This order will dispose of the proceedings initiated against M/s Pakistan Telephone Cables Ltd. (the "Company") for making unauthorized investments in its associated companies in violation of the provisions of Section 208 of the Companies Ordinance, 1984 (the "Ordinance").
2. The Company is a public company limited by shares, incorporated on June 08, 1983. Its shares were listed on the stock exchanges of Karachi and Lahore. It has authorized and paid up share capital of Rs.220 million and Rs.210 million respectively, as per its audited Balance Sheet for the year ended June 30, 2005. The object for which the Company was established are contained in its Memorandum and Articles of Association. It is principally engaged in manufacturing and selling of telecommunication cables. Selling is mainly against Pakistan Telecommunication Company Limited. The Registered Office of the Company is located at 18th Mile RCD Highway 27/3/2, Mouza Bairut, Tehsil Hub, District Lasbella, Balauchistan. The Company has 1,628 shareholders comprising individuals, financial institutions etc. as per pattern of shareholding annexed to the Directors'
Report on the accounts for the year June 30, 2005.
Associated companies, directors and their spouses hold around 75% of the paid up capital. This indicates that there is sufficient public interest in the shares of this Company.
3. The position of equity of the Company, its profits and distribution of dividends for the years 2000 to 2005 are as under:
4. The Board of Directors of the Company, as per its Financial Statements for the year ended on June 30, 2005 comprises of the following individuals {{TABLE}} Mr. Raza Abdul Aziz Al- Raee, Chairman / Chief Executive Mr. Aijaz Abdul Aziz Al- Raee, Director Mr. Riyadh Abdul Aziz, Al- Raee, Director Mst. Rabia Barkat Ali, Director Mr. Muhammad Khashif, Director Mst. Sumaih Saeed-ur-Rehman, Director Mr. Asma Hafeez, Director
5. The brief facts of the case are that while examining the annual audited accounts of the Company for the year ended June 30, 2005, it was observed by the Commission that the Company has made following investments in its associated undertakings.
Particulars 2004 2003 Associates (Note 16) 43,265,449 0 Due from associated undertaking (Note18) 7,700,989 556,828 The Company explained in note 16.1 of the aforesaid financial statements that an amount of Rs.
15.771 millions is given temporarily at the rate of 8.5% p.a. on average to Plaza Companies (Pvt) Ltd. for which Company shall place the matter for approval of the shareholders in the AGM.
6. The aforesaid note categorically pointed out that the Company has made investments in its associated undertakings without obtaining the requisite approval from the shareholders to whom authority is delegated under the Ordinance and which is the violation of the mandatory provisions of Section 208 of the Ordinance.
7. In view of the facts and circumstances as narrated in the preceding paragraphs, the Enforcement Department considered that the investments of the Company made in its associated undertakings were in contravention of the mandatory requirements of Section 208 of the Ordinance. It was, therefore, considered necessary to ascertain the extent of violations committed by the Company and loss sustained in consequence of these investments for which necessary proceeding were initiated under section 208 of the Ordinance.
8. Show Cause Notice dated December 7, 2005 was, therefore, issued to the Company and its Directors highlighting the prima facie violations of Section 208 of the Ordinance. They were also called upon to show cause as to why action may not be taken against them as provided in Sub- section (3) of Section 208 read with Section 472 of the Ordinance.
9. In response to the Show Cause notice Mr. Shah Naveed Saeed, FCA, partner of M/s Syed Husain Zafar Naveed & Co, Chartered Accounts represented the case on behalf of the Company, its Chief Executive and Directors. The learned counsel gave the following representations: The breakup of advances amounting to Rs.43,265,449 was disclosed and was comprised of the following amounts. a) The Plaza Companies (Pvt) Limited Rs.15,770,556 b) Al- Raee (Pvt) Limited Rs.18,469,883 c) Chief Executive Rs. 9,025,000 Rs. 43,265,449 He also explained that a Special Resolution was passed on October 24, 2002 to lend funds to Al- Raee (Pvt) Limited upto Rs.25 million at 19th Annual General Meeting; accordingly the Form-26 was submitted to Deputy Registrar, Quetta in Compliance of Section 172 (1) of the Ordinance. The Copy of Form-26 was enclosed in which the following special/extra ordinary resolution was duly passed; "Resolved that the Company be and is hereby authorized to lend funds to the associated undertakings, M/s Agro Oil Extraction Industries Ltd. & M/s Al-Raee (Pvt) for Rs.
25. Million each at the average borrowing cost of the Company on the daily product Basis." "Further Resolved that lending period shall be AT WILL by all parties" With regard to the payment to the Chief Executive for purchase of Al-Raee House, it is submitted that the Memorandum of Understanding has been made between Mr. Raza Abdul Aziz Al-Raee, Chief Executive and the Company with the condition that the final agreement will be made after getting approval of members in Extra Ordinary General Meeting (EOGM) of the Company. The matter relating to the M/s Plaza Companies (Pvt) Ltd. for payment of Rs.15.770 million will also be approved, which is included in agenda of EOGM. Further the payment of Rs.7.700 million is made to Agro Oil Extraction Industries Limited after approval of special resolution dated October 24, 2002 as described above.
10. Mr. Shah Naveed Saeed, FCA, the learned counsel admitted that Company has made default by not complying with mandatory provision of Section 208 of the Ordinance. However, he has assured that the default will be rectified within 25 days and also requested for a lenient view.
11. I have considered the reply of the Company and the relevant provisions of law for making investments in associated undertakings, provided in the Sub-section (1) of Section 208 of the Ordinance, which make it compulsory to pass a Special Resolution for making any investment by a company in its associated companies or undertakings. It is also one of the conditions that a statement of material facts including the nature and amount of the investment and terms and conditions attached thereto accompanies the notice of meeting in terms of S.R.O No. 865(I)/2000.
These provisions of law are mandatory and no investment in associated companies can be made without following the laid down procedure. The Company has not complied with the statutory provisions while making investment of Rs.15.770 million in the Plaza Companies (Pvt) Limited. From the perusal of the documents and information placed on record, it is evident that the investment was made in M/s Plaza Companies (Pvt) Ltd without seeking approval of the shareholders and the learned counsel has admitted that these investments were made without the authority of Special Resolution.
12. The contention regarding investment of Rs.18.469 million and Rs.7.70 million in M/s Al- Raee (Pvt)
Limited and to M/s Agro Oil Extraction Industries Limited respectively were looked at and special resolution passed on October 24, 2002 authorizing the investment was examined. The resolution in this respect suffers from the legal deficiency and is defective. The Company filed Form-26, which was required under section 172 of the Ordinance, with the Commission while it was required to submit Form-28, which was required under section 208, of the Ordinance. Moreover, the Company did not comply with section 160 of the Ordinance and the information required to be disclosed to the shareholders as required in the S.R.O No. 865(I)/2000 was not provided. Order dated May 14, 2004 was passed for violation made by the Company under section 160 of the Ordinance
13. The advance of Rs.9.025 million was given to the Chief Executive for purchase of office premises and no written agreement has been finalized. This attracts provisions of the Section 195 of the Ordinance and separate proceedings are under process.
14. The directors owe fiduciary duties to the Company they serve and its shareholders. They must discharge their statutory obligations in good faith with fairness and honesty. The directors have failed to exercise reasonable care to see that mandatory provisions of law were being violated and have not respected the mandate of the shareholders. Therefore, the directors have breached their fiduciary duties, which they owed to the Company and its shareholders. The Directors made unauthorized transactions out of the funds of the Company. In fact the Company has been acting as a financer providing funds to the associated concerns to fulfill their working capital requirements at the cost of the Company.
15. 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 force and are not acceptable.
Violation of section 208 of the Companies ordinance is established and all directors are responsible for the said violation. In view of the above, 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, impose a fine of Rs.300,000 on the Chief Executive and each of the Directors namely Mr. Raza Abdul Aziz Al- Raee, Chairman / Chief Executive, Mr. Aijaz Abdul Aziz Al- Raee, Director, Mr. Riyadh Abdul Aziz, Al- Raee, Director, Mst. Rabia Barkat Ali, Director, Mr. Muhammad Khashif, Director, Mst. Sumaih Saeed-ur-Rehman, Director and Mr. Asma Hafeez, Director. The Company and the afore-named directors are directed to deposit the aforesaid fine in the designated bank account maintained in the name of Securities & Exchange Commission of Pakistan in the Habib Bank Limited within 30 days of the date of this order and furnish a receipted challan to the Commission in this regard.
16. The Chief Executive and directors are also directed, in terms of Section 472 of Companies Ordinance, to make good the default made by them and are advised to recover the unauthorized investments alongwith the markup from the associated undertaking within 30 days of this order.
Failing recovery of the unauthorized investment within the time frame as explained above, all the directors would be liable to make good the loss incurred by the Company and deposit the aforesaid amounts from their personal resources. The Chief Executive and directors are further directed to remove the irregularities made in the investment of Rs.18.469 million and Rs.7.70 million in M/s Al- Raee (Pvt) Limited and to M/s Agro Oil Extraction Industries Limited respectively within 90 days of the order. The Chief Executive and Directors are also directed to provide an undertaking that they will recover the amount along with mark-up from the associated concerns and would otherwise be personally liable to the make good the loss. The aforesaid undertakings shall be furnished to the Commission by January 15, 2006. Moreover auditors' certificate in respect of the markup charged to the associated concern and the borrowing cost of the Company during the lending period is also required to be provided. All the directors are reprimanded to be careful in future and should remain compliant with the Law.
17. The Chief Executive and Directors of the Company are hereby directed to deposit the\ aforesaid fine totaling to Rs.21,00,000 (Rupees twenty one 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.