The Appellate Bench of the Securities and Exchange Commission of Pakistan (SECP) Monday set aside an order issued against a mobile phone operator by the Enforcement Division of the commission. The SECP Bench comprising Fida Hussain Samoo Commissioner Insurance and Zafar Abdullah Commissioner SCD issued an order in favour of the cellular company to dispose of appeal No 02 of 2011 filed under section 33 of the SECP Act, 1997 against the order dated 09/12/10 (Impugned Order) passed by the Respondent (Director Enforcement SECP).
The Appellate Bench order said that the examination of the annual audited accounts of the telecom company for year ended 30/06/08 (Accounts) revealed long-term deposits amounting to Rs 940.859 million (2007: Rs 678.618 million) received by the Company from distributors, franchisees and post-paid customers as security deposit.
The Company stated that Long Term Deposits serve as security against billing/trade receivables due to the Company arising from the provision of mobile services and these are retained throughout the duration of services to secure performance obligations by Franchisees, Distributors and Post-paid customers. The Company stated that these securities deposits are interest-free which will be refunded after termination of relationship with the Company and the security deposits are received in accordance with the requirements of signed agreements/contracts with Franchisees, Distributors and Post-paid customers.
Show cause notice dated 03/09/10 (SCN) was issued to the Appellants (company directors) under section 229 read with section 476 of Companies Ordinance, 1984 (Ordinance) for contravention of section 226 of the Ordinance. The Appellants filed reply to the SCN and hearing in the matter was held. The SECP dissatisfied with the response of the company, passed the Impugned Order and imposed a penalty of Rs 5,000 each on the Appellants with the total amount aggregating to Rs 40,000, order said.
The company directors have preferred the instant appeal against the Impugned Order. The company's representatives argued that the nature of the business of the Company is such that services are provided continuously on a real time basis. Therefore, the nature of security and advance payments which the Company has received from Customers are not of a kind which can be kept in a separate account. Advance payments, which are mentioned in accounts as security deposits are of the nature of credit limits/advance payments for availing services of the Company. Therefore, the amounts received in advance by the Company from the Customers for availing services and sale of goods do not fall in the ambit of section 226 of the Ordinance and are fully exempt under the proviso of section 226 of the Ordinance. The term "security deposits" as employed in section 226 of the Ordinance refers to such amounts which are required by their very nature to be held in trust or for securing performance or which cannot be used or adjusted on daily basis and from time to time, but this term cannot be extended to include such amounts which are liable to be adjusted on daily and current basis.
Furthermore, in telecommunication business in which the Company is involved, services are provided to the Customers on daily basis and advance deposits are liable to be adjusted on current and real time basis. Further obligations of the Appellants have to be measured in juxtaposition with its accounting requirements, which require revenue on daily basis and GSM licenses and Pakistan Telecommunication Authority (PTA), which require Appellants/Company to pay annual fees on gross revenue basis It is pertinent to mention that if the Appellants/Company are not allowed to adjust advances deposited by the Customers then gross revenue shall be different and the Appellants/Company will be failing to meet their obligations under its GSM licenses. Therefore, it is imperative that the Company has a liberty to keep its accounts current and adjust such advances on real time basis, company said.
The SECP has failed to appreciate, consider and take notice of agreements between the Company and its Customers in relation to the treatment of advances. The Impugned Order is based on non-appreciation of the contractual arrangement between the Appellants and the parties making payments under the head of Security Deposit as well as the lawful mandate of section 226 of the Ordinance. The fact that the Respondent has not applied the test supplied in the Proviso is evident from the plain fact that the terms of the contract between the Appellants and the parties paying funds under the head of Security Deposit have not been discussed, considered or appreciated at any stage leading to the passing of the Impugned Order. The Impugned Order is based on a mechanical treatment of the term Security Deposit on the basis of nomenclature alone without considering the merits of the case and without appreciating the nature of payment given such nomenclature within the industry. The Impugned Order creates legal, regulatory and accounting anomalies and has the effect of amending and overriding the regulatory framework within which the Appellants are required by law to operate. Further, the Impugned Order requires that the Appellants deviate from the accounting practices generally prevalent in the industry and founded primarily on the terms of the Appellant's license.
The SECP Director Enforcement rebutted the arguments of the company by stating that the provisions of section 226 of the Ordinance are clear and applicable to all businesses which receive advance from customers as security deposits. Due consideration has been given to the nature of the business of the Company. The security deposits received from the franchisees, distributors and post-paid customers by the Company fall in the ambit of Section 226 of the Ordinance and should have been deposited in a separate bank account. The aforesaid security deposits have been shown in the Accounts under the head of Long Term Liabilities as Long Term Deposits.
Therefore, the Company's stance that advance payments are not of a kind which can be kept in a separate account, is not tenable. Further, the provisions of the Ordinance prevail over all other subsidiary regulations and practices. It was the fiduciary duty of the Appellant to ensure that the provisions of section 226 of the Ordinance were fully complied with. The provisions of Section 226 of the Ordinance had been violated by the Company by utilising the securities and deposit amount without the authority of contract in writing.
Bench is of the view that it is important to keep in view the nature of the business of the Appellant to determine whether or not section 226 of the Ordinance is applicable to the security deposit held by the Company. Bench has reviewed Clause 3.2.3(i) of the Cellular Services Agreement (Agreement) provided by the Appellants. The security deposit shall become refundable after termination of this Agreement which shall be refunded within 30 days from the claim from the Customer and provision of all required documents pertaining to such claim. The Customer hereby authorises Wand to utilise the security deposit in any manner whatsoever during the term of this Agreement...." Furthermore, Clause 2.3 of the Franchise Agreement between the Company and PTA (Franchisee) provides.
Clause 2.3 of the Franchise Agreement also gives the Appellants the right to utilise the security deposit and is refundable subject to deduction of the amounts owed to the Company. Therefore, bench does not agree with the Respondents that the company was not authorised to use the security deposit during the term of the agreements.
Bench is of the view that the proviso to section 226 of the Ordinance is applicable in the instant case as clause 3.2.3(i) of the Agreement authorises the Appellant to utilise the amount for adjustment of any receivable from customer. The amount received was not in the nature of an advance to be kept till termination of services of client. Bench concur with the Appellants that the advance deposits are liable to be adjusted on current and real time basis in view of the agreement entered into with clients. Due to this, these cannot be regarded as a security deposit in terms of section 226 of the Ordinance. In view of the foregoing, the Impugned Order is set aside, SECP Appellate Bench added.