1. Order
2. This order will dispose of the proceedings initiated under Section 224(2) of the Companies Ordinance. 1984 (the "Ordinance") by the Securities and Exchange Commission of Pakistan (the "Commission") through Show Cause Notice NO. S.M.(3.0)C.0,222/13(365)2005 (the "Notice") dated 25/05/2009, against Mr. Najeeb-Ullah Ghauri_ (the --Respondent") Director, NetSol Technologies Limited (the. -Issuer Company-I, Brief facts of thc. case arc t hat:- The Riesponderg made following purchase arid sale transactions as a Director oldie Issuer Company within. the period of less ihari six, months:- b) On aCCCHWEL ctf the aforementiorTed transacuons, the kesvondent made gain of Rs, 15.584,690- (Rupees Fifteen million live hundred eighty-four thousand six hundred and ninety only), computed in the manner prescribed hi Rule Hi n1 the Lompallies (General Provisions and Forms)
3. Rules, 1985 (the "Rules-1.
3. Section 224 of the Ordinance provides that where inter olio a Director of listed equity securitics makes any gain by purchase and .sale, or the sale and purchase, or any such security within a period of less than six months, such person is required to make a report and tender the amount of such gain to the company and simultaneously send an intitnation to that effect to the Registrar of Companies and the Commission. The said Section further provides that where such person fails or neglects Co tender or the company fails to recover, any such gain within a period of six months after its accrual, or within sixty days of a demand thereof, whichever is later, such gain shall vest in the Commission and unless such gain is deposited in the prescribed account, the Cotnrnission may direct recovery of the same as.an arrear of land revenue.
4. 4, Since neither the matter of accrual of the .aforesaid gain was reported by the Respondent in Part-D of the prescribed returns of beneficial ownership filed by him with this Commission for the aforementioned transactions, nor its tendering or recovery was divulged to the Commission. as provided in section 224(2) of the Ordinance, therefore. the Respondent was intimated vide this okice letter dated 20/1112008 that as provided in Section 224 of the Ordinance, the amount of the aforementioned gain has now vested in favour of the Commission, The respondent was advised to respond the matter, within 15 days of the. said intimation. M3 Parini and Associates Corporate and Capital Market. Consultants (tile "Counsel"); subsequent to seeking extension in time twice, responded the matter on behalf of the Respondent vide its letter dated 09/01/2009, The Counsel inter alio stated that:- a) 11 has been observed that bonus distribution announced by the company and bonus shares duly received by the director twice on 05-06-2007 and 15-11-2007 to the extent of 93,500 and 118,690 shar& have not been reckoned and taken into account lvhile calculating the impugned gain. In case the said bonas. .shares would have been accounted for the. re:Nliitiiig gain would have been quite different". b)
5. The company has timely raised the riernand, however, the matter has remained under correspondence with regards to difference of opinion with respect to quantum of gain, as there were divergent views regarding computation of gain, afier taking into account the sale of bonus ,shares twice .received by the actual omouiu which Mr. Chattri is ready to offer to the company in reTonse to their demand.
5. The plea of the Cow isel was e.Kannined in the light of provisions of Section 224 of the Ordinance and Rule 1 of the Rules and was considered to he untenable. Thus, the Counsel was intitnated accordingly on 11/02/2009. In response. the Counsel reiterated its earlier stance vide its letter dated 20/03/2009 and also provided copy of correspondence exchanged between the Issuer and the Respondent. The Counsel also requested for an opportunity of personal hearing. Thus.
6. Notice under Section 224) of the Ordinance was served upon the Respondent on 25/05/2009 for providing him an opportunity of personal hearing on 09/06/2009, which on the request of the Counsel cat- the Respondent was adjourned and re-fixed for 18/06/2009. On the given date Counsel or the Respondent namely Mr. MTaved Patmi. Chief Executive, NU Panni and Associates and Mr. rvIAytib Qureshi, Director MJ Fanrti and Associates appeared before inc and presented their written submissions and stated that: - i) The ResP4)ndent is untitled to retain the sale proceeds of h(mu,s. ,shares and the yurne should be excluded from his other purchase and ,vale or sale and purchase transactions which purportedly conic irvithin the ambit of Section 224. The impact of exclusion Cones Jo Rs.
7. 3,046,968/-, 2) The Respondent lye a ilOWCar to tender the tenderabk gcoin of Rs. 12,537, 730/- try the Issuer ("ompany.
6. At the outset of verbal submissions, the Counsel stated that arguments in favour of the aforesaid disputations have been given in detail in its letters dated 09/01/2009 and 20/0312009.
8. Thus, the arguments advanced by the Counsel in support ()Fits foregoing contentions in writing as ,xell verbally are as under:- et. -The Respondent received 96,075 and 118,690 bonus shares on 05/06/2007 and 17/11/2007 and sold them on 04/06/2007, 07/06/2007 and 14/11/2007, There is yro requirement in the law to vecYlcally report which shares hove been mild, Both safes were muck on the close proximity to the receipt ref bonus. shares. First six day tiler receipt and second tiro days before ree741'ipt Of bonus shares, as the director has been duly irilbrIned 021 both occasions cffn issue of the bonus shares by the Board of Directors of the Compoirm The Counsel further contended that the receipt of bonus shares (nbt constituting a purchase wider sub-rule (2) of the Rule 16 ibid), therefore, their subsequent sale stands excluded from //w atubii e..!fSocrion 224 and the Rule or else it would have been Section 224, while, it is silent about the sale of bonus shares, because as per the said Rule, the shares are fungible, hence aver receiving, the bonus shares becomes part of .entire holding of the beneficial owner, and such discrimination, specially in dematerialized form of shares becomes impossible.
9. 1 also do not agree with the contention of the Counsel that the shares are identical 4inci posses equal rights and entitlement only .hen dividend in cash or stock is distributed by the listed companies. in this regard. 1 am of the view that shares arc identical and fungible for all practical purposes including sale, as each share of same class carries same dcnorninationipar value and fetches same market price that is why the Rule 16 does not exempt the sale of claimed bonus shares from the applicability of Section 224 of the Ordinance.
10. During the course of hearing, the Counsel agreed that the securities of same class arc fungible. identical, substitutable and have the same right and privileges. but simultaneously it was also stated thatfi.u. the applicability of the under reference law, some imperceptible distinction is required to be made to distinguish between shares held in the beneficial holding of a shareholder. I do not intend to agree with this contention of the Counsel, as this view-point not only crushes the concept of"shares are fungible" but also assigning of such distinction in the present system of dematerialized shares is impossible.
11. I have also gone through the case cited by the Counsel. in the instant ease, the transactions were made in 1093, when the shares were kept in physical form_ while, the concept of"fungibility- was made part of the Rule 16 of the Rules on 21/0812001, subsequent to introduction of Central Depository System. The under reference order was passed by the Commissioner (SM) on 01/04/2002: wherein appeal was accepted vide Appellate Bench Order dated 23/07/2002.
12. In addition to above above, in my views, if some how the proposed segregation between the bonus shares and other shares (held of the same class) is made and the plea of the Counsel that "the director or other persons referred in the law would be at liberty to sell such shares without attracting provisiOns of section 22-1 ibid is accepted, then it would not only lend the redundancy to whole scheme envisaged in Section 224 of the Ordinance and Rule 16 of the Rules, but, also cause several implications. For instance, if a beneficial owner of a listed company receives 100,000 bonus shares on a specific date. After receiving the bonus shares he/she may indulge in sale and purchase of shares on the plea that sale is heinp, made out of bonus shares, resultantly. the beneficial owner would be able to defeat the purpose of the law.
13. Notwithstanding above, I have also looked into the plea of the Counsel that sale executed on 06/06/2007. 07/06/2007 and l .2007 was disposal of bonus shares, which was received by the Respondent on 05 Y 7007 and 17/11/2007 respectively. In this concern I have consulted the returns of beneficial ownership, filed by the Respondent. C.DC's letter dated 06/06/2007 provided by the Counsel and Activity Report of the CDC's account of the Respondent and observed as under:- 1, The Form-32. filed by the Respondent for change in shareholding shows that 96.075 and 118,690 bonus shares were allotted to him as at 11105/2007 and 1.5/11/2007 respectively.
14. I1. Manager Operations, Central Depository Company's letter dated 06/06/2007 (provided by the Counsel, as pledged in persona] hearing) shows that the bonus shares were crediled into respective accounts in the Central Depository System at the end of the day 005/0612007.
15. Activity Report of Respondent's CDC Account No. 7293 shows that 96.000 bonus shares were credited to the account on I9/0612007_ While, 85.300 arnd 33,330 shares were credited to the account on 20/11/2007 and 22/0212001 respectively.
16. Thus in my opinion effective dales of receipt of bonus shares by the Respondent are 19/0612007 (for 96,000 shares.), 20/11/2007 (for 85,300 shares) and 22/02/2008 (for 33,300 shares). The record suggests that the Respondent did not made any immediate sale transaction subsequent to receipt of 96,000 bonus shares (which were credited to his account on 19/06/2007), but he purchased 40,125 shares from 01/10/2007 to 29/10/2007 in nine transactions, Similarly, no sale transaction has also been reported by the Respondent after the receipt of second tranche of the bonus shares.
17. Thus, the claim olthe Counsel that sales made on 06/06/2007, 07/06/2007 and 1,i/11/2007 were out of 96.075 and 118,690 bonus shares does not have any force. The 'acceptance of the said. plea of the Counsel would imply that the shares were sold before their actual receipt. b) Concerning the second plea of the Counsel that the Respondernt now he allowed 10 tender the amount of gain 10 the l'ssfe.f- Company, I have consulted the provisions of Section 224(2) of the Ordinance, which inter aiia determines the time limit tin- the purpoe of recovery of amount of Qain by the issuer well as tendering of the gain by the beneficial owner to the issuer, It provides that where among others a Director fails or neglects to tender, or the company fails to recover. any gain within a period of .six months diet its accrual, or within sixty days of a demand thereof, whichever is later, shall vest in th.e Commission. In the instant case, the prescribed time limit has already been elapsed. neither the Respondent tendered the gain to the Issuer nor the Issuer recovered it, therefore, the Respondent is now required to tender the gain in favour of the Commission. Ii is also pointed out that even the Commission does not have any power tinder the Ordinance to allow the Director to tender the said amount of gain to the issuer Company subsequent to the lapse of stipulated time limit.
18. I have also examined the correspondence exchanged between the Issuer Company and the Respondent (provided by the Counsel), which reflects that the Respondent intimated the Issuer on 20/11/2008 that the Commission has also initiated proceedings for recovery of the under reference amount of gain. After the said intimation, the Issuer Company has never approached to the Commission for becoming party of the said proceedings on the basis that it has already raised demand for this purpose. Even, in response to my query. the Counsel stated that it is representing only ihe Respondent, So, the circumstances suggest that the Issuer Company is not only aware of the legal position of the matter, but also stands agreed with ihe view-point of the Commission, Perusal of the correspondence exchanged between the ftesporident and the Issuer Company further. reveals that the issuer Company raised demand for recovery of the on the basis of information received from the Contra[ Depository Company of Pakistan_ while_ on the request of the Respondent; the Issuer Company provided him the details or computation of tenderable gain. The contents of the Computation Sheet (prepared by the Issuer Company) suggests that the Issuer Company has given him the benefit of disposal of the bonus shares with the remarks that "Delivery of 93.300 (vide Sr. No, 3 of the Computation Sheet) and 118.690.bonus shares (vide Sr. No 13 of the Sheet) were received in CDC account on 05/06/2007 and 17/11/2007 respectively. While, in-fact the said bonus shares were received in the cm account of the Respondent on 19/06/2007 and 20/] 1/2007. Thus, in my views, the said contents of the Computation Sheet indicate two issues as.follow;- i) The.: Issuer Company has not properly examined the activity report of the CDC's account of the Respondent on the basis of which the claimed demand was raised by it. ii) The Computation Sheet also negates the claim of the Respondent that the delay in tendering of the gain to the Issuer Company was due to difference of opinion with respect to quantum of gain- after taking into account the sale of bonus shares, but. the under reference correspondence does not give any such indication of difference of upinian.
19. I have also examined the view point of the Counsel that it is right of the Issuer Company to receive the amount of the renderable gain and the Commission has no legal ground _for ciciiming the same under the low. In this coimection, I am of the view, that the amount of tenderable gain is not an outcome of any activity of the Issuer L:ompany. but it generates from market-based activity of the beneficial owner, therefore, the law provides an opportunity to the company to recover the gain within the stipulated lime period and it does not become company's right.
8. In view of the foregoing, t am of the considered opinion that the arQutnents presented by the Counsel of ihe Respondent do not have any merit and substance. Hence, the request of the Counsel to exclude the sale transactions made on 06/06/2007. 07/0612007 and 14/11/2007 from (he ambit of the Section 224 of the Ordinance and to allow the Respondent to tender the gain to the Issuer Company at [his stage is rejected and the Respondent is hereby, directed to tender Rs.
20. 15,584,690/- (Rupees Fiiieen Gnillic Five hundred eighty-four thousand six hundred and ninety only) to the Securities and Exchange Cormnission of Pakistan as provided in section 224(2) of the Companies Ordinance. 1984, through a demand draft in favour of the Commission, within thirty days of the issue orthis order.