Insurance companies: non-submission of auditor's certificate violation of Companies Rules: SECP

The Securities and Exchange Commission of Pakistan (SECP) has termed it violation of the Companies (Issue of Capital) Rules, 1996 by insurance companies in case any company fails to submit auditor's certificate, along with the decision of the directors to issue bonus shares communicated to the commission and the respective stock exchange.
In this regard, the SECP has issued an order here on Wednesday specifying that the decision of the directors to issue bonus shares shall be communicated to the Authority and the respective stock exchange on the day of the decision and the intimation letter shall be accompanied by the auditor's certificate.
According to the SECP, the order shall dispose of the proceedings initiated against the Directors (including the Chief Executive) and the Secretary of an insurance company for not complying with the requirements of Rule 6 of the Companies (Issue of Capital) Rules, 1996 (the "Rules"). The provisions of Rule 6 of the Rules state that in case of the issuance of bonus shares by listed companies.--A listed company may issue bonus shares subject to the following conditions:-
(i) The decision of the directors to issue bonus shares shall be communicated to the Authority and the respective stock exchange on the day of the decision and the intimation letter shall be accompanied by the auditor's certificate.
(ii) The free reserves of the company calculated in the manner as specified in rule 5 shall be sufficient to issue the bonus shares after retaining in the reserves twenty-five per cent of the capital as it will be increased by the proposed bonus shares.
(iii) a certificate from the auditors shall be obtained to the effect that the free reserves and surpluses retained after the issue of the bonus shares will not be less than twenty-five per cent of the increased capital; and
(iv) All contingent liabilities disclosed in the audited accounts and any such liability which may have been created subsequent to the audited accounts shall be deducted while calculating minimum residual reserves of twenty five per cent."
The company had communicated to the Commission, the decision of its Directors to issue 25 percent bonus shares on the day of decision, ie, April 4, 2013. However, the intimation letter was not accompanied by the auditor's certificate as required by Rule 6(i) read with Rule 6(iii) of the Rules, although the company has mentioned in the notes to the Notice of the Annual General Meeting that the Auditor has certified the free reserves of the company.
The company, while adhering to what they have been observing in the notices of the other companies, had stated that it is not a general secretarial practice to attach the free reserves certificate from the Auditors with the Notice. In the light of the above-quoted Rule 6 of the Rules, the communication of the decision of the Board of Directors should have been sent to the Commission along with the certificate of free reserves from the Auditors, on the day on which such decision was taken by the Board, the SECP said.
Therefore, the show cause notice was issued to the company's then so-called Directors and the Company Secretary, calling upon them to show cause as to why the penalty, as provided under Rule 11 of the Rules, should not be imposed upon the Company's then so-called Directors (including the then so-called Chief Executive) and the Company Secretary for not complying with provisions of Rule 6 of the Rules.
The company responded that the certificate of free reserves of the company from their statutory auditor was not attached with the notice of the Annual General Meeting of the company, as the same is not in general secretarial practice, however, the same had been filed with the Commission at the time of filing of Form 3. Lastly, the company prayed before the Commission to take a lenient view in the instant matter as late filing of the free reserves certificate from the auditor of the company was inadvertent.
The SECP has carefully examined and given due consideration to the written and verbal submissions of the company (through the company's representatives), and have also referred to the provisions of the rules. The SECP was of the view that there has been an established default of Rule 6 of the rules.
In exercise of the power conferred on me under rule 11 of the Rules, instead of imposing the penalty onto the addressees of the Show Cause Notice, take a lenient view, and thus, condone them due to facts. Also, the Company Directors (including the chief executive) and the company secretary are hereby issued stern warning that in case of similar non-compliance in future a stronger action will be taken, the SECP order added.