' This order shall dispose of Appeal No,7 of 2010 filed under section 33 of the Securities and Exchange Commission of Pakistan (the "Commission") Act, 1997 against the order dated 31-12-2009 (the "Impugned Order") passed by the Respondent.
2. The facts leading to the case are that D.G Khar. Cement Company Limited (the "Company") advanced an amount of Rs,339.816 million to Nishat Hotels and Properties Limited ("NHPL") during the year ended 30-6-2008. The advance was disclosed in the accounts of the Company for said period as Advance against issue of shares. No shares were issued by NHPL and the amount was received back by the Company on 5-1-2009. The Company did not provide interest on the said advance, which remained outstanding for more than a year. As per the record available with the Commission, the shareholders of the Company had only approved equity investment in the shares of NHPL to the extent of Rs,700 million in their extraordinary general meeting ("EOGM") held on 31-10- 2007. In view of the aforesaid it was observed that approval of shareholders was only for making equity investments, however, the Company made an investment in the nature of advance and also caused loss to the Company by not charging interest thereon.
3. Show cause notice dated 14-10-2009 ("SCN") was issued to the directors of the Company for violation of section 208 of the Companies Ordinance, 1.984 (the "Ordinance"). Reply to SCN was submitted and hearing in the matter was held. The Respondent dissatisfied with the contention of the Appellants passed the Impugned Order and imposed penalty of Rs,1,50,000 only on each Appellant.
4. The Appellants dissatisfied with the Impugned Order have preferred the instant appeal. The Appellants' representative argued that:--
(a) the Board of Directors ("BoD") of the Company approved equity investment in NHPL through a unanimous resolution. The shareholders of the Company also unanimously passed a special resolution for equity investment in the EOGM held on 31-10-2007. NHPL purchased land for the project for Rs,845 million. It included Rs,334 million contributed by the Company as equity investment. The amount contributed by the Company, therefore, was utilized for project cost and not for any other purposes. The BoD were of the view, that the capital should only be increased after approval of the project was received from Lahore Developmental Authority ("LDA"). On account of delay in government policy, LDA did not grant approval and the money received by the NHPL was deposited in the share deposit account in accordance with the requirement of the Ordinance;
(b) the Company did not incur any loss on the equity investment in NHPL as the amount was returned by NHPL to the Company. The Company would have made loss if shares were actually issued or up winding up of the Company as in either case, the proceeds would have been substantially lower than the cost of equity investment. The observation of the Respondent that loss has been incurred on the investment is baseless; and
(c) the Chief Executive Officer of the Company and his family members had to contribute huge sums of money from their personal resources to enable NHPL to refund the equity investment to the Company. The Chief Executive Officer and his family members had to suffer losses on the investment due to fall in the value of the land. The penalty imposed on the Appellant was without any cogent reasons and was not in proportion to the offence alleged.
5. The department representative argued that:--
(a) the amount of Rs,339.816 million advanced by the Company to NHPL was in the nature of an advance and not an equity as contended by the Appellants' representative. The amount was advanced on 25-10-2007 at a time when no offer for issuance of shares was made by NHPL, whereas, the special resolution was passed later on 31-10-2007;
(b) the advance was an interest free investment in the associated concern and was not only violation of section 208 of the Ordinance but also caused loss to the Company on account of non- receipt of interest: and
(c) the Respondent has taken a lenient view after taking into consideration that the amount advanced to NHPL has been recovered. The maximum penalty for violation of section 208 of the Ordinance is ten million rupees on each director, whereas, the penalty imposed on each Appellant is Rs 1,50,000.
6. We have heard the parties and have gone through the record. Our parawise findings on the issues are:--
(a) Section 208 of the Ordinance is reproduced for ease of reference:
208. Investments in Associated companies and undertaking.---(1) Subject to subsection (2A) a company shall not make any investment in any of its associated companies or associated undertakings except under the authority of a special resolution which shall indicate the nature period and amount of investment and terms and conditions attached thereto.
' Provided that the return on investment in the form of loan shall not be less than the borrowing cost of investing company.
' Explanation: The expression 'investment' shall include loans, advances. Equity, by whatever name called, or any amount, which is not in the nature of normal trade credit.
' Emphasis added ' The explanation to section 208 of the Ordinance provides that any amount whether in the form of advances or equity is an 'investment' in terms of section 208 of the Ordinance. The argument of the Appellants' representative that it was an equity investment and not an advance is also not substantiated with facts of the case as the aforementioned amount was advanced on 25-10-2007 at a time when no offer for issuance of shares was made by NHPL; whereas, the special resolution was B passed later on 31-10-2007. Moreover, the authorized capital of the NHPL was Rs,10 million before the advance was received and no application was made for enhancement of the authorized capital of NHPL after the receipt of, the advance by NHPL. The enhancement of the authorized capital is a prerequisite for enhancing the paid up capital of a company, as such, the aforesaid amount can only be treated as an advance by the Company to it associated concern, namely NHPL;
(b) the proviso to section 208(1) of the Ordinance provides the basis for the return on investment.
The amount of Rs,339.816 million advanced by the Company to NHPL was in the nature of an advance and no interest or return on investment was envisaged at the time of making the advance. The amount of Rs,339.816 was invested with NHPL for more than an year, as a result the Company was deprived of the return that could have been earned by investing the said amount in any other mode. The contention of the Appellants' representative that no loss was caused to the Appellants is thus without any basis; and
(c) the Respondent at the time of imposition of penalty of Rs,150,000 on each director instead of maximum penalty of Rs, ten million on each director has taken into consideration the mitigating circumstances including the fact that the advance has been recovered.
'In view of the above, we see no reason to interfere with the Impugned Order. The appeal is dismissed with no order as to cost.