Al Wakeelo
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Petitioner: Messrs GHARIBWAL CEMENT LIMITED and others VS Respondent: RASHID SADIQ, EXECUTIVE DIRECTOR (ENFORCEMENT AND MONITORING), SECURITIES AND EXCHANGE COMMISSION OF PAKISTAN
Court Name: Appellate Bench of Securities and Exchange Commission of Pakistan Judge(s): Shahid Ghaffar, M. Zafar-Ul-Haq Hijazi Title:Messrs GHARIBWAL CEMENT LIMITED and others vs RASHID SADIQ, EXECUTIVE
DIRECTOR (ENFORCEMENT AND MONITORING), SECURITIES AND EXCHANGE COMMISSION OF PAKISTAN Case No.: Appeal against Order dated 5-12-2001 Date of Judgment:2002-04-02 Reported As: 2003 CLD 131 Result: Appeal disposed of Judgment ORDER 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
---
## Page 2
(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
---
## Page 3
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
---
## Page 4
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).
---
## Page 5
(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.
---
## Page 6
(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
---
## Page 7
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…
Read the unabridged text and precedent citation network on Al Wakeelo Legal Research Platform.