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From Shamim Ahmed Rizvi, Islamabad
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, 1999.

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 long run.

(iv) It may result in remittance of huge outflow of foreign exchange especially by multinational companies whose majority shares are held by foreign shareholders.

(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 stock market.

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:-

"[59] The provisions of sub-section (9A) of Section 12 shall not apply to —

(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 prospectuses

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 Ordinance, 1984.

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 and Reserves.

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 examination/finalization.