vi

Enforcement of corporate laws in respect of listed companies is the responsibility of Enforcement Division (ED) of the Commission. The main functions of ED are examination and analysis of the accounts of all listed companies, and to maintain the required vigil in order to determine whether listed companies have met their statutory obligations particularly relating to disclosure requirements. ED focuses its attention on inter-corporate financing, non-declaration and non-payment of dividends, identification of irregularities and mal-practices in accounts. Based on the outcome of the examination of accounts, ED orders investigation into affairs of public listed companies through Inspectors; normally investigations are out-sourced. ED takes action against defaulting companies in light of reports submitted by the inspectors. ED has paid special attention to compliance of statutory obligations of companies which materially affect the interests of minority shareholders like the holding of annual general meetings within the prescribed period and circulation of accounts to the shareholders. By close compliance monitoring of listed companies (with respect to statutory requirements), ED helps in instituting improved corporate governance in addition to protecting minority interests.

During the period under review, ED has taken a number of significant measures. While carrying out its responsibilities, ED has closely coordinated with the stock exchanges, which helped to identify material irregularities in some listed companies.

EXAMINATION AND ANALYSIS OF ACCOUNTS OF LISTED COMPANIES
ED has developed a detailed standardized check-list based on the requirements of the Fourth Schedule to the Companies Ordinance, 1984 and IAS. ED also out-sourced certain assignments to Chartered Accountants. On the basis of the examination of accounts, a large number of companies were called upon to explain their position on issues like auditors’ qualifications, inadequate disclosure in the directors’ reports and investment in associated companies. ED also sought clarification on abnormal transactions, poor trading results and increased administrative expenses.

INVESTIGATION INTO AFFAIRS OF LISTED COMPANIES:
Out of the companies, which have been placed on the defaulters’ counter by KSE due to non-payment of dividend for the last five years, ED identified 177 companies for detailed scrutiny. These companies were called upon to explain their poor operating results and some of these responded by improving their performance during the period. 76 companies out of these 177 companies paid dividend after a lapse of five years. Investigations were ordered against 15 companies under sections 263 and 265 of the Companies Ordinance on the following grounds:

q Complaints by shareholders about poor performance and mis-management;
q  Concealment of material facts from investors while making public offerings and mis-statements in the prospectus;
q  Inconsistency in working results;
q  Deterioration in performance after listing and privatisation;
q  Consistent default in payment of dividend;
q  Mis-management and oppression of minority shareholders;
q  Shifting of business to subsidiary companies not wholly owned by the principal company;
q  Irregularities in election of directors.

As a result of the pro-active role played by ED, the number of companies, which paid dividend increased to 43% of total listed companies (in 1999) as against 35% in the preceding year. A large number of companies also moved out of the defaulters’ counter of KSE because of their payment of dividend. The sector-wise position is reflected in the table given below:

S.No.	Sector	Total Companies	DIVIDEND PAID
			1998	1999
1.	Mutual Fund	39	22	19
2.	Modarabas	47	13	26
3.	Leasing companies	32	20	20
4.	Inv./Sec.Cos/Banks	39	15	20
5.	Insurance	39	16	17
6.	Textile Spinning	146	34	51
7.	Textile Weaving	26	7	9
8.	Textile Composite	54	16	17
9.	Woollen	8	1	2
10.	Synthetic & Rayon	26	9	12
11.	Jute	8	3	3
12.	Sugar & Allied Ind.	38	8	21
13.	Cement	20	1	4
14.	Tobacco	6	2	2
15.	Fuel & Energy	28	20	20
16.	Engineering	16	5	4
17.	Auto & Allied Engg.	25	10	11
18.	Cables & Elect.Goods	15	5	4
19.	Transport & Comm.	7	2	2
20.	Chemical & Pharm.	39	23	23
21.	Paper & Boards	15	8	8
22.	Vanaspati & Allied	19	1	0
23.	Construction	4	0	0
24.	Leather & Tanneries	8	4	6
25.	Food & Allied Ind.	22	12	13
26.	Glass & Ceramics	10	2	4
27.	Miscellaneous	29	9	12
	Total :	765	268	330

DIRECTIVES ISSUED TO LISTED COMPANIES
ED issued directives to 11 listed companies whose accounts indicated irregularities and malafide transactions during the period under review, and directed them to undo certain irregularities in their transactions, which had adversely affected interests of minority shareholders. The kind of transactions which were required to be undone are:-
q imprudent purchase of assets from associated companies causing financial loss to the company.
q  irregular expenditure on non-executive chairman affecting the profits of the company.
q  imprudent sale of assets causing huge loss to the company;
q  unauthorised expenditure in terms of memorandum of association of company; and
q  imprudent and irregular investment in associated companies causing huge losses to the companies.

ADOPTION OF INTERNATIONAL ACCOUNTING STANDARDS
ED has been promoting the adoption of IAS in order to improve the level of financial reporting. On the basis of recommendations received from the ICAP, the Commission, during the period under review, adopted and notified IAS No. 30, 34, 35, 37 and 38 during the period. The introduction of new IAS has helped increase the extent of disclosure by listed companies. These standards are described below:

q IAS 30-Disclosures in the Financial Statements of Banks and Similar Financial Institutions
This sets out minimum disclosure requirements for banks and financial institutions. The standard applies to separate and consolidated statements of a group that undertakes banking operations; the standard is applicable to operations on a consolidated basis.

q  IAS-34 - Interim Financial Reporting
This sets out disclosure requirements for preparation of half yearly accounts of listed companies which, inter alia, requires additional disclosures such as a cash flow statement, disclosure of changes in equity, comparison with the position at the end of the immediate financial year instead of the corresponding half yearly period (in the case of balance sheets), and selected explanatory notes to the accounts. ED has also issued a circular to all listed companies, explaining the standard.

q  IAS-35 - Discontinuing Operations
This requires disclosure by way of note to the financial statements giving information about discontinuing operations. The purpose of disclosure is to enhance the ability of users of the financial statements to make a proper assessment regarding the company’s future.

q  IAS-37 - Provisions, Contingent Liabilities and Contingent Assets
This sets out the latest internationally acceptable standard with regard to provisions, contingent liabilities and contingent assets.

q  IAS-38 - Intangible Assets
This prescribes accounting and disclosure standards for intangible assets which are not specifically dealt with in other IAS.

ENSURING COMPLIANCE WITH STATUTORY REQUIREMENTS OF THE COMPANIES ORDINANCE, 1984
An important function of ED is to monitor the working of listed companies and to ensure that these companies comply with statutory requirements under the Companies Ordinance, 1984. Major decisions taken by ED during the period under review were as follows:

q  Penalties were imposed on the managements of 26 companies, which failed to hold annual general meetings in time. The penalties imposed aggregated Rs.2,327,400/-

q  Penalties were imposed on the managements of 33 companies which failed to circulate half yearly accounts in time as required under section 245 of the Companies Ordinance, 1984. The penalties imposed aggregated Rs.6,60,000/-.

q  In order to ensure maximum participation of shareholders in annual general meetings and extra-ordinary general meetings, companies were directed to ensure that notices of meetings were published in newspapers with wide circulation.

q  ED has taken strict view of the tendency of the management of some companies which had remained closed for some time to sell their assets rather than go through the liquidation process. According to notices published in the press, assets were proposed to be sold to enable managements to pay off their outstanding debts. ED has taken a number of steps to discourage this practice. Besides, the managements of some companies were directed to ensure that before disposing of their assets, minority shareholders of the companies should be compensated adequately by purchasing their shares at a reasonable price, from their own resources.

q  Acting on complaints received from shareholders, managements of two companies were directed to disburse dividend already declared by the company. In one case, prosecution proceedings have been initiated against the company due to its failure to implement the directive.

ACTION AGAINST AUDITORS
While examining company accounts, ED has also been checking as to whether the auditors concerned had performed their duties in accordance with statutory requirements. During the period under review, two cases of auditors were referred to the ICAP for disciplinary action.

CORPORATE GOVERNANCE
Prompted by the Commission, a committee constituted by the ICAP prepared a code of corporate governance. The Commission was represented in the committee by the Commissioner with oversight over ED. The code seeks to make far-reaching improvements in the areas of minority representation of company boards, eligibility and role of directors, appointments of key company officials, disclosure requirements, and the role of auditors. The Commission considered the code at a special hearing arranged for this purpose and decided that before it is finalized it must be debated in open seminars so that all points of view can be taken into consideration.