' SADIQ HUSSAIN BHATTI, J.---The petitioner, Abdul Rehman Baloch, has filed this petition challenging the legality of Circular No,26 of 2008 dated 5-11-2008 ("the impugned Circular"), directing the securities held by collective investment schemes (Mutual Funds) to be valued with immediate effect after applying the discount rates prescribed in the impugned Circular, which adversely affected his investments in such Mutual Funds.
2. Brief facts of the case are that the petitioner invested Rs,10 million in the investment scheme of respondent No,3 on 24-6-2008 and a sum of Rs,10 million in a scheme sponsored by respondent No,4. Up to 31-10-2008, the petitioner earned a profit of Rs,281,941.69 and Rs,368,454.47 respectively on the above two investments. After the month of October, 2008, respondent No, 3 reduced the value of petitioner's investment by 10 per cent and there was a second reduction in the value of the investment of the petitioner by 10 per cent. These reductions were made pursuant to the impugned Circular issued by the respondent No,1 which resulted in substantial loss to the petitioner. The respondent No, 3 devalued the investment of the petitioner by 20 per cent while the respondent No,4 reduced the value of investment of the petitioner by 7 per cent. Therefore, through the present petition, the petitioner has challenged the validity of the impugned Circular terming it void and illegal.
3. Mr. Shahenshah Hussain, learned counsel for the petitioner argued that the impugned Circular has been purportedly issued under section 282-D of the Companies Ordinance, 1984 (hereinafter "Ordinance, 1984") which provides that any direction issued under the said provision of law must be in public interest. He submitted that since investments in such financial institutions are made for earning profits which mostly represents the lifelong savings of a person, therefore, any direction by respondent No,1 which may result in reducing the value of the investment would not be in public interest. He invited our attention to page 25 of the file and argued that a huge loss was suffered by the petitioner on his investments with respondents Nos.3 and 4. He submitted that if investments are curtailed in such manner by the investment companies then no one would come forward to invest in any government security. He further contended that it is duty of the Securities and Exchange Commission of Pakistan ("the Commission") to safeguard public interest. In this regard he referred to various law reports and law dictionary to explain the term "public interest". He also submitted that a circular cannot be given retrospective effect nor can a circular amend the terms and conditions of investment executed between the petitioner and the Respondents Nos.3 and 4.
He submitted that the respondent No,1 is not competent to issue any such directions which will modify the existing terms of investment to the prejudice of the petitioner without his consent. He, therefore, prayed that this petition may be allowed, the impugned Circular may be declared illegal and without lawful authority and direct the respondents to reimburse the petitioner for the financial losses suffered by him due to issuance of the impugned Circular. In support of his contentions the learned counsel relied on (i) BABAR KHAN GHORI and another v. FEDERATION OF PAKISTAN and others (PLD 1999 Karachi 402); (ii) ALSAMREZ ENTERPRISE v. THE FEDERATION OF PAKISTAN (1986 SCMR 1917)
(iii) ABDUL QUDDUS v. THE STATE (1985 SCMR 172), (iv) Messrs AIRPORT SUPPORT SERVICES v. THE AIRPORT MANAGER, QUAID-E-AZAM INTERNATIONAL AIRPORT, KARACHI and others (1998 SCMR 2268),
(v) MIAN MUHAMMAD AND OTHERS v. THE MUNICIPAL COMMITTEE THROUGH ITS CHAIRMAN (1983 SCMR 732), (vi) STATE LIFE INSURANCE CORPORATION OF PAKISTAN v. MESSRS PAKISTAN TOBACCO COMPANY LTD. (PLD 1983 Supreme Court 280).
4. On the other hand, at the very outset, learned counsel for respondent No,3 attacked the very maintainability of the Petition by pointing out that there are contractual obligations between the parties and, therefore, the same cannot be challenged by filing a constitutional petition under Article 199 of the Constitution. He invited our attention to the Offering Document (page 41 of the file - Annexure R-5) and stated that the petitioner, at the time of making the investment, was well aware that there is no promise of capital preservation and further that the returns on the investments were subject to market performance. On merits, the learned counsel submitted that at the relevant time there was no liquidity in the market and if the Commission had not intervened by exercising powers vested in it under section 282-D of the Ordinance, 1984, the entire market would have collapsed with devastating effect and investment of some of the investors would have been completely wiped out. He also referred to the averments made in paras 1 and 2 of the petition, and stated that when the conditions were favourable the petitioner earned huge profits on his investments and that this is proof in itself that the respondents were not acting mala fide but the fluctuation was due to the market mechanism. He also submitted that the circumstances at the relevant time left no way for the Commission but to intervene in exercise of powers under section 282-B of the Ordinance, 1984 to save the market from complete collapse. In this regard he also referred to the powers of the Commission contained in section 20 of the Securities and Exchange Commission Act, 1997 (hereinafter referred to as "the Act of 1997"). The learned counsel, with reference to the impugned Circular, stated that there was no liquidity in the market and circumstances were such that it called for taking immediate remedial steps and, therefore, the Commission issued necessary guidelines through the impugned Circular to determine the value of the debt securities held by collective investment schemes (Mutual Funds). He also submitted that under section 282D of the Ordinance 1984 the Commission was competent to issue the impugned Circular in the public interest.
5. The learned counsel for the respondents also argued that contractual obligations cannot be enforced through constitutional petition and relied upon the case of MESSRS MOMIN MOTOR COMPANY v. THE REGIONAL TRANSPORT AUTHORITY, DACCA (PLD 1962 Supreme Court 108), wherein the Hon'ble Supreme Court held as under:-- "Learned counsel then attempted to argue that his client had contractual rights, because he had been made to spend a lot of money on making the road bus worthy and the understanding was that no other permit-holder would be introduced in this route. The short answer to this contention is that contractual rights, if any, are not enforceable but recourse to writ jurisdiction.
(Underlined is ours).
6. The learned counsel for respondents Nos. 3 and 4 mainly contended that they are Assets Management Companies and were bound by the law to follow the instructions of the Commission and, therefore, by acting upon the impugned Circular they have acted within the four corners of law and have not done anything illegal or unlawful. However, they supported the submissions advanced by learned counsel for the Commission.
7. First we would consider the point of maintainability of this petition. A perusal of the prayer clause shows that the petitioner mainly seeks two prayers: (i) declare the impugned Circular as illegal, void and without lawful authority and (ii) reimbursement for the losses suffered due to the impugned Circular. Suffice it to say that the first question which falls for consideration in this petition is whether the impugned Circular was competently and lawfully issued by respondent No,1 or not. On this point, this petition is maintainable as this Court has ample powers to consider the same in view of the fact that respondent No, 1 is performing duties in connection with affairs of the State. In this view of the matter, if it is held that the impugned Circular was not lawfully and competently issued and the same is declared to be illegal, unlawful and void, then the deduction/alterations made pursuant to the impugned Circular in the investment of the petitioner would revert to its original position and there would be no question of deciding any disputed question of facts.
8. Before proceeding any further, it would be advantageous to reproduce the impugned Circular, which reads as under:--.
"CIRCULAR NO.26/ 2008 ' Subject: Directive under section 282D of the Companies Ordinance, 1984.
(1) Due to absence of liquidity and price discovery' in the debt market, the Securities and Exchange Commission of Pakistan, in exercise of its powers conferred under section 282D of the Companies Ordinance, 1984, is satisfied that it is necessary and expedient in the public interest generally and in the interest of unit holders especially, to direct all Asset Management Companies that all debt securities including Term Finance Certificates (TFCs), Sukus etc. Held by collective investment schemes (Mutual Funds) shall, with immediate effect, be valued after applying the following discount rates for calculating the Net Asset Value (NAV):-- S.No. Equity or issuer rating Percentage of discount to face value
1. AAA 5%
2. AA+ 7.5%
3. AA 10%
4. AA 12.5%.
5. A+ 15%
6. A 17.5%
7. A- 20%
8. All others 30%
(2) The Mutual Funds calculating NAV on backward pricing basis shall not entertain any redemption requests today i,e, 5th November, 2008.
(3) This directive shall have immediate effect and will be applicable till 12th January, 2009 or such other date as the Commission may specify.
9. Pursuant to the above quoted impugned Circular, the respondents Nos.3 and 4 acted in accordance with the directions contained therein and determined the redemption value of the units on the basis of such discounted rates. This adversely affected, inter alia, the petitioner, which is the main cause of concern to the petitioner and, therefore, he filed the present petition impugning the same.
10. The question which goes to the root of the present case is whether the Commission was competent to issue the impugned Circular or not and whether the impugned Circular was in the public interest. If the Commission was not empowered to issue the impugned Circular or if the same was not public interest then this Court has wide and ample powers to declare the same as without lawful authority and of no legal effect.
11. First, we will take up the question whether the Commission was competent to issue the impugned Circular. In this regard reference may be made to section 282D of the Ordinance, 1984, under which the impugned Circular was issued, which reads as under:-- 282D. Power to issue directions.---(1) Notwithstanding anything contained in any other provision of this Ordinance, where the Commission is satisfied that it is necessary and expedient so to do-
(a) in the public interest; or
(b) to prevent the affairs of any NBFC (or notified entity) from being conducted in a manner detrimental to the interests of shareholders (or unit or certificate holders as the case may be,) or persons whose interests are likely to be affected or in a manner prejudicial to the interests of the NBFC (or notified entity); or
(c) to secure the proper management of any NBFC (or notified entity) generally it may issue directions to NBFCs (or notified entities) generally or to any NBFC (or notified entity) in particular (to do or desist from doing such acts as the C NBFC 'for notified entity) Commission may deem fit and to carry out such changes as are necessary to rectify the situation and the NBFCs (or notified entities) shall be bound to comply with such directions.
(2) The Commission may, on representation made to it or on its own motion, modify or cancel any direction issued under subsection (1) and in so modifying or cancelling any direction may impose such conditions as it thinks fit."
12. A perusal of the above quoted section 282D of the Ordinance, 1984 reveals that the Commission is empowered, notwithstanding anything contained in the Ordinance, 1984, to issue directions to NBFCs (or notified entities) to do or desist from doing such acts as the Commission may deem fit and to carry out such changes as are necessary to rectify the situation and the NBFCs (or notified entities) shall be bound to comply with such directions.
13. In this regard reference may also be made to section 20 of the Act, 1997, which describes the powers of the Commission. Section 20 (ibid) reads as under:--
20. Powers and functions of the Commission.---(1) The Commission shall have all such powers as may be necessary to perform its duties and functions under this Act.
(2) The. Commission may having regard: to its' functions and to exercise its powers 'efficiently, organize .Itself into divisions, wings or 'such other sub-divisions as it may consider expedient.
(3) The Commission may, from lime to time, identify the matters requiring the Board to make policy decisions and may also make recommendations regarding policy to the Board for its consideration.
(4) The Commission shall be responsible for the performance of the following functions:
(a) regulating the issue of securities;
(b) regulating the business in Stock Exchange and any other securities markets;
(c) supervising and monitoring the activities of any central depository and Stock Exchange clearing house;
(d) registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, underwriters, portfolio managers, investment advisers and such other intermediaries who may be associated with the securities markets in any manner;
(e) proposing regulations for the registration and regulating the working of collective investment schemes, including unit trust schemes;
(f) promoting and regulating self-regulatory organizations including securities industry and related organizations such as Stock Exchanges and associations of mutual funds, leasing companies and other NBFIs;
(g) prohibiting fraudulent and unfair trade practices relating to securities markets:
(h) promoting investors education and training of intermediaries of securities markets:
(i) conducting investigations in respect of matters related to this Act and the Ordinance and in particular, the purpose of investigating insider trading in securities and prosecuting offenders;
(j) regulating substantial acquisition of shares and the merger and takeover of companies;
(k) calling for information, from and undertaking inspections, conducting inquiries and audits of the Stock Exchanges and intermediaries and self regulatory organizations in the securities market;
(1) considering and suggesting reforms of the law relating to companies and bodies corporate, securities markets, including changes to the constitution, rules and regulations of companies and bodies corporate, Stock Exchanges or clearing houses;
(m) encouraging the organized development of the capital market and the corporate sector in Pakistan;
(n) conducting research in respect of any of the matters set out in this subsection;
(o) performing such, functions and exercising such powers of the Authority, including any powers of the Federal Government delegated to the Authority (other than the power to make any rules or regulations) under the provisions of the Ordinance, and under any other law for the time being in force under which any function or power has been conferred on the Authority including, but not limited to, the functions and powers set out in the Schedule to this Act;
(p) performing such functions and exercising such powers (other than the power to make any rules or regulations) under the Ordinance or any other law for the time being in force as may, after the commencement of this Act, be delegated to it by the Federal Government and exercising any power or performing any functions conferred on it by or under any other law for the time being in force; and
(q) proposing regulations in respect of all or any of the aforesaid matters for the consideration and approval of the Board.
(5) Without prejudice to the provisions of subsection (4), the approval of the Commission shall be required by--
(a) all public companies incorporated in Pakistan which intend to issue or offer for sale securities in markets outside Pakistan or to list such securities on a Stock Exchange outside Pakistan, in each case, whether directly or through an intermediary;
(b) all bodies corporate incorporated outside Pakistan which or persons who intend to issue or offer for sale, securities to the public in Pakistan or to list such securities on a Stock Exchange; and
(c) all bodies corporate incorporated outside Pakistan which are already listed on a Stock Exchange, for the listing of and quotation for any additional securities.
(6) In performing its functions and exercising its powers, the Commission shall strive--
(a) to maintain facilities and improve the performance of companies and of securities markets, in the interest of commercial certainty, reducing business costs, and efficiency and development of the economy;
(b) to maintain the confidence of investors in the securities markets by ensuring adequate protection for such investors;
(c) to achieve uniformity in how it performs those functions and exercise those powers;
(d) to administer laws effectively but with a minimum of procedural requirements;
(e) to receive, process, and store, efficiently and quickly, the documents lodged with, and the information given to it under this Act, the Ordinance or any other law;
(f) to ensure that the documents, and the information referred to in clause (e) are available as soon as possible, for access by the public; and
(g) to take whatever, action it can take, and is necessary, in order to enforce and give effect to the Act and the Ordinance or any other law."
14. A perusal of clause (g) of subsection (4) of section 20 of the Act, 1997 reveals that a duty is cast upon the Commission to ensure that (i) no fraudulent and (ii) no unfair trade practices relating to securities market take place. Thus, the Commission is to ensure that neither any fraudulent nor any unfair trade practice is allowed in securities markets. In both these case the Commission cannot act as a mere passerby or a silent spectator. In view of section 282D of the Ordinance, 1984 and provisions of section 20 of the Act, 1997, when examined in juxtaposition, it is crystal clear that a duty is cast upon the Commission to intervene in such manners to ensure honest and fair trading takes place in the securities markets.
15. In such view of the matter, we are of the opinion that the Commission was fully competent to issue directions in the nature of the impugned Circular to respondents Nos.3 and 4 to ensure that neither any fraudulent nor any unfair trade practice is allowed in securities markets.
16. So far the acts done by respondents Nos.3 and 4, pursuant to the impugned Circular, it may be noted that not only the Commission has been given wide powers to issue directions to NBFCs (or notified entities) but such NBFCs (or notified entities) have also been bound to follow the same by use of the imperative word "shall". Respondents Nos.3 and 4 are Non-Banking Finance Companies with license to perform Assets Management Services under the Non-Banking Finance Companies (Establishment and Regulations Rules), 2003 while Respondent No,1 (the Commission) is the Regulatory authority and any direction issued by it is mandatory for respondents Nos.3 and 4 to follow. Thus, there can be no cavil to the proposition that respondents Nos.3 and 4, by following the instructions/directions contained in the impugned circular, have acted in accordance with law.
17. Now, we will consider the next question i,e, whether the impugned Circular was in public interest.
It was argued by the learned counsel for the petitioner that reducing the size of investment of an investor cannot be termed as in public interest since this will adversely affect the investments in the country.
18. In the case of BABAR KHAN GHORI and another v. FEDERATION OF PAKISTAN and others (PLD 1999 Karachi 402), a Division Bench of this Court dilated upon the question of "public interest" as under:- - Bare reading of the Ordinance shows that its prime object is to provide control on exit of certain persons from Pakistani. No good reason has been assigned to challenge its propriety. Public interest is above the individual. Since, it is not possible to provide all the grounds, which may differ from person to person or group to group, it is left to the discretion of the Federal Government to prohibit such person or persons from proceeding abroad and to check the proper exercise of this discretionary power, a provision of review is provided in the Ordinance.
' In the case reported as Miss Naheed Khan v. Government of Pakistan and others PLD 1997 Kar. 513, the vires of the Ordinance were challenged as being discriminatory and violative of the provisions of Articles 4, 9 and 15 of the Constitution. At page 518, the following was observed: "There is no controversy in regard to the fact that under Exit from Pakistan (Control) Ordinance, 1981 freedom of a person to proceed abroad can be restricted, if it is found to be in public interest. The Preamble to the Ordinance itself suggests that the object behind the Ordinance was to provide for control on exit of certain persons from Pakistan. Although the expression, public interest' has not been defined in law, but in Ashiq Ali Bhutto v. President, Summary Military Court, PLD 1979 Kar. 814, it was observed that, although, it was not possible to lay down any yardstick by which 'public interest' could be measured, but it was a matter which could be left to the subjective satisfaction of the authority concerned."
' It is noted that the expression "public interest" means an act, which is basically meant for the benefit of general public and it differs from case to case. Accordingly, we hold that the Ordinance is not in violation of any provisions of the Constitution."
19. In "Stroud's Judicial Dictionary", Fourth Edition, page 2186, "public interest" has been defined as "A matter of public or general interest "does not mean that which is interesting as gratifying curiosity or a love of information or amusement, but that in which a class of the community have a pecuniary interest, or some interest by which their legal rights or liabilities are affected..."
20. In the case of JAWAID IQBAL v. Khawaja MUHAMMAD ARIF (1999 SCMR 13), the Hon'ble Supreme Court held as under:-- "Even otherwise, if the de facto doctrine, as recently reiterated in Mahmood Khan Achakzai v.
Federation of Pakistan, PLD 1997 SC 426, was invoked, the order of eviction, passed by the Controller, having come about bona fide and in public interest, should be assumed to have been passed de jure and possessed all the attributes of a lawful, operative and binding order. Such attributes and outcome would remain unaffected even if the person/authority, ultimately, turns out to be devoid of legal sanction. The doctrine, which is based on higher considerations of public policy, is calculated to ensure continuity to avoid dislocation and to prevent confusion in the conduct of public affairs, on the one hand, and the safeguard of public and private rights, emerging from de facto acts of officers, performing functions of the State in the ordinary course, on the other. In the result, such acts are not exposed to be questioned far want of legal authority in collateral proceedings, though direct challenge in the presence of all necessary parties, If otherwise satisfying the requirements of law remains permissible. On this criterion also the incidental challenge to the competence of the learned Controller is not entertainable in the instant proceedings."
21. In our opinion the above last cited case has no relevance to the facts of this case as in that case the question for consideration was whether the Rent Controller was properly appoint in terms of section 4(2) of the Sindh Rented Premises Ordinance, 1979, since he had neither served as a Civil Judge nor as a First Class Magistrate for a period of three years. Therefore, the observations made in that background cannot be applied to this case.
22. So far as the observations made in the case of Babar Khan Ghori and the definition of the term "public interest" given in Stroud's Judicial Dictionary is concerned, it transpires that public interest is entirely different from individual interest wherein a person only seeks protection of his own interest.
In view of this meaning of the term "public interest", it would have been against the public interest if the Commission had not acted promptly by taking some measures to ensure that the class of community having invested in the units were treated equally. Conversely speaking, by issuing the impugned Circular, the Commission acted in public interest as it ensured an even treatment to all the unit holders i,e, "a class of the community" having a pecuniary interest in the units purchased by them. Therefore; we are of the opinion that the impugned Circular was issued in public interest.
23. Learned counsel for the petitioner also argued that the respondent No,1 cannot rely upon the Offering Documents as it was not a party to the same. It may be mentioned reference to the Offering Letter was made only to show that the petitioner made aware of the risk involved, particularly the return/mark-up risk, market risk, sovereign risk, depletion of principal risk and Government regulation risk.
24. So far as the contention of the learned counsel for the petitioner, that retrospective effect cannot be given to the impugned Circular, suffice it to say that no past and closed transactions were disturbed or any profit given to the petitioner was recalled. Therefore, there is no question of giving retrospect to the impugned Circular. The main purpose of the impugned Circular was to correct the defective pricing mechanism to safeguard the interest of the investors generally. It is a usual phenomenon that when stock markets crush the investors withdraw their investments in a haste which further deteriorates the market position. For this purpose regulatory agencies are formed who act to save the markets from complete collapse.
25. It was submitted by the learned counsel for respondent No,1 which was not controverted by the counsel for the petitioner with any conviction, that there was dearth of liquidity and price discovery in the market which was playing havoc with the market and a number of unit holders were rushing to get en-chased their units thus pressing the panic button. Due to this the trading in debt securities virtually came to a standstill which resulted in paucity of adequate price discovery. This led to complete erosion of confidence in the market which, in turn, led to unprecedented redemption pressure. At this juncture the securities were valued at higher levels existing before the liquidity crisis while in fact the actual value of the units drastically decreased. Thus the unit holders were filing redemption requests at over-valued Net Asset Value (NAV). In these circumstances, the Managers were unable to sell the debt securities to pay the redemption - proceeds within the stipulated period of six working days: Due to these facts, the value of the investment of the petitioner diminished but the redemption continued on the exaggerated rates. If this trend was allowed to continue then the unit holders who approached the respondents Nos. 3 and 4 for redemption on the old exaggerated rates would have been unduly benefited at the cost of long term investors. So, on the one hand, some of the unit holders would have earned undue advantage while the others would have been left penniless. In order to preempt such a situation, the respondent No, I intervened and issued the impugned Circular so that the units are redeemed at actual NAV and not at the exaggerated NAV. This step was taken to ensure that all unit holders are treated equally. The impugned Circular, in unequivocal terms, states that "it is necessary and expedient in the public interest generally and in the interest of unit holders especially to direct all Asset Management Companies that all debt securities including Term Finance Certificates (TFCs).
Sukus etc. Held by collective investment schemes (Mutual Funds) shall, with immediate effect, be valued after applying the following discount rates for calculating the Net Asset Value." Thus it was in the interest of each and every unit holder i,e, public interest, that such a mechanism is put in place so as to ensure that no unfair trading takes place which will give undue advantage to one and put another in undue disadvantage. The open-end fund market was rapidly collapsing and called for immediate action from the respondent No,1. Therefore, respondent No,1 gave directions to respondents Nos. 3 and 4 to apply discounted rates simply to correct the defective' pricing mechanism.
26. The upshot of the above discussion is that, in our opinion, the impugned Circular was validly and lawfully issued by the respondent No,1 and it was issued in public interest to safeguard the interest of all the unit holders and to eliminate the element of unfair trading. Therefore, we find no force in this petition which is dismissed. revisions by the competent authorities. Therefore, it is advisable to consult the official sources or legal professionals for the most up-to-date and accurate information.