Some companies involved in fraudulent activities have adopted different methods to bar the Securities and Exchange Commission of Pakistan (SECP) from inspection of their records under the Companies Ordinance 1984. Sources told Business Recorder on Monday that the SECP is facing serious problems in inspection of records of various companies due to novel techniques used by such companies in the field formations.
Resultantly, the SECP was unable to scrutinise records in several cases for verification purposes. Sources said that one of the major problems being faced by the SECP is that some companies do not give access to their record. These companies adopt different kinds of delaying tactics to create problems for the commission's officials. For example, excuses like record not maintained or relevant accountants/officials are on leave, were conveyed to the SECP to avoid access to the record. In certain cases, companies inform the concerned officials that the relevant officials responsible for record maintenance are not available.
If inspection of record is sought, certain companies manage to get stay orders, preventing the SECP from carrying out inspections for detecting fraudulent activities. The SECP is empowered to inspect all records and investigate matters relating to the company transactions under the Companies Ordinance 1984 and various other laws administered by the commission despite the fact that no loss is being caused to the company whose records are sought to be inspected. On the other hand, all kinds of dubious methods are employed by the companies to delay the inspections by filing appeals/petitions.
The most common method to challenge the inspection order is to go into review petition against the order. The order is being challenged at the level of different stages available under the law. The reported incidences of burnt record, missing record and destruction of record due to heavy rain, etc, only points towards such kinds of trends in the corporate sector. However, FIR has to be lodged in such incidences to give legal backing to such cases.
Sources said that the section 231 of the Companies Ordinance 1984 is related to the inspection of record. Under section 231 (inspection of books of account by registrar), the books of account and books and papers of every company shall be open to inspection by the registrar or by any officer authorised by the Commission in this behalf if, for reasons to be recorded in writing, the registrar or the Commission considers it necessary to do.
If default is made in complying with the provisions of section 231, every person who is in default shall be punishable with imprisonment of one year and with fine of Rs 10,000. Sources said that the law clearly directs the companies to maintain books of accounts and give access to the SECP officials. Despite this fact, the commission still gives ample time to the companies to provide relevant record. The compliance is still not satisfactory even after relaxation of time period.
Sources said that the SECP has recently invoked provisions of section 495 of the Companies Ordinance 1984 against a registered unit of Karachi. As per provisions of the section 495, where any directive is given or order is issued by the Court, non-compliance within the specified period in such direction or order shall render every officer of the company or other person responsible for non-compliance thereof punishable, in addition to any other liability, with fine.
The recent arrests of an owner of a Karachi based printing press and graphic designer for printing fake shares of companies listed at stock exchange including a Textile Mills confirmed the initial findings made in the on-going investigations initiated by the SECP.
The Central Depository Company, Karachi (CDC) reported to the SECP that in an attempt to enter its shares on the CDC in electronic format, the unit had fraudulently represented a paid up capital of Rs 598.6 million divided in 59.8 million shares (beyond its actual reported capital of Rs 48.6 million). These were registered with CDC as a result of the fake declaration filed by two directors of that mill.
These shares were thereafter entered into the Central Depository System by way of deposit of physical shares through various brokers. Such physical shares, are deposited with the brokers and are presented to the share registrar as per procedure to be dematerialised and kept in record.
However, the recent confiscation of fake printed shares by the FIA substantiates the apprehension that no such physical shares were deposited earlier by the different participants, including the brokerage firm, and that these fake shares were being printed to unlawfully build the share record and to conceal the issue of fake shares by this mill.
The Commission had ordered an inspection under section 231 of the Companies Ordinance, 1984 to examine the books of accounts and papers of company to verify the issue of 55 million fake shares by the company beyond its reported paid up capital comprising of 4.8 million shares.
Simultaneously, another enquiry was authorised under section 21 of the Securities and Exchange Ordinance, 1969, to investigate the dealings and transactions in the shares of the company. However, the unit, its share registrar and the brokerage firm involved did not provided the requisite books and records to the authorised officials of the commission, and instead resorted to legal notices to the SECP.
Later on, the Commission requested the relevant judicial fora for access to the records of the mill already filed by the Commission. The court had directed the mill through its order dated September 25, 2008, to produce all the records before the inquiry officers appointed by the Commission within 15 days of the said order.
However, the unit succeeded to get another extension of 15 days from the court on October 28, 2008. Upon expiry of this extension, the unit was apparently getting the fake certificates printed to build their record for submission before the SECP inspectors etc.
As a result of SECP inquiry, it has been revealed that every time an inspection of record is sought, various companies use such kind of techniques to bar the commission from carrying out inspections, and detect fraudulent activities, undermining the shareholders and public at large.
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