' On 12th January, 1982, the Federal Government appointed Mr. S.M. Masood, FC A under section 21 of the Securities and Exchange Ordinance,1969 hereinafter referred to as the Ordinance) to conduct an enquiry into the affairs of M/s. Colony Textile Mills Limited.
2. On receipt of the enquiry report, a show-cause notice dated 1st December, 1986, under section 22 of the Ordinance was issued to the company. In response to the show-cause notice, the company submitted their reply dated St May, 1987. The case was heard and the company was provided opportunity or elaborating and explaining their point of view about each contravention mentioned in the show-cause notice.
3. Initially, it was argued that, ironically, the enquiry was started on the initiative of the company itself when the Government was approached for financial assistance for the company. It was pointed out that the cause of financial was go-slow tactics and hostile attitude of workers towards its management particularly after the 1977 firing incident. Though the situation improved gradually but resources of the undertaking suffered in the process and losses started accumulating. Thus it was claimed that it could not be said that there had been any lack of interest by the Directors or any improper management and planning of the Unit. In other words, so it was argued, that the very basis for the start of the proceedings did not exist.
4. Dealing with the preliminary objection out the basis of enquiry, I do not find any merit in the same because as a result of the enquiry, the Inspector did point out glaring facts about the mismanagement, particularly in the financial affairs of the company. Not only this, even prior to the appointment of Inspector on 12th January, 1982, there was material on record to suggest that whereas out 27 of cotton textile mills of the country, as many as 18 had shown better profitability in 1981 than in 1980 and as many as 8 mills had more or less maintained more or less the same profitability as in 1980, only Colony Textile Mills Limited had shown a huge loss of Rs,73 lacs for six months of 1981 against Rs,9 lacs profit in 1980. This occurring of this loss was intriguing and needed to be thoroughly investigated. Thus there was sufficient basis for the start of proceedings and there was no illegality in the same. The preliminary objection is, therefore, rejected.
5. Coming to the specific items the first contravention pointed out in the show-cause notice was that in 1971-72 the company had set up an independent modern spinning unit comprising of 27,000 spindles, while weaving unit of 170 looms was set up in 1976 under the name of Multan Cotton Industries Limited (MCI) at Multan. Separate working results of M C I, were not disclosed in the accounts for the years ended 30th September, 1979 and 1980 which was in contravention of Securities and Exchange Rules, 1971. In their written reply the company categorically denied having set up any independent unit under the name of Multan Cotton Industries Limited. During the hearing the learned counsel contended that the M C I was established by the Colony Textile Mills Limited in 1971-72 at Multan Industrial Estate. This unit was never incorporated as an independent limited 'company. Therefore, the allegation of non-disclosure does not carry any weight at all, I have gone through the record and I find that there was no separate Board of Directors of M C I and the Chief Executive and Managing Director were the same as in the case of Colony Textile Mills Limited. As claimed by the company, the unit was never incorporated as an independent Limited Company. I have therefore, no hesitation in agreeing with the contention of the company in this behalf. The contravention against the company is not proved and accordingly dropped.
6. The second contravention mentioned in the show-cause notice was that the shareholders' interest was Rs,57,061,111 which was far below than that of lenders amounting to Rs,156,854,875 (about one-third of total company's liabilities as on 30th September, 1980). Liquidity position of the company became so precarious that it was unable to meet its obligations in the subsequent years.
Further, due to liquidity position of M C I project, the payments of Rs,10,724,204 and Rs,7,542,975 to PICIC which were due during the years 1978, 1979 and 1980 could not be made. Apart from the above, the company was also unable to pay the interest amounting to Rs,16,755,941 outstanding for the last three years. Liquidity position of M C I project became so poor that its power connection was disconnected for non-payment of electricity bill in May, 1982 which resulted in total closure of the mill. This project was not being looked after at site by any director of the company and its affairs deteriorated due to improper management, planning and insufficient working capital. This shows lack of fiduciary control on the part of the directors.
7. In reply the company denied the allegation and maintained that the start of the M C I was good, rather above expectations, but due to recession in the international textile market, in particular, coupled with the imposition of export duty, the working results started showing adverse results. The Annual Report, 1973 containing the audited accounts of the Colony Textile Mills Limited for the year ended 30th September, 1973, would confirm that there was no problem of any working capital for the M C I (not an independent unit) and would show a figure of Rs,2,07,29,535 as profit before taxation. It was further contended that the problem was not that of management or working capital but that of labour. It was further stated that the material factor of the period to which this allegation relates, should be kept in view while judging the truth of the assertion. Everyone knows that with the coming of new Government, labour was 'freed' from all shakles of responsibilities and loyalties with the result that complete lawlessness took over in all labour concentration spots. The company made hectic efforts to retrieve the situation and various communications were addressed to Martial Law, police and district administration authorities. However, no positive result could be achieved and the state of affairs left the management with no other choice but to apply to the Punjab Labour Court No,8 for closure of the M C I and the Court vide its Order dated 4th July, 1983 allowed the closure of the unit (M C I).
8. I have given careful thought to the contention of the company. The application for closure of the M C I to the Labour Court was filed within the meanings of Standing Order 11/A of the West Pakistan Industrial and Commercial (Standing Orders) Ordinance, 1968 which provides that "no employer shall terminate the employment of more than 50% of the workmen or close down the whole establishment without prior permission of the Labour Court", but in the face of the company's own assertion that M C 1 was not an independent unit, it is not understood how this application was valid, when the involvement of workers were less than 50%. When confronted with this situation, the learned counsel conceded that the Standing Orders were not applicable to the M C I, but submitted that the application was filed only to avoid legal complications and illegal pressure of the workers.
9. I have considered the position and I find that notwithstanding the illegality of the action before the Labour Court, the intent of offence cannot be established in respect of the particular allegation.
The position seems to have become really desperate for the company. However, the company has not said anything about the specific facts pointed out in the show-cause notice regarding the non-payment of electricity bills, loans of IDBP and PICIC and outstanding interest. The facts that the company had a profit of Rs,7,07,29,535 (before Taxation) in 1973 or it had general reserve of more than 38 millions, are of no avail if the outstanding dues have remained unpaid. Even conceding that M C 1, or sake of argument that it was not an independent unit, the unassailed fact emains that there was no proper financial management, cannot be brushed side.
10. The next contravention mentioned in the show-cause notice was that vide loan agreement with IDBP made in December, 1969 foreign currency loan was sanctioned in US dollars repayable in Pak Rupees for import of spinning machinery. In 1971 and 1972 the loan was utilized in the currencies other than US dollars and accounts were being maintained in those currencies and not US dollars.
As per clause (6) of the Loan Agreement these currencies should have been converted into US dollars and accounts were to be maintained to US dollars. This material terms of loan were also not disclosed in the annual accounts over the years in contravention of Rules. In reply the following two contentions have been made:
(i) that the Industrial Development Bank of Pakistan maintained their account in various currencies and was debiting the accounts of company accordingly and sending them debit advices in confirmity therewith. Therefore, they had to incorporate the said advises in their accounts as they had not been able to discharge their loan liabilities However, they will sort out the matter, whenever they finally discharge any of their liabilities on this account.
(ii) that the matter had been already taken up with the bank and they were sure that the company would not suffer any monetary loss.
11. The contention of the company has been considered. Though the allegation had been categorically denied and the learned counsel maintained that no violation as such has been made, but the company failed to substantiate fully the material facts, particularly about the alleged non-observance of clause (6) the Agreement which could have been beneficial to the company. However, I allegation is not considered appropriate enough for an adverse action against I company.
12. The next contravention was about the amount of gratuity payable t employees which was not being ascertained and provided in the accounts as 30th September, 1980 in contravention of the Rules. In reply the company contended that in presence of the "Provident Fund Trust", no further provision as such in the accounts was required. The contention of the company has been considered. Keeping in view the provisions of Standing Order 6 of the We Pakistan Industrial and Commercial (Standing Orders) Ordinance, 1968, the objection is dropped.
13. The next contravention was that during the years 1973 to 1980 machinery of different types financed by PICIC and IDBP were received and kept for in stores/work-in-progress until final erection. PICIC and IDBP charged interest o the, cost of these assets. Such interest which comes to Rs,6,233,244, was to b Capitalized on year-wise basis instead of charging to Profit and Loss Account. Six ring' frames valuing Rs,2,334,774 which were received in earlier years were still lying in store godown as unutilized and the interest had been charged to Prof and Loss Account. Non- capitalization, of interest was against the accounting principles and gave a wrong picture of year- wise profits.
14. In reply the company vehemently denied the correctness of the allegation and explained that the spinning unit machinery of MCI had not arrived in a single lot as it was supplied in different consignments from time to time. When the supply was completed, the unit was erected and put into operation except a few "Ring Frames" and "Roving Frames" which could not be installed due to non-availability of some other essential parts. The interest amounting to Rs,1,191,832 and Rs,1,373,030 for the erection period was duly capitalised during the year 1972 and 1973.
Subsequently, some Rings Frames and other machines were damaged due to fire in M C I.
Therefore, the same could not be utilized. The company received Rs, 793,609 as insurance claim from the National Security Insurance Company Limited. The interest in respect of the uninstalled machinery damaged due to fire, was rightly charged to profit and loss account as it did not relate to the erection period. About the weaving section machinery, the company stated that after completion of its erection, the expenses were capitalised as under: {{TABLE}} 1974-75 1975-76 1975-76 Weaving Section Weaving Section Spinning Section Rs, 798,149.50 Rs,1,546,561.93 Rs,2,344,711.43 Rs, 57,696.43 R s.2,402,408.26
15. The learned counsel of the company stated that it does not establish any mala fides on the part of the company or departure from the recognized accounting principles. Thus it was incorrect to allege that wrong picture of year-wise profits was shown. I have considered the explanation of the company and I am inclined to agree to the same.
16. The next item was that the weaving unit remained closed during the year and depreciation was not charged on the weaving machinery, though full depreciation amounting to Rs,330,228 had been charged on weaving factory building and other allied assets. In reply it was submitted that the plant remained closed for the whole year. Consequently, no depreciation was charged on the same. However, depreciation on the weaving-shed building was charged, as it was used for the machinery and allied stores facilities etc. The learned counsel appearing for the company contended that the company had not contravened any provision of the Ordinance. The contention of the company was not satisfactory as non-charging of depreciation on any asset presents an incorrect picture about the accounts.
17. The next contravention that while the audited accounts as at 30th September, 1980 show that the entire items of plant and machinery, furniture and fixtures and vehicles of Model Ginning Oil Mills Limited were sold out by that date, in actual fact the following items were sold subsequent to that date and thus, correct disclosure was not made:
(a) Plant and Machinery Rs,10,900 Furniture and Fixture Rs,750
(b) One transformer 1260 KVA (Climax)--still lying in stores.
(c) Sale proceeds of one Motor-cycle and one Bicycle costing Rs,8,779 were not accounted for in the accounts.
18. In reply the company contended that they did not own any unit by the name of "Model Ginning Oil Mills Limited". They had the Model Ginning and Oil Mills situated at Mumtazabad. About the deficiencies pointed out in the sale transaction, the company submitted:
(a) that "the Fixed Assets Register" was not maintained during the period when their Model Ginning and Oil Mills remained under the control of the Cotton Trading Corporation of Pakistan.
(b) that Assets were sold mostly in lots, hence the sale proceeds and Profit/Loss of each item could not be determined separately.
(c) that the gross sale proceeds were set-off against the written down value of the lot of the assets sold as appearing in the printed accounts, and, in view of the (a) above, the unsold Assets and their written down value could not be worked out and mentioned in the Schedule.
19. I have considered the matter and I agree that the company did not own the Model Ginning Oil Mills Limited. It's unit was known as Model Ginning Oil Mills. About the explanation given by the company, I feel that the manner in which these transactions took place, does create some doubt about their genuineness, but since proper disclosure about the sale proceeds was made in the Annual Report, 1981., the objection is dropped.
20. The next contravention mentioned in the notice was that 7 kanals and 2 marlas of land belonging to Model Ginning Oil Mills alongwith building constructed on it were sold in October, 1979 but the profit realised on land amounting to Rs, 215,700 and on building amounting to Rs,120,174 were not incorporated in the accounts. Similarly profits of Rs,381,390 realised on sale of Oil Milk buildings were also not incorporated in the accounts. In audited accounts it has been stated that gain on sale of land and building would be incorporated in the year when entire land and building would be disposed of. For correct accounting principles, profit of one year should not be deferred to subsequent years. Correct disclosure was, therefore, not made.
21. In reply the company submitted that since the entire land and building of the Model Ginning and Oil Mills was not finally disposed of, therefore, following the conservative accounting policy, the management decided not to account for the gain on the part sale in the income of the current year. It was further submitted that the profit on sale of land is capital gain and is transferable to capital reserve, if it exceeds the cost price. But as the sale proceeds of land were less than the cost, it was not transferred to capital reserve. At the time of hearing, the learned counsel for the company also explained the contention of the company at length and submitted that no contravention as such has been made. After a careful consideration of the explanation, I find that the Board of Directors' decision to defer the profit of one year to next year was incorrect and bad from the accounting point of view. But nevertheless, it does not lead to any adverse inference as no mala fides can be established in view of the overall loss in the sale. Accordingly, the objection is dropped.
22. The next contravention noted in the show-cause notice was that the Ginning Factory, Mumtazabad, was located within the Municipal limits of Multan and was thus very attractive.
Management sold 7 kanals and 2 marlas alongwith the construction thereon in plots to 14 persons on October 29 and 30, 1979. The Board of Directors in a resolution passed on October 11, 1979 authorised a junior employee of the company to sell the land. The land was sold at an average sale price of Rs,3,000 and Rs,1,000 per marla respectively for a total sale price and price excluding `malba'. The land was sold incompetently at a grossly understated price. The sales though agreed by the Excise and Taxation Department, were far below the prices of the other properties sold in the same vicinity which fetched prices of upto Rs,15,000 per marla.
23. In reply the company challenged the correctness of the allegation and claimed that Syed Ali Akbar was a senior executive of the company and for the last twenty years, he had been Manager of the Model Ginning and Oil Mills, therefore, he being fully acquainted with the affairs of the Mills, was rightly appointed as General Attorney by the Board of Directors. It was further submitted that all the sales of land had been made at best available rates, after ascertaining the prevalent rates in the vicinity. It was argued that no sale of land can be registered without the approval of the Excise and Taxation Department, who fixed the Capital Gain Tax according to the market rate. The sale could have been objected to by the Excise and Taxation Department, but in actual fact, not a single case was objected to nor rejected by the Department. It was further contended that the negotiation for sale of the land went on for quite some time and when these were nearing maturity, the Board of Directors passed resolution on 11th October, 1979, whereafter the sale-deeds were executed. About the location of the land, it has been stated that the total area (1,453 marlas) had with it a very narrow front and, therefore, the land being in the depth and at the tail-end, was neither easily accessible nor connected with any sewerage, road/lanes and other service lines. It naturally could not fetch the same rate as for the area with a wide and proper front. In the written reply it has been further stated that upto 20th March, 1985, 1,253 marlas had been sold for a total of Rs,6,618,542 or average of Rs,5,282 per marla even though some of the land fetched Rs,10,000 per marla which was better located. The company denied the allegation and maintained that the value declared by the company was correct and it was incorrect to suggest that the land was sold at dirt cheap rates when in the same vicinity it was Rs,15,000 per marla.
24. I have given may anxious thought to the matter and after going through the details of transactions and the location plan of the area, I am inclined to agree that the transactions were duly authorised, location-wise the land was adversely placed, it was not comparable with the other area mentioned in the show-cause notice and the transactions had been made in the best interest of the company. Accordingly, the objection is hereby dropped.
25. The next contravention pointed out in the notice was that as at 30th September, 1980, Rs,5,162,347 had been shown as invested in the shares of certain quoted and unquoted companies.
This amount appeared to have been unnecessarily blocked on investments on which return was very low, whereas the company itself paid interest, @ 14% to banks on overdrafts.
26. In reply the company contended that out of Rs, 5,162,347, the major investment Rs,3,743,100 was in the 6% cumulative preference shares of Colony Thal Textile Mills Limited, which was incorporated in 1958 as a subsidiary of the company. These preference shares were not quoted on the Stock Exchange and, therefore, the only option available for the Mill was to wait for Colony Thal to redeem these preference shares when it so decided. Though the company desired to disinvest the same but for reasons explained above, it was not possible to do so. About the Government Compensation Bonds of Rs,400,076, the company counsel made a reference to the Notes to the Accounts for the year ended 30th September, 1980 which are reproduced below: "(i) Government Compensation Bonds of Rs,400,076 are still receivable from the Federal Government in respect of shares held by the company in Multan Electric Supply Company Limited.
The company has challenged the withholding of Compensation Bonds through writ petition filed in the Lahore High Court, which is still pending for final adjudication.
(ii) Interest for some period on Government Compensation Bonds valuing Rs,265,500 (already received and delivered to the company) is also payable by the Government which has not been incorporated in these accounts."
27. About the Income Tax Bonds of Rs,103,500 the company submitted that the same have been sold out during the year 1984-85. With regard to amount of Rs,24,000 relating Cosminn Limited, the company contended that though there had been no return on it, yet through it, the company did earn a lot of profit on its exports in the past. About the other small investments, the company maintained that the market value of the said shares had never gone below.
28. The learned counsel argued that investments in the shares did not show any mala fides on the part of the company nor did it suggest that the amounts had been blocked unnecessarily. He claimed that the pivotal question for consideration was whether any investor could claim to have made investments which were always loss-proof or that in the circumstances, the company had failed to make any real effort about the disinvestment. I agree with the learned counsel and I find that the capital had not been unnecessarily blocked. At the most it be attributed to an error of judgment and no mala fide has been noticed. In my opinion when about 82.5% items had been amply explained by the company no adverse inference could be drawn and, therefore, the objection is dropped.
29. The next point mentioned in the show-cause notice was that on physical verification by the Enquiry Officer against book balance of 12,742 shares of Nafees Cotton Mills Limited, 12,692 shares were found in the name of Colony Textile Mills Limited while one share certificate bearing No,000047 for 50 shares having distinctive number was found in the name of Naseer Mughis Limited. Against Note 13 (d) of Annual Report of 1980, 3,000 shares of Colony Woollen Mills Limited previously registered in the name of Humayun Naveed Limited had not been transferred and registered in the name of the company on 12th March, 1981.
30. In reply the company submitted that the Nafees Cotton Mills Limited inadvertently put the rubber stamp of Naseer Mughis Limited instead of Colony Textile Mills Limited on its share certificate. The clerical mistake has now been corrected in the certificate. The company produced a photo copy of the same. Regarding 3,000 shares of Colony Woollen Mills Limited, it was stated that these were got transferred on 2nd March, 1981 without any loss to the company. This fact had already been mentioned in the Annual Report, 1980, vide Note 13 (d). In view of this satisfactory explanation, the objection is dropped.
31. The next contravention, mentioned in the show-cause notice was that the comparison of the quoted shares as shown in the account, with those shown in Form "E" of respective companies, it was revealed that 9736 (3,225 plus 3,016 Otis 3,495) shares of the three companies were less shown in the accounts. Correct disclosure was, therefore, not made.
32. The explanation of the company in reply to the show-cause notice is correct and the same would form a part of this order. Therefore, the objection is hereby dropped.
33. The next contravention mentioned in the show-cause notice was that the recovery of yarn in the year ended 30th September, 1980 in respect of Multan Cotton Industries was shown at 80.77% and at 79.04% in respect of Colony Textile Industries which were low when compared even with the results shown in the past years. Even in the year ended 30th September, 1978 when labour riots took place in Colony Mills, the results declared were far better and the yield declared was 86.43% in C T M and 82.19% in the case of M C I. Invisible waste was shown at 2.45% and 3.51% respectively which appeared to be highly exaggerated as normal invisible waste was between 1 and 1-1/2% sale of cotton yarn was thus understated and correct disclosure of sales was not made.
34. In reply the company denied the allegation and contended that the hard waste which was taken out in the process of weaving had been included to work out the .Results. It did not give the true picture up to the ring-production. If the results are compared upto spinning i,e. The hard waste upto winding included, the correct position would emerge. Thus the comparison made by the Enquiry Officer was fundamentally unjustified. The company further contended that the machines were very old to the extent of being even obsolete mostly of the vintage of 1952, and, therefore, in the circumstances this was the maximum output which had properly been disclosed in the accounts and inference of under-statement of the sale of cotton yarn was unsubstantiated. In support of their contention the company also produced a copy of the order dated 31st March, 1985 passed by the Appellate Assistant Commissioner, Income Tax Range C, Lahore wherein the declared wastage was accepted. Considering the contention of the company and the aforesaid Income Tax Appellate Order, I agree to the contention of the company and do not subscribe to the notional suppression of the sales of cotton yarn. The objection is, therefore, dropped.
35. The next objection was that as per stock ledger 157,728 metres of Tank and ordinary malatia cloth were delivered to Colony Woollen Mills Limited on 16th September, 1980 by C T M. Neither sale invoices were prepared for these items nor these were included in the closing inventory. The cost of these items were not available. On the average sale rate charged from Nafees Cotton Mills it works out at Rs,820,000. The sales were thus understated by this amount. Correct disclosure of the sales was not made.
36. In reply the company explained that they had not been manufacturing Tank or ordinary malatia since long, nor were these items in the stock during the period under report. The counsel further explained that the said items were received for processing from Nafees Cotton Mills Limited and after processing, the same were delivered back to them at their godown situated in the premises of the Colony Woollen Mills Limited. The amount pointed out was received as processing charges.
37. I have considered the explanation and there being nothing to substantiate the objection or to rebut the position stated by the company, I agree to the same. The objection is dropped.
38. The next contravention pointed out in the show-cause notice was that during the year polyester yarn of different counts weighing 2],587.24 Kgs. Was purchased for Rs, 1,058,336 from Nafees Cotton Mills Limited an associated undertaking, above the company's own cost price. It is not understood as to why, in the presence of sufficient quantity of polyester fibre in the stock, specified yarn could not be produced in the mills especially when mills were also running below capacity. If this yarn had been produced in the mills cost per kilogram would have been reduced.
39. In reply the company submitted that the manufacturing of polyester/viscose yarn was different from the production of cotton yarn and certain changes needed to be affected in the cotton spinning machinery for the purpose of spinning the polyester yarn. The company's Ismailabad Unit was very old and obsolete and of 1952 vintage. The management tried to manufacture the polyester yarn. But ultimately the fibre had to be sold out and the company had to purchase polyester yarn from Nafees Cotton Mills Limited and others.
40. I have considered the matter. It is admitted that the machinery is old one but one could not understand the logic behind this purchase and sale when in the knowledge that manufacturing and production of polyester yarn was not feasible at all. I am, therefore, convinced that simply due to the wrong policy of the management, the company suffered loss on these transactions and the associated company benefited with these transactions as the cost of the company's own
41. The next contravention mentioned in the show-cause notice was that in February, 1980, 50,000 kilograms of polyester fibre was sold to Nafees Cotton Mills, an associated company, approximately at marginally higher price. It was utilised by Nafees Cotton Mills Limited for their own yarn production and part of this was re-delivered to the mills at higher prices. Due to wrong policy of the company, it suffered a loss on the purchase of above yarn. The associated company, therefore, again benefited at the cost of the company and its shareholders.
42. In reply the company denied the allegation and put forward the same arguments as given in reply to para (xv) of the notice. The company submitted a statement showing details of the purchase and sale of polyester and contended t it was not a bad bargain for the company.
43. The plea was considered and it has been proved beyond any doubt that to wrong policy of the management, the company suffered loss (through marginal) on these transactions.
44. The next contravention mentioned in the show-cause notice was that ing the year export sales were made for Rs, 88,051,209 and were shared by the two units as under; Colony Textile Mills Limited (C T M) Rs,85,107,859.
Multan Cotton Mills Limited (MCI) Rs, 2,943,350.
Rs,88,051,209 ' Exports shown to have been made by C T M are inclusive of Rs, 14,809,361 exported through different parties. The sponsors of three companies included other parties, namely, Samina Agencies Limited, Humayun Naveed Limited and Naveed Fareed Limited were the family members or Directors of Colony Textile Mills Limited. In addition to these C T M also sponsored eleven other concerns out of which only No fail Impex was an outside party. Bank accounts were opened in their names from C T M funds with Habib Bank Limited and American Express. Commission amounting to Rs,54,522.86 was only paid to Humayun Naveed Limited which they paid to L.A. Commercial S.A.
Switzerland, on account of a contract with them and to Nofail Impex to the extent of Rs,12,600 at rate agreed at Rs 1,800 per ton.
45. The company tried to explain before the enquiry officer, that expo quota of company had exhausted and it was forced to export the surplus goods or borrowed quotas of other parties.
However, the position is that these exports could have been made by the other unit of the company namely (M C I) whose quota was not apparently fully utilized during the year. Thus the benefit which the company could derive, was passed on to the relatives of the Directors.
46. In reply the company denied the correctness of the allegation an contended, that the All Pakistan Textile Mills Association allocated the exports quota in the name of Colony Textile Mills Limited and no individual unit either Multan Cotton Industry, Industrial Estate or Ismailabad Unit come into picture.
47. In support of their contention the company produced a copy of letter dated 6th May, 1987 issued by the All Pakistan Textile Mills Association confirming that the Association has never allocated any textile quota to Messers Multan Cotton Industries, Multan as they had never been enrolled as the members. The company further contended that since the export quota allocated to the company was not sufficient to fulfil their export commitments, the quota other exporters had to be utilized by the company. Thus it was wrong an incorrect to say that the benefit which the company could derive, had been passe on to the relatives of the Directors.
48. The contention of the company was considered. And in view of certificate of All Pakistan Textile Mills Association and the detailed reply to show-cause notice, I am inclined to agree to the same.
49. The next objection mentioned in the show-cause notice was that in local market all the qualities of grey-cloth were mostly sold to Anwar Sharif an six other related_ parties of Karachi at the rate of Rs,4 and Rs, 4.45 per yard, the cost price. During the year sales made to such parties were Rs, 23,316,493 Certain office invoices of these parties were marked as "Not for Export".
50. A few quantities of grey-cloth were also sold to Nafees Cotton Mills Limited at Rs,4.82 and Rs,5.34 per yard, yielding a profit of Rs,247,236 (18.22% Again, 16,400 yards of Ex 2166 quality was sold to another local customer. He Nizam Din and Sons Limited, Karachi @ Rs,4.70 per, yard vide Invoice No,1227 dated 4th September, 1980. Further in June, 1980, 111,000 yards of above quality Ex 2166 was also West Germany. Total amount recovered per yard was Rs,5.40 yielding a profit of 30.12% as compared to cost. When confronted, the company vide their letter dated 31st August, 1982 replied that the grey-cloth, being remnant and 'B' grade left-over from the export, had to be sold locally to Messers Anwar Sharif and Co., Karachi, and the other six parties at the best available rates.
However, the same products sold to Nafees Cotton Mills Limited being `A' grade (80 yards and upstandard cloth) were sold at the normal rates and the relevant bills also depict the same fact.
51. Messrs Anwar Sharif and Co., Karachi, being brokers their purchasers ere sometime on their own account and sometimes on other (principals). The )mpany pleaded ignorance about any relationship between Messrs Anwar Sharif id Co. And the six others.
52. Regarding the exports, it was stated that_the quota allocated during 1979-80 to Colony Textile Mills Limited for export was fully utilized. It also included he quota for export to Italy which was restricted to Italy alone and being unable honour the indenting from the Italian buyers, it was endeavoured, in the best interest of the company, to make full use of the quota of other holders with whom he company could arrive at the arrangement; 90% of such quota was utilized for export to Italy. Thus their exports for the year had been much higher than the quota allocated to the company and nothing had remained unutilized therefrom.
53. I have considered the explanation of the company and I may mention that the production figures of the grey-cloth as given at the end of the show-cause notice [item (xviii) page 12] do not substantiate the argument of the company. He explanation is contrary to the facts as grey-cloth locally sold as 'B' grade production which ranges between 25% and 69% of the total production in the different qualities, could not be termed as 'left over from export'. The quantity of which 'left over from exports' sold to Anwar Sharif and their six other parties works out at 6,367,933 meters out of total production of such qualities of grey oath at 16,731,348 metres. The explanation of the company moves around the argument of very-old machinery, However, even taking that factor into consideration, it cannot be said that the company could produce only 62% of 'A' Trade export quality cloth and the remnant 38% had to categories as 'B' grade, meant only for local market and that too was mostly unverifiable. Therefore, the various inference is the same as mentioned in the show-cause notice i,e. The management was deliberately changing the description of the quality of cloth by marking as the same 'B' grade and thereby understating the receipts by not according the actual transactions and not even any documents in support of the claim. The company claimed that the transactions were generally settled on Telephone and thus no documents were available.
54. Attempts were made to obtain direct confirmations from the brokers at addresses given by the management. With the exception of Goodluck Corporation to whom 38% sales were made and who verified the transactions with C T M, no reply was received from the other parties. In the absence of substantiating documents regarding these sales, validity of these transactions as claimed timed by the management cannot be vouched for. Furthermore, it is rather surprising and difficult to believe that settlements regarding sales of Rs,23,316,493 had been made orally and without maintaining apropriate and necessary records. The learned counsel tried to explain the prevailing system of sale of textile items in the market and submitted that practically, it is impossible to bring each and every transaction in writing. I have considered the arguments and I regret that I cannot agree as the same are without any substance. The counsel of the company has failed to discharge the onus of proving the authenticity of these transactions.
' Therefore, the pleadings in this behalf are rejected.
55. In conclusion, for the reasons and facts recorded above, it is held that the company has not been able to dislodge the contraventions mentioned in paras (vi), (xv), (xvi) and (xviii) of the show- cause notice and to establish that the same were not wilful. I, therefore, under section 22 (1) (c) of the Securities and Exchange Ordinance, 1969, direct the company to pay to the Federal Government by way of penalty a sum of Rs,5,000 by or before 12th November, 1990.