M/s. Universal Leasing Corporation Limited, a public listed company, was incorporated on 29.07.1993 and was granted license to carry on leasing business on 28.05.1995. The annual accounts for year ended 30.09.99 of the company were examined and following observations were made:- i) M/s. Universal Leasing Corporation Limited was required to invest at least 70% of its funds in leasing business as per requirement of Rule 7(1)(i) of the Leasing Companies (Establishment and Regulation) Rules, 1996 and Rule 12 of NBFIs Prudential Regulation issued by State Bank of Pakistan but the company's investment on 30.06.99 was just 43% in the said business and instead of increasing investment to the statutory level, the company withdrew Rs.19.776 million from leasing business as per Cash Flow Statement for the year ended 30.06.99. Moreover, these investments decreased from 57% as on 30.06.98 to 43% as on 30.06.99. ii) The provisions of potential lease losses and doubtful receivables increased from Rs.2.6 million to Rs.9.4 million indicating the poor recovery system and extending of leasing facilities without complying with the provisions of NBFIs Prudential Regulation. iii) The company incurred net losses after taxation of Rs.9.097 million which indicates its poor performance. iv) The salaries of the company increased from Rs.1.4 million to Rs.2.1 million inspite of decrease in leasing business indicating the improper utilization of the company's fund. v) Apparent non-compliance with the provisions of International Accounting Standards No.12 & 17. vi) The company made investment in musharaka business of Rs.29.909 million which is 30% of total assets indicating the substantial diversion of funds from principal line of business to musharaka business which in fact is not allowable business of the company and therefore, the funds were mis- utilized.
2. The above defaults and discrepancies led to impression that the business of the company is being conducted with intent to defraud its creditors and members and the company is carrying on business which has not been authorized to it, the affairs of the company are being conducted to deprive the members of a reasonable return and the financial position of the company is such as to endanger its solvency. A show cause notice dated 15.05.2000 was, therefore, issued in terms of proviso to section 265 of the Companies Ordinance, 1984 as to why the inspector may not be appointed to investigate into the affairs of the company.
3. The company replied vide their letter dated 17.06.2000 that change of management took place in January 26, 2000 when three new directors were inducted who had great caliber with professional skills to ensure the smooth flow of the company's operations. The above significant change improved the quality of operations of the company. The major task of the management was to focus on the exposure from the Musharaka business, recovery of old outstanding dues by aggressive campaign against defaulters, minimizing the cost of operation and advancing new leases to the credit worthy clients, and making availability of fresh funds for the leasing business. The management, after efforts of 6 months, has come out of the difficult period and now progressing towards prosperity. The major stuckups of the company have been cleared or are in a process of liquidation. The staff cost has been significantly reduced thereby providing extra cushion/margin for company to negotiate new leases.
4. As the reply furnished by the company did not satisfy me, the company was provided an opportunity of being heard and the date in this respect was fixed on 26.06.2000. S. Muhammad Shabbir Shah, Chief Executive of the company appeared and accepted that the company has diverted its funds from leasing business to musharaka business and assured that the company would make efforts for recovery of the funds to plough back in leasing business. The Chief Executive requested for providing a period of six months for recovery of such funds.
5. The management has confessed the defaults and requested for allowing the period to plough back the funds into leasing business but I have apprehension even about existence of genuine musharaka business and there is a fear that these funds would have been mis-appropriated by the management. In case of Unicap Modaraba managed by same group, grave mis-appropriation have already been noticed and with a purpose to protect investors, management of the Modaraba has been changed and investigation proceedings have been initiated. The situation in this case closely resembles with the situation in that Modaraba and requires a prompt action.
6. I, therefore, in the public interest and in exercise of powers conferred by section 265 of the Companies Ordinance, 1984 (XLVII of 1984) hereby appoint M/s. Yusuf Adil Saleem & Co., Chartered Accountants, Karachi to act as an Inspector to investigate into the affairs of M/s. Universal Leasing Corporation Limited on a remuneration of Rs.100,000/- (Rupees one hundred thousand only) including all expenses incidental to the investigation, to be paid by the company. The investigation will cover the period from 01.07.1997 to 30.06.2000 and would include detailed investigation and verification of the books and records maintained by the leasing company to ascertain whether or not, the operation of the leasing company was in accordance with the Memorandum and Articles of Association of the company, the Leasing Companies (Establishment & Regulation) Rules, 1996, NBFIs Prudential Regulations, International Accounting Standards especially IAS-12 & 17 and Companies Ordinance, 1984. The Inspector shall, inter alia, report on the following:- i) Whether the genuine musharaka business exist and what is the nature of musharaka? Terms and conditions of the musharaka agreement, nature of business, size of musharaka and the profit thereof should be reported. Profit or loss or opportunity cost for diversion of the funds from leasing business to musharaka business may also be ascertained. ii) The investment in leasing, decision taking, recovery system, the default position, provisioning for lease losses etc. should be evaluated and reported. iii) The transaction with associated companies and undertakings, should be examined and evaluated. iv) The reasons for loss during the year should be evaluated and reported. v) Administrative and operating expenditures and their genuineness should be worked out and reported. Report whether or not adequate system of internal control exists to prevent mis- appropriation and mis-application of company's assets. vi) Compliance with statutory requirements in operation of the company indicating that the business was conducted and expenditure was incurred in accordance with the objects and purpose of the company. vii) Lapse or other delinquency detected during the course of investigation.
7. The inspector shall submit a detailed report alongwith supporting documents/evidence to the Commission (in quadruplicate) within 60 days from the date of this order.