1988 PLP 1408 (MLD)

This order shall dispose of an application under sections 96,97 of the Companies Ordinance, 1984, filed by the Banker's Equity Limited, for confirmation of reduction of its subscribed and paid-up capital to be made; in pursuance of special resolution passed by the shareholders in the annual general meeting held on 30th December, 1987.

2. The petitioner-Company was incorporated as a Public Limited Company in the year 1979 and is quoted on the stock exchange. It has an Authorised Capital of Rs.5,000 million and subscribed and paid-up capital of Rs.1,033.92 million divided in to 103,392 shares of Rs.10 each. The present shareholding position of the Company is shown here under:- "Shareholders Nos. No. of shares %

1. State Bank (1) 35,365,100 34.20

2. NCBs (5) 52,297,600 50.58

3. PBC (1) 711.900 O.69 Sub - Total: 88,374,600 85.47

4. Insurance Companies (6) 2,950,000 2.85

5. DFIs & others (2) 1,010,000 0.98

6. General Public: a) Overseas (2422) 5,612,100 5.43 b) Local (5614) 5,445,300 5.27 Sub - Total: 15, 017 14.53 Total: 103,392,000 100.00"

3. The circumstances which compelled the Company to initiate proceedings for reduction of its subscribed and paid-up capital are, that ever since its ;c=,e:%r p0ration, its income was exempt from payment of income Tax. However, under the Finance Act, 1986 this exemption was withdrawn and from the assessment year 1986-87 onward its profit became taxable. In the estimation of the management of the Company the imposition of the income Tax necessitated the balancing of the capital structure of the Company. This prompted the Managing Director to take up the matter to the Board of Directors. The factors which weighed with him to make such a move, as disclosed in para No.1.03 of the petition are:- "(i) since the Income-Tax has become applicable to the profits after counting of the borrowing and administrative general expenses, the dividend is distributed to shareholders out of the after tax profits, low debt-equity ratio with a large capital base of the petitioner's would inevitably lead to a poor rate of return on the capital. This would cause erosion in the pre -tax pool of funds available for plough back and would have adverse implications for the growth of the petitioners business; (d) the available amount of distributable profits would be inadequate to declare a reasonable dividend on the existing paid-up capital which would affect the quotation of the shares of Bankers Equity on the stock market; and (iii) Bankers Equity has chalked out an elaborate plan to mobilise funds from the general public through sale of PLS Certificates of Investment (COI). The declaration of un attractive rate of dividend by the petitioners would deter the saver from investing in these Certificates of Investment (COI)."

4. It is discernible from the record that the Board of Directors in the meeting dated 16-8-1987 passed a resolution accordingly; the extract whereof has been appended to the petition as Annexure A/2. The matter was then placed before the shareholders of the Company, in the annual general meeting held on 30-12-1987; the resolution passed therein is reproduced below:- "(i) the issued, subscribed and paid-up capital of the Company be and is hereby reduced by a sum of Rs.700 million i.e. from Rs.1,033.92 million to Rs.333.92 million. (ii) the reduced capital, aggregating to Rs.700 million shall be converted into Term Finance Certificate (TFCs) redeemable by the Company in 10 equal annual instalments after a grace period of 15 years with a return of 10 per cent per annum of their face value; (iii) against the redemption of capital by Rs.700 million, SBP, PBC and NCBs shall surrender their shares for conversion into TFC. However, if any public shareholder desires such conversion, he shall be given the first preference, and (iv) the Managing Director is hereby authorised to do all acts, deeds and things appertaining to the reduction of the capital, and all that may directly or indirectly appertain to it, including accepting surrender of shares and by way of conversion, issuing the requisite TFCs and to authorise his officers and subordinates with such authority as he may deem expedient or necessary in or about the circumstances."

5. I have heard Mr. Jawad S.Khawaja, Advocate at some length and examined the available record. The authority to reduce capital is conferred on the Company, under para 11(iv) of its Articles of Association and the exercise of this power is reflected by the resolution dated 30-12-1987 passed by the majority, of the shareholders of the Company, to whom the material facts concerning reduction of capital, under a statement envisaged by clause (b) of Section 160 of the Companies Ordinance had been conveyed.

6. As stated by the learned counsel for the Company, under the Scheme of the reduction of the capital, the scribed and paid-up capital shall be scaled down from Rs.1,033.92 million to Rs.333.92 million and thus reduced by Rs.700 million. This, according to him shall not affect the basic capital structure of the Company as on its request the amount of Rs.700 million well be made available to it for conversion into Long Term Finance Certificates, carrying a rate of return of 10 per cent per annum. These certificates would be redeemed by the Company in ten equal instalments, after a grace period of 15 years from the date of issuance thereof. As a matter of fact reduction shall be made in the share holding of the State Bank of Pakistan, 5 Nationalised Commercial Banks and the Pakistan Banking Council, who hold majority of shares and shall surrender their shares to the tune of 70 per cent, for investment into the Certificates aforesaid. Thus, in the revised paid-up capital structure, 55.03 per cent of the shareholding will be held by these Financial Institutions and the remaining 44.97 per cent by the general public and other investors. The public shareholders are not debarred from converting their shareholding in to the investment in the Long Term Finance Certificates. It is in the resolution dated 30-12-1987 that first preference shall be given to them, in case they chose to go for such conversion. The Scheme appears to be quite viable.

7. A question arises as to whether or not the alteration in the frame-Work of the capital structure, will be of some advantage to the Company and its shareholders. According to the figures for the year ending 30th June, 1987, disclosed to the Court, the expenditure incurred on borrowing in the form of return on Long Term Finance Certificates will amount to 70 million rupees. Obviously, this will be an admissible expenditure which will ultimately help in improving the tax structure in favour of the Company. It has rightly been canvassed, that by virtue of the implementation of the proposed Scheme, there shall be over all improvement in the return on the paid-up capital. The contemplated benefits attributed to the proposed reduction in capital, on the basis of the calculations relatable to the financial year 1987 as mentioned in para 2.02 of the petition are portrayed as under: Existing Rupees (in million) After giving effect to the proposed reduction in paid capital Profit before return on L.TFCs and Tax 230 230 Less: Return on L-TFCs -/230 70/160 Less: Provision for Tax @ 40% 92 64 Paid-up capital 1033.920 333.920 Rate of Return on paid-up capital (%). 13.35 28.75

8. It has been pointed out that in case the proposed reduction in the capital is not affected, the large capital base of the Company coupled with the low debt equity ratio would result in poor yield on the capital and thus the Company shall not be in a position to declare a reasonable dividend. Consequently, its quotation on the stock market would become un attractive. It is submitted that the Company wanted to mobilize public funds by the sale of PLS Certificates of Investment, but due to the poor dividend, the investors would remain off the floor

9. It is obvious that the Company has the power to reduce its capital. The extent and mode of reduction of capital is a domestic affair of the Company and in this respect the decision of the majority of the shareholders must prevail. The resolution dated 30-12-1987 is the manifestation of such a decision. Whether the reduction of capital is conducive to the business of the Company and how much capital ought to be reduced, the shareholders are the best Judge m the matter. If their verdict expressed through resolution, is fair and not prejudicial to the interest of the minority, the court should not hesitate to confirm such a resolution. The Scheme of reduction of the capital placed before me appears to be quite fair and reasonable and seemingly, would not work to the disadvantage of those shareholders who abstain to participate therein; rather as demonstrated in the earlier part of this order, its implementation would result in an overall gain Needless to state that under its Memorandum of Association, the Company has ample power to borrow and raise funds for its business. The issuance of the Long Term Finance Certificates falls within the ambit of such power. For all these reasons the reduction of the scribed and paid-up capital in terms of the Company's resolution dated 30-12-198' is confirmed. H.B.T./B-71/L Application accepted.