While rejecting an order of the Securities Market Division (SMD) SECP against a broker, the Appellate Bench of the Securities and Exchange Commission of Pakistan (SECP) has ruled that Chief Executive Officer (CEO) is the most relevant person to hold the properties and assets of a company in his possession as a trust for safe custody.
The SECP Appellate Bench has further observed that the Board of the Appellate (Trading Entitlement Certificate Holder) had authorized the CEO to hold cash and gold; therefore, the bench finds no anomaly in this regard. The audited accounts for the year ended 30/06/15 also contain the figure of directors' loan Rs 2,500,000 under the heading of long-term liabilities, therefore, the bench has no doubt that amount of loan belongs to the appellant and the CEO has been duly authorized by the appellant to hold cash and gold in his possession.
The Bench has also examined the respondent's objection with regard to non-execution of the agreement on a stamp paper. In the bench's view, execution of the agreement on a letterhead of the appellant does not render it invalid because the respondent has failed to substantiate this requirement through any provision of law.
In view of the foregoing, the SECP Appellant Bench is of the view that the appellant has calculated the net capital balance (NCB) in accordance with the Third Schedule of the Rules, and guidelines issued by the Commission.
Therefore, SECP Appellant Bench has hereby set aside the impugned order and accepted the appeal of the Trading Entitlement Certificate Holder, the Bench added.
Details of the case revealed that the order is passed in the matter of appeal No 27 of 2017 filed under section 33 of the Securities and Exchange Commission of Pakistan (Commission) Act, 1997 (SECP Act) against the order (impugned order) dated 03/10/16 passed by the respondent (Securities Market Division SECP).
The brief facts of the case are that the appellant was a trading entitlement certificate holder of the then Lahore Stock Exchange Limited (LSE) and is registered as a broker with the Commission under Brokers and Agents Registration Rules, 2001 (Brokers Rules). The Commission vide Order dated 31/08/15 appointed an inspection team to inspect the books and record of the appellant. The inspection team observed that the net capital balance (NCB) of the appellant was Rs 4,208,081.
The inspection team advised the appellant to provide documentary evidence to substantiate the cash in hand appearing in the aforesaid NCB. In response, the appellant informed that its chief executive (CEO) had provided loan amounting to Rs 2.5 million to the appellant in shape of cash and gold. The Inspection team's observation with regard to loan and cash in hand are as under:
(i) The appellant classified the loan obtained from the CEO as long-term loan. However, the appellant did not provide copy of the written agreement executed on a stamp paper for the said loan.
(ii) The appellant did not provide any documentary evidence for the remaining amount of Rs 1,780,931 shown as cash in hand. (iii) The appellant informed that the cash and gold were in the personal custody of the chief executive.
(iv) The NCB, prima facie, was overstated by Rs 4,280,931 in violation of rule 2(d) of the Securities and Exchange Rules, 1971 (SE Rules).
The Commission served the notice on the appellant under Section 22 of the Securities and Exchange Ordinance, 1969 (Ordinance). The appellant vide letter dated 28/12/15 submitted its written response to the notice along with a copy of loan agreement executed between the appellant and its CEO and board resolution to this effect.
The respondent dissatisfied with the response of the appellant held that the appellant is expected to ensure compliance with the applicable regulatory framework in letter and spirit. Furthermore, the appellant was required to exercise due skill, care and diligence in the conduct of its business. The appellant, however, did not exercise the requisite diligence while calculating its NCB and submitted an overstated NCB to the then LSE. As a result of the overstatement, the exposure limit calculated by the then LSE were also overstated. A penalty of Rs 100,000 was imposed on the appellant by the respondent and the appellant was directed to comply with the regulatory framework in letter and spirit in future. Moreover, the CEO of the appellant was advised by the respondent to attend training courses in order to educate himself regarding differences between company and partnership structure, duties and responsibilities of chief executive and directors of company, etc.
The appellant preferred the instant appeal on the following grounds:
The impugned order is illegal as the appellant duly fulfilled all the requirements of rule 2(d) of the SE Rules while preparing and getting the NCB of the brokerage house audited. The respondent was unjustified in imposing such a high penalty and creating a bad name of the appellant in the industry, when the appellant was performing its responsibilities with due care, due diligence and competence. During the audit, the auditors demanded from the appellants to present the cash in hand and gold which were presented before them and physically counted. A cash and cash equivalents certificate was also provided in support of the management assertions. Therefore, after the performance of these necessary audit procedures, there was nothing to create doubt regarding the legal ownership of the cash and cash equivalents. Furthermore, the cash was kept in the possession of the appellant's CEO by agreement of board of directors (BOD) and there is no harm in keeping appellant's asset safe with the person who is in charge and responsible for company matters and who is also a director/member of the appellant. It is incorrect to state that not depositing cash into the bank is proof that cash was not legally given by the CEO/lender.
The appellant prepared the NCB in accordance with the applicable law and also got it audited by the qualified auditors who performed all their procedures to verify the correctness of the NCB and issued a verification report. Therefore, the response of the respondent is not justified and against the spirit of law and natural justice.
Appellate Bench (the Bench) has heard the parties and perused the record. The audited accounts of the appellant show that on 30/06/15 cash in hand was Rs 4,280,931 out of which Rs 2,500,000 had been provided by the CEO, as a loan to the appellant and remaining amount of Rs 1,780,931 was the opening balance of cash in hand, brought forward from the previous year accounts. Therefore, the record is clear and the Bench has no doubt to believe that Rs 4,280,931 did exist as cash in hand as on 30/06/15.
The respondent had primarily one objection that the possession and title of cash and gold were not transferred in the name of appellant; therefore, these cannot be used in calculation of the NCB. The Bench has pursued the contents of the resolution and the agreement, which reveal that cash (Rs 1,500,000) and gold (Rs 1,000,000 - cash equivalent value) were provided to the appellant as unconditional and interest-free loan by the CEO. The resolution and the agreement also state that cash and cash equivalent shall remain in the custody of CEO and be utilized in case of extreme need.
The Bench is of the view that the agreement and the resolution are sufficient to prove that the appellant has undisputed legal title of cash and gold therefore, the respondent's objection is not cogent. The other objection of the respondent pertaining to the possession of cash and gold that was not transferred to the appellant, has also failed to draw the attention of the Bench. Admittedly, cash and gold were in possession of CEO, during inspection and proceedings before the respondent, however, for all practical purposes, the CEO is the most relevant person to hold the properties and assets of a company in his possession as a trust for safe custody. "Furthermore, the Board of the appellant had authorized the CEO to hold cash and gold; therefore, we find no anomaly in this regard. The audited accounts for the year ended 30/06/15 also contain the figure of directors loan Rs 2,500,000 under the heading of long term liabilities, therefore, we have no doubt that amount of loan belongs to the appellant and the CEO has been duly authorized the appellant to hold cash and gold in his possession."
The Bench has also examined the respondent's objection with regard to non-execution of the agreement on a stamp paper. In Bench's view, execution of the agreement on a letterhead of the appellant does not render it invalid because the respondent has failed to substantiate this requirement through any provision of law.
In view of the foregoing, the Bench is of the view that the appellant has calculated the NCB in accordance with the third schedule of the Rules, and guidelines issued by the Commission. "Therefore, we hereby set aside the impugned order and accept the appeal without any order as to cost," the Bench added.