M/s. Pak Fibre Industries Limited was incorporated in the year 1983 and was listed on the Karachi Stock Exchange in the year 1994. The company made public offer in September, 1994 at a premium of Rs. 15/- per share on the basis of its excellent past performance, as portrayed in its prospectus as under:- {{TABLE}} (Rs. in million)
Year 31-12-89 31-12-90 31-12-91 31-12-92 31-03-93 1-1-94 to 31-3-94 Sales 54.934 52.062 126.806 160.827 139.568 34.783 Cost of Sales 47.586 45.309 108.873 134.109 115.084 27.127 Gross Profit 7.348 6.653 17.933 26.718 24.484 7.656 Net Profit 2.259 1.529 5.508 13.527 12.231 1.759
2. The performance of the company which was quite satisfactory before its listing deteriorated immediately after listing as tabulated below:- {{TABLE}} Year 31-12-94 30-06-95 30-06-96 30-06-97 30-06-98 (Six months)
Sales 80.309 25.700 161.700 110.673 160.887 Cost of Sales 66.819 33.269 169.601 117.182 156.843 Gross Profit (/Loss) 13.490 (7.569) (8.230) (6.509) 4.044 Net Profit (Loss) (8.015) (22.429) (40.298) (40.525) (35.044)
Accumulated Loss - (21,190) (64,447) (104,972) (140.314)
Paid up capital 100.000 100.000 100.000 100.000 100.000
3. In view of non payment of any return to shareholders and the alarming bad performance by the company after its listing, there was an apprehension that the affairs of the company are not being managed properly and therefore a notice under Section 265 of the Companies Ordinance, 1984 was issued by the erstwhile Corporate Law Authority (CLA) on 11th May, 1998 which was replied by the company through its detailed letter dated May 23, 1998. The hearing in the case was also held on 8th August, 1998 before the erstwhile CLA which was attended by Mr. Hameed Habib, a director of the company. He, through written reply and verbal submissions, attributed the deteriorated performance to the factors like abnormal increase in the prices of raw material without corresponding increase in the prices of the products of the company, increase in the cost of electricity due to increase in the prices of high speed diesel, increase in the prices of other factors of production including the chips and other industrial material and non-availability of working capital due to embargo of State Bank of Pakistan through its prudential regulations.
4. Mr. Hameed Habib, the director of the company, at the time of hearing before CLA, however, assured that due to various concessions granted to the industry by the Government, the conditions in the industry have changed and the management of the company expects to show profits in the year ended on 30.06.1998. He assured that the company would be in a position to pay dividend on the basis of its performance for the year ended on 30.06.1998 and as such the CLA decided to pend proceedings under section 265 of the Companies Ordinance, 1984, till receipt of accounts for the period ended on 30.06.1998. However, on receipt of the accounts it was observed that contrary to the assurance for improvement in performance given by the director of the company had deteriorated further and the company suffered from a loss of Rs. 35.42 million and accumulated loss as on 30.06.1998 reached to the figure of Rs. 140.314 million against total issued and paid up capital of Rs. 100.00 million. Accordingly, the matter was again taken up with the company and a hearing notice under section 265 ibid was again served upon the company on May 1, 1999. No one appeared on the date of hearing on 13.05.1999. Hearing was again fixed on 27.05.1999. Again, no one appeared on the date of hearing. Again hearing was fixed on 19.06.1999. On the date of hearing, Mr. Hameed Habib, the director of the company and Mr. Iqbal Sumar, FCA, appeared. Mr. Hameed Habib repeated the same arguments as were stated in the past and again assured that there will be improvement in the operational results of the company in future. Since the policy of the Commission has been to pursue the managements of the companies to improve their efficiencies, controls and performances, the Commission decided to allow the company a period of 15 days to file projection for the next two years to decide the matter. Such projections were not filed within the time allowed. In this regard a reminder was also issued on 07.07.1999 directing the company to file the projections. The company failed to do the needful. It is to point out that projections were called for as, in the past, the actual performance of the company remained contrary to the verbal assurance given by the director of the company remained and the Commission wanted to confirm by a reference to projection, that the company may really improve in its operations.
5. As stated in foregoing the company disclosed a very rosy picture of its past performance in its prospectus due to which it succeeded to induce public to subscribe to its shares at premium of Rs.
15/- per share. However, a careful analysis of the accounts of the company reveals that in fact the business of the company was already at a declining trend when public offer was made but this aspect was concealed in the Prospectus. The operational results depicted for three months ended on 31.03.1994 had shown a significant dealing trend in sales & profit but a rosy statement about "market prospectus and profitability" was made in Paragraph - 4.9 of the Prospectus in the following manner:- "Polyester filament yarn has been traditionally used for ladies apparel wear due to its silky touch.
The demand for such fabric for local and export uses is expected to remain and show a healthy growth trend. In its texturised and twisted form, polyester filament yearn uses are growing and it is increasingly being used with cotton and blended spun yarns for dress fabrics for men as well as ladies and for upholstery. It is well known that polyester increase the wash and wear properties of the fabric. The basic raw materials are available in abundance. The company foresees no difficulties in marketing the polyester filament yarn. In the absence of any unforeseen circumstances the company expects a profitable operation. The polyester filament yarn based industry is one of the most important section of the economy. Also it is one of the participant of foreign exchange earner."
6. Further more the company made public offer on 14th September, 1994 and it showed a loss of Rs.
10.824 million for its whole year ending on 31.12.1994. In other words upto the time of public offer it, prima facie, has already suffered a loss to the extent of Rs. 7 to 8 million which was concealed from the public. Rather 3 months results ended on 31.03.1994 disclosed a profit of Rs. 1.759 million, which appears to be doubtful. Prima facie public deceived by portraying a very rosy picture and by concealing declining trend of business and the public, on the basis of this picture made investment at a very high premium. The company through its written reply and through verbal submissions at the time of hearing attributed its bad performance firstly to the general economic crisis and then to the crisis in the Industrial sector in which the company is engaged and also the increase in the cost factors of productions, the political instability of the country and various taxes imposed by the Government. The company which collected Rs. 125 million from the public through public offer pleads that lack of working capital was another major factor responsible for failure of the company.
7. Mr. Hameed Habib, director of the company at the time of hearing has prayed that appointment of Inspector under section 265 of the Companies Ordinance, 1984 may be further pended for some time on the verbal assurance that the company would declare much improved results for the year ended on 30.06.1999. This assurance of the directors seems to be an attempt to get action of the Commission delayed further as the company's half yearly accounts for the period ended on 31.12.1998 shows a very bad performance in which the company had suffered from a further loss of Rs. 57.296 million. It is not understandable as to how the company can declare better results for full year when in the first half it has suffered very heavy losses. It is felt that director of the company just wants to gain some further time for which there is no justification. This is a classic case in which the company had shown extremely wonderful results before listing, sold shares at high premium and then the company straight-way collapsed. On examination of accounts for the period immediately after listing it has been observed that the funds raised through public subscription were not utilized in the manner undertaken in the Prospectus.
8. Mr. Hameed Habib also informed the Commission at the time of hearing that presently only 18% shares of the company are held by general public. This means that the shares sold to general public on premium have subsequently been purchased by the sponsors at a bottom rotten price and it strengthen my belief that again an attempt is being made to get the matter of appointment of Inspector delayed on unrealistic assurances in order to gain some more time to buy remaining shares from the poor public at a price around Rs. 3/- per share and then to come up with this argument that there is almost nil minority interest in the company. I am convinced that affairs of this company should be got investigated to ascertain the facts as the general public in case of this company has seriously suffered and there has been no return to shareholders in last five years.
9. Investigation into the affairs of the company appears necessary also for the reason for the reason that an analysis of the published results for the proceeding years indicate alarming inconsistencies relating to gross profit margin etc. (statement enclosed). The gross profit margin which stood at 17.8% in the half year ended 31.12.1996 turned into negative in the subsequent half year and stood at minus 34.3%. Again in the half yearly period ended on 31.12.1997, the company earned gross profit at 2.7% whereas in subsequent half year company has declared a gross loss of 44.28%. These inconsistency need to be probed into in depth.
10. Therefore, in view of the deteriorated performance after public offer and alarming inconsistencies in operational results outlined in the annexed statement, I, in public interest and in exercise of the powers conferred on me under section 265(b) of the Companies Ordinance, 1984 (XLVII of 1984) hereby appoint M/s. Hameed Chaudhri & Co. Chartered Accountants, Karachi, to act as Inspectors to investigate into the affairs of M/s. Pak Fibre Industries Limited on a remuneration of Rs. 150,000/- which shall be paid by the company.
11. Without, in any way limiting to the scope of investigation, the Inspector shall conduct investigation on all aspects of the operations of the company and shall after scrutiny of the entire record and books of accounts furnish reports, inter alia, on the followings:-
(i) Reasons and genuineness of heavy losses after public offer as the company appeared to be a well established concern before the public offer. Inspector will also report if any wrong statement was made in the prospectus regarding profitability of the company to lure to public to make investment in its shares.
(ii) Whether or not funds raised through public offer were utilized in the manner as undertaken in the Prospectus.
(iii) Whether or not proper record have been kept by the company as required by section - 230 and section - 234 of the Companies Ordinance, 1984.
(iv) Whether or not an adequate system of internal controls exist so as to prevent mis- appropriation and mis-application of Company's assets.
(v) Whether or not internal audit department is functioning properly, is it competent enough and independent to perform its functions. Evaluate internal audit reports and report that how these are disposed of by the Board i.e. whether or not immediate required actions are taken.
(vi) Is there some effective budgetary and cost control system and are any special studies carried out to improve workings of the company, if so comment.
(vii) Whether or not the purchase and sales rates of materials and products respectively are comparable with the market rates generally reported.
(viii) Whether or not expenses have been properly incurred, sanctioned, vouched and allocated and these were for exclusive purpose of the company.
(ix) Whether or not proper storage system has been maintained and stocks, stores, raw material and finished goods quantitatively reconcile and have been correctly valued, provision against dead stocks, slow moving spare & stores have been made and the production and wastage rates are comparable with other units.
(x) Ascertain the frequency of meeting of board of directors, role on non executive and executive directors, the over all comprehension of board of directors, their experiences to determine their ability to run this business in which company is engaged.
(xi) To examine and report the reasons of inconsistencies in operating results as pointed out in the annexure.
(xii) Compliance with statutory requirements in the operations of the company indicating that the business was conducted and expenditure were incurred in accordance with the objects and for purposes of the company.
(xiii) To report in respect of any lapse or other delinquency detected during the course of investigation. projections and business plans produced by the management will be evaluated and summarized with an opinion by the Inspector thereon.
10. 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.