4-c, mezzanine floor, khayaban-e-lttehad, phase vil … bank/16may18(1).pdf · 2018. 5. 21. ·...

TRANSPARENCY INTERNATIONAL-PAKISTAN

4-C, Mezzanine Floor, Khayaban-e-lttehad, Phase VIL Defence Housing Authority, Karachi. Tel: (92-21) 35390408, 35311897-8, Fax: (92-21) 35390410 E-mail: [email protected] Website: www.transparency.org.pk

16th May, 2018 TLI8/1605/1A

Mr. Tariq Bajwa, Governor, State Bank of Pakistan, Karachi.

Sub: Allegations of Money Laundering by NAB on Azgard Nine Ltd. (ANL) and JS Global, and Transactions through Swiss Bank Julius Baer, Accused in SECP Investigation in PICT

Share since 20 12.

Dear Sir,

TI Pakistan has received another complaint, on the allegations of money laundering by Azgard Nine Ltd. (ANL) and JS Global.

The complainant has made the following allegations;

That,

1. National Accountability Bureau, while undertaking an inquiry, since 12th April 2013, on the corruption case of Azgard Nine Ltd, found some financial illegalities. NAB Karachi sent the inquiry report on 6.4. 2016 to Chairman NAB Islamabad for authorization of investigations against Jehangir Siddiqui & Company Ltd and others.

2. This information was revealed from the documents obtained from SHC, CP No 3861 of2016, filed by Jahangir Siddiqui & Co. Ltd & others on 29.6.2016 against NAB. Annex-A.

3. NAB Karachi findings, as submitted in SHC by Jahangir Siddiqui & Co. Ltd & others are quoted below;

L Insider Trading o(AZGARD Nine Ltd. (ANL) Shares:

a. As per investigation conducted by Securities & Market Division of SECP on the manipulative prohibitive activities in ANL, it has been found that Directors of Jahangir Siddiqui & Co and others involved in market manipulative activities. The report identifies huge cash withdrawals that ... within the ambit of Money Laundering. In one particular instance JS Global paid Rs.J43 million individuals on 19-4-2008. This amount was then withdrawn.from their bank accounts in the from .... On 28-29 April 2008. It remains to be investigated as to who was the ultimate beneficiary of cash.

b. ANL, as per its Audited Accounts for the year 2008, remitted Euros 23.758 million for purchase of an Italian company Montebello SRL, through Farital AB, a

A NON-PARTISAN, NON-PROFIT COALITION AGAINST CORRUPTION Donations exempted from tax U/S 2 (36) (c) of I. Tax Ordinance 2001

£TRANSPARENCY .:::;~INTERNATIONAL-PAKISTAN Continuation Sheet No ......... .

holding company incorporated in Sweden. In this way Euros 23.758 million were siphoned off from the Company, ANL in its Audited Account for the year 20I 3 reported that Farital AB had been dissolved. Farital AB was incorporated in order to acquire I 00% interest in the Montebello SRL. Further investigation will determine which sponsors have taken awqy this amount (rom the Company. Due to siphoning off the funds and mismanagement with intent to cheating public at large, a loss of Rs. I,992 million has been reported in the year ended in June 20 I 4.

c. The report also reveals connections of certain accused persons with Khanani & Kalia, Ex-money changers, SECP report identifies few instances where through JS Bank payments were routed to Khanani & Kalia. Further investigation into bank accounts of these accused persons will lead to money laundering proofs. As per SECP Investigation Report, JS Bank, one of the accused, has been used as strong Group ally to hide some crucial financial matters of Group members. A review committee was formed by SECP to analyse the findings of investigations and evidence available against 3 I accused persons for filing of criminal complaint in the court of law. The review committee gave their recommendations in writing and suggested filing of criminal complaint uls I 7 of Securities & Exchange Ordinance I969 against 26 out of 3I accused persons which was filed before Additional Session Judge (South) Karachi. The Hon 'able Sessions Court issued Bailable Warrants of Arrest of accused persons vide order dated 22.04.20I 3.

JS Investment Company filed a CP No.I985 o[2013 in Hon'able High Court in which the Hon 'able Court stayed the proceedings of the Criminal Complaint.

4. NAB inquiry report as well as SECP investigation report indicates involvement of Khanani & Kalia. Cash withdrawals of Rs. 143 million were paid by JS Global to certain individuals on 19-4-08. This amount was then withdrawn from their bank accounts in the form of cash on 29th April 2008 and it remains to be investigated as to who were the ultimate beneficiary of this amount. These activities are supposed to be reported to FMU by the Banks.

5. NAB inquiry report dated 6.4.2016 specifically states the siphoning off the funds. That in 2008 ANL, remitted Euros 23.758 million for purchase of an Italian company Montebello SRL, through Farital AB, a holding company incorporated in Sweden. In this way Euros 23.758 million were siphoned off from the Company, ANL. In its Audited Account for the year 2013 ANL reported that Farital AB had been dissolved. Farital AB was incorporated in order to acquire 100% interest in the Montebello SRL. Further investigation will determine which sponsors have taken away this amount from the company. Due to siphoning off the funds and mismanagement with intent to cheating public at large, a loss ofRs.l ,992 million has been reported in the year ended June 2014. The Bank used for this transition was Bank Julius Baer Family office Ltd. Switzerland, on 29-12-2008. Annex-B.

The SECP investigation report also includes that these huge cash withdrawals from Bank in Orangi and Kemari Towns are potential cases for Money Laundering and Anti-Terrorist financing probe. Free delivery transactions among Group members were also noted as mentioned in the Report. It needs to be investigated that how JS

~TRANSPARENCY .::;/INTERNATIONAL-PAKISTAN Continuation Sheet No ......... .

Bank being facilitator in the entire scheme of fraud, while flouting all the rules and regulation applicable for anti-money laundering and anti-terrorist financing.

6. Jahangir Siddiqui Co Ltd filed a Constitutional Petition in SHC on 29.6.2016, after getting hold of internal documents of NAB Executive Committee Board Meeting. They also managed through the SECP appeal to stay order on a fine ofRs 1.3 million, for mis-reporting. This was done to get way from actions to be taken under the Anti-Money Laundering Regulations of 2008, on the charge of siphoning off the funds and mismanagement with intent to cheating public at large, which is a crime. This must be investigated by the SBP and the Bank who remitted Euros 23.758 million for purchase of an Italian company Montebello SRL, through Farital AB, a holding company incorporated in Sweden. Annex C, D, E, F.

7. Chairman JS Bank, Ali Siddqui, was the Director of ANL in 2008. Panama papers has exposed that JB Bank President Ali Siddiqui was a Director of Novo lance Ltd, British Virgin Island incorporated on 22 May 2007. An Intermediary company is DATTNI CHACCS, England. Ali Siddqui was a director from 21 June 2007 to 1 June 2019, and startup Group, Craigmuir, Chambers, P.O.Box 71, Road Town Tortola, BVI, and a director from 1 June 2009, and the address of offshore company is D- 185, Block 5, Shara-e-Firdausi, Clifton Karachi. The Company is active today also.

8. Bank Julius Baer is also involved in SECP other investigation on Insider Trading, in sale of 2,234,983 shares of Pakistan International Container Terminal Limited ("PICT") at the average rate of Rs. 100.82, in 2012. SECP Investigation Report is enclosed. Annex-G.

History ofPICT share dealing by SECP with Swiss authorities is enclosed. Annex-H.

9. Bank Julius Baer on 4.2.2016 was found guilty of money laundering and illegal banking in many cases, one of the largest is US$ 547 million fine. Bank Julius Baer of Switzerland will pay a $547 million penalty as two bankers individually plead guilty. The bank itself is charged with helping U.S. taxpayers hide billions in offshore accounts and cheating the IRS. The Bank's deferred prosecution agreement admits that it knowingly assisted U.S. taxpayer-clients in evading taxes. The deal requires the bank to pay $547 million right away.

The allegations have been examined by TI Pakistan. Transparency International Pakistan refers to its letter to the Prime Minister of Pakistan, dated 12 April2013, copies to SBP Governor, Annex-1, and letter dated 13th May 2013 sent to SBP Governor on the allegations of money laundering by SECP on Azgard Nine Ltd. (ANL) and JS Global. Annex-J.

Prima facia State Bank of Pakistan under the money laundering rules and regulations, should take up these allegations, against Azgard Nine Ltd. (ANL) and JS Global, Jehangir Siddiqui & Company Ltd, Bank Julius Baer, PICTL and SECP under Anti Money Laundering Regulations of 2008.

£.TRANSPARENCY ~ INTERNATIONAL-PAKISTAN Continuation Sheet No ......... .

Transparency International Pakistan is striving for across the board application of Rule of Law, which is the only way to stop corruption.

With Regards,

Justi~~1~ \~ Trustee

Copies forwarded for the information and action under their authority to;

I. Secretary to Prime Minister, Islamabad. 2. Registrar, Supreme Court of Pakistan, Islamabad.

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"+ this is being done at the behest of a group of people led by a st~ker of Karachi who is a self-proclaimed business rival (acting with the aid and

connivance of his erstwhile busineSs associate and officer of Transparency

International Pakistan against which cases by some of the Petitioners or their

associates are pending before this Hon'ble Court) of Mr. Jahangir Siddiqui, one of

the most respected and renowned entrepreneurs of the country and founder of JS

Group. The motivated and malicious nature of the inquiry and investigation

against the Petitioners. JS Bank Ltd., and Mr. Ali JehAngir Siddiqui. who is son of

Mr. Jahangir Siddiqui and presently the Chairman of JS Bank Limited/ Director

of Petitioner No.l/JSCL and a dynamic entrepreneur in his own right, would

becom~ clear from the report submitted by the Respondent No.2 before the

Executive Board of the Respondent No.I. It would not be out of place to highlight

here that the Petitioner No. 1/JSCL is the largest shareholder of JS Bank Limited

with 70.42% shareholding. Being misled by the twisted findings of this r~port, the

Executive Board of the Respondent No.J·has rep,.,:.:dly granted permission for

initiating investigations against the Petitioners as reported i~ the media.

9. That it is submitted tnat .there are primarily two allegations which are subject

mutter of the investigations namely trading in Azgard Nine Limited (ANL) shares

and fee. paid to Mr. All Jehangir Siddiqui by (he· Petitioner No.I. It is submitted

·that the first issue is exclusively based on an old investigation resulting in tiling of

Criminal Complaint No.243/13 by SECP before th.: District and Sessions Court

and presently subject matter of proceedings before this Hon'ble Court in

C.P.No.D-1985/2013 while the second Issue has been duly cleared by SECP and I

subject matter of proceedings before this Hon'ble Court in Suit No. 57912014.

Tnis would be evident from reading the report of Respondent No.2 and direction

given thereon by Respondent No. I. A copy of the report, received by the

Petitioner No.I and reproduced herein below, by the Respondent No.2 is attached

as Annex B.

MES Ng. N6BK2015U0919S49 Received at HQs: 06,04.2016 Date;. ______ ...:.

I. I Details or accused

EBM

Name and Father's Status of Ca.tegor BPS (if AWs lriv I Inq On ECL lndividua j \ Name of the the y any) issue 'oined or bail (Place lllabUily

1

accused accused d {II' not or not d or ofthe o (Arrested not not) accused o

or not) I

i Dr. Asif Brohi, the Not Banker Presi-dent . Joined - . 1 then President NBP Arrested (22) Qamar Hussain, the Not Banker SEVP Joined - - l then SEVP NBP Arrested (21) Shahid Anwar Khan, Not Banker SEVP - Joined - . - !

4

l ~

the then SEVP NBP Arrested (21) -Rafiq Bengali, the Not Banker SEVP . Not . . then SEVP, NBP Arrested (Zl) joined Nausherwan Adil, Not Banker SEVP . Joined . . . the then SEVP NBP Arrested (21) Nadeem Ilyas, the Not Banker "SEVP . Joined . . . then Oroup. Arrested (21) Chief/SEVP ,NBP ' I

Mr. Ali Jehaogir Not Pvt. . . Joined . Siddiqui, Director Arrested Persoi1

I

JSCL --1-A bid A min, Chief Not Pvt. . Not . . Financial Officer Arrested Person joined I M/s Azgard Nine I !

~ : I A limed Humayun Not Pvt. . . Not . . l Shaikh CEO Arrested Person joined 2. Case Details

a. Particulars of Complainant Transparency International Paki s

3.

4.

b. Amount involved (in Million Ruoees) 2.808 billion (appro:.. l c. Date of Receipt ofComolaint in NAB 12.04.2013 d. Date of authorization of CV with authority (Cn!Dli) . e. Date of authorization of inquiry with authority 06.05.20 I 5 by C11

(CniDO) f. Date of Authorization of lnvestigatlon with authority

(Cn/DG) ' , g. Date of Transfer/Re-Authorization of -

CV /lf!quiry/Iiwestigatlon h. Present Staae of Case Inquiry

(CV /lnq/Invrg/VR/PB/Refl Aooeal, etc. ' i. CO: Mr. Rizwan Aziz Siddiqui, Adc

Director j. JO: Mr. Muhammad Nasir Shehzad, A

Director Gist of All~atlons under NAO 1999

a. Insider Tr~g in Purchase of Aziard Nine Shares. b. A ward of SO 4.3 million Advisory Fee. c. Involvement of Mahwish Jehangir Siddiqui Foundation in share Trading and Availing Wr

' Tax Exemption. ... d. Purchase of Agritech Shares by NBP at Higher than Market Price . Brief Facts/ Findln&s of the lnuuirv:

·-"NAB (K) has. recommended to author1ze ~nvestJgl:ltJon agamst accused persons

on alleaation at a, as nothing has surfaced on nlleaation at 'c' above. Allegation-wise detail is as under: ·

·J. Insider Trading ofAZGARD Nine Ltd.

- ---.-----------------

l I ...----::: b. ANL, as per its Audited Accounts for the year 2008, remitted Euros 23.758

million for purchase of an Italian company Montebello SRL, through Farital AB, a holding company incorporated in Sweden. In this way Euros 23.758 million were siphoned off from the Company, ANL in it~ o\udited Account for the year 2013 reported that Farital AB had been dissolved. Farital AB was incorporated in order to acquire 100% interest in the. Montebello SRL. further jovestjgation will determine whjch sponsors have lak~D ·away thjs amount from the Company. Due to siphoning off the funds ~nd mismanagement with intent to cheating public at large, a loss cif Rs. I ,992 million has been reported in the year ended in June 2014.

c. The report also reveals connections of certain accused persons with Khanani & Kalia, Ex-money changers, SECP report identifies few instances where through JS Bank payments were routed to Khanani & Kalis. further investigation into bank accounts of these accused persons will lead to money laundering proofs. As per SECP Investigation Report, JS Bank., one of the accused, has been used as strong Group ally to hide some crucial financial matters of (}roup members. A review committee was formed by SECP to analyze the findings of investigations and evidence available against J I accused persons for filing of criminal complaint in the court of law. The review committee gave their recommendations in writing and suggested ftling of criminal COf!!plalnt u/s 17 of Securities & Exchange Ordinance 1969 against 26 out of 3 I accused p

I '.? _;--court The matter was placed jn the AGM elated 09.04.2014 and was uoanjmoysly approved and ratified.

g. NAB CIT agrees with the report of SECP that M/s JSCL is a Brokerage house, entrusted .,;.,ith investments of investors instead of giving bonus to' its Directors.

Ill. Involvement of Mahl!fish Jebaniir Foundation CMJSf) in share trading and avai!jng j!legal tJX exemptioOSi

h. In this matter, inquiry holds that no violation of Memorandum of Association has

been establish~d. The share trading by MJSF had no significant effect on share

market. Further, the .tax exemption granted to MJSF had been lifted and tax

demand (Rs. 5.117 million) was enforced by FBR and recovered the amount.

IV. Mjsuse of Authority jr\ Purchue 9f Agrjtech Shares at Higher than Mackel Rate:

i. Based on documents collected from NBP, SECP and SBP, it revealed that M/s

ANL mandated Faysal Bank in 2010 to restructure its debt' (Rs. 40 billion)

involving more than 63 banking institutions. Resultantly, in December 20 I 0, a

master restructuring and Inter-Creditor Agreement (MRA) was signed amongst all

lenders. As per agreement, Agritech Lid. (AGL) .

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~·~ Securlll88 and Exchange Commlselon of Pakistan

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ti8Ddlr .......... - ..., ~lliOid. To paM tle IIIOM)' trail of the ~ tit_,.... ........ 1IJIIl the Baow Ap!IMDI dated 1610S/08 (AiueiRI Bl4) '*••• ..... } .. QnpiQJ-...... ,.., Offiee Ltd, Switred~Dd tad. a~ cratler Nllipt dltad 29112101 (AD4eXare BIS) to show ttl1\lldlea oodrma1ioD ad a11o lttler dated OSIOl/09 (A.Doexure BIS-1} frotn Defap

to CBO of the Coa\piQy oodrmiDC t1aat paymeat 1W beea received. At regards

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~ Securities and Exchange Commission of Pakistan An f) {!_'f.~ C

BEFORE APPELLATE BENCH NO. 1Y In the matter of

Appeal No. 36 of 2016

(i) Mr. Aehsun M.H. Shaikh

(ii) Mr. Ahmed H. Shaikh

(iii) Mr. Nasir Ali Khan Bhatti

(iv) Mr. Usman Rasheed

(v) Mr. Farrukh Hussain

(vi) Mr. Yasir Habib Hashmi

(vii) Mr. Munir Alam ... Appellants

(Appellant No.(i) Chairman, Appellant No.(ii) Chief Executive and

Appellants No. (iii) to (vii) all directors of Azgard Nine Limited)

Versus

Mr. Abid Hussain ED (CSD), SECP

Date of Hearing 21109/16

Present:

For the Apoellants:

(i) Mr. M. Umar Suhaib Pirzada. Counsel

(ii) Mr. Faisal Iqbal Khan, Counsel

for the Respondent;

(i) Ms. Amina Aziz.. Director (CSD) (ii) Mr. Aqeel A. Zeeshan, Joint Director (CSD)

QRDER

~.IV Appell$ No. 36 of 2016

.. Respondent

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C 1 sion of Pakistan

Securities and Exchange omm 5

. n 33 of the securities and This order is in appeal No. 36 of2016 filed under secno . d

1. • . f p Jdstan (Commission) Act, 1997 against the or er Exchange eomnusston 0 a (Impugned Order) dated 11/0S/16 passed by the Respondent.

2. The brief,..... of tho case .,. that A%pJd Nino Limited (CompanY) tiled an application dated 3010911S ,..king Commission's approval for exemption from

consoUdation under section 237 of the Companies Ordinance. 1984 (Ordinance) in respect of its subsidiary Montebello S.R.L (Montebello) due to bankruptcy of

Montebello. Tbe Company along with the aforesaid application submitted an order

of the Italian Cotut as evidence. Perusal of the aforesaid order revealed as under:

(i) The bankruptcy was filed on 12106114; and (ii) The Court passed order on 22112114 for sealing Montebello and appointing

trustee.

Perusal of the annual audited financial ~tements (Accounts) of the Company for the year ended 30/06Jl4 and subsequent interim accounts for the periods ended

30109/14, 31/12114 and 31103/15 revealed that the Company neither disclosed the

aforementioned material facts along with other consequences of bankruptcy of

Montebello, if any, nor did it assess the investment, goodwill and other balances

disclosed in the respective accounts in respect of Montebello for impairment in the

light of such facts. The following balances in respect of Montebello were appearing

in Company•s respective accounts:

Period Mar 31. Dec 31,2014 Sep 30,2014 June 30, 2014 Ended 2015 Trading transactions

Sales 30,641,588 30,941,588 30,580,299 648,263,567

Balance 34&,506,72 387,704,392 988.373,277 963,354,964 outstandin 1

Pm due by more than 293,180,320 one car

Appull No. 36 0(2016


Securities and Exchange Commission of Pakistan

Intangible Assets Goodwill- 692.874,468 767,048,212 817,167,305 1844,487,927 Montebello

Long tenn investments

Cost 2,625,026,047 2,625,026,049

FV Adjustment 2,625,026,04 7 2,625,026,049

Impairment

Opening balance (1,164,365,312) (1,164,365,212)

Charge for the (11,253,066) (11 ,253,066) year Accumulated (1,175,618,378) (1 '175,618,3 78) impairment

Net carrying 1,449,407,671 ,1,449,407,671 11,449,407,669 ,1,449,407,671 value .. ..

(2013; *1.126 mtlhon and .. 38.768 mtlbon)

In view of the aforementioned facts, the Accounts of the Company for the year ended

30/06/14 and its subsequent interim accounts, prima facie, omitted material

information about latest status of operations of Montebello. Moreover, the said

accounts were, prima facie, misstated since impairment of trade debts, equity

investment and goodwill was not adequately and appropriately assessed and

accounted for as per requirements of International Accounting Standard (lAS) 39 and

lAS 36, keeping in view the objective evidence of impairment on the respective

reporting dates due to bankruptcy tued by Montebello.

3. Show Cause Notice (SCN) dated 09/1 0/l.S was issued to the directors of the Company

including the Chairman and Chief Executive (Appellants) lldvising them to explain

their position as to why penal action may not be taken against them under section 492

of the Ordinance. Mr. Muhammad Ijaz Haider, Company Secretary, through letter

dated 22110/15 requested for extension in time for submission of reply to the SCN.

The Appellants were given time till I 0/11/1 S for submitting the response. The written

reply to the SCN was submitted by the Appellants through le«er dated I 0/11115.

Appnls No. :16 of 2016

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1 1 of Pakistan Securities and Exchange Comm 55 on

r • on 30/11115, 30/12115 and 18/01/16 but Subsequently, the case was ftxed for beanng . was held on

, ted requests. Finally, the heanng was adjourned on Appellants repea behalf of the 16/03116. Mr. Ijaz Haider and Mr. M. Zahid Rafiq appeared on

Appellants and mainly reiterated the earlier written submissions.

f th A ellants in exercise of the 4 The Respondent dissatisfied with the response o e PP · . . sed a penalty of Rs.l ,300,000 powers conferred by section 492 of the Ordmance unpo .

directed to deposit the fines m in aggregate on the Appellants. The Appellants were

the following manner:

Name of Respondents Amount in Rupees Mr. Ahmed H. Shaikh, ChiefExecutive 300,000

Mr. Yasir Habib Hashmi 300,000

Mr. Munir Alam 300,000

Mr. Aehsun M.H.Shaikh, Chairman 100,000

Mr. Nasir Ali Khan Bhatti 100,000

Mr. Usman Rasheed 100,000

Mr. Farrukh Hussain 100,000

Total 1,300,000

S. The Appellants' Counsel preferred the appeal on the following grounds:

a) The annual, half yearly and quarterly consolidated financial statements of the

Company were prepared on basis of the annual audited financial statements of

Montebello and wtaudited half yearly and quarterly management accounts received

from Montebello's management. At the end of the financial year in 2012, on the

basis of annual audited financial statements of Montebello, provision for impairment

to the extent of Rs.l,125,597,650 was provided in the Accounts of the Company.

Since 2012, the operations of Montebello declined due to aggravated economic

recession. In view of this, the Company's management hired independent Chartered

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Montebello investment appearing in the books of the Company. tn the year 2013 and

2014. provision for impaii'Olent was adjusted in the books of the Company in line

with the recommendations of the Chartered Accountant Firm. Impairments were

determined based on calculations of fair value of investment of Montebello. The fair

value was determined using the Discounted Cash Flow method (DCF) which took

into account the potential of future earnings of Montebello. Impairment adjustments

for years 2013 and 2014 were booked for an amount of Rs.39 million and Rs.ll

million based on reports of the Chartered Accountant Finn on prospective financial

information. The business operations of Montebello continued to show a downward

trend in 2014 and as per Montebello's management in Italy, it was due to the

prevailing economic conditions in Europe. The Company was aware of such

economic situations from market sources and no immediate follow up was

considered necessary by the Company. Montebello's management in Italy advised

the Appellants in late 2014 to hold exports as they were facing issues in recoveries

from the customers in the nonnal course of business and, therefore. the Appellants

temporarily discontinued exports to Montebello. It should be noted that the

management of Montebello kept the Appellants updated on the situation of

recoveries but never disclosed anything about the bankruptcy proceedings. However,

it was in the month of September 201 S that the Appellants learnt through some

former employees of Montebello that matters of Montebello had worsened and not

been managed properly. Montebello's management including the director/CFO left

without any proper notice or communication. The Appellants inunediately contacted

their legal counsel and instructed them to obtain all necessary details and orders

relating to bankruptcy proceedings of Montebello. There was, therefore, never any

false statement on part of the Appellants regarding Montebello and the Company

adequately disclosed whatever material information it possessed. Further, it is

pertinent to mention that it has been more than 1 0 years since the Company was

listed in the Pakistan Stock Exchange and it has complied with all the requirements

since listing.

b) The Respondent alleged in the Impugned Order that the Appellants have violated the

provisions of section 492 of the Ordinance and bas accused the Appellants of

Appeals No. 36 of 2016

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Securities ~nd Exchange Commission of Pakistan

"willful" concealment under section 492 of the Ordinance. The Respondent,

however, has provided no reasons for the same and there was no element of willful

concealment by the Appellants. All the allegations made by the Respondent are

without substance, baseless and misconceived. The Respondent while passing the

Impugned Order failed to understand that 'mens rea' was mandatory ingredient of

section 492 of the Ordinance which was needed to be established before imposition

of penalty. However, in the present case, there was neither any mala fide on part of

the Appellants nor was there any intention of the Appellants to mislead or defraud

the public or any of its investors.

c) The Appellants followed lAS and duly complied with all applicable laws and

regulations to the best of their abilities. There has been no specific deviation from

lAS 36 or lAS 39 as mentioned in the Impugned Order. The Respondent did not

clarify how the Appellants fell short of market practice. There is no specific violation

of the aforementioned clauses. The discrepancies which are listed in the Impugned

Order are simply based on general terms and norms.

6. The Respondent rebutted the arguments of the Appellants as follows:

a) The Appellants were penalized after establishing the case of violation of section 492

of the Ordinance. lAS 36 contains a provision which requires assessment of

impairment of Company's investment in Montebello and recording appropriate

amounts of impairment in the Accounts. Bankruptcy of Montebello was filed on

12106/14 and appointment of trustees for Montebello was made on 22112114. The

plea of the Appellants that the management came to know about the aforesaid

proceedings against Montebello in September 2015 i.e. after fifteen monthS of filing

bankruptcy proceedings in the court, was not tenable. The Accounts for the year

ended 30/06/14 and subsequent periods did not disclose the material facts about

Montebello and filing of bankruptcy proceeding against it. Montebello was a wholly

owned subsidiary of the Company and in all probability the Company's management

was aware of the circumstances of Montebello in which the Company had substantial

investment which was being impaired over the years due to continuous losses

o\ppeab No. 36 of 2016



incurred by Montebello. Montebello's management was appo· t d d m e an must have

been guided by the Company's management The A llan · · ppe ts as dU"ectors of the Com~y. ~we fiduciary duties towards the Company and it is one of their primary responstbablles that they must exercise care in discharge of their responsibilities to

oversee the performance of all the investments of the Company and to safeguard all

its assets. The Company's investment in MontebeJio was an equity investment and

not in the nature of a loan or advance whose recovery was dependent on the

performance of Montebello. The Company by virtue of owning the entire

shareholding of Montebello was in control of its affairs through the board of

directors who were nominees of the Company's management. In all likelihood, the

Appellants must have had the knowledge of affairs of Montebello, however, they

failed to disclose and appropriately reflect the impact in the financial statements of

the Company.

b) Section 492 does not set a strict test to prove that the default was willful for

imposition ofpcnalty, as is apparent from the bare reading of the section. In case of

misstatement, no such test has been set. Mens rea need not be established in respect

of proceedings under the provisions of the Ordinance, which only provide for

pecuniary fines. In case of omission of material facts, section 492 of the Ordinance

outlines two conditions i.e. (i) there is omission of material fact; and (ii) the person

responsible for omission knew about materiality of the fact. Only knowledge of the

materiality of the omission of material facts is to be reasonably established.

c) The applicable international accounting standards require assessment of impairment

of assets based on information available from internal as well as external sources and

reflect the impairment of assets in the fmancial statements. The Appellants have

failed to make full disclosure and record adequate impainnent on investment in

Montebello disclosed in the Company's Accounts, as per requirement of applicable

JAS. Therefore, there was omission of material facts and the Accounts were

misstated.

7. We have he81Ci the parties i.e. the Appellants and the Respondent.

AppealS No. 36 of 20Ui


• •

•


8. The Appellants' Counsel have argued they had not omitted to reveal the

bankruptcy of Montebello in the Accounts for the year 30/06114 and interim

accounts ended 30/09/14,31/12/14 and 31103115 as knowledge of the bankruptcy

proceedings only came to their knowledge in September 2015. At the hearing, the

Counsel also retied on the email correspondence dated lS/0911 5 and 16109/1 S

between the Company's management and the management of Montebello to

substantiate the claim that the Company was WUlware of Montebello's bankruptcy

proceedings. Furthennore, there was no mens rea or willful concealment and the

Appellants cannot be penalized under section 492 of the Ordinance. The

Respondent has rebutted this argument by stating that it is impossible that the

Appellants being directors of the Company were not aware of the circumstances

of its subsidiary i.e. Montebello and failed to make full disclosure and record

adequate impairment on investment in Montebello in accordance with lAS 36 and

lAS 39.

9. We are of the view that the Appellants have themselves acknowledged that from

the year 2012 onwards. the operations of Montebello had declined due to

economic conditions. In the instant case, the Company not only knew that the

situation was grave but had worsened and could have made every effort to find out

about Montebello's bankruptcy proceedings. It is also almost impossible to

believe that for fifteen months after Montebello had filed for bankruptcy, the

holding Company had no information about the status of its subsidiary. At the

time of application for exemption from consolidation of accounts under section

237 of the Ordinance was made i.e. on 30/09/15, MontebcJJo bad already been

declared bankrupt and ceased to exist yet the Company makes the extraordinary

assertion that it bad not known about its status. Even for argument's sake if it was

true that the Company had not known the status of Montebello, it is still the

fiduciary responsibility of the directors of the Company to malce all efforts

necessary to be fully aware of the circwnstances and status of its subsidiary at all

times. Mens rea has been defined in Black Laws Dictionary as '"the state of mind

that the prosecution, to secure comiction, must prow that a defendanJ had when

Appeals No. 36 of 2016


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committing a crime; criminal intent or recklessness. The word "willful default"

has been defined in Oxford Dictionary of Law Fifth Edition as "The failure ofthe

person to do what he should do, either intentionally or through recldessneu. " The

argument of the Appellants that the default under section 492 of the Ordioance

was not willful or there was no mens rea holds little merit as even though there may not be knowledge or intent, the Appellants had not exercised due skill and

care required of them as directors of the Company. We are of the view that the

penalties were tightly imposed on the Appellants under section 492 of the

Ordinance.

10. In view of the above, we see no reason to interfere with the Impugned Order. The

Impugned Order is upheld with no order as to costs.

~ (Flda Hussain Samoa) Commissioner (Insurance)

Announced on: 2 8 SEP 2016

Appeals No. !6 of 2016

Pu• g cf9


-?f-nnex-- D

Corporate Supervision Department Company Law Division

Before Abld Hussain- Executive Director (CSD)

Number and date of notice:

Date of hearings:

In th.t matter of

Azaard Nine Limited

C:SD/ARN/64/2015-931·37, dated October 9, 2015 March 16, 2016

Present Mr. M. ijaz Haider, Mr. M. Zahid Rafiq, authorized representatives

ORDER

UNDER Sl!CTION 1?2 READ WITH SECTION 476 QP DIE CQMPANIES ORDINANCE. 1984

This order shall dispose of the proceedings initiated against the following directors

including the chief executive (the "respondents") of Azgard Nine Umited (the NCompany"):

1. Mr. Aehsun M.H. Shaikh, Chairman 5. Mr. Farrukh Hussain

2. Mr. Ahmed H. Shaikh. Chief Executive 6, Mr. Yaslr Habib Hashml

3. Mr. Nasir Alll

SECURITIES & EXCHANGE COMMISSION OF PAKISTAN corporate Supervision Department

company Law Division

ankru tcy f the Montebello, if aforementioned material facts along with other consequences of b P 0

any, nor did lt assess the Investment. goodwill and other balances disclosed In the respective

accounts In respect of Montebello for impairment in the light of such facts.

3. Following balances in respect of Montebello were appearing in Company's respective

accounts:

Period Ended Marl1, 2015 Dec31,2014 Sep 30,2014 June 30, 2014

Amounts in Rs.

Trading tranaactions

Sales 30641,588 30,641,588 30,580,299 648,263,567

Balance outstanding 3M,506,121 381,704.392 988,373,2T1 963,354,964

Put due by more than one year 293,180,320

Intangible Alsets Goodwlll-Montebello 692,874,468 767.()48,212 817,167,305 844,487,927

Long tenn investments

Cost 2,625,026,047 2,625,026,049

FV Aciiustment . . 2,625,026,047 2,625,026,049

Impairment

Openin~ balance _11, 164,365,312) •(1,164,365,312) charge for the year (11,253,066_1 ~11,253,066 _l

Accumulated lmpairment (1,175,618,378) (1,175,618,378)

Net ...... .~ .... ~'~ value 11.449,401,671 1.449,401 .6n 1,449,407,669 1,449,401,671

(2013; ott,126 million and ~.768 mUllon)

In view of the aforementioned fac:ts, the Accounts of the Company for the year ended June 30, 2014

and Its subsequent interim accounts, prima facie, omitted material information about latest status

of operations of Montebello, the rrubsldiary. Moreover, the said accounts were, prima facie,

mismsted since impairment of trade debts, equity investment and goodwill was not adequately

and appropriately assessed and accounted for as per requirements of International Accounting

Standard ("lAS") 39 and lAS 36, keeping in view the objective evidence of impairment on the

respective reporting dates due to bankruptcy filed by Montebello. Since the impact of the

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'•I:CP

SECURITIES & EXCHANGE COMMISSION OF PAKISTAN Corporate Supervision Department

Company law DMslon

c----·1· aforementioned omtsalons and misstatements appeared to be material, therefore, the SCN was

Issued to the respondents advising them to expllln their position as to why penal action may not

be taken against them under section 492 of the Ordinance.

4. In response to the SCN, Mr. Muhammad ljaz Halder, the Company Secretary, through

letter dated October 22, 2015 requested for extension in time for submission of reply to the SCN.

The respondents were given time till November 10, 2015 for submitting the response. The written

reply to the SCN was submitted by the respondents though letter dated November 10, 2015. A

brief of Written submissions of the respondents with reference to the contents of the SCN Is given

below:

• Primary activity of Montebello was to buy and seU fabrics, mostly denim. Since the

acquisition of Montebello, the Company exported fabrics valuing USD54.8 m!Ulon and sold it

In European markets through Montebello. The local management team In Italy was kept at

the mWmum level to uve cost. All operations. accounts and finances were looked after by

the Director/CFO of Montebello along with his team. The annual, half-yearly and quarterly

consolldated finandal statements of the Company were prepared on the basis of the annual

audited finandal statements of Montebello and UlUiudited half-yearly and quarterly

management accounts received from the MBL's management. On the basis of annual audited

fmancial statements of Montebello for the year ended 30 June 2012, provision for Impairment

to the extent of Rs.l,l25,597,650 was provided in the Account 2012 of the Company.

• Since the year 2012, Montebello operatiON witnessed downward trend due to aggravated

economl~ recession. In view of this, the Company's management asked Independent

Ow1ered Accountants' firm to prepare projections of Montebello operations to assess fair

value of Montebello Investment appearing In the boob of the Company. In the years 2013

and 2014 provision for impairment was adJusted In the books of the Company In line with

recommendations of the firm.

• The operations of Montebello continued to show downward trend in 2014 and as per

Montebello's management In Italy, it was due to the prevailing economic conditions in the

Europe, and being aware of such economic situations from market sources, no immediate

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SECURmES & EXCHANGE COMMISSION OF PAKISTAN

">£CP Corporate Supervision Department

Company Law OMslon

foUow up wu contldered nec:eaary by the Company, u there were no signa of any extreme

tltuation and the Company's management continued to rely on their £eedback.

• Montebello'• management In Italy advised w In late 2014 to hold exports u they were facing

some Issues in recowtles from CUitOa\en In normal course of business. and thus, we

accordingly temporarily discontinued exports to Montebello.

• They kept on updating us on the situation of recoveries but never disclosed anything about

the bankruptcy proceeding~. It was the month of September 2015 when we came to lc:now

through aome former employees of Montebello that matters at Montebello had got worsen

and not been managed properly. The Montebello's management Including the director I CFO

left It without any proper notice or c:omrnunlatlon. In this scenario, we immediately

contacted our legal counsel and lnstructed them to obtain all necessary details and orders

relating to bankruptcy proceedlngt.

• We hope the above explanation clarifies that there has been no false statement on part of the

Company regarding Its subsidiary, Montebello and that the Company has adequately

dlscloeed whateveT material Information it possessed. Further, the Company always checked

the authenticity of any information before disseminating. In view of the above submissions,

we would request you to please waive the subject notice under section 492 read with section

476 of the Ordinance.

5. Subsequently, the case was fixed for hearing on November 30, 2015, December 30, 2015,

January IS, 2016, however, based on the respondents repeated requests, the hearing was

adjoUrned. Finally the hearln8 wu held on March 16, 2016 before the undersigned and Mr. Ijaz

Halder and Mr. M. Zahid Raftq appeared on behaJI of the respondents. They mainly reiterated the

earlier written aubmitsions. Upon a question regarding the investment in Montebello, the

authorlud representatives affirmed that the Company acquired brands by making investments in

Montebello and it did not Involve ac:qul.sitlon of phyalcal assets. They further stated that

Information regarding filing of bankruptcy case against Montebello was first received by the

Company ln September.October 2015. Bankruptcy was caused by outstanding dues and severance

of employees who filed the bankruptcy suit. When the IUthorized representatives asked how the

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SECP

SECURITIES & EXCHANGE COMMISSION OF PAKISTAN Corporate Supervision Oepanment

Company Law Division

(.'""'"'""'"'"Shu'· •.

management of the Company remained unaware of aU these developments despite having the

entire shareholding of the Montebello, they could not provide a satisfactory answer. The

undersigned allowed them two weeks' time to provide all the necessary documents and evidence

including the Company's oversight mechanism for Montebello, details of bankruptcy suit, sales 1

receipts mechanism along with other necessary details in relation to the Montebello. Since the

authorized representatives did not provide any information subsequent to the hearing, they were

advised through letter dated April 6, 2016 to provide the following:

(i) Mechanism used by the directors and management of the Company for oversight of

Montebello, the subsidiary of the Company in view of huge investment made by the

Company in Montebello;

(ii) Details of bankruptcy proceedings along with copies of correspondence; and

(iii) Mechanism for sales made to and proceeds received from Montebello by the Company.

6. The representative, through letter dated April 15, 2016 provided the information. A brief

of additional information and submissions provided Is produced below:

• The Montebello's management used to send quarterly, half yearly and annual audited

finandal statements to the Company and directors of the Company Ln their quarterly

meetings used to discuss those. The management used to follow up for recovery of

receivables from Montebello.

• The bankruptcy order dated December 12, 2014 is enclosed for ready reference. In this

regard, the Company has already filed its claim of Euro 4,296,076.93 with the Court of

Vlcenza (copy enclosed).

• Montebello's management primarily comprised of European technical and marketing staff

who were In close contact with the Company's relevant team and marketing staff. Terms

of sale were normally 150 days on DA basis and Montebello was buying at better prices

compared to other customers. The Company's team used to coordinate with Montebello's

management to ship orders and follow up for recoveries. The sales proceeds were

remitted to the Company through banking channels. Telephonic interactions were done

'll~ . r 7th FloOr. NIC Building, 63-JiMah Avenue 'H""--b Islamabad, Pakistan . - · PABX: + 82·51·9207091-4, Fax: +Ql-51-9100454, 9100471, emaH: rt,ebmllt!!OHcp pov pk. Website: 'fNfW secp,goy pk


\. i

SECURmES & EXCHANGE COMMISSION OF PAKISTAN Corporate Supervision Department

Company Law Division SF.:CP c--""' !/NCI • J •

Co used to make on need bub with main~ on reoeivables after dispatches. The mpany

sales to Montebello directly without Involving any agency.

• The IOie purpose of acquiring Montebello wu to market the Company's products In

Europe using foreign brands and exllting market presence, providing onsite customer

support. technJca! expertise and liaison and achieving growth through existing customer

bale. Below Is the breakup of annual exports to Montebello:

Year Annual Exports (Rs.) Annual Hxport USD

2008 1.283,393,965 16,956,700

2009 959,245,359 12,613,922

2010-11 1,1'72,900,745 13,881,725

2011·12 480,576,672 5,6f!7 ,8t17

2012-13 295,894.009 3,018,116

2013-14 648,263,568 6,482,982

201'-15 30,658,456 309,203

Subsequently, through letter dated and April 18, 2016, the authorized representative further

submJtted that Mr. Nasir All khan Bhatti. Mr. Farrukh Hussain. Mr. Usman Rasheed and Mr.

Aehsun M. H. Shaikh are non-executive directors and are not involved in day to day affairs of the

Company, therefore, they may be excluded from the proceedings. He further reiterated that

matters highlighted in the SCN and during the hearing were unintentional and beyond the control

of the Company's management and its board of directors. The representative stated that the

Company is pau1ng through a audal phase of financial restructuring and has achieved a capacity

level of 70% in three years. The restructuring which involved more than eighty investors will

matedalize in due course of time through extraordinary efforts of the directors and management.

At thU aitial time any unfavorable decision wfll adversely affect confidence of lenders and

shareholders. The Company has the right to appeal in case of any adverse order, however, it is

requested that in such a case, the adverse order may not be published.

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Company Law DMslon

7. Before proceeding further, lt Is necessary to advert to the follOWing relevant provisions or

Ordinance. lASs:

Section 492 of the Ordinance, states u under:

• ~ in any rtturn, rrporl, cmifo:ate. hlanct sh«t, profit tmd IOBI~~ecount, income

tmd aperulitrm aca~unt, ~. offer of sluzres, bocks of IICCOUnts, appliaztion,

ln.formaHort or trplanation nquirtd by or for tJu pu~ of my oft~ provisions of this

Ordinan~ or pursuant to atr order or dirrction gtwn under this Ordinaru:r m.Jca a

statement which is~ or incorrect in atry mmrilll particular, or omits flJtY m4tcrlal fact

lawwing it to be material, shall be punishablt tuith fin~ not acnding fiw hundrtd

thousand rupru. •

lAS 36 - Impairment of Assets has the following provisions:

9. An entity shall usess at the end of each reporting period whether there Ls any

indication that an asset may be impaired. If any such lndlc:.atlon exists, the entity shall

estimate the recoverable amount of the asset.

10. Irrespective of whether there is any lndlc:.atton of impairment, an entity shall also:

(a) test an intangible asset with an indefinite useful life or an intangible asset not yet

available for use for Impairment annually by comparing its carrying amount with its

recoverable amount. This impairment test may be performed at any time during an annual

period, provided it is performed at the same time fNery year. Different Intangible assets

may be tested for impairment at different times. However, If such an Intangible asset was

initially recognized during the current annual period, that Intangible asset shall be tested

for impairment before the end of the current annual period.

(b) test goodwill acqutred In a business combination for lmpalrment annually ln

accordance with paragraphs 80-99.

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12. In uses&iDg whether there fl any indication that an auet may be impaired. an

entity shall consider, u a minimum. tha foUowing Jndlations:

Ertmud IOflf'UI ofinform4tUm

(a) durlrlg the period, an users market value has declined significantly more than would

be expected u a result of the passage of time or nonnal use.

(b) signifiCUlt changes with an adverse effect on the entity have taken place during the

period. or wiD take place in the near future, in the technological, market. economic or legal

environment In which the entity operates or In the marlcet to which an asset Is dedicated.

(c) market interest rates or other market rates of return on investments have increased

during the period, and those increases are likely to affect the discount rate used in

calculating an asset's value In use and decrease the asset's recoverable amount materlaUy ·

(d) the carrying amount of the net assets of the entity Is more than its market

capitalisation.

lntmtal SDUJUI ofinfomllltion

(e) evidence Is available of obsolescence or physical damage of an asset.

(t) significant changes with an adverse effect on the entity have taken place during the

period, or are expected to take place in the near future, In the extent to which. or manner

In which. an asset is used or is expected to be used. These changes include the asset

becoming Idle, plans to discontinue or restructure the operation to which an asset belongs,

plans to dispose of an asset before the previously expected date, and reassessing the useful

life of an asset as finite rather than indefinite. •

(g) evidence is available from Internal reporting that Indicates that the economic

perfonnance of an asset ls, or will be, worse than expected.

In terms of the Commission's notification SRO 1003 (J)/2015 dated October 15, 2015, the powers to

adjudicate cases under section 492 of the Ordinance have been delegated to the Executive Director

(Corporate Supervision Department).

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8. I have anal:yad the facta of the dUe. relevant pnwilfons of the Ordinance and the

arguments put forth by the. respondents and my observations are u under:

a) Presently, the Montebello ila direct wholly owned subsidiary of the Company acquired in

2008 throuJh investment in Farital AB ("FAB"), another wholly owned subsidiary

incorporated In Sweden. The Company In its llMual audited accounts for the year ended

December 31, 2008 recorded the fair value of investment at Rs2,625 mllUon. Subsequently,

the FAB wu diuolved in the year 2013 and the Montebello became direct wholly owned

subsidiary. Being the wholly owned subsidiary of the Company, it is highly un!Jkely that

the Company's management was unaware of the circumstance of the Montebello.

b) Being a wholly owned subsidiary, Montebello's management must have been appointed

and guided by the Company's management and board of directors. Directors of the

Company owe fiduciary duties towards the Company and it is one of their primary

responsibilities that they must exercise care In disdwge of their responsibilities to oversee

the performance of all the investments of the Company and to safeguard all its assets. The

statement by the respondents that they were so Ignorant of the performance of its wholly

owned subsidiary, in which the Company had substantial investments, that they did not

have any information or knowledge about filing of bankruptcy on June 12, 2014 and

appointment of trustees for Montebello on December 22, 2014. The plea that the

management and directors of the Company came to know about the aforesaid

proceedings against Montebello In September 2015 i.e. after fifteen months of filing these

proceedings In the court, Is not tenable. The company's investment in Montebello was ii.Il

equity investment and not in the nature of a loan of advance whose recovery was

dependent on the performance Montebello. The company by virtue of being Jn the

ownership of entire shareholding of the Montebello was In control of Its affairs through a

board of directors which were the nominee of the Company's management. The

contention that the sole owner and controller of Montebello, was unaware of the

proceedings Initiated for its legal demise is totally baseless and beyond comprehension. In

all likelihood, they must have the knowledge of affairs of the Montebello, however, they

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SECURITIES & EXCHANGE COMMISSION OF PAKISTAN

SECP Corporate Supervision Department

Company Law DMslon c~sn-•-9-

failed to disclose and appropriately reflect the impact In the financial statements of the

Company.

c) The rapondents have stated that an operations. ac:counts and finances were looked after

by the dlrector/CPO of Montebello along with his team and the Company's management

was totally reliant on the annual, hall-yearly and quarterly reporting by the Montebello

for consolidation of the financial statements of the Company. They have tried to imply

that except for the aforesaid annual and Interim reporting by the Montebello, the

Company's management did not have any other mechanism to Independently evaluate

and assess the performance of Montebello. This intended implication in itself is irrational

and unjustified. The respondents' contention about the complete independence of director

I CFO, who was nominee I appointee of the Company, and affairs of the Montebello

without there being any effective oversight mechanism defy all logJc and prlndpals of

corporate governance. Such an Independence ol a wholly owned subsidiary and its

management whereby there was not even any compulsion to Inform the controlling parent

company'• management on the matten as critical as flUng of proceedings for winding up

of Montebello il beyond comprehension. Therefore the plea is not tenable.

d) Aa the respondents have themselves stated, the Montebello's operations witnessed

downward trend since the year 2012. and the Company's management after having

evaluated the value of investment in Montebello by an independent firm, recorded

impairment in the value of investment in its Accounts. They have admitted that the

downward trend continued in the year 2014 and still the Company's management

continued its relJance on the Montebello's management In Italy and did not take it as

something extraordinary leading to any extreme situation. On the standard of reason. it

just does not appear acceptable that the Company's management did not strive for

obtaining the information regarding actual situation in respect of Montebello despite

Company's huge investments and stake. The stance depicting the casual attitude with

whleh a substantial investment of the Company wu being handled, to the extent that

even when the investment wu being Impaired the BOD of the Company failed to take

appropriate measures or require a through deliberation is not acceptable and Is at best a

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cover up. Even if this plea Is accepted, the directon' have acted ruthlessly without care in

respect of their responsibilities to oversee the performance of the wholly owned

subsidiary Montebello.

e) In view of the aforesaid and bued on balance of probability, it is beyond juJtific:ation to

state that the diredots of the Company became aware of the bankruptcy proceedings

against the Montebello, the wholly owned subsidiary, after fifteen months of filing of such

proceedlngt in the court. It appears that they deliberately, avoided dlsdosure with regard

to the aforesaid proceedings against the Montebello in the Italian court in the Accounts

2014 md subsequent Interim accounts of the Company. Moreover, they failed to

appropriately assess and account for the Impairment of trade debts, equity investment

and goodwill as per requirements of I.AS-39 and lAS 36, keeping in view the objective

evidence of impairment on the respective reporting dates due to bankruptcy filed by

Montebello. It Is also clear that the impact of the resultant misstatements and omissions

was material.

f) The ultimate responsibility of preparing the financial statements in accordance with the

Ordinance and International Financlal Reporting Standards Including the lASs rests with

directors who are charged with governance of the Company. The Ordinance and IFRS

require that financial statements should present fairly for each financial year

the Company's financial position. financial performance and cash flows. This requires the

faithful representation of the effects of transactions, other events and conditions

in accordance with the definitions and recognition aiteria for assets, liabilities, income

and expenses. This necessitates adequate disclosure and full compliance with all

applicable lFRSs.

g) In terms of the Code of Corporate Governance. 2012 ("Code") applicable to all listed

companies, It ls mandatory for the board of directors to establish a system of sound

internal contro~ which is effectively implemented and maintained at all levels within the

company. In order to strengthen and formaliu corporate decision-making process, the

Code requires all significant Issues to be placed for the information. consideration and

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SECURITIES & EXCHANGE COMMISSION OF PAKISTAN Corpoi'Jte Supervision Department

Company Law Division ~-$1tHf-/l·

and/ its committees. Moreover, dedaion of the board of dlrecton of listed CODlpaniea or

ftnancla) 5tatementl of a listed company cannot be circulated unless the CEO and the CFO their espect~ve signatures, for

present the financial statements, duly endorsed under r

consideration and approval of the Board of Directors.

h) One of the main obJectives and Intent of section 491 of the Ordinance is to protect the __,1 bankers customers etc., of users, which may Include investors, shareholders, Ut:U tors, '

financial statements against misstatements so that reliable finandal Information which Is

vital for making a well Informed decision is available to them. Accurate and reliable

financial ~rtlng is the bedrock upon which our markets are based. False financial

lnfonnation or Inadequate Information with material omission shudders the Investors'

confidence and erodes the integrity of the markets. For our capital markets to thrive,

Investors must be able to receive an unvarnished assessment of a company's financial

condition. Flnandal statements must provide transparency for Investors, and must not

obscure the truth, even if that truth is Inconvenient

i) Accepting the respondents' plea that being completely reliant upon the information

disseminated to them by the management of the Montebello, they were unaware of the

circumstance of the Montebello and proceeding filed against it in Italian court and hence

could not be held liable for not giving disclosure in the Company's financial statements,

would tantamount to acx:eptance of the fact the BOD is not retponsible to run and manage

through employing persons of Integrity In the management to carry out the day to day

affairs of the Company and establishing a control mechanism which ensures that the BOD

Is kept informed and abreast about the affairs of the Company. U this stance Is accepted

then the board of directors would become a rubber stamp used to accept and release to

stakeholders Including the shareholders, lnveston, financiers, vendors, regulators etc.

whatever is presented to them without verification rather than the ultimate controlling

body ln the corporate governance structure. This would mean that the whole corporate

structure, which has been evolved over centuries, would shatter. I am of the finn view that

the board of dirertors has the authority to enquire and confirm the information presented

to them and it Is their responsibility to ensure that true, fair and correct information Is

provided to stakeholders. Directors have the ultimate responsibility to oversee and

7V1 Floor, NIC Buldlng. C53-Jir1Mh. Avenue ~ ltlamabad. P8ldstan PASX: + U-61-02o1CI81-4, Fax: +U-51·91110464, Q100.C71, Emit Wlbrrm!trCbp.ppy.pk. W.t.!t.: m .-;ep.oov Ills


SECP



manage affairs of the Company. Therefore they have to be vigilant while performing their

duties and exercise due care and prudence. They must ensure that appropriate staff is

employed by the Company at all levels and effective and sound systems of Internal

controls are in place to ensure due legal compliance. Therefore directon are responsible to

ensure that financial statements approved by them given adequate and accurate

disclosure in line with the applicable IFRS and that there is no omission of material facts.

j) Directors of a listed company while filing their consents to act as directors, Inter alia. give

an undertaking that they are aware of their duties under the Ordinance and that they have

read the relevant provisions contained therein. It Is mandatory for the directors of a listed

company to have knowledge of provisions of the applicable laws. Therefore, it is directors'

own responsibility to determine and fulfil their obligations under the provisions of the

applicable laws. They cannot escape responsibility by citing that they did not have

knowledge about the circumstance of the Montebello, therefore, disclosure of vital

lnformation with regard to affairs of Montebello was omitted. M a matter of fact,

disclosure material information was omitted from the Aocounts of the Company for the

year ended June 30, 2014 and its subsequent interim accounts which were misstated

Impairment of trade debts, equity Investment and goodwill was not adequately a.nd

appropriately assessed and accounted for as per requirements of lASs.

k) The respondents filed ita dalm in the court for recovery of their receivables fonn

Montebello on Febnwy 29, 20161.e. after almost four months of inltfation of the subject

PfOC"dings. This delay In filing of the claims only shows lax behavior and lack of prudence on the part of the directors of the Company and appears to be a move to

appease the reguator rather than genuine effort to recover substantial fund of the

company.

1) The staled non-executive directors namely Mr. Nasir All Khan Bhatti. Mr. Farrukh

Hussain, Mr. Usman Rasheed IIJld Mr. Aehsun M. H. Shaikh may not be inVolved In day

to day affairs but being members of the board of directors they share the responsibility for

overall oversight of the affaln of the Company. Theretore, they cannot be exduded from

the subject ptoeeedings.

~~~ 71h FlOOr, NIC Building. 83-Jinnah Avenue . - ',

~~~ .. , Ftx: +92-61-9100454, 9100471, !malt W!ICJml'terCIHguoy Dk. Weblle: www MC!I goy Dk


·I SECURITIES & EXCHANGE COMMISSION OF PAKISTAN 5ECP

Corporate Supervision Department Company law DMslon

9. I deem ft necessary to make some observatiON on the ImportanCe of compliance with

requirements of the IPRS and the Ordinance In preparation of financial statements, adequacy and

accuracy of ntent. Therefore, It is of utmost

importance that all the applicable requirements of IFRS are complied with ln letter and spirit. It is

the duty of the company and its directors to see that the disclosures made in the financial

statements are adequate and correct and there is no misstatement or omission of material facts. In

addition to their responsibilities of overseeing and managing affairs of the Company, directors

also have fiduciary duties towards the Company. They are. therefore, liable to a higher level of

accountability which requires them to be vigilant and perform their duties with care and

prudence. It is directors' responsibility to oversee the functioning of the company, to keep it

appropriately staffed and organized to ensure due compliance of law. In this context the

respondents cannot absolve themselvu of their statutory duties regarding misstatements ln the

finandal statements.

10. For the foregoing reasons, I am of the view that the respondents have made themselves

liable fur action under the provisions of section 492 of the Ordinance. Therefore, in exercise of the

powers conferred by section 492 of the Ordinance, I hereby Impose a fine of Rs.1,300,000/- (Rupees

million three hundred thousand only) ln aggregate on the respondents. The respondents are

diredecl to deposit the fines in the following manner:

7th Floor, NIC Building, 83-Jinnah Avenue Islamabad, Pakistan PABX: + 12-61-9207CW1-4, Fax: +12-61..V1004S4, 9100471, Email: wtbmlltlrGtasp.qov pk. Webde: www yep poy p1t


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SECURITIES & EXCHANGE COMMISSION OF PAKISTAN , Corporate Supervision Department

Company law Division c--- Sllut. ,, . Name of Resoondents Amount in Ruoeet

Mr. Ahmed H. Shaikh. Otief Executive 300,000 Mr. Yasir Habib Hashml 300,000 Mr. Munir Alam 300,000 Mr. Aehsun M.H. Shaikh. Chairman 100 000 Mr. Nash AU Khan Bhatti 100,000 Mr. Usman Rasheed 100,000 Mr. Farrukh Hussain 100,000

Total RsUOO,OOO

The aforesaid fines must be deposited In the designated bank account maintained withMCB Bank

Umited in the name of the "Securities and Exchange Commission of Pakistan" within thirty days

from the receipt of this order and furnish receipted bank vouchers to the Commission. In ca.se of

non.({eposit of the penalties, proceedings for recovery of the fines as arrears of land revenue will

be initiated. It may also be noted that the aforesaid penalties are Imposed on the respondents In

their personal capacity; therefore, they are required to pay the said amount from personal

resources.

The aforesaid proceeding and penalty imposed pertain to the reporting aspect of the Company's

investment in Montebello and is without prejudice to any action the Commission may Initiate to

probe/adjudge the act of the making the investment by the Company and its related impacts on

the Company's financial position.

AMounced: May 11,2016 Islamabad

r(CSD)

71h floOr, NIC eulldlng. 63-Jinnah Avenue oPY z websJe: Jt«W'"'P qoyJ!Is lalatn&bad, P~1 ~ Fax: +92-51-t11»'54. V1~71, emaB: ~ pABJ(: + 92-51._.,,.,., -·


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[Islamabad]

Before A bid Hu11ain. Executive Director

In the matter of

Mit. Azprd Nine Limited

Number and date of show cause I notice EMD/233126412002-761 dated February 4, 2016 l Date(s) of hearing I

May 18, 2016: Hearing held May 30, 2016: Hearing held September 8, 2016: Hearing held

Mayl8. 2016 M. ljaz Haider - Company Secretary; M. Zahid Raftq- CFO Abrar Khan- Partner- Ahmed & Qazi , Advocate and legal consultants

Present at the hearing Fatema Madvtwala- Senior Associate- Ahmed & Qazi, Advocate and legal consultants

Mil~ ~~ ~QU " SCRlemb~[ ~. 2Ql§ Mr. Ahmed H. Sheikh_ CEO Mr. Abrar Khan, Partner, Ahmed & Qazi, Advocate & Legal Consultants

Date of Order I March 17,2017 I ORDER

This order shaU dispose of proceedings initiated against M/s Azgard Nine Limited

("Company") Wlder the provisions of Section 265 of the Companies Ordinance, 1984

("Ordinance") through a show cause notice dated ---c~"Notice") issued to its

Chief Executive and Directors.

2. The Company was incorporated in Pakistan as a public limited company and is

listed on Pakistan Stock Exchange. The Company is a composite spinning, weaving,

dyeing and stitching unit engaged in manufacturing of yam, denim and denim products. SECURrTIES AND EXCHANGE COMMISSION OF PAKISTAN !~IC Building,~! Jinn~~ l,.r· c;he


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The RegiStered office of the Company is situated at Lahore.

3. . f N li are summarized below:

Background facts lead.Jng to lSSUance o o ce

a) During the year ended 30 June 2015, the Company had incurred net loss of Rs.2,934

million and its current liabilities exceeded its current assets by Rs.9,253.59 million,

and its accumulated losses stood at Rs.ll,Sl3.25 million resulting in negative equity

of Rs.3,839 million. Auditor's report for the aforesaid period was also qualified for

company's failure to pay its liabilities, incorrect classification of liabilities, non-

provisioning of invesbnent in TFCs of Agrltech Limited, non-compliance with IAS-

39 In respect of investment in preference shares of Agritech Limited and

inadequacy of impairment in respect of bankruptcy of Montebello s.r.l. (the "MBL ")

The Auditor's report also included a matter of emphasis regarding going concern

uncertainty;

b) The Company was suffering losses continuously since period ended June 30, 2011

except for the period ended June 30, 2013 where Company earned a profit of Rs.963

million alter accounting for gain of Rs.4,298 million on disposal of investment in its

subsidiary Agritech Limited;

c) Board of directors (BOD) of the Company approved acquisition of Farital AB

("Farital"), a company incorporated in Sweden, which owned MBL, a company

incorporated in Italy, in its meeting held on December 17, 20C!l. In 2008, the

Company acquired 100% interest in Farital which was holding company of MBL

with 100% shareholding. The investment was recorded in Company's annual

audited accounts for the year ended December 31, 2008 at Rs.2,625 million being the

fair value of the investment. As disclosed in Note 22 and 45.2 of the annual audited

consolidated accounts of the Company for the year ended December 31, 2008

goodwill of Rs.l,918 million was recognized on acquisition of MBL. The Company

charged impairment in respect of aforesaid investment amounting to Rs.1,125

million. Rs.39 million and Rs.ll million in 2012, 2013 and 2014 respectively.

Jl!' Floor, NIC Butldina, Jinneh Avenue, Blue Area. lslarnabad PABX: +92·S 1-9207091-4, Fax No. +92·51-9100454 &: 9100471, Email: webmaster®secp.aovJ!.5 Website: wwu· ·~~~ ~~· -'·


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Standalone and consolidated annual audited accounts of the Company for the year

ended June 30, 2014, included accumulated impairment on account of investment

in MBL and goodwill of Rs.1,176 mlllion and Rs.1,493 million respectively resulting

in net carrying value of investment in MBL and goodwill as Rs.1,449 million and

Rs.844 million respectively. The Company in its annual audited accounts for the

year ended June 30, 2015 had booked full impainnent of Rs.1,449.41 million against

its balance amount of investment In MBL and Rs.452.53 million against Its balance

amount of trade receivables from MBL;

d) Bankruptcy of MBL had resulted into huge loss to the Company approximately

amounting to Rs.3,077.53 (Rs.2,625 million the cost of investment and Rs. 452.53

million the amount of impaired trade receivables);

e) Accounts of the Company for the year ended June 30, 2015 also disclosed following

unusual transactions with MBL that were not disclosed as related party transaction

in the interim periods ended on September 30, 2014, December 31, 2014 and March

31, 2015 implying that the transactions were entered into in the last quarter i.e. after

bankruptcy/cessation of MBL, raising doubts about the authenticity of these

transactions:

i. Debt swap agreement dated 12-08-2014 was signed to acquire trade

receivable of MBL from its customer Corceltex LDA Portugal of the same

amount. Gross amount of debt swap is stated as Rs.138.928 million in note

20 and Rs.192.747 million in Note 39.1.1

ii. Purchase of fabric of Rs.100 million from MBL.

f) Court Order sealing MBL and appointing trustee was passed on December 22, 2014,

however, as submitted by the Company to the .Commission, the management of the

Company did not have any intimation regarding the bankruptcy till September

2015;

g) It was also noted from records of MBL in the Companies Register, Clamber of

Commerce of Vicenza that MBL started its business activities in May 2008 whereas,

,. ,,_, NICB·-,_ ....... BlK-........ ~ PABX: +92·SI·9207091-4, Fax No. +92-SI·91004S4 &9100471, Email: [email protected] Website: www.seep.rov.ok


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SECURITIES & EXCHANGE COMMISSION OF PAKISTAN -, .•. - -~ C~te Supervision Department


in BOD minutes approving the investment, MBL was stated as having successful

operating record of more than 25 years;

h) As per annual financial statements of MBL for the year ended June 30, 2014 as

submitted by the Company, breakup of its liabilities and trade receivables was as

tmder;

Uabilida Euro Note to the Accounts

-short tmn borrowfngt- Unsecured 1,093,049 6

representi.na tinaru:e aaainst foreign bills Trade and other payabla 7 &:7.1

Ctedltors

Azgard Nine 8,479,475

others 140,230

Total Creditors 8,619,705

Accrued liabilities 613,744

Advances from Customers 6,644

Payables to Employees . Total· Trade and other payables 9,240,093

•the aggregate available facilities amounts to Euros 2.5 million out of which Euros 1.41

million remained un-availed as at the reporting date.

Trade Receivables Euro Note to the Accounts

Local-considered stood 557,297 12 Local-considered doubtful 809,235 Local-Total 1,366.532 Foreign Total- considered good 9,720,229 Trade Receivables(l.ocal +foreign) 11,086,761 _"'impairment allowance lor doubtful debts 809,235 Trade Receivables(NET)- 10,277,526

~painnent amount carried forward from 2013. No impairment was provided for the

year 2014.

"'f'l' Floor, NlC Buildlna.1ilmlh A venue, Blue Area. Islamabad PABX: +92-~1-9207091-4, Fax No. +92·51·9100454 4 9100471 Email· webmutsr@sq? .

• · .rov.pk Websne: www.secp.goy.pk

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SECURmES & EXCHANGE COMMISSION OF PAKISTAN Corporate Supervision Department


i) Ou f t o total liabilities of MBL amounting to Euro 10.333 million, liabilities

amounting to Euro 8.619 million i.e. 83% were payable to the Company, employee

liabilities were nil and trade receivables amounting to Euro 10.277 million were

considered good. Records of MBL also revealed that its employees reduced from 10

in 2013 to 5 in 2014 and subsequently it remained at 5 in 2015 implying that

employees were fired in 2013 while till year ended June 30, 2014 no amount in

respect of employees compensation was disclosed as contingent liabilities.

Moreover, no disclosure about court cases filed by or against MBL was available in

the aforesaid accounts;

j) Following was stated in auditor opinion on the accounts for June 30, 2013 filed by

MBL with the Companies Register, Chamber of Couunerce of Vicenza:

"I note the pres en~ in the balcmce sheet of defe"ed tax assets of € I. 000.915. To this by the

way, given the recurrent cmd substantial operating losses of the company, I express my

concerns about the potemial for effective recovery of this amount In future years. inviting

the administrative body to evaluate the clearance of the same. The correctness of the going

concern basis in preparing the financial statements, the recurring cmd signifiCant operating

losses, the encormtered difflculrtes in paying the debts at maturity provided, including

social security and tax, the difficulties of recovery, the c~ent relationship commercial and

fmancia/ linlc.r with the parent, lead me to ask the administrative body to constantly monitor

the economic and financial situation of the company, and to take action without delay to

talre any activities deemed useful and necessary to ensure the normal course Company

management, as well as the protection of business continuity, so that the company can

continue to operate as entities operating in the short - medium term. Jn my opinion, except

for the possible adjustrrunts rtlated to that stated in previous paragraph on deferred tax

assets, the abovementioned flncmcial statements comply with regulations goveming their

preparation; therefore It has been clearly stated and give a true and fair view of the assets.

finances and results. "

However, the above stated observations of the auditor have not been

discussed/referred in the annual audited accounts/consolidated accounts for June

d d · tin financial 30, 2013 implying that the Company deliberately conceale etenora g

position of MBL;

- 7" Floor, NIC Building. Jinnah Avenue. Blue Atea,lsl~ ov Dk Websi~: w-w seep gov pk PABX: +92·SI·9207091.4, Fax No. +92·"·9100454 & 9100471, Email: ~mute seep g '


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Company Law OMslon

k) Prima facie, it appeared from the above circumstances that the Company, despite

being sole shareholder and major creditor of MBL, did not make reasonable and

prudent efforts to prevent its banlauptcy and safeguard its interests as MBL's

parent Company which was also reflective from the fact that no efforts had been

demonstrated for mitigating expected losses; and

1) The Company had not paid cash dividend to its shareholders since 2008. A bonus

issue GP20% was made in 2009.

4. In the aforesaid circumstances, Notice was served upon the Olief Executive and

Directors of the Company requiring them to explain as to why an inspector may not be

appointed to investigate the state of affairs of the Company.

5. The Company Secretary responded to the Notice vide letter dated March 11, 2016

stating that no circumstances exist which call for application of any provision of section 265

to the Company and that the circumstances are beyond management's control. Acquisition

of Agritech followed by gas crisis, energy crisis and International meltdown of 2008 are

responsible for Company's losses. The Company sold entire shareholding in Agritech in

2012, to reduce debt burden. However, full proceeds from sale of Agritech could not be

received (Rs.306 million still outstanding). Delays in tax refunds and rebates further

exacerbated the issue. The Company's response also mentioned that presently 73.70% of

the lenders have given their in-principal approval for second round of restructuring and

rest are expected soon. Company Secretary also mentioned that the Company shall take all

necessary steps to maximize recovery from MBL and restructure and revive the Company

to provide reasonable return to shareholders in near future. With respect to the investment,

the response entailed that the management actually acquired selected assets of MBL for

Euro 23.758 million, which includes Brands, customers' relationship, GoodwilL product

development and technical knowhow with only 39 employees and decided not to purchase

the high cost manufacturing facilities of MBL This new Company then started operations

in 2008. When MBL was acquired, exactly the same facts were declared and disclosed. And

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-I, SECURITIES & EXCHANGE COMMISSION OF PAKISTAN

Corporate Supervision Department Company Law Division

despite recession in market Company made exports to MBL of ~.1.2 billion in 2008. Later MBL started facing liquidity issues due to slow recovery of trade debts and global financial

crisis. The company was the only supplier of fabric for MBL therefore 83% of the liabilities

of MBL are payable to the Company. Response further went on to slate that the

transactions relating to debt swap agreement with Corceltex LOA (Coreeltex) and purchase

of fabric from MBL are genuine and authentic and entered in to the books as and when

they occurred, prior to the MBL Bankruptcy.

6. Subsequently, several hearing opportunities were given and further information,

documents and approvals were called from the Company

7. Before discussing the submissions made by Company's directors and their authorized

representative I deem it necessary to refer to the relevant provisions of the Ordinance.

Section 265 of the Ordinance empowers the Commission to appoint inspectors to investigate

the affairs of a company and to report thereon if in the opinion of the Commission there

exists circumstances suggesting that

i. the business of the Company is being or has been conducted with intent to defraud

its creditors, members or any other persons or for a

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