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For business information, annual reports, laws, ordinances, regulations and articles. |
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Enforcement
and Monitoring Division
1. Overview
The Enforcement and Monitoring Division (EMD) is responsible for the enforcement of
corporate laws in respect of listed companies (other than insurance companies and
specialized companies). The EMD endeavors to protect the interests of minority
shareholders, creditors and other stakeholders by ensuring full and fair disclosure - in
terms of the Fourth Schedule to the Companies Ordinance, 1984 and the IAS adopted in
Pakistan. During the year under review, the EMD focused its attention on ensuring timely
holding of AGMs by companies and circulation of annual and interim accounts amongst their
shareholders within the prescribed period. Unauthorized and unlawful inter-corporate
financing, non-payment of dividends, irregularities and malpractices in accounts,
non-compliance with statutory requirements, mismanagement, oppression and poor financial
results also remained focal points of the EMD's surveillance activities. During the year,
the EMD ordered several investigations into the affairs of listed companies and based on
the findings of the inspectors' reports, appropriate penal actions were taken. Recently,
the EMD has also initiated action against auditors for negligence and professional
misconduct on their part. Proactive monitoring by the EMD resulted in improving corporate
governance in listed companies to a considerable extent that in turn helped in bolstering
the confidence of investors and the general public.
2. Regulatory Actions
i. Unauthorized Inter-corporate Financing
During the period under review, the EMD initiated action against 10 companies for
violation of the provisions of Section 208 of the Companies Ordinance, 1984. While
penalties aggregating Rs. 7.3 million were imposed on two companies, the other cases were
at different stages of processing at the close of the period under review. To minimize the
incidence of excessive inter-corporate financing, the EMD issued a notification during the
year whereby all listed companies were advised to annex a statement with the notice of
meeting giving detailed information about the investments proposed to be made in their
associated companies/undertakings. The objective of such disclosure is to improve
transparency in corporate transactions and to ensure that vital information about proposed
investments in associated companies is communicated to the shareholders
ii. Notifications and Circulars
During the year under review, a number of notifications and circulars were issued by the
EMD, the salient ones among which were as follows:
a. Notification No. 865 (1)/2000 dated December 07, 2000 requiring listed companies to
provide detailed information at the time special resolutions are passed in regard to
investments in associated companies.
b. Circular No. 8/2000, dated July 6, 2000 requiring listed companies to follow the
requirements of IAS 34 notified vide SRO No. 33(1)/2000 dated January 27, 2000 while
preparing half yearly accounts under Section 245 of the Companies Ordinance, 1984.
c. Circular No. 14/2000 dated November 14, 2000 prescribing procedures for disposal of
cancelled share certificates of listed companies that were entered at the Central
Depository System (CDS).
d. Circular No. 2/2001 dated February 22, 2001, directing listed companies to transmit
copies of notices of AGMs/Extraordinary General Meetings (EGMs) to the Commission on the
same day that the notices of meetings are issued to the shareholders.
e. Circular No. 3/2001, dated April 13, 2001 clarifying that listed companies, among
others, may dispatch dividend warrant and share certificates through courier services.
2. Monitoring and Enforcement
i. Holding of AGMs and Circulation of Accounts
Companies are required to hold their AGMs within six months of the close of the
financial year and to circulate annual reports among the shareholders along with notices
of meetings at least 21 days before the date of AGMs. In this connection, the EMD issued
Show Cause notices to 54 companies and imposed penalties on 34 companies, which had failed
to hold their AGMs within the prescribed period. Warnings were also issued to 78
companies, which failed to submit their annual accounts to the Commission. The Commission
has also started the practice of sending its representatives to attend general meetings of
certain companies as observers. This initiative has resulted not only in the orderly
holding of meetings but also in enhancing shareholder confidence. A larger number of
shareholders are now motivated to attend such meetings and to discuss the company's
affairs with the management.
ii. Extension in Holding of AGMs
During the period under review, the Commission received 76 applications for extension in
holding of AGMs, out of which 20 were rejected, as the grounds for seeking extensions were
found inadequate.
iii. Examination of Annual and Interim Accounts
Listed companies are required to submit annual and half-yearly accounts to the
shareholders, stock exchange(s) and the Commission as per the requirement of the Companies
Ordinance, 1984. To examine these accounts, a standardized checklist was devised keeping
in view the disclosure requirements under the Companies Ordinance, 1984, its Fourth
Schedule and the IAS. During the year under review, published accounts of companies were
thoroughly examined and the managements of several companies were called upon to explain
their position with regard to deficiencies noticed in the financial statements. As a
result of strict monitoring by the EMD, the quality of financial reporting by companies
and its presentation has improved substantially.
iv. Circulation of Half-yearly Accounts
Half-yearly accounts of listed companies are required to be circulated within two
months of the close of first half of the financial year. During the year under review, 64
Show Cause notices were issued to directors of companies who failed to circulate
half-yearly accounts within the prescribed period. Penalties were imposed on the
directors/CEOs of 23 companies while warnings were issued to 41 companies.
v. Publication and Circulation of Notices of Meetings to Shareholders
To ensure timely issuance and publication of notices of meetings, all listed
companies were directed to transmit copies of notices of AGMs and EGMs to the Commission
through fax message on the same day that these notices were issued to the shareholders.
This directive helped the EMD to take timely corrective measures in cases where certain
resolutions were proposed to be passed by companies in violation of the statutory
requirements. Consequently, the concerned companies were directed, in time, by the EMD
either not to pass such resolutions or to proceed only after removing the deficiencies
noted.
vi. Unauthorized Sale of Assets
It was observed that managements of a number of companies that intended to close-down
their operations would sell off their plant and machinery and other valuable assets in
order to settle outstanding debts, including amounts borrowed from sponsors. Effectively,
this practice resulted in a loss in the value of investment of the minority shareholders.
Taking heed of notices published in the press regarding sale of assets by the managements
of such companies, the EMD took a number of remedial measures to discourage this practice,
e.g. directing the concerned managements to ensure that minority shareholders were
adequately compensated. This policy was adopted in the case of those companies in which
there was either no chance of revival or the possibility of potential return to the
shareholders was considered remote.
vii. Investigations into the Affairs of Companies
The EMD orders investigations into the affairs of such listed companies in which
there are apprehensions regarding mismanagement, continuous deprivation of a reasonable
return to the shareholders or violation of statutory provisions. During the period under
review, the EMD strengthened its surveillance activities and investigation proceedings
were initiated in 79 cases. These investigations were mainly related to companies in the
textiles and sugar sectors in which there had been a turnaround due to robust cotton and
sugarcane crops. The Division, therefore, focused on companies whose performance had
either improved or which had sufficient reserves but their shareholders were being
deprived of any return on their investment.
Inspectors were appointed in the case of 11 companies out of which three companies filed
appeals in the concerned High Courts challenging orders of the Commission to appoint
inspectors. In one case, the Peshawar High Court upheld the order of the Commission while
in another, the Appellate Bench of the Commission set aside the order. The remaining cases
are in progress at various stages. Investigations have been ordered mainly on the
following grounds:
a. Non-compliance with statutory requirements.
b. Complaints by shareholders about mismanagement.
c. Inconsistencies in operating results.
d. Consistent default in payment of dividends.
e. Deterioration in performance after listing and privatization; non-payment of dividends.
f. Oppression of minority shareholders.
The ensuing investigation reports are being processed and appropriate action in accordance
with the law will be taken.
viii. Improvement in Payment of Dividends
As a result of proactive surveillance by the EMD, the number of companies that
paid dividends to the shareholders increased substantially during the last two years. A
large number of companies also came out of the defaulter counter of the KSE due to
resumption of dividend payments. The pattern of payment of dividend by listed companies
during the last three years is presented as follows:
ix. Directives Issued to Listed Companies
During the period under review, the EMD issued directives to the following nine
companies whose accounts indicated irregularities and, possibly, fraudulent transactions
that adversely affected interests of the minority shareholders.
a. The directors of Ghani Textile
Mills Limited were directed to deposit into the company's account an amount of Rs. 9.6
million on account of an undue gain that they had made when they sold to themselves a part
of the company's investments in an associated company, namely, Ghani Glass Mills Limited.
b. The directors of Pioneer Cement Limited were directed to return an amount of Rs. 11
million to the company that had been erroneously paid to its Chairman on account of
reimbursement of medical expenses.
c. The directors of Husein Sugar Mills Limited were directed to deposit in the company's
account an amount of Rs. 15 million on account of the sale of shares of its subsidiary to
the directors of the same subsidiary at an inadequate price.
d. Six companies, namely Dewan Sugar Mills Limited, Dewan Mushtaq Textile Mills Limited,
Dewan Khalid Mills Limited, Dewan Textile Mills Limited, Haji Muhammad Ismail Mills
Limited and National Tannery of Pakistan Limited, were refrained from passing special
resolutions, for inter-corporate investments or the disposal of their assets, which were
not in conformity with the law.
x. Actions Against Auditors
During the year, it was observed that several auditors had failed to act in
conformity with the statutory requirements and that material facts had not been brought to
the notice of the members. The Commission initiated action against several auditors in
this regard. These cases were also referred to ICAP for taking necessary disciplinary
action against the concerned auditing firms. Referrals were made to ICAP mainly on account
of the following:
a. Failure to point out factual position regarding supplier's credit.
b. Taking up the audit assignment without prior intimation to the previous auditor.
c. Failure to report improper books of accounts maintained by the companies.
d. Failure to report non-compliance with IAS.
e. Violation of the requirements of Generally Accepted Accounting Principles and ICAP's
circulars.
xi. Investors' Grievances
To afford greater protection to investors and minority shareholders, immediate
steps were taken on receipt of their complaints against listed companies. Greater emphasis
was placed on the representations from shareholders and an attempt was made to redress
their grievances in the minimum possible time. During the period under review, 159
complaints were received from investors/shareholders, out of which 152 were resolved.
xii. Status of Cases with Appellate Benches
During the year, 10 companies filed petitions with the Appellate Benches of the
Commission against orders of the Commissioner/Executive Director, EMD. In five cases, the
decisions were upheld while in three cases, relief was granted. In the remaining two
cases, necessary proceedings are in progres
