This order will dispose of the proceedings initiated against M/s Crescent Steel and Allied Products Limited. (the "Company") for making unauthorized investments in its associated company in violation of the provisions of Section 208 of the Companies Ordinance, 1984 (the "Ordinance").
2. The company was incorporated on August 01, 1983 as a public limited company under the provisions of the Ordinance and is quoted on all stock exchanges of Pakistan. It has authorized and paid up share capital of Rs.1 billion and Rs.349.96 million respectively, as per its audited Balance Sheet for the year ended June 30, 2006. The Company, is one of the down stream industries of Pakistan Steel Mills, manufacturing large diameter spiral arc welded steel line pipes at Nooriabad (District Jamshoro). The coating plant of the Company commenced commercial production from 16 November 1992. The company acquired a running spinning unit at Jaranwala (District Faisalabad) on June 30, 2000. The cotton spinning activity is carried out by the company under the name and title of "Crescent Cotton Products" a division of the Company. The Company has 1,984 shareholders comprising individuals, financial institutions etc. as per pattern of shareholding annexed to the Directors' Report on the accounts for the year June 30, 2006. Associated companies, directors and their spouses hold around 25.16% of the paid up capital. This indicates that there is sufficient public interest in the shares of this Company.
3. The Board of Directors of the Company, as per its Financial Statements for the year ended on June 30, 2006 comprises of the following individuals.
Mr. Mazhar Karim Chairman Mr. Ahsan M. Saleem Chief Executive Mr. Javed A. Callea Non-Executive Director Mr. Javed Iqbal Non-Executive Director Mr. Mohammad Anwar Non-Executive Director Mr. Nasir Shafi Non-Executive Director Mr. S.M. Ehtishamullah Finance Director & CFO Mr. Zahid Bashir Non-Executive Director
4. The Company was asked vide letter dated July 05, 2006 to clarify its position with regard to total investment of the Company in the Altern Energy Limited ("Altern") and evidence of compliance with SRO 865 (1)/ 2000 made under following resolutions tabled before the shareholders: {{TABLE}} Date of EOGM Resolution Purpose of Investment in accordance with SRO 865 (1)/ 2000 Amount (Rs. in Million)
January 28, 2006 Approval of the Company be and is hereby accorded to make potential equity investment upto Rs.60.4 million in Altern Energy Limited, an eventual associated concern Balance Diversification 60.40 April 28, 2006 Approval of the Company be and is hereby accorded to make an additional equity investment of Rs. 570.3 in Altern Energy Limited, an associated company, by way of rights subscription of Rs 57.028 million ordinary shares of Rs. 10 each be and is hereby approved. Balance Diversification 570.30 July 14, 2006 Approval of the Company be and is hereby accorded to make an additional long term equity investment up to Rs.379 million in Altern Energy Limited, an associated company, by way of right subscription of Rs. 37.9 million ordinary shares of Rs. 10 each as per Right Issue announced by the Altern Energy Limited to Finance its own expansion and also to finance the acquisition of Rousch Power (Pakistan) Limited is hereby accorded" The purpose of present issue is to invest in shares of Altern Energy which in turn will use these funds to acquire 59.984% of shares of an independent power project, Rouch (Pakistan) Power Limited ("RPPL"). RPPL is the owner of a power generation plant with a dependable capacity of 395 MW operating on natural gas. The revenues of RPPL is based on a 30 yeas take or pay power purchase agreement with WAPDA. Altern Energy itself is also revamping and enhancing company's assets." 379.00 {{TABLE}}
5. The Company vide letter dated July 10, 2006 replied that the investment of the Company in Altern would amount to Rs. 1.047 billion. The Company had already advanced a sum of Rs. 60.4 million against potential equity investment approved in EOGM dated January 28, 2006 and Rs. 34.7 million against Rs. 570 million approved by the shareholders in EOGM dated April 28, 2006. The total investment of the Company would be Rs. 1.047 billion in the Altern, the detail for cost of Rs. 1.047 billion together with the number of Shares and their face value is given as under. {{TABLE}} Particulars No. Of Shares Face Value@ Rs.
10 per share Rs. (in Million) Cost Rupees in Million Source of Payment Acquisition under listed Companies (Substantial Acquisition of Voting Shares and Takeover) Ordinance, 2002. From sponsor shareholders (Sponsors) @ Rs. 12.50 per share 7,735,000 77.40 96.70 Internal Generation of Funds From 1 % public offering to existing shareholders@ Rs. 12.50 per share 1,295,000 1.20 1.60 -do- Approved by Shareholders in EOGM dated April 28, 2006 57,030,000 570.30 570.30 Internal Generation of Funds and Realignment of Investment portfolio Approved by Shareholders in EOGM dated July 14, 2006: 37,900,000 379.00 379.00 -do- Total 102,794,000 1,027.90 1,047.60
6. The reply of the Company was not found satisfactory and was asked vide letter dated July 12, 2006 to explain why the Company had given loan to Altern amounting to Rs.95.1 million, when the shareholders never gave any approval to the Company for the aforesaid loan. Moreover, the exact sources of funding for meeting the proposed investments had not been explained at any point of time in the earlier EOGMs. It also appeared from the representation given by the Company that requirements of SRO 865(I)/2000 dated December 6, 2000 for investment in associated concerns has not been complied with regard to the earlier resolutions passed on January 28, 2006 and April 28, 2006. It is required that in case any decision to make investment under authority of a resolution is not implemented till the holding of a subsequent general meeting, its status including the following must be explained to the shareholders in the statement of material facts annexed to the notice of the meeting. "It was further pointed out by the Chairman that the last circulated (unaudited) accounts were available with CSAPL and CSAPL sought and received confirmation from AEL that there was no major change in the financial position of AEL since last EOGM of CSAPL held on April 28, 2006, and Mr. Shafiqur Rebman a shareholder of the Company enquired about the reason for delay in making investment in AEL. Mr. Iqbal Sheikh mentioned that Karachi Stock Exchange had not granted approval to AEL so far for issue of Right offer letters to its shareholders".
10. Moreover, in order to provide an opportunity of personal hearing, the case was fixed for May 7, 2007. Mr. Javed Panni, Corporate Advisor of the Company appeared before me, he reiterated the submissions made in the written reply to the show cause notice. During the Hearing, the Corporate Advisor of the Company admitted the default in respect of investment of Rs. 60.4 million and further submitted that the aforesaid amount is immaterial and interest of the shareholders have not been damaged. Moreover, the default is not willful or intentional.
11. I have considered the reply as well as the submission made during the hearing by the learned Corporate Advisor of the Company. The amount advanced by the Company is loan and this is confirmed by the Auditor of the Altern M/s Yusaf Saeed & Co., Chartered Accountants in their certificate dated June 29, 2006 addressed to the Manager, Karachi Stock Exchange (Guarantee)
Limited. The Auditors stated in their certificate that they have reviewed the books of Altern on June 15, 2006 and confirm that cash was received as "LOAN" from Crescent Steel and Allied Product Limited. The reply of the consultants is analyzed and my observations on the issue are as follows: a. The company should have made payment at the time of acceptance of right issue and extending the advance at an earlier date was never envisaged. b. The time factor is not relevant here, subscribing for right issue do not require any advance payments and the company should have only made payment at the time of acceptance of right issue. In this case, the Company has advanced an amount of Rs.60.4 million for ten months and an amount of Rs. 34.7 million for five months, implying that the Company is acting as financer for Altern, the funding needs of the Altern is met by the Company without respecting the authority of the shareholders.
14. For the foregoing reasons, it is established that the Chief Executive and the Directors have violated the provisions of Section 208 of the Ordinance and have not exercised due care while providing advances to associated concerns. After analyzing the facts of the case and arguments put forward I am of a considered view that these do not carry rationalization and are not acceptable. Violation of section 208 of the Companies ordinance is established and all directors are responsible for the said violation. However, I, instead of imposing maximum penalty of Rs.
1,000,000 on its Chief Executive and each director as prescribed by Sub-section (3) of Section 208 of the Ordinance, take a lenient view of the default by imposing a fine of Rs.100,000 (one lac only) each on the following directors while the Non Executive Directors of the Company are reprimanded to be careful in future; {{TABLE}} Name Designation Amount Mr. Mazhar Karim Chairman 100,000 Mr. Ahsan M. Saleem Chief Executive 100,000 Mr. S.M. Ehtishamullah Finance Director & CFO 100,000
15. The Chairman, Chief Executive and the afore-named director are hereby directed to deposit the aforesaid fine totaling to Rs.300,000 (Rupees Three lacs only) in the designated bank account maintained in the name of Securities and Exchange Commission of Pakistan with Habib Bank Limited within thirty days from the receipt of this Order and furnish receipted vouchers or pay by a DD/pay order issued in the name of Commission for information and record, failing which proceedings under the Land Revenue Act,1967 will be initiated which may result in the attachment and sale of movable and immovable property. It may also be noted that the said penalties are imposed on the Chief Executive and other Directors in their personal capacity, who are required to pay the said amount from their personal resources.