Making investment in associated companies: Companies bound to take approval from shareholders

The Securities and Exchange Commission of Pakistan (SECP) has ruled that the Companies Ordinance has bound companies to take approval from shareholders before making an investment in associated companies and taking approval from shareholders after making investment in associated company cannot serve the purpose. This has been stated by the SECP in its order which dispose of the proceedings initiated against the Directors including the Chief Executive (the "respondents") of a cement manufacturer (the "Company") through show cause notice ("SCN") dated October 20, 2015 issued under the provisions of Section 208 read with Section 476 of the Companies Ordinance 1984( "Ordinance").
The SECP said that the provisions of Section 208 of the Ordinance are clear and explicit and bound companies to take approval from shareholders before making an Investment in associated companies and taking approval from shareholders after making Investment in associated company cannot serve the purpose.
Brief facts of the case are that notice of annual general meeting dated September 23, 2015 of the Company revealed that during the financial year 2015 the Company purchased 3.9 million share of subsidiary Company without approval of shareholders under Subsection 1 of Section 208 of the Ordinance. Consequently a SCN was served upon the cement company (respondents) on October 20, 2015 to show cause as to why penalty may not be imposed under Section 208 of the Ordinance for making investment in subsidiary without authority of special resolution. The SECP said that thee provisions of Sub-section (1) of Section 208 of the Ordinance provides that a company shall not make any investment in any of its associated companies or undertakings except under the authority of special resolution which shall indicate the nature, period and amount of investment and terms and conditions attached thereto provided that the return on Investment in the form of loan shall not be less than the borrowing cost of the investing company.
Explanation: The expression "investment" shall include loans, advances, equity, by whatever name called, or any amount which is not in the nature of normal trade credit. For the foregoing reasons, the SECP is of the opinion that the provision of Section 208 of the Ordinance has been violated by the company as they failed to take approval of shareholders before making investment in subsidiary. However, the SECP has also noted that the cement company has admitted oversight on their part and obtained shareholders' approval by providing complete information as required by the law. The self-realisation and corrective measures taken for avoidance of future errors are also reassuring. The enforcement and regulatory function of the Commission is aimed at building a compliant corporate culture, directors have a key role in ensuring that seed of this culture grows and is well nurtured. Therefore, the SECP has taken a lenient view and hereby warned the cement manufacturer to ensure compliance of law in future, SECP order added.