An Appellate Bench of the Securities and Exchange Commission of Pakistan (SECP) has upheld an SECP order, issued against a telecom company, which imposed an aggregated fine of Rs 1,500,000 on the company/CEO and also directed company to stop payment of the questioned dividend immediately and recover and deposit amount of dividend paid earlier.
The two-member Appellate Bench-III comprising Aamir Khan Chairman SECP/Commissioner Company Law Division and (Farrukh H. Sabzwari Commissioner AML issued a landmark order (Appeal No. 37 of 2018) guiding/clarifying telecom companies in a number of issues including payment of dividend falling within the domain of the commission.
The bench referred to the law that Companies Act, 2017 prohibit declaration or payment of dividend from the sale or disposal of immovable property or assets of a capital nature. The income from sale or disposal of capital assets of the company may not be distributed among the shareholders, except through winding up of the company. If company has disposed of immovable assets then proceeds for such transfer or sale should have not been used except to promote the company's objectives and its core business, SECP Bench declared.
The Director/Head of Department (CCD), SECP had imposed a fine of Rs 500,000 on the company and Rs 1,000,000 on CEO of the company. The company was also directed to stop the payment of the questioned dividend immediately and to recover and deposit the amount of dividend paid earlier, if any. Bench has also minutely analyzed company's other stance with regard to the payment of dividend from the profits realized from the amount of intrinsic value of towers.
The Bench is of the view that company's argument that the questioned dividend has been paid from the profits of intrinsic value of the capital assets (towers) is misconceived because in a sale transaction, intrinsic value and fair market value/depreciated value constitutes a complete sale consideration. Furthermore, the sale consideration under the BTA (agreement) has not categorized the sale transaction into tangible or intangible/intrinsic, therefore, company's plea that they have paid the questioned dividend from the profits and not from the capital is without any substance.
As company's business does not consist of buying and selling of towers, therefore, it falls under the first category of companies that are not allowed to pay dividends from the profits raised through the sale of immovable property or assets of capital nature, SECP Bench added. The brief facts of the case are that as per financial statements of company for the year ended December 31, 2017, the net profit was Rs 77,659,466,000/- (seventy-seven billion six hundred fifty-nine million four hundred sixty-six thousand).
The net profit was inclusive of the gain on transfer of net assets [(Rs 59,297,894,000/-)fifiy-nine billion two hundred ninety-seven million eight hundred ninety-four thousand] and the gain on disposal of operating fixed assets (Rs 76,448,000/-) seventy-six million four hundred forty-eight thousand].
The afore stated gain arising from transfer of net assets and from disposal of operating fixed assets, encompassed 76% of the net profit. The company transferred and disposed of net assets and operating fixed assets to a private limited company. The telecom company declared Rs 34,810,000,000/- (thirty-four billion eight hundred ten million) as interim dividend for the year 2017. The substantial part of net profit arose out of gains from disposal/transfer of assets, therefore, declaration of interim dividend was prima facie violation of Section 240(2) and Section 241 read with Section 502 of the Companies Act, 2017 (Act) that prohibit declaration or payment of dividend from the sale or disposal of immovable property or assets of a capital nature.
Appellate Bench observed that the telecom company's case also does not fall under the exception of Section 240(2) of the Act whereby a company engaged in buying and selling of immovable assets or assets of capital nature, can declare dividend from the profits generated from the sale of such assets. The company's core business is provision of telecom services to its customers and it is important to understand that said services may not be rendered without availability of complete infrastructure that includes the telecom towers. Therefore, it is not possible for the Bench to consider that company's core business was buying and selling of telecom towers.
The company was also unable to demonstrate how distribution of dividend was made after adjusting/setting off any loss arising from sale of such capital assets in the instant case. Furthermore, this is not a case of unrealized gain on investment property, therefore, company' argument with regard to the proviso of Section 240(2) of the Act is not relevant.
The Bench is of the view that shareholders' rights revolve around the numbers of shares they hold. The assets of a company represent the underlying value of shares owned by shareholders, however, this value cannot be claimed through disposal of such assets, during the existence of a company. Moreover, reduction of capital is a concept whereby a company reduces its paid up capital or accumulated losses whereas disposal of capital asets does not entitle a company to reduce its paid up capital. Therefore, company's reliance on this point is irrelevant. The bench concur with the (Director/Head of Department (CCD), SECP (respondent's) finding that income from sale or disposal of capital assets of the company may not be distributed among the shareholders, except through winding up of the company.
Furthermore, if company has disposed of immovable assets then proceeds for such transfer or sale should have not been used except to promote the company's objectives and its core business, SECP Appellate Bench stated. Bench concluded that the show cause notice was issued for the violation of requirements under Section 240(2) and Section 241 of the Companies Act, therefore, Respondent's observation/direction with regard to alleged violation of Section 279 to 282 was unwarranted. The Bench, therefore, holds that the Respondent cannot proceed beyond the scope of the allegations contained in the SCN. However, without prejudice to the observation and direction contained in the Impugned Order, relevant authority may proceed against the Appellants in accordance with law.
The violation of Section 240(2) of the Act has been established against the company, therefore, except for Respondent's observation/direction with regard to alleged violations of Section 279 to 282, the Impugned order is upheld and the Appeal is dismissed.
Comments
Comments are closed.