ISLAMABAD, Dec 14: The Securities and Exchange Commission of Pakistan (SECP) has imposed a fine of Rs300,000 on each of the five working directors including the chairman and chief executive of Gharibwal Cement Limited for making unlawful investments/ advances amounting to Rs510.841 million in its associated company, namely Dandot Cement Limited, in gross violation of the provision of Section 208 of the Companies Ordinance 1984.

The remaining two nominee directors representing National Investment Trust (NIT) and State Life Insurance Corporation (SLIC), have been issued warnings “to be more cautious, careful and prudent in future,” says an SECP press release.

Gharibwal was a project of State Cement Corporation, which was privatized in 1992. The project was acquired by the present management of the company through acquisition of 51 per cent shares (847.363 million).

Examination of the accounts of Gharibwal for the year ended June 30,2000 revealed that the management of the company had made an unauthorized investment of Rs172.973 million to purchase share of Dandot Cement Limited, which were 43.54 per cent of Dandot’s total paid-up capital. The company also purchased 1,766,500 shares from the stock market, thus making a total investment of 13,316,500 shares (50.73 per cent) of Dandot.

The company also provided advances/loans of Rs337.8 million to Dandot, thus the advances and investments at the year end aggregated to Rs510.841 million, whereas the law requires that aggregate investments in associated undertakings should not exceed 30 per cent of the paid-up capital plus free reserves of the investing company at any point of time.

Section 208 of the Companies Ordinance also requires that shareholder’s prior approval be obtained to make equity investments and advances in associated undertakings.

Gharibwal had made the investments without the prior approval of the shareholders.

Furthermore, Gharibwal borrowed huge funds for making investments in Dandot and was paying mark-up on these funds. It suffered losses on sale of a part of its investments in Dandot, and its equity investments had undergone considerable impairment.

The Annual Audited Accounts of Dandot for the year ended June 30, 2000 presented a very bleak picture as it had accumulated staggering losses to the tune of Rs1,090.949 million against the equity of only Rs262.500 million, and the auditors had raised doubt about the company’s ability to continue as a ‘going concern’.

The Executive Director, Enforcement and Monitoring Division SECP, Rashid Sadiq, in his order observed Gharibwal and Dandot, became formally associated undertakings on March 06, 2000 due to inter-connecting relationship of common directorship. However, it appears that even prior to this formal association, they were acting as such and treating one and other as associated companies, as Abdul Rafiq Khan, Tousif Peracha, Farooq Zaman and Niaz Peracha who were directors of Gharibwal were co-opted as Directors of Dandot.

He also observed that the financing transactions between Gharibwal and Dandot do not fall under ‘normal trade credit’, and this relationship in itself shows that both these companies come under a common management and are being treated as such.

The Executive Director (Enforcement), therefore, concluded that Gharibwal had contravened the law, as it made investments for purchase of 4,790,100 shares of Dandot without passing a special resolution; it made investments in excess of 30 per cent threshold; it made huge advances to Dandot in excess of prescribed ceiling and without authority of special resolution; it sold shares to Saudi Pak Leasing without special resolution; and it charged markup on advances to Dandot at less than the borrowing cost. He held the Directors and Chief Executive responsible for these violations.

As regards to the nominee directors, namely Anis Wahab Zuberi, representing NIT and Imtiaz Rasool, representing SLIC, both of these Directors were apparently misled and deprived of the opportunity of applying their mind on the issue of investments in Dandot especially when they do not appear to be privy to this deliberate default and they also dissented from the Board in this regard.—APP