make may inhibit its growth and hence adversely impact the economy. Again imposing a uniform quantitative or percentage bar on the borrowing of All companies may not be advisable as companies differ in nature and types of capital structures required to run them
b. SBP’s insistence on asking all directors to submit personal liabilities for loans taken by the company is counter productive as it negates the concept of limited liability. Un scrupulous companies nominate persons with poor net worth as directors to dodge this provision and at the same time this provision deters genuine independent directors from accepting directorial appointments. Thus it does not protect the other stakeholders of the company.
c. Exempting non executive directors from responsibility for company’s liabilities appears logical when seen in context of limited liability companies, but it is liable to open up doors for misuse and abuse.
d. The ethical standards of those who run limited companies in Pakistan forbid any attempt to allow them to be self regulated however the scope of formalized self regulation by company boards has not yet been explored.
what i may do now?
Querist : Anonymous
Querist :
Anonymous
(Querist)
08 December 2009
policy for borrowing power of comapany
20 July 2024
The policy document on borrowing powers of public limited companies in Pakistan should emphasize prudent borrowing practices, set borrowing limits based on equity, enhance board accountability, introduce regulatory oversight, reevaluate director personal liability, and encourage ethical standards. The process involves thorough research, stakeholder consultation, drafting the policy document, reviewing and incorporating feedback, and submitting the final document to the Securities & Exchange Commission for consideration.
20 July 2024
Developing a policy for the borrowing power of a company involves outlining guidelines and procedures that ensure responsible borrowing practices while balancing growth opportunities and financial stability. Here’s a structured approach to crafting such a policy:
### Policy Framework for Borrowing Power of Company
1. **Objective**
- The policy aims to regulate and optimize the borrowing activities of the company to support growth while safeguarding financial stability and protecting stakeholders’ interests.
2. **Guiding Principles**
- **Prudent Borrowing:** Ensure all borrowing is done prudently, considering the company’s financial capability to service debts and repayments.
- **Transparency:** Maintain transparency in borrowing decisions and disclose relevant information to stakeholders, including shareholders and regulatory authorities.
- **Accountability:** Establish clear accountability mechanisms for borrowing decisions, involving board oversight and compliance with regulatory requirements.
- **Risk Management:** Implement robust risk management practices to assess and mitigate financial risks associated with borrowing activities.
- **Legal Compliance:** Adhere to all applicable laws, regulations, and guidelines related to borrowing, including provisions under the Companies Act and regulatory directives.
3. **Policy Components**
a. **Borrowing Limits and Criteria:**
- Define the maximum borrowing limit based on financial metrics such as equity, assets, or earnings capacity.
- Specify criteria for determining the purpose and duration of borrowing, ensuring alignment with the company’s strategic objectives.
b. **Approval Process:**
- Outline the procedure for seeking approval for borrowing, including thresholds that require board or shareholder approval.
- Identify key stakeholders involved in the approval process and their respective roles and responsibilities.
c. **Risk Assessment:**
- Require a comprehensive risk assessment before initiating any borrowing, including financial analysis, market conditions, and potential impact on liquidity.
- Establish guidelines for evaluating the risks associated with different types of borrowing instruments, such as loans, bonds, or credit facilities.
d. **Documentation and Reporting:**
- Mandate the maintenance of accurate records and documentation related to borrowing transactions.
- Specify reporting requirements to the board of directors, shareholders, and regulatory authorities on borrowing activities, including updates on utilization and repayment status.
e. **Compliance and Monitoring:**
- Ensure compliance with internal policies, legal requirements, and regulatory guidelines throughout the borrowing lifecycle.
- Implement monitoring mechanisms to track borrowing performance, assess compliance with debt covenants, and identify early warning signals of financial distress.
f. **Review and Evaluation:**
- Conduct periodic reviews of the borrowing policy to assess its effectiveness and relevance in achieving financial objectives and mitigating risks.
- Incorporate feedback from stakeholders and external audits to enhance the policy’s robustness and adaptability to changing business environments.
4. **Implementation Plan**
- Develop an implementation plan outlining the steps, timelines, and responsible parties for executing the policy.
- Conduct training sessions and workshops to educate key stakeholders, including executives, managers, and employees, on the policy’s provisions and implications.
5. **Policy Adoption and Communication**
- Obtain approval from the board of directors and formally adopt the borrowing policy.
- Communicate the policy to all relevant stakeholders, ensuring understanding of their roles and responsibilities in adhering to the policy guidelines.
6. **Continuous Improvement**
- Foster a culture of continuous improvement by soliciting feedback, monitoring policy outcomes, and making necessary adjustments to enhance effectiveness and compliance.
By following this structured approach, you can develop a robust borrowing policy that promotes financial discipline, mitigates risks, and supports sustainable growth for the company while aligning with regulatory requirements and stakeholder expectations.
### Policy Framework for Borrowing Power of Company
1. **Objective**
- The policy aims to regulate and optimize the borrowing activities of the company to support growth while safeguarding financial stability and protecting stakeholders’ interests.
2. **Guiding Principles**
- **Prudent Borrowing:** Ensure all borrowing is done prudently, considering the company’s financial capability to service debts and repayments.
- **Transparency:** Maintain transparency in borrowing decisions and disclose relevant information to stakeholders, including shareholders and regulatory authorities.
- **Accountability:** Establish clear accountability mechanisms for borrowing decisions, involving board oversight and compliance with regulatory requirements.
- **Risk Management:** Implement robust risk management practices to assess and mitigate financial risks associated with borrowing activities.
- **Legal Compliance:** Adhere to all applicable laws, regulations, and guidelines related to borrowing, including provisions under the Companies Act and regulatory directives.
3. **Policy Components**
a. **Borrowing Limits and Criteria:**
- Define the maximum borrowing limit based on financial metrics such as equity, assets, or earnings capacity.
- Specify criteria for determining the purpose and duration of borrowing, ensuring alignment with the company’s strategic objectives.
b. **Approval Process:**
- Outline the procedure for seeking approval for borrowing, including thresholds that require board or shareholder approval.
- Identify key stakeholders involved in the approval process and their respective roles and responsibilities.
c. **Risk Assessment:**
- Require a comprehensive risk assessment before initiating any borrowing, including financial analysis, market conditions, and potential impact on liquidity.
- Establish guidelines for evaluating the risks associated with different types of borrowing instruments, such as loans, bonds, or credit facilities.
d. **Documentation and Reporting:**
- Mandate the maintenance of accurate records and documentation related to borrowing transactions.
- Specify reporting requirements to the board of directors, shareholders, and regulatory authorities on borrowing activities, including updates on utilization and repayment status.
e. **Compliance and Monitoring:**
- Ensure compliance with internal policies, legal requirements, and regulatory guidelines throughout the borrowing lifecycle.
- Implement monitoring mechanisms to track borrowing performance, assess compliance with debt covenants, and identify early warning signals of financial distress.
f. **Review and Evaluation:**
- Conduct periodic reviews of the borrowing policy to assess its effectiveness and relevance in achieving financial objectives and mitigating risks.
- Incorporate feedback from stakeholders and external audits to enhance the policy’s robustness and adaptability to changing business environments.
4. **Implementation Plan**
- Develop an implementation plan outlining the steps, timelines, and responsible parties for executing the policy.
- Conduct training sessions and workshops to educate key stakeholders, including executives, managers, and employees, on the policy’s provisions and implications.
5. **Policy Adoption and Communication**
- Obtain approval from the board of directors and formally adopt the borrowing policy.
- Communicate the policy to all relevant stakeholders, ensuring understanding of their roles and responsibilities in adhering to the policy guidelines.
6. **Continuous Improvement**
- Foster a culture of continuous improvement by soliciting feedback, monitoring policy outcomes, and making necessary adjustments to enhance effectiveness and compliance.
By following this structured approach, you can develop a robust borrowing policy that promotes financial discipline, mitigates risks, and supports sustainable growth for the company while aligning with regulatory requirements and stakeholder expectations.
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