From Shamim Ahmed Rizvi,
Feb 14 - 20, 2000
Headed by a professional chartered Accountant of repute, Mr. Zafar
Hijazi, the Monitoring and Enforcement Division of the Securities and Exchange Commission
of Pakistan has played the most vital role in protecting the interest of small
shareholders by streamlining, working of listed companies through close scrutiny of their
accounts and taking them to task on various accounts.
The Monitoring and Enforcement Division is totally a new division
established on 1st January 1999, entrusted with the responsibility to monitor the workings
of listed companies with an objective to protect the interest of the small shareholders.
The work allocated to the Monitoring & Enforcement Division, in brief, included
evaluation of the performance of the listed companies through examination of their annual
and half yearly accounts, overseeing that disclosure requirements of 4th Schedule to the
Companies Ordinance, 1984 and International Accounting Standards are observed in
preparation of accounts, matter relating to holding of AGMs, dividends and taking
cognizance against defaulting companies for non-observance of the corporate laws,
mis-statements in Prospectus and Inter corporate Financing.
The major action taken by the M&E Division during the year
1999 are as under:-
Non-payment of dividend
Section 265 of the Companies Ordinance, 1984 empowers SECP to order
investigation into the affairs of the companies which are, prima facie, mismanaged and
members thereof are deprived from a reasonable return. In view of the facts that about
two/third of companies listed on the Stock Exchanges in Pakistan have not been paying
dividends to the members for the last many years due to which the confidence of the
investors was badly shattered, the Commission decided to take up cases of such companies
for detailed investigations. In this matter, it was decided that, in the first instance,
the companies will be pursued to improve their working results so as to pay some returns
to the shareholders. The Inspectors shall be appointed in those cases, where Commission
was convinced that there are visible evidences of mis-managements and frauds and there is
no likelihood/commitment from the management to improve their working results.
At present 765 companies are listed on the Karachi Stock Exchange; out
of which 505 companies are either closed in losses or have minor reserves and were not
paying dividends to their shareholders. There may be genuine reasons for losses in some
companies but there are quite a large number of companies which declare losses due to
manipulation/mis-management, have huge fleets of directors with fabulous remunerations,
leaving nothing for the shareholders. The M&E Division initiated investigation
proceedings under Section 265 against 172 companies which were not paying dividends for
the last many years or which appeared to be grossly mis-managed.
Notices were issued to these companies asking them to explain as to why
inspectors in their Cases for bad performance may not be initiated. With the efforts of
this Division, 44 companies have so far declared dividend after a lapse of about 5 years.
19 companies which will hold AGM by 3 lst March, 2000, have promised to pay dividend on
the basis of their next account. About 16 companies have promised to improve their working
results in future.
Taxation on reserves of companies under section 12 (9A) of finance act,
The Finance Act, 1999 introduce tax on public companies (other than
scheduled banks and modarabas) at the rate of ten percent on the amount of undistributed
reserves in case the reserves exceed 50% of the paid up capital. The provision in the
Finance Bill which stipulated tax on reserves in excess of 50% of paid up capital of
public companies which derived.
Profits for any income year but did not distribute cash dividends.
Apparently, the main objective of the proposal for taxing undistributed reserves is to
force companies to distribute maximum dividend to the shareholders. A large number of
representative were received which pin-pointed following possible negative implications of
the tax on reserves:-
(i) It may discourage industrial/economic growth as companies would be
discouraged from re-investing their profits in expansion and renovation.
(ii) Companies may suppress their profits to avoid tax which would lead
to misreporting of profitability and financial health of companies.
(iii) Companies may resort to expand their capital base by capitalizing
profits which may be counter productive in the absence of any expansion/increase in their
profitability and may thus prove detrimental to the interest of the small shareholders in
(iv) It may result in remittance of huge outflow of foreign exchange
especially by multinational companies whose majority shares are held by foreign
(v) It may make companies more dependent on borrowings than financing
their projects from equity.
(vi) The amendment may affect prices of shares of good companies on the
The Commission, in the larger interest of the corporate sector, took up
the matter with the Finance Ministry which agreed to the suggestion and issued a revised
notification as under:-
" The provisions of sub-section (9A) of Section 12 shall not
(i) a company listed on a stock exchange which distributes at least
forty per cent of its after-tax profits of the relevant income year;
(ii) a public company not listed on the stock exchange;
(iii) a trust or a company in which not less than fifty per cent shares
are held by the Government; or
(iv) a leasing company as defined in the Leasing Companies
(Establishment and Regulation) Rules, 1996."
Due to this amendment at least 38 companies have paid additional
dividend to their shareholders.
C. Annual general meetings by listed companies
In order to ensure that companies hold their Annual General Meetings
and prepare their Annual Accounts regularly, provisions have been made in Section 158 and
233 of the Companies Ordinance, 1984. Annual General Meetings of the Companies are the
proper forum where the shareholders are able to know about the factual positions of their
investments and can discuss matters like declaration of dividend, measures to be taken to
cut down heavy expenses, reasons of heavy losses incurred and other issues with the
management of the companies.
Section 158 of the Companies Ordinance, 1984 provides that every
company should hold its annual general meeting within eighteen months from the date of its
incorporation and thereafter at least once in every calendar year within a period of six
months following the close of its financial year and not more than fifteen months after
the holding of its last preceding annual general meeting. However, in case of listed
companies, the Commission may for any special reason extend the time by a period not
exceeding ninety days. Under Section 233 of the Companies Ordinance, 1984, the directors
of every company are required at some date not later than eighteen months after the
incorporation of the company and subsequently once at least in every calendar year to lay
before the company in annual general meeting a balance sheet and profit and loss accounts
together with auditors report etc.
Although in the past, the erstwhile Corporate Law Authority had been
trying to ensure that companies comply with the statutory requirements of these important
sections yet due to some lenient view shown in the past the managements of the Companies
adopted lethargic attitude in compliance of these sections.
Since the Securities & Exchange Commission became functional in
January, 1999, its Enforcement and Monitoring Wing has been very vigilant to ensure that
compliance of these statutory requirements are made by the companies and it started taking
punitive actions against such companies which defied to comply with such important
regulations, show cause notices were issued to 50 companies where the managements had not
held the AGMs timely and not presented their accounts in the AGMs. As the written
explanation of 24 companies were not found satisfactory they were accorded an opportunity
of being heard in terms of sub section (3) of Section 476 of the Companies Ordinance;
1984. The Chief Executive or their authorized representatives appeared before the
Commission and gave their explanations for non compliance of these sections. The
explanations of the Chief Executives of 16 companies were not found satisfactory and they
were imposed penalties of Rs. 18,10,650/- under Section 158 (4) of the Companies
Ordinance, 1984. The defaults in 5 cases were condoned as the default was not found to be
wilful on part of the Chief Executives. The decision in the rest of the three cases has
yet to be taken as they are pending for want of further clarifications. Out of the
remaining 26 cases where hearing were not held 4 cases were dropped as either the
companies were being liquidated or delisted. The rest of 21 cases are at different stages;
while One case has been referred to the Registrar of Companies for initiating prosecution
proceedings under Section 233 (6) read with sub section (7) of Section 230 of the
Companies Ordinance, 1984 which prescribes punishment with imprisonment for a term which
may extend to One Year and with fine which shall not be less than Ten Thousand rupees or
more than Twenty Thousands rupees. Besides, nine other chronic cases which have been
habitual defaulters and have not held the AGMs for the last many years, their cases have
been referred to Registrar of Companies for initiating prosecution proceedings against the
managements of these companies.
During the year 1999; 83 companies applied to the Commission under
Section 158 of the companies for extension of period in holding the AGMs. These
applications were properly scrutinized by the Enforcement and Monitoring Wing of the
Commission and extensions were allowed to 54 companies only as the reasons explained by
their managements were found cogent and their past record in holding the AGMs were
satisfactory and they have seldom sought extensions in the past. The requests of 24
companies were turned down as their past record was not satisfactory and they were found
habitual in seeking extensions. In five cases further clarifications have been called for
from the companies.
The Commission has decided to be more strict in this matter and to make
the companies regular in holding their AGMs and in preparation of their annual accounts to
enable their shareholders to know about their investments. By the timely actions of the
Commission against those companies which fail to hold annual general meetings and lay
therein accounts, the companies will hopefully become more careful to comply with
statutory requirements of Section 158 and 233 of the Companies Ordinance 1984. The
Commission expects that the strategy adopted by it, in this regard, the number of such
defaulter companies will be reduced to "great extent in the year 2000".
E. Examination & evaluation of accounts
The annual statement of account of a company is the most import
document from the point of view of a shareholder. In order to ensure that these accounts
exhibit true, correct and fair view of the state of the companies affairs and contains
maximum information as required under law, the system of examination of accounts has been
strengthened for which a detailed check-list based on the requirements of the Fourth
Schedule to the Companies Ordinance and International Accounting Standards (IAS) has been
prepared by the E & M Wing and has been introduced. The E & M Wing has also
started availing the services of the Chartered Accountants for indepth examination of the
published annual accounts of the listed companies to ensure that disclosure requirements
are properly met and there is no violation of law. During the year under review 673
accounts were filed by the companies which were examined. On the basis of this
examination, explanations from a large number of companies were called by the E & M
Wing on matters like non-providing of explanation on auditors qualifications,
non-disclosure of information regarding "Year 2000 compliance", reasons for huge
losses, investments in associated companies.
H. Action against companies lying closed
During the course of investigation it was transpired that there are
companies whose offices are lying closed and there is no body to look after their affairs
or to receive letters. The Commissioner (E&M) considered these cases and the
respective CRO (Company Registration Offices) were advised to take action against these
companies for not maintaining their registered offices under the provisions of Section 142
of the Companies Ordinance, 1984. In this regards action was taken in 27 companies.
It was further transpired that there are listed companies which have
discontinued their operations since long, have not paid any dividend to their shareholders
for more than 10 to 15 years but are still listed and functioning as listed companies. The
matters of these companies were considered and in the case of three companies namely;
(Colony Woolen Mills Ltd. Valika Art Fabrics and Ahmed Spinning Mills Ltd.) it was decided
to file winding up petitions against these companies with the courts. Necessary notices to
these companies have been served under the provisions of Section 305 and 309 of the
Companies Ordinance, 1984 and necessary action are in progress.
I Action initiated against companies for mis-statement in their
The M&E Division has initiated action against three companies
namely D.G. Khan Electric Company Ltd., Wali Oil Mills Ltd. and Saadi Cement Ltd., for
mis-statement in their prospectuses under Section 60, 66 and 492 of the Companies
J. Intercorporate financing
A large number of companies have made investment in their associated
undertaking contrary to the interest of their minority shareholders. The E & M Wing
issued a Circular in May, 1999 advising all the listed companies to furnish detailed
information with regard to the investments made by them in their associated companies. The
information so received was analysed and in number of cases, directions were issued to the
companies to withdraw their investments from the associated companies.
K. References made to ICAP
The E & M Wing has made a number of references to the ICAP on
different issue. A reference was made to the ICAP regarding non-compliance by the
companies and the auditors to the requirements of IAS-25 and TR-23 issued by the ICAP
regarding evaluation of investments in shares of the listed companies. The Institute
furnished its reply on which it was advised to take corrective measures in the matter. The
Institute finally issued a Circular (No.17/99) to its Member, both in practice and those
working in Industry, to abide the requirements of the above referred standard and TR in
letter & spirit.
L Treatment of surplus arising out of revaluation of fixed
assets (section 235)
Where a company revalues its fixed assets, the increase in, or sums
added by writing up of, the value of such assets as appearing in the books of accounts of
the company shall be transferred to an account to be called "Surplus on Revaluation
of Fixed Assets Account" and shown in the balancesheet of the company after Capital
The SECP is carrying out an exercise to ascertain the impact of
revaluation of fixed assets on profit and Loss account of listed companies and in this
connection all the companies which have revalued their fixed assets were asked to give the
requisite information and most of the companies have furnished required information. The
M&E Division intends to take a policy decision in the matter so that the profits of
the companies, which have revalued their assets are not suppressed due to this factor and
the shareholders may continue to get adequate return on their investments.
M. Unlawful with-holding of payment of dividend
Section 251 of the Companies Ordinance, 1984 provides that when a
dividend has been declared by a listed company, it shall not be lawful for the directors
of the company to withheld or defer payment of dividend and Chief Executive of the company
shall be responsible to make payment of dividend, in the manner, provided in Section 250
ibid within 45 days of the declaration. M/s. Quality Steel Mills Limited declared 10%
dividend for the period ended 30.06.1998 in the AGM held on 26.08.1999 and have failed to
make payment of the dividend to all the shareholders of the company within prescribed
limit of the declaration of dividend. Similarly M/s. United Sugar Mills Limited declared
5% interim dividend for the half year ended on 31.03.1999 and have also failed to make the
payment to all the shareholders for which both the companies have been issued show cause
notices under Section 251 of the Companies Ordinance, 1984. The Commission intends to file
prosecution proceedings against the managements of these companies for unlawful
withholding of payment of dividend to their shareholders.
N. Actions against the auditors
The E & M Wing has also started actions against the auditors for
not giving proper audit reports. In one case notice under Section 260 has been issued.
Efforts are made that auditors become more responsible while giving their reports on the
accounts of the listed companies.
O. Complaints received from the shareholders/stock exchanges
The M&E Division has started taking immediate actions on the
complaints which are received from the shareholders of the Stock Exchanges against the
management of the listed companies. During the period under review, large number of
complaints were received from the shareholders/Karachi Stock Exchange out of which
necessary actions were completed in most of the cases whereas remaining cases are under