This order shall dispose of the proceedings initiated through Show Cause Notice No.EMD/233/164/2002-7073-7079 dated December 30, 2005 against Noon Textile Mills Limited (the "Company") under the provisions of Section 208 of the Companies Ordinance, 1984 (the "Ordinance").
2. The Company was incorporated as a public company limited by shares in the year 1966. The shares of the Company are listed on the Karachi and Lahore Stock Exchanges. The paid up capital of the Company is Rs. 20 million divided into 2 million ordinary shares of Rs. 10 each. The Company is principally engaged in the manufacture and sale of cotton yarn. Its mills are located in Sargodha District. The Company has 549 shareholders comprising individuals, joint stock companies, private limited company, financial institutions etc. and as per its pattern of shareholding annexed to the Directors' Report in the accounts for the year September 30, 2004, Associates, directors, their spouses and minor children hold 92% of the total shareholding. Board of Directors of the company as per its annual report for the year ended June 30, 2005 comprises the following persons:
1. Ch. Muhammad Tariq, Chief Executive
2. Ch. Muhammad Nasir Ali, Director
3. Ch. Muhammad Aamir, Director
4. Mrs. Shazia Tariq, Director
5. Mrs. Mussarat Ayyaz, Director
6. Mrs. Khadija Begum, Director
7. Ch. Muhammad Boota, Director
3. Brief facts of the case are that the examination of audited accounts of M/s Noon Textile Mills Limited (the "Company") for the year ended June 30, 2005 (the "Accounts") revealed that Rs. 13.757 Million is shown as due from associated undertakings M/s Neelibar Textile (Pvt) Mills Limited and M/s Qadri Textile Mills Limited. Perusal of prior years' accounts revealed that the amount has been outstanding since long. It was also noted that the amount was separately disclosed for the first time in the accounts for the year 2001 and comparative figures for the year 2000 were shown as restated. While no disclosure about the names of these undertakings was given till the year 2002.
The balance outstanding at various points in time was as follows: {{TABLE}} Year 2000 2001 2002 2003 2004 2005 (Restated)
Advances to 8,473,852 17,387,837 15,242,277 13,627,155 11,163,154 13,757,839 Associates
4. It was also observed from the notes to the accounts that no markup was being charged by the Company on these balances since inception, while the Company's borrowing cost as per accounts for the year 2005 was 20% p.a. Moreover, the aforesaid investment was made by the Company without obtaining approval of its shareholders.
5. A Show Cause Notice (the "Notice") was issued to the Chief Executive and directors of the Company on December 30, 2005 as to why a penalty under Section 208 of the Ordinance may not be imposed on them for aforesaid violations. The company replied to the Notice vide its letter dated February 01, 2006. In this context following submissions were made: The amounts due from Associated Undertakings do not represent advances within the meanings of investments under section 208 of the Companies Ordinance, 1984. Infact, these represent normal business transactions including trading of goods. The borrowing cost of 20% mentioned in the notice, taken from Note No. 11 relates to Short Term Loan of Rs.890,000 from National Industrial Co-operative Finance Corporation Limited (NIFCL). This loan is outstanding since around 1992 and has been utilized by the Company at that time. NIFCL is under liquidation and no claim of the said loan or markup has so far been made. This loan has not been utilized by the company in the current assets in the financial years ended on September 30, 2000 to June 30, 2005. Therefore the Company has no borrowing cost against current assets in these years. All steps are being taken to adjust all outstanding balances due from associated undertakings as early as possible. Since these advances do not represent investments, it has therefore been requested that proceedings be dropped.
No comments were made as regards the non-disclosure of names of these undertakings till the year 2002.
6. The Company's reply to the issues raised in the Show Cause Notice was not satisfactory.
Their representation that the advances were outstanding due to normal business transactions including trading of goods with the associates was also not supported by evidence, as no sales were reported in the Company accounts during the period perused since 1992. Further, the contention that no markup is charged on the grounds that the Company has no borrowing cost other then frozen balance of only one interest bearing liability, payable to a financial institution which is currently under liquidation is also not valid. Interest free advancing to associates clearly violates the provisions of Section 208. In order to give an opportunity to the management of the Company to clarify their position, a hearing was fixed on February 27, 2006, which was adjourned on Company's request and was refixed on March 15, 2006.
7. On the date of hearing Mr. Mr. M. Azam Khan, Company Secretary and Mr. Fahim Ahmed, Consultant appeared on behalf of the Chief Executive and directors of the Company.