The Securities and Exchange Commission of Pakistan (SECP) has observed that the securities of same class of a same listed company are interchangeable/fungible under section 224 of the Companies Ordinance 1984.
Through an order issued here on Wednesday against a director of a brokerage house, the SECP explained that a question arises why shares of the same class of the same listed company are considered "fungible" in nature? Answer of this question may be derived from the characteristic and rights attached with a security/share of a same class. It is worth mentioning that each share of same class carries same denomination/par value, fetches same market price, same payout and same voting rights. Even delivery of any share of same class may be received and made at the time of purchase and sale respectively. Hence no distinction can be made among the shares of the same class on the basis of rights attached thereto.
To ascertain the legitimacy of the contention of the Legal Counsel, the issue "whether or not the shares of the same class are substitutable and fungible" is needed to he addressed first.
For this purpose, the SECP has consulted the prevailing law and rules on the subject matter this aspect of the issue has visibly been narrated in section 224(1) of the Ordinance and Rule 16 of the Rules. In order to elucidate the position, it is useful to reproduce section 224(1) of the Ordinance.
The SECP is of the view that the phrases "equity securities" and "any such security" appear in the Section 224(1) have very much significance here, The words "equity securities" signifies that a beneficial owner may own simultaneously more than one class of shares, while the word "such security" symbolizes here security of same class, Furthermore, noticeably the word "any" appears before the words "such security". Thus, it is emphasised here that the law uses word "any" instead of the word "particular". Hence, the tenderable gain will arise through purchase and sale or sale and purchase of "any security of same class" instead of "particular security of same class, by a beneficial owner of a listed company. This suggests that securities of same class of a same listed company are interchangeable/fungible. And this concept has explicitly been expressed in Rule 16(1) (b) of the Rules, which states that:-
"...the purchases and sales shall be matched as aforesaid so long as the securities involved in the purchase and sale are of the same class and of the same listed company and for this purpose the shares shall be deemed as fungibles.
It is further pointed out that the concept "shares of same class are fungible in nature" is not a new concept, as it is prevailing since the promulgation of Securities and Exchange Ordinance I 969 ("SE Ordinance"), when the subject matter of trading by officers and principal shareholders of listed companies was monitored under the SE Ordinance. The issue was elaborated in Circular No. 2 of 1971 dated 26/06/1971 of the then Securities and Exchange Authority of Pakistan.
In order to know the international practice on the subject matter, the prevailing legal frame-work in United States of America (the "USA") has been consulted, where legal provisions on the subject matter are almost same as in Pakistan. In USA, the matter of trading by directors, officer and principal shareholders is dealt under Section 16 of the Securities and Exchange Act. 1934").
The aforementioned discussion as well as judgment of Supreme Court of Pakistan and the Circuit Court of Appeals of USA clearly states that shares of same class are identical and substitutable.
Furthermore, as per SECP, the whole mechanism envisaged in Section 224 of the Ordinance revolves around the concept that the "securities of same class are fungible". For instance, if we assume that the shares of the same class are not fungible in nature and tenderable gain would accrue on purchase and sale or sale and purchase of "only particular" securities, then it would definitely lend the redundancy to whole scheme build up in section 224 of the Ordinance. For example a beneficial owner makes handsome gain on purchase and sale transactions within the period of six months. He will be able to escape easily from the mischief of Section 224 of the Ordinance on the plea that the purchased and sold securities were not same, which is not intention of the law.
It is evident from the foregoing discussion that the Respondent has made gain on account of the aforesaid sale and purchase transactions. Since the transactions have resulted in gain therefore, the Respondent was required to discharge its certain obligations pursuant to Section 224(1) of the Ordinance. But the Respondent has failed to discharge its said obligations therefore, the request to withdraw the Notice is rejected. Since, the amount of gain is still with Respondent, therefore, as provided in Section 224(2) of the Ordinance the gain has vested to the Commission. Since Supreme Court of Pakistan in aforementioned judgment held that "the gain will remain, under all circumstances property of the company. While, the entitlement of SECP to recover the amount in question from the director beneficial owner would he treated as being in nature of an enforcement mechanism to ensure that the wrongful gains do not remain with person who has violated the section, but are transferred to the benefit of the company. Since ultimately, the amount of gain is required to he transferred to the issuer Company, therefore, in order to make the process of recovery of gain simple, the Respondent is hereby directed to tender Rs 1,297,035 to Issuer Company, within 30 days of the Issue of this Order and provide a copy a bank account statement of the respective date highlighting therein debit entry of aforementioned amount, for the record of SECP, within seven days of the tendering of the gain.
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