Under Sub- Section (5) of Section 235 read with SRO.45/(1)/2003 and Section 476 of the Companies Ordinance, 1984.
This order shall dispose off the proceedings initiated through Show Cause Notice No. EMD/233/269/2002-968-975 dated July 26, 2005 under the provisions of Section 235 of the Companies Ordinance, 1984 (the "Ordinance) served on all the directors including the Chief Executive of M/s. Mian Textile Industries Limited (the "Company").
2. The Company is a public company limited by shares which are listed on the Karachi and Lahore Stock Exchanges. Paid up capital of the Company is Rs. 221.052 million divided into 22.105 million ordinary shares of Rs. 10 each. The Company is principally engaged in the manufacturing, marketing and exports of textile products. Its production facilities are located in District Kasur. The Company has 2,283 shareholders comprising of individuals, investment companies, insurance companies, joint stock companies, and modaraba companies. As per its pattern of shareholding annexed with the Directors' report in the accounts for the year September 30, 2004, Directors, their spouses and minor children and relatives hold 65.86% of the total shareholding which indicates that there is considerable public interest in the Company. Board of Directors of the company as per its annual report for the year ended September 30, 2004 comprises of the following persons:
1. Mian Muhammad Jehangir, Chairman & CEO
2. Mian Khurshid Ahmad, Director
3. Mian Waheed Ahmad, Director
4. Mian Muhammad Nawaz, Director
5. Mian Waqar Ahmad, Director
6. Mian Khurram Jehangir, Director
7. Mrs. Nargis Jehangir, Director
8. Mr. Muhammad Asif, Director
3. Brief facts of the case are that examination of audited accounts of the Company for the year ended September 30, 2004 revealed that the Company has not complied with the provisions of Section 235 of the Ordinance read with S.R.O. 45(I)/2003 dated January 13, 2003(the "SRO"), by failing to charge full amount of depreciation on revalued assets to Profit and Loss Account and to transfer the amount of incremental depreciation from the surplus on revaluation of fixed assets account to unappropriated profit / accumulated loss account through statement of changes in equity. The auditor of the Company, M/s. Manzoor Hussain Mir &Co., has also qualified their report to the shareholders on the aforesaid issue in the following manner: Quote Subject to Note No. 3.1 a) In line with the previous practice, depreciation for the year on revalued portion of fixed assets amounting to Rs.23.111 million is offset against their surplus, so as to bring both these accounts at par with each other. Although it has raised the profits to that extent but it has no impact on the shareholders' equity (refer to Note 2.5). b) The policy followed regarding Surplus on Revaluation of Fixed Assets is not in conformity with the Section 235 of the Companies Ordinance, 1984 and International Accounting Standards and results for the year are affected to that extent.
Unquote Relevent part of Note No. 2.5 is reproduced hereunder: Quote Depreciation on the revalued portion of these assets is set off against their recorded "surplus" at straight line method so as to reduce the revalued potion and its surplus.
4. The matter was taken up with the Company and it was advised vide letter no. EMD/233/269/2002-6920 dated March 08, 2005 to furnish explanation/clarification for the aforesaid violation. The Company in its reply dated March 30, 2005 submitted that the policy regarding set off of incremental depreciation against surplus on "revaluation of fixed assets" was adopted in 1987 and no objection was raised at any stage. Being not satisfied with the reply of the Company a show cause notice under Section 235 of the Ordinance was issued to all the directors including the Chief Executive of the Company and they were advised to appear before the undersigned on August 10, 2005 to show cause as to why penalties as provided under Section 235 of the Ordinance may not be imposed on them for violation of the aforesaid provisions of the Ordinance. Mian Muhammad Jehangir, the Chairman & Chief Executive of the Company, requested to re-fix the date for personal appearance on August 12, 2005. The request of the Chief Executive was acceded to.
5. On the date of hearing, Mian Muhammad Jehangir, the Chairman/Chief Executive of the Company, appeared before the undersigned to argue the case. In his verbal and written submissions, Mr. Jehangir put forward the following arguments: a. The matter has been taken up by the Commission many times before, and never before has there been any further query with regards to any of the replies submitted by us nor has any action been initiated against us. Therefore, we were under impression that our responses have been found satisfactory since there are many provisions in law which stipulate that a company can apply different accounting treatment by seeking the approval of the Commission. b. We are of the view that the treatment adopted by us gives the true and fair view of the state of affairs of the Company. If incremental depreciation is charged to profit and loss account, the profits so computed are not true for the simple reason that no money was spent or cost incurred on acquisition of capital assets and depreciation was charged on fictitious figures of revaluation surplus reordered by book adjustment. c. We were not aware of the requirements of S.R.O. 45(I)/2003 dated January 13, 2003. d. If we change our policy to comply with the provisions of the Ordinance, our profits for the period will suffer, our ratios will distort and we will face problems in getting finance. However, if you direct, the Company will comply with the requirements of law.
6. Submissions of Mr. Jehangir, in writing and at the time of the hearing, have been examined and are discussed in seriatim below: a. The Company has not been compliant with the requirements of Section 235 of the Ordinance in the past too and the matter was also raised by the Commission in 2001. In the meanwhile, requirements of the law were changed due to amendment in the Companies Ordinance, 1984 vide Companies (Amendments) Ordinance, 2002, which were further clarified through Commission's notification No SRO 45(I)/2003 dated January 13, 2003. Since the earlier default pertains to the provision of law which was amended subsequently, hence the matter was not further taken up with the company with the hope that highlighting the default would make the company more vigilant in abiding by the law. b. I do not agree with the contention that the treatment adopted by the Company gives a true and fair view. When a treatment is prescribed in the law, a company cannot depart from it on any pretext whatsoever. The Company has not followed the requirements of Section 235 and the SRO as it has not charged the incremental depreciation of Rs.23.111 million to the profit and loss account of the Company and resultantly the profits of the Company have been overstated by the same amount. It has also failed to transfer the amount of incremental depreciation from the surplus on revaluation of fixed assets account to un-appropriated profit / accumulated loss account through statement of changes in equity. Had the Company complied with the requirements of the Ordinance, the profit Rs.6.640 million for the year as reflected in the accounts of the Company, would have turned into loss of Rs.16.471 million. The accounts of the Company, therefore, do not give a true and fair view. c. The plea that the Company was not aware of the requirements of the SRO is not tenable as the matter was pointed out by the auditors of the Company. Further, ignorance of law is no excuse. It is the fiduciary duty of the directors to take measure so as to enable them to be informed about all the mandatory statuary requirements only then they can ensure that the company is in compliance with all the mandatory requirements of the statue. d. The argument that by adopting the treatment as prescribed in the Ordinance the profits of the Company will be disturbed and the ratios of the Company will get distorted is also not tenable. The underlying assumption of any reader/user of the financial statements is that the accounts have been made out in accordance with provisions of law and provisions in the law are such so as to ensure that the financial statements give a true and fair view of the affairs of the companies.
Therefore, companies cannot be allowed to violate the provisions of the Ordinance to make their ratios attractive.
7. In view of the foregoing, the default under Section 235 of the Ordinance is established.
However, in view of assurance given by the Chief Executive for future compliance, I, taking a lenient view, instead of imposing a maximum penalty of Rs.20,000/- on each director, impose a fine of Rs.5000/- on the Chief Executive of the company only, for the aforesaid default, as provided under Sub-section (5) of Section 235 of the Ordinance. The other directors are strictly warned to be careful in future.
8. The Chief Executive and directors of the Company are further directed, in terms of Section 473 of the Companies Ordinance, 1984, to comply with the provisions of Section 235 of the Ordinance read with S.R.O. 45(I)/2003 dated January 13, 2003 in the accounts of the Company for the year ended June 30, 2005.
9. The Chief Executive of the Company is hereby directed to deposit the aforesaid fine in the designated bank account maintained in the name of Securities and Exchange Commission of Pakistan with Habib Bank Limited or pay through a demand draft in the name of Securities and Exchange Commission of Pakistan within thirty days from the receipt of this order and furnish receipted bank voucher to the Commission, failing which proceedings for recovery of the fines as an arrears of land revenue will be initiated. It may also be noted that the said penalty is imposed on the Chief Executive in his personal capacity; therefore, he is required to pay the said amounts from his personal resources.