1. This Order shall dispose 'of the Appeal against the order, dated December 5, 2001 passed by the Executive Director, Enforcement and Monitoring Division the (the "impugned order") of the Securities and Exchange Commission of Pakistan (the "Commission") under section 208 read with section 476 of the Companies Ordinance, 1984 (the "Ordinance").
2. Brief facts of the case are that while examining the published accounts of Gharibwal Cement Limited ("Gharibwal") for the financial year ended on June 30, 2000 it was observed by the Executive Director (E&M) that the Company had invested an amount of Rs,172.973 million in Dandot Cement Company Limited ("Dandot") and purchased 11,429,708 shares thereof, which constituted 43.54% of the paid-up capital of Dandot. The Company was also stated to have advanced loans to Dandot to the tune of Rs,337.8 million at the mark-up 12% per annum. This was subsequently shown under the commercial trade agreement, dated July 7, 2000 as financial facilities in the nature of normal trade credit. All liabilities of Rs,337.8 million were transferred to Dandot as per agreement between Citibank and Dandot, dated November 2, 2000. The admitted position is that: Gharibwal purchased 11,550,000 (44%) shares of Dandot for Rs,190 million vide agreement, dated November 22, 1999 between Gharibwal and Chakwal Group, 7,726,4000 shares of Dandot were transferred to Gharibwal on March 6, 2000; balance 3,823,600 shares were to be transferred in favour of Gharibwal within two months from the date of the execution of the agreement according to supplemental Agreement-II, dated March 3, 2000. Pursuant to the said supplemental Agreement-II, Gharibwal agreed to place a sum of Rs,49.657 million with Jehangir Siddiqui Investment Bank (Jehangir Siddiqui) in an escrow account to be disbursed to Dandot subject to transfer of shares.
These shares (3,823,600) were transferred by April 25, 2000.
3. It is also an admitted position that Gharibwal became associated undertaking of Dandot on March 6, 2000 because on that date Gharibwal reached, for the first time, a shareholding of 20% in Dandot and its nominees are appointed as directors of Dandot. Gharibwal purchased 966,500 shares of Dandot from the market between March 7 to June 30, 2000 for 7.3 million. Gharibwal sold 1,886,792 shares of Dandot to Saudi-Pak Leasing Company Limited at Rs,13.25 per share under buy back arrangement for Rs,19 per share. The ratification for financing facilities aggregating to Rs,337.8 million and other investments was recorded by the Board of Directors of Gharibwal vide the resolution, dated December 8, 2000. These actions of the Company were also qualified by auditors of Ghairbwal in their audit report, dated January 4, 2001 on the annual accounts for the year ended June 30, 2000 as investment being made in contravention of section 208 of the Ordinance. The financial statements for the above mentioned year further reported a loss of Rs, 3.547 million on account of sale of a part of its investments in Dandot apart from heavy borrowings to make investment in Dandot.
4. Since the investments made by Gharibwal appeared to be in violation of section 208 of the Ordinance, the Executive Director (E&M) issued a show-cause notice to the directors of the Company ("Appellants") on March 27, 2001. In response to that notice, counsel for the said directors made writer submissions and provided various explanations in the hearings before. After having considered the explanations provided, Executive Director (E&M) concluded that Gharibwal's investments in Dandot were in violation of the mandatory provisions of section 208 of the Ordinance and the same cannot be rectified later on by way of ratification. The Executive Director (E&M) accordingly imposed a penalty of Rs,300,000 on each of five directoRs, The Executive Director (E&M) further directed the management of Gharibwal to bring back its investment in Dandot alongwith mark-up within six months from the date of the impugned order in case of failure of the appellants to comply with the afore-stated directions, the Directors were made liable to make up the shortfall. Being aggrieved with the above mentioned order of the Executive Director (E&M), the appellants filed the instant appeal that came up for hearing on March 5, 2002.
5. The appellants in their appeal have vehemently contested the findings of the Executive Director (E&M) in the impugned order and have also submitted written arguments alongwith case-law in support thereof. In our view the following issues arise out of this appeal:--
(i) What investments were made in Dandot as an associated company of Gharibwal?,
(ii) Whether the ratification by the shareholder rectifies the default made under section 208 and legalizes the investments made by a company in excess of 30% threshold?
(iii) Whether the financial facilities provided by Gharibwal to Dandot were in the nature of "normal trade credit", and the mark-up charged on advances and loans was less than the borrowing cost of Gharibwal?
(iv) Whether Gharibwal has suffered any loss due to the investments made in Dandot?
(v) Whether the buy back arrangement entered into by Gharibwal with Saudi-Pak Leasing Company Limited is in contravention of section 208 of the Ordinance?
(vi) Whether section 195(5) and section 488 of the Ordinance can be invoked in the present circumstances?
6. The above issues are discussed below taking into consideration the arguments submitted by both the parties in light of the relevant law.
(i) What investments were made in Dandot as an associated company of Gharibwal?
(a) The learned senior counsel, Dr. Parvez Hassan appeared on behalf of the appellants submitted that major part of the investments in Dandot was made on March 6, 2000, as a result of which Dandot became associated company. He explained that a major part of shares, purchased on this date, was delivered simultaneously on making the payment while 3,823,000 shares were delivered subsequently (payment against these shares had also been made by way of deposit of the consideration in the escrow account) and as such, investment made on this date does not attract the provisions of section 208 of the Ordinance because at the time of such investment Gharibwal and Dandot were not associated companies it has been further emphasized that these shares could not have been transferred at that time as these were not available and were pledged. Also, submission has been made on behalf of the appellant that the intent of the parties is visible as the payment for such shares was deposited in an escrow account and the transaction in fact had materialized; the only formality left to be performed was handing over of the said shares. The learned senior counsel, however, admitted that further investment in 966,500 shares of Dandot and loans of Rs,337.8 million was made/extended after the invested company had attained the status of associated company but pleaded that in the Extraordinary General Meeting held on December 8, 2000 ("EGM"), the shareholders of the company approved these investment decisions had actions of directors were duly ratified by the shareholders,
(b) On the other hand, the grounds given in the Impugned Order for not treating 3,823,000 shares as part of an investment prior to the time when Gharibwal and Dandot became associated company is given on pages 14-16 of the Impugned Order. The Executive Director has emphasized that this investment cannot be treated as investment in Dandot prior to its becoming associated company of Gharibwal because of the simple reason that according to the mandate given to Jehangir Siddiqui Investment Bank, the payment was to be made only on receipt of shares from the sellers and further the profit on the said point was paid to Gharibwal. Since the investments for the purchase of said shares were made after March 6, 2000 when the interconnecting relationship between the two companies was already established, section 208 of the Ordinance would become applicable. It is further stated, that section 208 comes into play only when the investment actually takes place and not at the stage of an agreement to invest. The Executive Director has placed his reliance on Brooke Bond India Ltd. v. UB Ltd. (1994) 79 Companies Cases 346).
(c) After having reviewed the above-cited case, we are of the considered view that the said case is not on the specific issue at hand. In the cited case, the legality of a contract was in question. It was alleged that the contract violated section 372(4) of the Indian Companies Act and in this respect it was held that what is prohibited by subsection (4) is "investment" and not agreement to invest. The issue in the present case is whether in the peculiar circumstances by virtue of the agreements between Gharibwal and Dandot the transfer of shares which took place subsequent to the companies having become associated companies can be treated as an investment prior to their associated relationship. The relevant facts in this regard as provided in the Impugned Order and submitted by the counsel for the appellant are that: Gharibwal entered into a share purchase agreement, dated November 22, 1999 for purchase of 11,550,000 shares for a consideration of Rs,160 million. Subsequently, two supplemental agreements were entered into on March 3, 2000. In Supplemental Agreement-I, sales price of shares was enhanced from Rs,160 million to 190 million.
Under Supplemental Agreement-II 7,726,400 shares were to be transferred on March 6, 2000 against the payment of Rs,100.343 million. The balance shares were to be transferred in favour of Gharibwal within two months from the date of execution of the agreement. The payment for these shares was deposited with Jehangir Siddiqui in an escrow account and as per the statement of the appellant before the Bench, the amount was deposited on the same date as that of the agreement and was to be disbursed to sellers on the transfer of 3,823,600 shares which took place on April 25, 2000 in favour of Gharibwal. The sequence of the transactions in our view clearly indicates that the intent was to acquire these shares and though the formal transfer took place after March 6, 2000, it appears convincing to treat the series of transactions as part of the principal shares purchase agreement, dated November 22, 1999. However, the said transactions are spread over a period of time, prima facie, owing to practical difficulties faced by the parties.
(d) Therefore, to extent of the investment for purchase of 3,823,600 shares, we hold that section 208 is not applicable. However, as for the investment in 966,500 shares of Dandot and loans of Rs,337.8 million extended to the investee company, the appellant is not disputing and admitting that the same were made when the associated relationship between Gharibwal and Dandot had come into existence.
(ii) Whether the ratification by the shareholder rectifies the default made under section 208 and legalizes the investments made by a company in excess of the 30% threshold:
(a) It has been forcefully argued by the learned senior counsel Dr. Parvez Hassan that section 208 does not acquire the "prior" or "previous" approval of the shareholders, It mainly requires the approval in the form of "the authority of a special resolution". Therefore, the word "prior" should not be read into a statute and only plain and natural meaning of a statute should be given effect. It has been further submitted that where the Ordinance requires "previous" or "prior" consent it has been specifically provided for see, for example, sections 37(3), 44, 62-A, 178(1), 267(2) and 432(6).
This may be contrasted with sections 58, 62(1) 192(2), 195(1), 206(3) and 208(1) which require approval but do not require it to be "previous" or "prior". Reliance has also been placed on the Indian Case Law where in Mathura Prasad Saraf v. Company Law Board the Calcutta High Court held that subsequent approval by shareholders and the Central Government were appropriate under section 372(4) (analogous section under the Indian Companies Act of section 208). Further, in East Indian Produce Limited v. Naresh Acharya Bhaduri (1988) 64 Comp. Cas. 259, it has been submitted by the learned senior counsel that though a Division Bench was inclined to accept the argument that permissions indicated in section 372(4) are conditions precedent but did not consider necessary to express any final view on this point. As a result of these decisions section 372(4) was modified by an amendment in 1988 where the words "previously approved by the Central Government" were added into the said provision. It has, however, been emphasized by the learned senior counsel that even the amended section 372(4) does not require previous approval of The shareholders, Even a subsequent approval of the shareholders under section 208 of the Ordinance validates investments made by the company and thus ratification, even subsequently validates unauthorized actions of the Directors of a company. In this regard reliance has been placed on a number of cases (a) Bamford v. Bamford (1969) 1 All ER 969 (CA); (b) Halsbury's Laws of England, Fourth Edn., Volume 7, para. 726; (c) Gower, LCB, Gower's Principles of Modern Company Law, at 177, Fifth Edn., 1992; (d) Grant v. United Kingdom Switchback Railways Co. (1888) 40 Ch. D 135 (Court of Appeal) cited in Sealy, LS, Cases and Materials in Company Law, at 192-93, Fifth Edn., 1992;
(e) Parmeshwari Prasad Gupta v. The Union of India, AIR 1973 SC 2389; and (f) V.N. Bhajekar v. K.M.
Shinkar AIR 1934 Bombay 243. The superior Courts of Pakistan have also validated allegedly "illegal" and "void" agreements (under section 23 of the Contract Act, 1872) requiring approvals by public authorities on the basis of their ex post facto approvals; see generally Manzoor Hussain v. Wali Muhammad, PLD 1965 SC 425. The appellants have also invoked the doctrine of substantial compliance McDermott v. Bear Film Co., 219 Cal. App. 2nd 607; Nishat Mills Limited v. Superintendent of Central Excise Circle II and 3 others PLD 1989 Supreme Court 222 and E.A.E Vans v. Muhammad Ashraf, PLD 1964 SC 537 and have submitted that beneficiaries of statutory provisions even a mandatory one can waive the protection offered to them by the said provisions Vellayan Chettiar v. Government of the Province of Madras, PLD 1947 PC 160. It has been submitted that the shareholders of Gharibwal are the beneficiaries of section 208; they waived the protection offered to them in the EGM. Reliance has been placed on the maxim, Cuilibet licet renuntiar juri prose introducto (Any one may .Waive or renounce the benefit of a principle or rule of law that exists only for his protection).
(b) The Executive Director in respect of the issue of ratification has relied on the well-settled principle that when law requires something to be done in a particular way, it should be done in that specified manner and none other. In his view, the plain reading of the provision of section 208 of the Ordinance show the intention of the Legislature that it is a mandatory restriction on companies for making investment in their associated companies. Since it entails penal provisions for violation.
Special resolution in his view is a condition precedent for making investments in terms of section 208 and the shareholders do not have the power to ratify an act which is outside the powers of the company.
(c) We have considered the arguments and rationale from both sides and closely examined the provision of section 208 under the Ordinance and section 372(4) under the Indian Companies Act.
It needs to be appreciated that the principle of plain and ordinary meaning from reading of section 208 of the Ordinance appears none other than seeking prior permission of both the shareholders as well as the Commission. In our view the two provisions are distinguishable. The words "under the authority" as used in section 208 of the Ordinance are much stronger than the word "sanctioned" used in section 374 of the Indian Companies Act. In our view, by no stretch of imagination an act can be termed as "under the authority" when the authority is subsequently acquired. The appellant has also submitted his arguments regarding the interpretation and relevance of the word "prior" and "previous" "approval" which does not appear convincing to us. The expression "approval" has nowhere been used in section 208 of the Ordinance, therefore, applying the principle of plain and ordinary meaning and the principle of redundancy we should not read into a statute words that are not provided for. It is relevant to see the context in which a word is used and only then a word should be interpreted or a meaning can be assigned to it. To us, the plain and ordinary meaning of the words "under the authority" means having consent of the shareholders prior to investment.
(d) As for the case of East Indian Produce Limited v. Naresh Acharya Bhadu (1988) 64 Comp. Cas.
259, the DB was not only inclined to accept the argument that the permissions are conditions precedent but in fact expressly approved this view discussing its rationale as follows:-- "in our view from reading of section 372 of Companies Act, a conclusion may be drawn that in the absence of the resolution of the investing company in its general meeting and approval of the Central Government, such investment in shares of other body corporate in excess of 10% of the subscribed capital of such other body corporate cannot be made."
"In our view the approval of the Central Government is not idle formality. Before according approval the Central Government may have to examine whether the investing company exceeding the prescribed ceiling and further whether there is any proper resolution sanctioning such investments.
These are requirements to be taken into consideration before such investments are given."
The D.B. In the aforesaid case did not consider it necessary to express any final view on this issue as it was not contested that any resolution was passed or permission of the Central Government was taken, therefore, the Court proceeded on the presumption that such approvals/permissions were not obtained by the company. In our view, the judgment in the East India case in fact strengthens the case of the respondent. Furthermore, the fact that subsequently the word "previous approval" was specifically included in the Indian Companies Act, the intent of the Legislature stands clarified.
The other cases relied on the point of ratification are not on this particular issue and can, therefore, be distinguished. The doctrine of substantial compliance in our view cannot be resorted to under the circumstances where there has been a clear violation of the mandatory provisions. As for the case-law submitted on the point that the beneficiaries of the statutory provision can waive the protection offered to them, we find the same not ' relevant as that particular case relates to wavier of right to notice. We are, therefore, of the view that investments made by Gharibwal in Dandot when they had the status of associated companies cannot be validated by virtue of ratification.
(e) We further feel that not only a part of investment in Dandot was made in violation of section 208 of the Ordinance (which has also been admitted by the counsel of the appellant), but also, some very serious governance issues also arise. As observed by the Executive Director (E&M) in the Impugned Order, the agreement to purchase shares of Dandot was signed on November 22, 1999, whereas the matter of subject investment came before directors only on November 24, 1999.
However, directors did not bother to disclose this material information in directors' report, dated November 24, 1999 annexed to the financial statement for the year ended on June 30, 1999. In the Annual General Meeting held on December 24, 1999 the shareholders were not informed about this very major development. Then the half yearly accounts for the period ended December 31, 2000 also do not carry full and meaningful disclosure in this regard. The matter came to the members on December 8, 2000 when Gharibwal had perhaps reached a point of no return. Certainly, on December 8, 2000 the transaction was virtually irreversible, so the resolution passed on this day cannot be considered to be an independent one having been passed without any fear -and pressure on the minds of the shareholders, The resolution passed by the shareholders subsequently after investment has been made, cannot be treated equally with the resolution passed before making any investment. Therefore, the ratification by members subsequently does not carry any meaning.
(f) Similarly we do not agree with this argument of the learned counsel that even in the absence of any application for exemption under second proviso to section 208 of the Ordinance on the basis of foreign investment in Gharibwal, the Executive Director (E&M) could treat Gharibwal as a company enjoying exemption thereunder. The arguments of the learned counsel that since the profitability of the investing company has improved subsequently and that no shareholder has filed any complaint against this investment, do not carry weight. Law must be followed and it cannot be said that violation of law should be judged in light of results of the violation only and if results are good, violations should be altogether ignored.
(iii) Whether the financial facilities provided by Gharibwal to Dandot were in the nature of "normal trade credit", and the mark-up charged on advances and loans was less than borrowing cost of Gharibwal?
(a) The learned senior counsel for the appellant has submitted that the financial facilities of Rs,337.8 million were in the nature of normal trade credit covered by the commercial trade agreement, dated July 4, 2000 between Gharibwal and Dandot. It has been pointed out by the Executive Director (E&M) in the Impugned Order that the agreement was signed the time up to which the Gharibwal had made payments aggregating Rs,485.239 million to Dandot on different dates. The nature of financing transactions as reflected from the record and described in the Order mainly relates to incurring expenses like salaries and wages, utility bills etc. It has been held in the impugned order that the words "normal trade credit" suggest a credit which is given in normal course of business. To this we would like to add that it is a simple matter, trade credit would mean credit arising out from trade between parties and such credit extended should be a current liability for the receiver. An open ended credit without specific purpose cannot be termed as normal trade credit. Therefore, the mere fact that the parties have covered these financial facilities by subsequently entering to a Commercial Trade Agreement would not make the financial facilities extended fall within the ambit of "normal trade credit". In our view the appellants have failed to prove that the objective was for normal trade practice.
"Lending on less than borrowing cost"
(b) The senior counsel for appellant has pleaded that the return on advances/loans to Dandot was at not less than the borrowing cost of Gharibwal. The weighted average borrowing cost of Gharibwal as per its audited account for the year ended June 30, 2000 works out to be 15% per annum approximately. The counsel admits that the markup charged on the financial facilities of Rs,337.8 million was @ 12%. However, the Executive Director (E&M) has pointed out that from the perusal of the record of Gharibwal, the payments made by it to Dandot at one point in time during March 6, 2000 to June 30, 2000 aggregated to Rs,485.239 million. In the appeal, the appellants have not pressed this point and have brought nothing forward to support their case, however, we are of the view that this should be verified by an auditor and loss if any should be compensated for. We would further like to clarify that the return on loan under section 208(1)(b) is not to be less than the borrowing cost and this borrowing cost is to be the weighted average borrowing cost of the investing company.
(iv) Whether Gharibwal has suffered any loss by virtue of Investments made in Dandot?:
(a) The senior counsel for the appellant has vehemently denied that Gharibwal has suffered any loss direct or indirect in consequence of its investments in Dandot. It has observed that from Note 32 of the account of the Gharibwal, it is evident that Gharibwal has suffered loss of Rs,3.547 million on sale of a part of its investment in Dandot which has not been controverted by Gharibwal. It has further been held in the Impugned Order that no benefits as envisaged in the material facts (under section 160) has so far accrued to Gharibwal on its investment in Dandot and the fact is that, Gharibwal has not only suffered loss on its investment in Dandot but also it is still exposed to substantial losses being major shareholder of Dandot which has also been a cause of great concern.
(b) The arguments submitted on behalf of the appellant in this regard are primarily, supported by commercial justifications for acquisition. In the appellant's view the Executive Director (E&M) ignored all evidence and arguments that substantiated that appellants had acted in the best commercial interest of both Gharibwal and Dandot. It has been argued that appellants substantially contributed through their personal funds and resources through the success of the companies; and it is the companies and their shareholders that have been benefited from the decision, acts and generosity of the appellants and not the other way. By way of background, it has been explained by the learned senior counsel that the sponsors of Ghairbwal, Mr. A. Rafiq Khan and Mr. M. Tousif Piracha acquired 51% of the controlling shares of Gharibwal in September, 1992 from the Privatization Commission of Pakistan at a total purchase price of Rs,847.363 million by Rupee encashment of US $ 28.137 million. The 51% of total shares of Gharibwal are held by two foreign companies Astoria Investments Ltd. And Topaz Holdings Ltd. It has been further submitted that the Cement Industry of Pakistan is going through a worst ever crisis since 1995 due to market slum, over capacity and over taxation. The large scale expansion and optimization taken by most of the cement units during the 90s in the hope of economic revival proved futile and resulted in massive over capacity. It has been emphasized that despite the cement crisis and the fact that Gharibwal is based on wet process production technology which is old, outdated and expensive method involving an excess consumption fuel energy. Gharibwal has remained in continuous operation. It was keeping the adverse scenario that the sponsors undertook a number of steps to ensure continued financial and technical viability of Gharibwal for the protection of its shareholders, While giving grounds for acquisition of Dandot the learned counsel submitted that Dandot is a modern dry processing plant established in 1984 which incorporated latest cement technology and process. However, due to gross misma nagement of its previous owner and prolong dispute with Dandot's workers' union, the said plant remained closed down for three yeaRs, It has been forcefully argued that the equity investment alongwith management take over of Dandot by Ghribwal was a timely and beneficial decision because the equity investment in Dandot was only Rs,190 million whereas the replacement cost of Dandot or a similar dry processing unit comes to Rs,4.5 billion.
The said equity investment was in fact financed by the funds made available through the standby letter of credit (SBLC) by the sponsors against their personal foreign assets. The actual cost of purchase of 44% shares of Dandot was only the cost of borrowing 12% to 13% of the SBLC. It has further been added that it takes about 4 to 5 years in procuring and commissioning a dry process cement plant in Pakistan and the fact that there was close market proximity (Dandot is situated within 40 kms of Gharibwal) between Dandot and Gharibwal was another important factor for acquiring the same. As had another competitor taken over Dandot the resulting severe market competition from Dandot as a competitor would have precipitated severe problems for Gharibwal.
Once the SBLC and other financial facilities of Dandot are paid of in about 4 year's Dandot shall stand as a strong, viable and profitable unit both for itself and Gharibwal and take over of Dandot shall result the long run economies of scale in marketing and lead to invaluable dry process based cement expertise for Charibwal. Dandot was a sick and closed down unit for three years and prior to take over sponsors of Gharibwal provided SBLC in the amount of Rs, 337 million against their personal foreign currency assets to obtain local rupee financing on the account of Gharibwal till unfreezing of Dandot's own account. The sponsors also provided personal guarantees. However, as soon as Dandot's account unfrozen SBLC held by Gharibwal were fully transferred to Dandot in November, 2000 and there was no loss to Gharibwal and its shareholders in this regard. The mark- up due on account of Dandot by Gharibwal during the period March-November, 2000 was fully reimbursement to Gharibwal as well, therefore, neither any harm was caused to Gharibwal and any of its shareholder in respect of equity investment nor the directors of Gharibwal benefited in any way from this transaction.
(c) The appellants in their written submissions have highlighted the continual financial and other support that has been provided by the sponsors to Ghairbwal and Dandot which includes providing of loan facility to Charibwal and Dandot, obtaining bank guarantees against their assets, incorporating a subsidiary company Gharibwal Electric Company Ltd. Comprising of an electric power generation plant of 12 mega watt capacity in order to provide an efficient and constant supply of electricity to Gharibwal and effecting the settlement of liabilities of a big lease creditor of Gharibwal which was causing an excessively high mark-up burden of 23% upon Gharibwal. Also, complete conversion of Gharibwal from gas to a coal firing system, import of filter presses from UK which will reduce moisture contents of wet process of Gharibwal, thereby making it as competitive as new dry cement plant.
(d) Having heard the above, apparently cogent commercial justifications for acquisition and the personal stakes risked by the sponsors, we now look at the reasons recorded by the Executive Director in this regard. It has been observed in the Impugned Order that the argument that the decision to acquire the management and control of Dandot was motivated by twin goals of availing a commercial opportunity and acting in overall interest as a catalyst of the revival of a sick unit cannot be a justification to violate mandatory provisions of law under the camouflage of so- called revival of a sick unit. It has been further observed that although Dandot is based on the latest technology of dry process of manufacturing, the financial position of Dandot is dismal and it has accumulated staggering losses to the tune of Rs, 1,090,949 million.
(e) Having considered the arguments given from both sides we are principally in agreement with the position taken by the Executive Director that commercial consideration cannot be treated as a justification to violate the mandatory provisions of law. However, at the same time we commend the learned senior counsel who tried to convince us by his eloquent arguments that the investments were because of commercial consideration and not a deliberate breach of law. Since, we are dealing with the particular issue as to how much loss has occurred due to investments in Dandot, it seems pertinent that such evaluation cannot be made unless considerations for such investment are taken into account. In view of the arguments given by the learned senior counsel we feel that it may be premature to pass any judgment at this stage regarding commercial viability as the result of investment may take its time. However, under the circumstances where the advances stand returned, we are of the view that the only practical way of quantifying the said loss is to see whether the advances to Dandot were given on the weighted average borrowing cost of Gharibwal or below, if it turns out to be less than the weighted average borrowing cost of Gharibwal that amount must be compensated for as loss to Ghairbwal.
(v) Whether the buy back arrangement entered into by Ghraibwal with Saudi-Pak Leasing is in contravention of section 208 of the Ordinance.
(a) According to the agreement with Saudi-Pak. Leasing, Gharibwal has sold 1,886,792 shares to Saudi-Pak Leasing at Rs,13.25 per share (Rs,20 million) which it will buy back pursuant to the buy back arrangement at a price of Rs, 19 per share. In view of the Executive Director this exposes Gharibwal to substantial loss, Gharibwal has also undertaken with Saudi-Pak Leasing to provide additional shares in case the share price of Dandot is less than Rs,10 per share on June 13, 2001. The share price of Dandot as on that date was Rs, 5.50 which suggests that Gharibwal must have provided further shares to Saudi-Pak Leasing on behalf of Dandot. This in the Executive Director's view exposes Gharibwal to loss. Although the appellants have not come forward with any convincing and cogent reason for such buying back arrangement, we are of the considered view that section 208 is not attracted to this particular transaction. For reimbursement of any loss sustained by the company under section 208(5) of the Ordinance it has to be inconsequence of an investment which was made without complying with the requirements of section 208 of the Ordinance. Sale of shares in our view amounts to disinvestments and further agreeing to buy back tantamounts to an act of financing. Such financing, in view of the Brooke Bond case can at best be termed as an agreement to invest and the requirements of 208 before such buying back takes place can still be satisfied. Prima facie such an arrangement definitely exposes Gharibwal to financial loss on account of Dandot which should in fact be borne by Dandot itself, however, invoking section 208 at this point in time may not be appropriate. If at all an action can be taken, proceedings, need to be initiated under other relevant provisions of law.
(vi) Whether section 195(5) and section of the Ordinance 488 can be invoked in the present circumstances:
(a) As for the applicability of section 195(5) nothing pressing has come forward from the appellants and we are absolutely in agreement with the view taken by the Executive Director (E&M) that applying the principle of special versus general provisions the section 195(5) has no application in the circumstances of the case.
(b) Appellants have invoked section 488 of the Ordinance to seek the approval of SCEP for the technical non-compliance. It has been argued that financing of Dandot was motivated by national interest and its bona fides are reflected by provision of personal financial support and guarantees provided by the sponsoRs, Before going further into the details of the arguments given on behalf of parties we consider it appropriate to examine the applicability of the said provision to the present proceedings. For case of reference section 488 in its relevant part is reproduced as under:--- If in any criminal proceeding for negligence, default, breach of duty or breach of trust against a person to whom this section applies, it appears to the Court, Officer, Authority or Registrar hearing the case that that person is or may be liable in respect of the negligence, default, breach of duty or breach of trust, but that he has acted honestly and reasonably, and that having regard to all the circumstances of the case, including those connected with his appointment, he ought fairly to be excused for the negligence, default, breach of duty or breach of trust, the Court Officer, Authority or Registrar, as the case may be, may relieve him, either wholly or partly, from his liability on such terms as the Court, Officer, Authority or Registrar, as the case may be, may think fit.
(c) From the above, it is manifest that section 488 is applicable only to criminal proceedings as opposed to civil proceedings. The term "criminal proceeding has been defined under the Black's Law Dictionary, Seventh Edition as follows:-- ' Criminal proceeding.... a proceeding instituted to determine a person's guilt or innocence or to set a convicted person's punishment; a criminal hearing or trial.
(d) In view of the above a criminal proceeding would entail a criminal hearing to trial and the Criminal Procedure Code governs such proceeding under Pakistani Law. In this regard it can be questioned that why then has the Commission been given powers under section 488 if the Criminal Procedure Code is not applicable to the hearings before the Bench. In our view, section 488 would be attracted only to such proceedings where criminal proceedings have to be initiated by the Commission in a Court of Session and the Commission has been empowered to grant relief under section 488 with the objective to provide protection against undue hardship in deserving cases and given relief from liability to a person who though technically guilty of defaults negligence and breach of duty or breach of trust is able to convince that it has acted honestly and reasonably, and having regard to the circumstances of the case, ought fairly be excused from the charge, and that no criminal proceedings or complaint be initiated before the Court. In the present case there is no penalty for imprisonment for which complaint has to be filed of proceeding to be initiated before the Court, therefore, in our view section 488 cannot be invoked for the purpose of section 208 of the Ordinance.
7. Having considered each of the above issues, in details, we must commend, that though we have differed on certain issues with the Executive Director (E&M), the impugned order certainly deserves appreciation for its thoroughness and the meticulous manner in which each and every aspect of the case has been dealt with. The learned senior counsel for the appellants also deserves praise for his assistance.
8. In light of what has been discussed above, we have come to the conclusion that there has definitely been a contravention of section 208 of the Ordinance by the appellant due to investment in Dandot in excess of 30% threshold. However, we have differed with the degree and extent of such violations as discussed above. This investment includes purchase of 966,500 shares of Dandot from the market for Rs,7.3 million and the huge advances to the tune of Rs,337.8 million which constitutes 517% of the; paid-up capital plus free reserves of Gharibwal for the period ended June 30, 2000. We note that huge advances to Dandot in excess of prescribed ceiling and without the authority of special resolution have been made by the appellant. However, the parties have informed that the advances in the amount of 337.8 million have already been returned. We have also taken note of the fact that the directors had approached the shareholders before issuance of any show-cause notice by the Commission.
9. Though the extent of violations stands reduced as compared to the findings in the impugned order, in our view the contravention of section 208 of the Ordinance by the appellants is not a minor one, as it far exceeds the stipulated threshold under law. Under the circumstances, the penalty imposed on the directors who were responsible for such defaults and violations named in the impugned order is reduced from Rs,300,000 to a fine in the amount of Rs,100,000 for each director. As for, Chief Executive Officer, we are of the view that he owes a greater responsibility of good governance and management of the company and, therefore, we hold him liable for a sum of Rs,200,000. As far as return/or losses accrued on Gharibwal's own funds utilized for investment in Dandot it cannot be less than the average weighted borrowing cost of Gharibwal. In this regard Gharibwal is hereby directed to submit a certificate of its auditors confirming the actual amount to be brought back on this account within 15 days from the date of receipt of this Order. Any shortfall indicated in the said auditor's certificate should be recovered from Dandot within 30 days from the date of receipt by the Bench of such certificate. Failure to do so would make the directors liable and such shortfall shall be recovered from the directors held responsible for making unauthorized investments.