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Petitioner: FAYYAZ AHMED and 2 others VS Respondent: LAHORE STOCK EXCHANGE (GUARANTEE) JUDGMENT
Court Name: Lahore High Court Judge(s): Ch. Khurshid Ahmad Title:FAYYAZ AHMED and 2 others vs LAHORE STOCK EXCHANGE (GUARANTEE)
JUDGMENT
Reported As: 1996 CLC 1469 Result: Order accordingly Judgment JUDGMENT ' As all the Writ Petitions Nos. 3886/95 4667/95, 5061/95, 5159/95, 5482/95, 7291/95, 7292/95, 7583/95 and 7597/95 have impugned the order of Chairman, C.L.A. Dated 21-3-1995 regarding provisional trading in the shares of Kohat Cement Co. Ltd., a provisionally listed company, therefore, are disposed of by this single judgment. 2. Kohat Cement Project was privatized by Government of Pakistan through Privatization Commission and Messrs Palace Enterprises (Pvt.) Ltd. Acquired 90% of the shares and sale agreement between State Cement Corporation of Pakistan and Messrs Palace Enterprises (Pvt.) Ltd. Was singed on 2-6-1992 and management of the Company was transferred on 31-10-1992 and Kohat Cement Company Ltd. Was incorporated and registered under Companies Ordinance, 1984 and object No,1 as mentioned in Memorandum of Association was:- "To acquire and take over from State Cement Corporation of Pakistan Ltd., the Cement Factory, godowns and other buildings and erections already built or now being built by the said Corporation at Kohat under the name of Kohat Cement Project, with hand pertaining thereto and all Stock in Trade book debts, goodwill and all other assets and liabilities in respect thereof and the benefit of all subsisting contracts and orders together with the rights and privileges relating to the said Cement Factory, at value to be mutually agreed upon between the vendor (State Cement Corporation of Pakistan Limited) and the Company." ' The Federal Government had accorded its consent to the issue of capital under the Capital Issues (Continuance of Control) Act, 1947 and Chairman, Corporate Law Authority had also approved under section 57(1) of the Companies Ordinance, 1984, the issuance, circulation and publication of
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the Prospectus of Kohat Cement Co. Ltd. The prospectus of the company had been approved by Karachi Stock Exchange (Guarantee) Limited, Lahore Stock Exchange (Guarantee) Limited and Islamabad Stock Exchange (Guarantee) Limited in accordance with the requirements under their Listing Regulations. The public issue subscription was to open at the commencement of banking hours on December 15, 1994 and close the same day at the close of banking hours. The minimum limit for an application was fixed at 200 shares or multiples thereof. The share was of the face value of Rs,10 but the premium of Rs,42 was allowed and thus subscription was at the rate of Rs,52 per share. In all 1,97,40,000 shares were available for general public subscription. 3. The provisional trading in shares commenced at Lahore Stock Exchange on 27-12-1994 under the Regulation for Trading in Provisional Listed Companies of the Lahore Stock Exchange (Guarantee) Limited published in the official Gazette of Pakistan in its issue of June 8, 1994 and the company was to come on the ready quotation board, after issuance of scrips on 7-2-1995. 4. The behaviour of the trading price of share of Kohat Cement Ltd. (hereinafter referred to as Company) assumed volatile proportion. On 4-1-1995 a hella was declared at Rs,49 per share. Another hella was declared on 21-1-1995 when the share was traded at the closing at Rs,40.60 paisas as against the opening rate of Rs,43.60 paisas. Double hella was declared on 23-11-1995 when the bulls ruled and there was an increase of Rs,6 per share. On 24-1-1995 bulls ruled again and hella was declared. There was double hella on 29-1-1995 and on 1-2-1995 transactions as registered at the closing hours had shown an increase of Rs,6 per share and as such double hella was declared. The market remained closed on 1st and 2nd of February, 1995 and no business was transacted on 4th and 5th of February, 1995, the latter being a closed holiday being Kashmir Day. The provisional counter did not open on 6-2-1995 as respondent No,3 had, after receipt of complaints of irregularities such as stipulation, cornering and short selling suspended the provisional trading and the small investors started agitation and holding of press conferences demanding the delisting of the company and cancellation of all transactions by the Capital Law Authority as done earlier in case of High Noon Laboratories Limited and Prime Bank. 5. Respondent No,3 vide its order dated 6-3-1995 ordered that the provisional trading regulations be held in abeyance till final decision about these regulations. The order is still effective. 6. Some of the investors had, as observed earlier, agitated against alleged worst speculative trading and the unwarranted premium and it was requested that the forward trading be cancelled and unwarranted premium allowed to the company be withdrawn. The Chairman, C.L.A. Ordered for the investigation and Director (Coord) prepared a report which was endorsed by Member Securities (C & W) and the Chairman after considering the report, came to the conclusion that:-- "I have addressed myself carefully to the issues raised in the complaints received from the public as well as observations made in the inquiry report. An analysis of the data collected indicates the following:-- (i) Most of the transactions were registered in the clearing houses in accordance with the 'Regulations for Trading in Provisionally Listed Companies' (henceforth termed as the Regulations) and, therefore, can be treated as legally executed transactions. A turnover of 55.401 million shares and 9.455 million shares was registered at K.S.E. And L.S.E. Respectively during the period of provisional trading, i,e,, between 26th December, 1994 to 6th February, 1995. Only a small percentage of these transactions can be treated as irregular on account of violation of Regulation 17 of the Regulations. (ii) The transactions alleged by the complainants to be at excessively high and extremely, low prices as compared to the officially published rates were not registered with the clearing houses and are suspected to have been transacted among the members. (iii) Various tests of 'cornering' applied to the case does not suggest any attempt at cornering. The total outstanding business at K.S.E. And L.S.E. Of around 1 million shares each is equal to the total
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float of 2.193 million shares. Besides, the brokers who have traded in the script were found to be both purchasing and selling and no single broker or group of brokers are receiving major chunk of deliveries. (iv) The price behaviour of Kohat Cement shows that while opening at Rs,56.50 on December 26, 1994 the price gradually came down to Rs,40 on January 22, 1995. The price indicates volatile rise after this date touching the highest price of Rs,68.25 on February 1, 1995. The volatile price behaviour indicates hectic attempt at covering the short sales. The fact that while no complaint was received from the public during the period of decline in the price and these were received during the period of volatile rise reinforces the view that it is mostly the short sellers themselves who raised hue and cry for relief. It appears that the short sellers acted in panic as they suspected cornering due to the small float. (v) It is strange that some members of the public have tried to give an impression that only small investors have suffered on account of provisional trading of the scrip. According to the statements of the complainants themselves, they have traded in thousands of shares. Obviously, their behaviour cannot be regarded as that of small investors. It appears that most of the complainants acted in an irresponsible manner as they should not expose their resources to investment in trade which is generally accepted as high risk investment. (vi) Scrutiny of the transactions has indicated that the K.S.E. And L.S.E. Have failed to enforce the Regulations effectively, while the I.S.E. Overlooked provisional trading by members among themselves although the Regulations had not been adopted by the exchange. The main irregularities noticed are mentioned below:- (a) In the case of K.S.E., maximum number of shares allowed by the Board of Directors in the terms of Regulation 9 to remain outstanding in any Member's account was prescribed as 10 of the offer which equals to 19,74.000 shares in the case of Kohat Cement. However, 'Outstanding Lot Statement' of K.S.E. Indicates that the outstanding number of shares of some members exceeded the prescribed limit despite the use of Hawala' mechanism. In the case of one Member, the outstanding number was approximately 700,000 shares on a particular day. (b) A number of transactions effected by members but not registered by the clearing houses were at a price higher and lower than the officially published prices on a date which involves violation of Regulation 17. (c) Some of the members of the Stock Exchanges continued trading during the period when trading was officially suspended due to clamping of 'Double Hellas' involving violation of Regulation 20. (d) L.S.E. Management did not comply with Regulation 21 which requires squaring up of outstanding business at the risk and account of the members who had failed to deposit the required amount. (e) The transactions entered into by members of I.S.E. Among themselves can be treated as irregular since the I.S.E. Has not yet introduced provisional listing of shares. (f) The requirement of deposit prescribed by Regulations 8 and 9 were allowed to be circumvented through the 'Hawala' practice." ' The Chairman, C.L.A. Was of the view that volatile price behaviour indicated hectic attempt at covering the short sales and this was clear from the fact that no complaint was received from the public during the period of decline in price whereas the same were received during the period of volatile rise and he was of the view that short sellers acted in panic as they suspected cornering due to the small float. He was further of the view that the complaints had been made by those who traded in thousands of shares. 7. The Chairman was also of the view that Karachi Stock Exchange and Lahore Stock Exchange had failed to enforce regulations effectively and he noticed the violation of Regulation No, 17, Regulation No,20, non-compliance by Lahore Stock Exchange with Regulation No,21 and also that the
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requirement of deposit prescribed by Regulations Nos.8 and 9 were allowed to be circumvented through the "Hawala" practice. He was of the view that the demand for cancellation of all the transaction could not be considered as that would adversely affect the interest of genuine investors and such cancellation would erode the confidence of investors in the market and in case the cancellation, was ordered, of the transactions in the present case, it would open a flood gate of demands from investors sustaining losses in trading of other issues which will impede the development of the market. On reference by the Court Chairman, C.L.A. Passed "explanatory order" on 29-7-1995 which further compounded the grievance and is also impugned. 8. In the above writ petitions the order of Chairman, C.L.A. Dated 21-3-1995 was assailed and it was submitted that the Board of Directors of L.S.E. Had committed violations of Ordinance (XVII of 1969) and rules and regulations framed thereunder and they indulged in manipulation, cornering of shares of the company, earlier by bringing the company on the provisional list and then ignored the manipulation by its Members, at the cost of poor investors, who indulged in kerb trading; Chairman, C.L.A. Who was the delegatee of the powers of the Federal Government under section 28 of the Securities and Exchange Ordinance, 1969 (Ordinance XVII of 1969) has overlooked, collusively condoned, and side tracked the fraudulent and deceitful acts of the office-bearers and Members of L.S.E. And that the decision of Chairman, C.L.A. Was ultra vires of the Ordinance No, XVII of 1969 and rules and regulations framed thereunder and the same was maia fide, based on extraneous reasons, untenable in the eyes of law, inspired by powerful manipulators, arbitrary and against the principles of natural justice which had frustrated the very purpose and objects of the Ordinance XVII of 1969 and amounted to condoning of malpractices, illegalities and irregularities ex facie, committed at the Lahore Stock Exchange; allowing trading at L.S.E. For another two days for settlement, amounted to placing a premium on the illegal acts of the L.S.E. And its Members and giving a licence further to stipulators and short sellers etc. To the detriment of the small investors. 9. The learned counsel for respondent No,1, opposed the petition; also raised preliminary objections; i,e, lack of bona fide on the part of the petitioner's absence of cause of action, non-violation of the regulations by respondent No,1 and the absence of the jurisdiction of this Court in a case of contractual rights and obligation. 10. It was maintained on behalf of respondent No,1 that the trading in shares of the company in L.S.E. Had closed at the rate of Rs,61.60 on the last date on provisional counter i,e, 6-2-1995 whereas closing rate at K.S.E. Was Rs,63.25 and that the petitioners themselves have indulged in stipulative cornering/trading. It was admitted that trading on the floor of the I.S.E. Remained suspended from 2-2-1995 to 6-2-1995 and no transaction was registered which was outside the "Hella" rate nor any transaction was registered which related to suspension period and that unregistered transactions between the Members are not equated with the transactions registered with the I.S.E. Clearing House. The impugned orders dated 21-3-1995 and 29-7-1995 passed by Chairman, C.L.A. Were supported. Regarding allegations against Ayyaz Mahmood it was submitted that according to the record of Lahore Stock Exchange no unusual circumstances relating to share trade exist in case of any member including Mr. Ayyaz Mehmood. It was further submitted that there was no connivance in any "Satta" as alleged. 11. Sh. Maqbool Ahmed, learned Deputy Attorney-General objected to the maintainability of the writ petition as quite an efficacious remedy was available to the petitioners, under section 26 of the Securities and Exchange Ordinance (Act XVII of 1969). He also defended the action of awarding the premium of Rs,42 to the company. 12. I have heard the learned counsel for the parties and have also been taken through the relevant provisions of Ordinance XVII of 1960, Prospectus of the Company and the Provisional Trading Regulations in case of the Provisionally Listed Companies as notified in the official Gazette of Pakistan on 8-6-1994.
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' Before proceeding to examine the other provisions and case of the parties on merits, it would be appropriate to decide the preliminary objection regarding maintainability of the writ petition. 13. Notwithstanding the fact that there was a remedy available under Ordinance XVII of 1969 against the impugned order under section 26 of the said Ordinance, the efficacy of the alternate remedy was the determining factor to see whether the writ petition was premature and/or was not maintainable before the petitioners had exhausted the remedies available to them under the law for the time being in force. 14. The petitioners had challenged the vires of the impugned order not on facts but on the basis of mala fides on the part of respondent No,1 and respondent No,3. It cannot be lost sight of that the behaviour of the share price in the provisional trading of shares of respondent No,4 was not only volatile but there was short selling. As against the available 1974000 share scripts and transactions of 55.401 million had taken place at K.S.E. And some 9.455 million shares at L.S.E. There is no doubt that the K.S.E. And the investors there had not objected to the impugned order and it has been stated by respondent No,3 that K.S.E. Had complied with the order which was not disputed by the petitioner or the learned counsel appearing on behalf of respondent No,1 and respondent No,4. 15. The maintainability of the writ petition under Article 199 of the Constitution of the Islamic Republic of Pakistan, 1973 was challenged and many citations from the Indian Jurisdiction were cited at the bar by learned counsel for respondent No, 1. Ample comparison of Article 226 of the Indian Constitution and Article 199 of the Constitution of Islamic Republic of Pakistan shows that Article 199 of the Constitution, 1973 (supra) had much wider a scope as compared to the scope of jurisdiction in the matter of issuance of writs. The maintainability was mainly assailed on the ground that the dispute related to contractual obligations of the investors and the members of stock exchange and that the contractual obligation was at much higher a padestal and was taken as sacrosanct under the Islamic Injunctions and the contracts relating to persons, even if voidable, were to be decided by Courts of pleanary jurisdiction and the petitioners could file civil suits for redress of their grievance. Reference was made to "Muhammad Jamil v. Pakistan Railways Board and 9 others" (1994 CLC 848). In the above case the matter related to the performance of contractual obligations and cancellation of work order. In the present case the order of Chairman, C.L.A. Was impugned which did not relate to any contractual obligation but was rather in relation to performance of his obligations/duties under Securities and Exchange Ordinance, 1969. It is respectfully stated that. The above citation as also the "M.A. Nasir v. Chairman, Eastern Railways and others (PLD 1965 SC 83) "Millat Tractors Employees Ltd. And others v. Government of Pakistan through Secretary, Ministry of Labour and Manpower and others (PLD 1992 Lah. 68) were not applicable to the facts of the present case. 16. The Chairman had. Vide impugned orders, allowed the opening of the provisional counter for another two days and the petitioners had genuine apprehension that the interest of the small investors would be further jeoperdized by manipulators with connivance of respondent No,4 as one of the "consultants of the issue" Riaz-ul-Hasan Ghori, had the office in the L.S.E. Building and at the address of Ayaz Mehmood, a member. As mentioned at page 31 of the prospectus the company was to come on Ready Quotation Board on 7-2-1995 and there was not trading on 6-2-1995 as admitted by L.S.E. Allowing of two more days for provisional trading amounted to placing a premium on the activities of stipulative cornering of shares, short sellers and those indulged in manipulation and was rather a licence for such unscrupulous activities to the maximum prejudice of the small investors. The remedy as suggested under section 26 of the Ordinance XVII of 1969 could not be considered as efficacious in the facts moving market and the objection regarding maintainability raised by the respondents is not sustained and it is rather a fit case where this Court was required to exercise its extraordinary Constitutional jurisdiction under Article 199 of the Constitution of the Islamic Republic of Pakistan, 1973. Reliance is placed on "Dr. Aman Ullah Khan
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and others v. Pakistan through Secretary, Ministry of Finance and others" (PLD 1990 SC 1092), "Nagina Silk Mills, Lyallpur v. I.T.O." (PLD 1963 SC 322), "Premier Cloth Mills v. Sales Tax Officer, A-Circle, Lyallpur and others" (PLD 1972 SC 257), Salah-du-Din and 2 others v. Frontier Sugar Mills Ltd. And 10 others" (PLD 1975 SC 244). 17. Respondent No,1 was incorporated as a limited company by guarantee on 5-11-1970 and had its own Board of Directors duly elected under the Companies Ordinance, 1984 with the declared object to further the objects of Securities and Exchange Ordinance, 1969. The object of the above Ordinance, as embodied in the preamble reads as:-- "An Ordinance to provide for the protection of investors, regulation of markets and dealings in securities." 18. Under section 34 of the Securities and Exchange Ordinance, 1969 the Stock Exchanges were authorised to frame their one regulations and for the purpose of regulating trading in the scripts of the provisionally listed companies, framed its regulations known as "Regulations for Trading in Provisional Listed Companies". The regulations which are relevant to the present case were framed by L.S.E. And, after obtaining prior approval of Corporate Law Authority, notified and got published in the official Gazette of Pakistan in its issue of June 8, 1994. ' Respondent No,4 had issued its prospectus and had called for applications for subscription on 15- 2-1994 which were to open and close the same day in the banking hours. The L.S.E. Provisional trading in the script commenced from 27-12-1994 and the company was to come on Ready Quotation Board on 7-2-1995. 19. Section 33 of the Securities and Exchange Ordinance, 1969 had provided for the framing of rules and under section 34 of the said Ordinance Stock Exchanges were also authorised to frame their own regulations. Lahore Stock Exchange (Guarantee) Limited framed its regulations which are relevant to the present case and known as the Regulations for Trading in Provisionally Listed Companies of the Lahore Stock Exchange (Guarantee) Limited. After obtaining the necessary prior approval of the Corporate Law Authority, notified the same and got them published in the official Gazette of Pakistan in its issue of June 8, 1994. The declared object of the Lahore Stock Exchange for framing the said regulations as given in the publication is reproduced:-- "Whereas the question of trading in the scrips of companies prior to their official listing by the Lahore Stock Exchange (Guarantee) Limited and more commonly known as 'kerb trading' has always been a matter of concern for that Exchange; and whereas, it is desirable that, in order to protect the interest of investors, listing is done simultaneously with the publication of the prospectuses which requires regulations to regulate such trading." 20. Respondent No,4 had issued its prospectus and had called for applications for subscription to 19,74,000 ordinarily shares of Rs,10 each to general public with a premium of Rs,42 per share. The public issue was to open with the banking hours on 1-5-1994 and was to close with the banking hours the same day. At Lahore Stock Exchange commenced provisional trading in the scripts of respondent No,4 from 27-12-1994 and the same continued till 6-2-1995 and the shares were to come on Ready Quotation. Board on 7-2-1995. The behaviour of the trading of shares at Lahore Stock Exchange is mentioned in para. No,4 (supra). The relevant regulations for the purpose of determining the fate of the writ petitions in hand were Regulations Nos.15, 17, 19, 20 and 21, and it is to be seen whether any consequence of default in compliance with the requirement was given in the Regulations itself. If admitted violation causes prejudice to an investor and a wrong is done to him, it would be equitable and just for the Court to provide remedy in such situations as a duty cast upon the Court. It was for the framers of the Regulations to provide remedy. The approval was granted without ensuring a relief to the persons wronged who cannot be left alone at the mercy of circumstances. Attempts at scams cannot be allowed to go unnoticed. ' For reference Regulations Nos.15, 17, 19, 20 and 21 reproduced:--
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(15) All transactions entered into on a particular day shall, before 5-15 p.m. The same day be sent for registration with the Exchange by the seller. The buyer shall sign the seller's contracts before 5- 00 p.m. Registration of transactions after the prescribed time will be received next date up to 11-00 a.m. On payment of penalty of Rs,100 (17) Only such contracts shall he accepted by the Exchange as are within the highest and the lowest range of the day as officially published by the Exchange. (19)There shall be a clearing on the opening day of such contract at the closing rate of the day. Thereafter, there shall be a clearing at least once a week at the closing rate of the day to be announced by the Exchange in the notice issued at the time of commencement of the contract. There shall be a Special Clearing of Hella in case of a rise of fall of Rs,3 per share from the last clearing rate. There shall be a final clearing in each scrip at the closing rate of the day previous to the listing of that script on the Ready Quotation Board. (20)In case of two Special Clearings of Hellas falling due simultaneously, business in the said scrip shall be immediately suspended and shall be resumed only after payments of clearing are completed for both Special Clearing or Hellas. This provision of closure shall also apply in case of two Special Clearings falling due on the weekly clearing day and also on the last day of business of the…
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