2005 PLP 1036 (CLD)

Date of hearing: 15th April, 2003. The appellant mentioned above has filed this Appeal No. 14 of 2003 under section 33 of the Securities and Exchange Commission of Pakistan Act, 1997 before the Appellate Bench against an order dated January 31, 2003 (the "impugned order") passed by Commissioner (SMD):

1. Brief facts of the case are that a notice dated June 4, 2002 was issued by the Commission to fine appellant to show cause as to why the gain made by it in purchase and sale transactions as beneficial owner of Shaheen Insurance Company Limited ("Issuer") should not be tendered by it in favour of the Commission, as provided in subsection (2) of section 224 of Companies Ordinance, 1984. The said purchase and sale transactions resulted in gain of Rs.1,157,450.00 to the appellant, which was not tendered to the Issuer within the period specified in section 224(2) of the Ordinance. An opportunity of personal hearing was granted to the appellant by the Commissioner (SM) on August 8, 2002, however not being satisfied by the arguments presented, he directed the appellant vide the impugned order to tender Rs.822,974 to the Commission.

2. The appellant has preferred this appeal before the Appellate Bench against the impugned order. The hearing was fixed on April 15, 2003 when the representatives of the parties mentioned above appeared before us. Mr. Safiullah appearing on behalf of the appellant asserted that the Commissioner (SM) misdirected himself in law when he held that Joint Venture Agreement dated February 19, 1998 ("JVA") was not an agreement to sell as contended by the appellant but in fact a sale agreement. He argued that Hollard Insurance had been given a 'put option' in the JVA, which it could exercise after two years from the date of execution of the JVA. This meant that the sale transaction was completed on the expiry of the put option period of two years i.e. in August, 2000, which in turn meant that the purchase and sale transactions were not executed within 6 months of each other as required by section 224 of the Ordinance. He relied on the provisions of Sale of Goods Act, 1930 in support of his argument. He further contended the Commissioner (SM) has erred in holding that sale was completed on February 19, 1998 when the JVA was executed. He contended that without prejudice to the above argument, the transaction could be said to be executed when the shares were transferred to Hollard in June, 1998 but not in February, 1998. Mr. Safiullah further argued that the Commissioner (SM) misdirected himself when he did not allow for the deduction of the expenditure as contended by the appellant under rule 16 of the Companies (General Provisions and Forms) Rules, 1985. Mr. Kashif Aziz argued that the Commissioner (SM) provided no opportunity to the appellant to prove the deductible expenditure incurred by it.

3. Mr. Ikram‑ul‑Haq appearing on behalf of the Commissioner (SM) argued first that the put option actually placed on obligation on Hollard that it would first offer the shares to the appellant and the issuer, in case it wanted to off load its acquisition from them. Even if Hollard had exercised the put option, such a transaction would have been considered a separate and independent transaction. He further contended that the date of purchase of shares and getting them transferred in ones name are two separate issues. The sale was completed on the eve of handing over the shares to the buyer and receiving consideration by the purchaser, which was done on February 20, 1998. He argued that it is apparent from the plain reading of the rule 16 that deduction from tenderable gain include nominal expenses like brokerage, stamp duty and expenditure actually paid or incurred in making the gain. Further, the provision can only be invoked where gain made from the purchase and sale is tendered to the company under section 224 of the Ordinance and not to the Commission. However, without prejudice to the foregoing, and taking a lenient view of the matter, the appellant was allowed to deduct Rs. 334,476 as expenditure, from the amount of tenderable gain. On the argument of the appellant that no opportunity was provided to the appellant Mr. Ikram referred to a letter dated October 31, 2002 written by the Commission to the appellant directing it to establish the deductions claimed by it.

4. We have heard both the parties and examined the issues raised by them. We do not find any merit in the contention of the appellant that the availability of the put option in the JVA meant that the sale transaction between the appellant and Hollard was not executed till the expiry of the period available under the put option. This was only an option available with Hollard to sell back the shares purchased by it. In case this option was indeed exercised by Hollard, that transaction would have amounted to a separate transaction. We also do not agree that the sale transaction was completed in June, 1998. The transfer of ownership in the shares from the appellant to Hollard was completed on the execution of the JVA. In any ease subsection (2) of section 221 of the Ordinance provides: (2) "The notice referred to in subsection (1) shall be given in writing within fifteen days of each acquisition or change of interest or right, as the case may be, referred to in subsection (1) of section' 220, or date of agreement referred to in subsection (2) of that section."

5. As for the issue of allowing the deduction of expenditure from the tenderable gain, we feel that the Commissioner (SM) has already taken a lenient view in allowing the appellant to deduct the expenditure of Rs.334,476 from the gain. We do not agree with the contention of the appellant that expenditure as projected by the appellant can be allowed to be deducted from the gain under the provisions of rule

16. We therefore find no reason to interfere with the impugned order, which is hereby maintained.

6. In the end we would like to show our discontent for the delayed action taken against the appellant for the above violations by the Securities Market Division. The appeal is dismissed accordingly. H.B.T./23/SEC Appeal dismissed.