ISLAMABAD, Jan 9: The Securities and Exchange Commission of Pakistan (SECP) has restrained a listed company from making interest-free and unsecured advances of Rs30 million to its associated company to protect shareholders’ interest.

An SECP announcement said that Universal Leather and Footwear Industries was planning to make interest-free and unsecured loan of Rs30 million to its associated company MIMA Cotton Mills Limited, which would have caused losses to its shareholders.

The company had convened an annual general meeting to pass a special resolution authorizing its chief executive to invest an amount of Rs30 million in the form of interest-free and unsecured advances to its associated company.

On receipt of the notice of the meeting, the issue was examined by the SECP’s enforcement division which found that interest-free loan to associated company would have the effect of siphoning of the gains to the shareholders of the company accruable from the loan proposed to be advanced to associated company.

The SECP, therefore, considered it unfair to the shareholders of the Universal Leather and Footwear Industries as it would have benefited the shareholders of the investing company at the cost of the shareholding of the investor company.

The SECP noted that this proposal had in fact violated the provisions of section 208 of the Companies Ordinance 1984 which did not envisage interest-free loans to associated companies. The company was accordingly advised by the SECP that it should obtain return on the proposed loan at not less than its borrowing cost.

On this direction, the company has agreed that it will charge mark-up on the said loan, however, it was clarified that since the company was not availing any finances from banks which would be available to it under Export Finance Scheme, the mark-up would be charged at not less than the cost of the said available funding to the company.