ISLAMABAD, Jan 16: The Securities & Exchange Commission of Pakistan has appointed an inspector to conduct an investigation into the affairs of Attock Refinery Limited, a privatized listed company.

The inspector, among other matters, would determine that the Attock Refinery’s dealings with associated undertakings/related parties were at arm’s length and that the company was not transferring its profits to the latter.

The decision, according to SECP source, followed the discovery by the SECP’s enforcement and monitoring division (EMD) that the company’s performance had been on the down slide since 1998.

During the period 1998-99 to 2000-01, it purportedly sustained heavy losses from its refinery operations and obtained from the government the hefty amount of Rs1.379 billion in subsidies as per Import Parity Pricing Formula which guarantees after-tax profit from refinery operations at 10 per cent of the paid-up capital of the company.

The company was asked to provide certain information regarding prices of products and transactions with its associated undertakings. This information was required to ascertain that the Attock Refinery had not transferred its revenue to associated undertakings through transfer pricing mechanism.

It did not, however, provide the requisite information even after several reminders. Instead of providing the relevant information/documents, the company furnished irrelevant and misleading information. Furthermore, it did not take any steps to reduce the suspicion of the Commission and prolonged the matter.

The inspector to investigate the company’s affairs in view of the following factors:

(i) There is a reasonable basis to conclude that the company’s transactions with its associated undertakings were not at arm’s length and that there might be an issue of reduced transfer pricing; (ii) subsidies obtained by it from the government; (iii) incorrect statements in the information provided to SECP; (iv) the company has made misleading statements regarding fixation of prices of its products, which might be an attempt to divert the attention from the main issue; (v) inadequate and incorrect disclosures in the financial statements regarding transactions with associated undertakings; and (vi) disclosure regarding the holding company was not in conformity with the books of account.

The SECP has directed the inspector to submit his report within 30 days to determine and include in his report the names of persons responsible for irregularities and mismanagement. The other issues on which he would also submit the report include:

(a) Whether the transactions with associated undertakings/ related parties were at arm’s length.

(b) Reasons for incurring losses on account of refinery operations and justification for subsidy obtained from the government during the years 1997 to 2001. Also whether these losses could have been reduced by competitive pricing of products, and whether the losses were due to mismanagement, imprudent policies or some other reasons.

(c) Investigation of sales/revenues with particular reference to procedure for price fixation particularly with related parties/associated undertakings.

(d) To check and review the minutes of meeting of board of directors or price setting committees to ensure that the prices are not set arbitrarily.

(e) To check and review the suitability of prices on the basis of the geographically segmented markets, consumer based market, market’s share of the company, demand for the company’s products, and impact of price elasticity of demand for the products.

(f) To perform horizontal as well as vertical analysis of the price margins of deregulated products before deregulation and after deregulation.

(g) To check and ensure that company is not transferring its profits to its associated undertakings by a detailed review of the transfer price of all products, which are fixed by the company and in the adverse situation the amount of siphoned funds along with supporting evidences and persons responsible for the same, together with recommendations to ensure that such practices do not occur in future.