THE domestic corporate scene appears murky with a growing perception of the tunnelling of resources through inter-company transfers within a business group.

Tunnelling is defined as the transfer of assets and profits out of firms for the benefit of the controlling shareholders. These companies veil their real profits to evade taxes and dodge minority shareholders, paying them less through dividend.

The proprietors of large business groups often use earnings of their flagship company to finance smaller firms under their control. Sometimes they expropriate share of minority shareholders by tunnelling resources from companies where they have low cash flow rights to firms where they have high cash flow rights.

“It is too broad brush statement to make as 660 listed companies include better governed well-reputed companies as well. Having said that, it certainly is an issue that needs to be understood, monitored and dealt within the country” Fawad Hashmi, head of the Pakistan Institute of Corporate Governance commented offhand when reached over telephone.

“We include this subject in the training that we conduct for company directors. We have a module covering inter- firm transfers in a business group”, he informed. “We are working on a project to analyse closely related party transactions in 100 companies listed at the Karachi Stock Exchange”, he pointed out.

Rahat Kaunain Hassan, chairperson Competition Commission of Pakistan thought the subject was beyond the commission’s domain. “My mandate is different; perhaps the Security and Exchange Commission would be in a position to give an informed comment as they ought to deal with governance aspects of firms”, she said over telephone from Islamabad.

“You do not need power glasses to see something this obvious. I do not want to name names but just look around. I can say with confidence that tunnelling and associated party transfers are carried out with impunity. Be it textile, media, cement, fertiliser, drugs, FMCG companies, auto giants, etc., the big boys are growing bigger by minutes and resort to any practice that allows them to multiply their wealth”, says a tycoon in Karachi with diversified business interests.

“Yes, I believe resources of a flagship company that has assumed a critical mass are leveraged to support associated smaller companies owned by a group. People do not think twice before abusing relevant laws and appeasing regulators”, Majyd Aziz a senior business leader of Karachi said.

“This is a core universal governance issue. In Pakistan, where institutions are weak and implementation of relevant laws often ineffective, a segment of corporate citizens is not inclined to behave responsibly. Many a times the board of directors flout their mandate of acting in the best interest of the company as directors manage decisions that tend to be beneficial to them but not necessarily to the company”, Khalid Mirza, member Corporate Appellate Tribunal, who teaches management at Lahore University of Management Sciences and was head of SECP and the Competition Commission of Pakistan before retiring in 2010, commented from Islamabad.

Asrar Rauf, senior member and the spokesperson of the Federal Board of Revenue did not comment on tunnelling but informed that the tax collectors have initiated some new projects to curb tax evasion by private and public limited companies.

“Last month a special cell in the Large Tax Payer Unit (LTU) in Karachi became operational with a mandate to detect options used by companies to understate profits to reduce tax incidence”, he said.

Rehmatullah Wazir, who heads the FBR’s special unit , said the focus of the cell has so far been to determine the extent of transfer pricing and identifying culprits in this regard. “The Income Tax Ordinance 2001 (Sections 108, 109, 78 and 85) deals with cross party transactions in a company. Under the law, the commissioner has powers to re-characterise trading accounts” Wazir told Dawn.

Chairman Security and Exchange Commission of Pakistan Mohammad Ali told Dawn that the regulator was active and trying within means to improve both the framework and compliance to minimise white collar crimes.

“The legal expert at the SECP can better inform on details but we are working hard to improve the environment by promoting best corporate practices for the benefit of businesses and the economy”, he said over telephone.

Tahir Mehmud, legal expert at the SECP, shared in detail the regulators response to company account manipulations by businesses.

“The frontline role in this regard is that of the audit committee and the external auditors. The SECP examines qualifications, if any, in the audit report and, if need be, issues notices for explanation. Is this sufficient? No, it is not”, explained Mehmud.

“We acknowledge the need to improve the quality of auditing. For a long time, a cell within the Institute of the Chartered Accountants of Pakistan has been certifying auditors but keeping in view the conflict of interest and possibility of lapses by auditors, the SECP has initiated the process to create an Audit Oversight Board”, he disclosed.

“There are laws prohibiting siphoning of funds from a company. Sections 195, 196 and 208 of the Companies Ordinance bars companies from unauthorised transfer of funds. The regulator has actually penalised violators, details of which are available on the website”, Mehmud concluded.