This refers to the Companies (Investment in Associated Companies or Associated Undertakings) Regulation, 2012 notified vide SRO 27(I)/2012 dated 16th January 2012. The statement to be annexed pursuant to Clause (b) of sub-section (1) of Section 160 of the Companies Ordinance, 1984 for approval of investment in associated companies under Section 208 has been revised.
There are some points narrated below which need clarification for proper understanding and uniform compliance by the companies seeking approval of investment in associated companies:
1. Regulation 3(3) - Undertaking by directors of the investing company that due diligence has been carried out for the proposed investment.
a. The format of undertaking and major contents of due diligence should have been prescribed by the SECP. These documents will vary from company to company, as there is no format.
b. Who will carry out due diligence: The investing company itself - question of transparency shall arise. If outsourced, cost shall be incurred and the information shall be at the disposal of the third party. Can the external auditors of the investing company carry out this assignment? Hopefully there may be no conflict of interest.
2. Regulation 3(4) - due diligence report in the general meeting.
Recommendations of duly signed due diligence report be put up in the meeting for inspection. The due diligence is an analysis of the current financial position and future prospectus of a company (Oxford Dictionary of Accounting). It does not contain recommendations. The word "recommendations" is not clear. Making known the contents of due diligence to the general public is not a wise option as projections etc are sensitive information.
3. Regulation 5 - Audited financial statement of associated company
The latest audited financial statement of the associated company shall be made available for inspection in the general meeting. What will happen if members start asking questions on these financials? The chairman can reply on his (investing) company's financials but may not on the associated company's. Can he say these financials are for inspection and not for deliberations?
It will also increase cost. The investing company had to put up the financial statement of their own company (which they always do) together with statements of associated company.
The Regulation says that the above referred two documents shall be available in a general meeting for inspection. In other words, due diligence report and financials of associated company are not to be mailed with the notice of meeting. After reading the notice of meeting, some shareholders can also ask for these documents on the plea that they cannot attend the meeting or their residence is in other city. The company has to provide them - it can't refuse.
4. Regulation 6 - Fair value of unlisted securities
The fair value of unlisted securities in which investment is proposed shall be determined by a Chartered Accountant firm. Will there be no harm if auditors of an investing company do this job? There may be no conflict of interest. The Regulation is silent on it.