1

Introductio
n
Different aspects of companies and penalties

Preparation of Prospectus:

Generally, the public issues of companies are handled by ‘Merchant

Bankers’ who are responsible for getting the project appraised, finalizing the
cost of the project, profitability estimates and for preparing of ‘Prospectus’.
The ‘Prospectus’ is submitted to SEBP for its approval.
For example: - ‘Abridged Prospectus’ is a shorter version of the Prospectus
and contains all the salient features of a Prospectus. It accompanies the
application form of public issues.

A large number of new companies float public issues. While a large number
of these companies are genuine, quite a few may want to exploit the
investors. Therefore, it is very important that an investor before applying for
any issue identifies future potential of a company A part of the guidelines
issued by SEBP (Securities and Exchange Board of Pakistan) is the
disclosure of information to the public. This disclosure includes information
like the reason for raising the money, the way money is proposed to be
spent, the return expected on the money etc. This information is in the form
of ‘Prospectus’ which also includes information regarding the size of the
issue, the current status of the company, its equity capital, its current and
past performance, the promoters, the project, cost of the project, means of
financing, product and capacity etc. It also contains lot of mandatory
information regarding underwriting and statutory compliances. This helps
investors to evaluate short term and long term prospects of the company.

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 Section 56. Penalty and Interpretation.-

(1) If any prospectus is issued, in contravention of section 54 or

55, the company, and every person who is knowingly a party
to the issue thereof, shall be punishable with fine not
exceeding five thousand rupees.

(2) In section 54 and 55, the expression "expert" includes an

engineer, a valuer, an accountant and every other person whose profession
gives authority to a statement made by him.

Section 66. Penalty for fraudulently inducing persons to invest

money. -

Any person who, either by knowingly or recklessly making any

statement, promise or forecast which is false, deceptive or
misleading, or by any dishonest concealment of material facts,
induces or attempts to induce another person to enter into, or to
offer to enter into,-

(a) any agreement for, or with a view to, acquiring, disposing

of, subscribing for, or underwriting shares or debentures; or

(b) any agreement the purpose or pretended purpose of which is to

secure a profit to any of the parties from the yield of shares or debentures,
or by reference to fluctuations in the value of shares or debentures; shall
be punishable with imprisonment of either description for a term which
may extend to three years, or with fine which may extend to twenty
thousand rupees, or with both.

shareholders of a company:

A mutual shareholder or stockholder is an individual or company

(including a corporation) that legally owns one or more shares of stock in a
joint stock company. A company's shareholders collectively own that
company and are the members of the company by signing the memorandum
of association . Thus, the typical goal of such companies is to enhance
shareholder value.

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Stockholders are granted special privileges depending on the class of stock.
These rights may include:

• The right to vote on matters such as elections to the board of directors.

Usually, stockholders have one vote per share owned, but sometimes
this is not the case.
• The right to propose shareholder resolutions.
• The right to share in distributions of the company's income.
• The right to purchase new shares issued by the company.
• The right to a company's assets during a liquidation of the company.

However, stockholder's rights to a company's assets are subordinate to the

rights of the company's creditors. This means that stockholders typically
receive nothing if a company is liquidated after bankruptcy (if the company
had had enough to pay its creditors, it would not have entered bankruptcy,
although a stock may have value after a bankruptcy if there is the possibility
that the debts of the company will be restructured).

Section 105. Penalty on concealment of name of creditor. -

If any officer of the company willfully conceals the name of any

creditor entitled to object to the reduction, or willfully
misrepresents the nature or amount of the debt or claim of any
creditor, or if any officer of the company abets any such
concealment or misrepresentation as aforesaid, every such officer
shall be punishable with imprisonment for a term which may
extend to one year, or with fine, or with both.

Management of a companies

Management in all business areas and human organization activity is the act
of getting people together to accomplish desired goals and objectives.
Management comprises planning, organizing, staffing, leading or directing,
and controlling an organization (a group of one or more people or entities) or
effort for the purpose of accomplishing a goal. Resourcing encompasses the
deployment and manipulation of human resources, financial resources,
technological resources, and natural resources.

Because organizations can be viewed as systems, management can also be

defined as human action, including design, to facilitate the production of

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useful outcomes from a system. This view opens the opportunity to 'manage'
oneself, a pre-requisite to attempting to manage others

Management can also refer to the person or people who perform the act(s) of
management

Section186. Penalties. -

Whoever knowingly and willfully contravenes or fails to comply

with any of the provisions of Sections 174 to 185 or is a party to
the contravention of the said provisions shall be liable to a fine
which may extend to ten thousand rupees and may also be
debarred by the authority which imposes the fine from becoming
or continuing a director of the company for a period not
exceeding three years.

Section189. Penalty for unqualified person acting as director, etc.

If a person who is not qualified to be a director or chief executive

or who has otherwise vacated the office of director or chief
executive describes or represents himself or acts as a director or
chief executive, or allows or causes himself to be described as
such, he shall be liable in respect of each day during which he so
describes or represents or acts, or allows or causes himself to be
described, as such, to fine which may extend to two hundred
rupees.

Section204. Penalty

Whoever contravenes or fails to comply with any of the

provisions of sections 198 to 203 or is a party to ;the
contravention of the said provisions shall be liable to a fine which
may extend to ten thousand rupees and may also be debarred by
the authority which imposes the fine from becoming a director or

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 chief executive of a company for a period not exceeding three
years.

Section 229. Penalty for contravention of section 226, 227 or 228.-

Whoever contravenes or authorizes or permits the contravention

of any of the provisions of section 226 or section 227 or section
228 shall be punished with a fine which may extend to five
thousand rupees and shall also liable to pay the loss suffered by
the depositor of security or the employee on account of such
contravention.
Preparation of Annual Accounts

Annual Accounts

All limited and unlimited companies, whether or not they are trading,
must keep accounting records. Certain information may be omitted from
the accounts of medium-sized and small companies.

All limited companies whether or not they are trading, must keep accounting
records and file accounts with the registrar each accounting period.
Accounts must be produced to a standard that can be scanned and
reproduced electronically and made available to the public. The amount
of financial information available depends on the size of the company.
See Company filing Requirements for more information.

Unless the subject company is claiming exemption as a medium sized,

small, audit-exempt or dormant company, the accounts will include:

• Directors report - containing a business review (unless a small

company) signed by a director or company secretary
• Balance sheet - signed by a director
• Profit and loss account - income and expenditure if the company is not
trading for profit
• Auditors' report - signed by the auditor
• Notes to the accounts
• Group accounts (if applicable)

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Section244. Penalty for improper issue, circulation or publication
of balance-sheet or profit and loss account. -

If any copy of a balance-sheet is issued, circulated or published

without there being annexed or attached there to, as the case may
be, a copy each of (i) the profit and loss account or income and
expenditure account, (ii) any accounts, reports, notes or
statements referred therein, (iii) the auditor's report, and (iv) the
directors' report, the company, and every officer of the company
who is knowingly and willfully in default shall be punishable with
fine which may extend to five thousand rupees.

Section 282 K. Penalty for making false statement, etc.__

(1) Notwithstanding anything contained in any other provision
of this Ordinance, if any person, being the chairman,
director, chief executive, by whatever name called or official
liquidator or any officer of a NBFC in any document,
prospectus, report, return, accounts, information or
explanation required to be furnished in pursuance of this
Ordinance or the rules made thereunder, willfully makes a
statement which is false in any material particular knowing
it to be false, or willfully omits to make a material statement,
mismanages the affairs of the NBFC or misuses his position
for gaining direct or indirect benefit for himself or any of his
family members, he shall be punishable with imprisonment
for a term which may extend to three years and shall also be
liable to fine which shall be not less than one hundred
thousand rupees, and shall be ordered by the Court trying the
offence, to deliver up or refund within a time to be fixed by
the Court any property acquired or gained by him in his own
name or in the name of his family members by so
mismanaging the affairs of the NBFC or misusing his
position or, in default, to suffer imprisonment for a term
which may extend to three years.

(2) Any officer, director or chief executive of a NBFC who is

either directly or indirectly owned, controlled or managed by
the Federal Government or a Provincial Government who

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 extends, or aides in extending, a loan, advance, or any
financial facility to a borrower or customer on the verbal
instruction of a holder of a public officer without reducing
the terms of the instructions into writing and drawing them
to the attention of his superior officer, or the board of
directors, shall be guilty of an offence punishable with
imprisonment of either description which may extend to one
year, or with fine, or with both, in addition to such other
action which may be taken against him in accordance with
law.

(3) If any company which is not a NBFC, or a company which

does not hold a license under section 282 C or the licence
granted to which has been cancelled, or any individual or
association or body of individuals, transacts the business
specified in 282 A, the chief executive, by whatever name
called, of the company and every director, manager, and
other officer of the company, and the individual and every
member of the association or body of individuals, shall be
deemed to be guilty of such contravention and shall be
punishable with imprisonment of either description for a
term which may extend to seven years and with fine the
amount of which shall not exceed one million and shall be
ordered by the Court trying the offence to pay the fine
within a time to be fixed by the Court or in default to suffer
further imprisonment for a term which may extend to five
years.

Explanation:- For the purposes of this section (282(K)) a

director or chief executive or other officer shall be deemed
to have acted knowingly if he has departed from established
NBFC business practices and procedures or circumvented
the regulations or directions/ restrictions laid down by the
Commission from time to time.”

Section492. Penalty for false statement.-

Whoever in any return, report, certificate, balance sheet, profit

and loss account, income and expenditure account, prospectus,
offer of shares, books of accounts, application, information or

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 explanation required by or for the purposes of any of the
provisions of this Ordinance or pursuant to an order or direction
given under this Ordinance makes a statement which is false or
incorrect in any material particular, or omits any material fact
knowing it to be material, shall be punishable with fine not
exceeding one hundred thousand rupees

The Auditor of Limited Company

Auditor
An auditor is a person who makes an independent report to a company's
members as to whether the company has prepared its financial statements
in accordance with company law and the applicable financial reporting
framework. The report must also state whether a company's accounts give
a true and fair view of its affairs at the end of the year.

How do I appoint an auditor?

An auditor must be appointed for each financial year, unless the directors
reasonably resolve otherwise on the ground that audited accounts are
unlikely to be required. The rules are different for public and private
companies.

For public companies, the directors appoint the first auditor of the company.
The auditor then holds office until the end of the first meeting of the
company at which the directors lay its accounts before the members. At that
meeting, the members of the company can re-appoint the auditor, or appoint
a different auditor, to hold office from the end of that meeting until the end
of the next meeting at which the directors lay accounts.

For private companies, the directors appoint the first auditor of the company.
The members may then appoint or re-appoint an auditor each year at a
meeting of the company's members, or by written resolution, within 28 days
of the directors sending the accounts to the members. If they do not do so for
a particular year, however, the appointed auditor remains in office until the
members pass a resolution to reappoint him or to remove him as auditor (5%

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of members, or fewer if the articles say so, can force the consideration of a
resolution to remove an auditor). This provision about remaining in office,
however, does not apply if the auditor’s most recent appointment was by the
directors or the company’s articles require annual appointment.

Section259. Penalty for non-compliance with provisions by

companies.-

If default is made by a company in complying with any of the

provisions of sections 252 to 254 or 256 to 258, the company and
every officer of the company who is knowingly and wilfully a
party to the default shall be punishable with fine which may
extend to fifty thousand rupees and in the case of continuing
default to a further fine which may extend to two thousand rupees
for every day after the first during which the default continues.

Section260. Penalty for non-compliance with provisions by

auditors. -

(1) If any auditor's report is made, or any document of the

company is signed or authenticated otherwise than in
conformity with the requirements of section 157, section 255
or section 257 or is otherwise untrue or fails to bring out
material facts about the affairs of the company or matter to
which it purports to relate, the auditor concerned and the
person, if any, other than the auditor who signs the report or
sign or authenticates the document, and in the case of a firm
all partners of the firm, shall, if the default is willful, be
punishable with fine which may extend to one hundred
thousand rupees.

(2) If the auditor's report to which sub-section (1) applies is made

with the intent to profit such auditor or any other person or to put another
person to a disadvantage or loss or for a material consideration, the
auditor shall, in addition to the penalty provided by that sub-section, be
punishable with imprisonment for a term which may extend to one year
and with fine which may extend to one hundred thousand rupees.

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Non-Banking Finance Companies

Non-banking financial companies, or NBFCs, are financial institutions

that provide banking services, but do not hold a banking license. These
institutions are not allowed to take deposits from the public. Nonetheless,
all operations of these institutions are still covered under banking
regulations. NBFCs do offer all sorts of banking services, such as loans
and credit facilities, retirement planning, money markets, underwriting,
and merger activates. The number of non-banking financial
companies has expanded greatly in the last several years as venture
capital companies, retail and industrial companies have entered the
lending business.

Section 282 M. Punishment and adjudication of fine or penalty.__

(1) Where a penalty or fine other than fine in addition to, or in

lieu of, imprisonment is provided for any offence,
contravention of, or default in complying with, any
provision of this Part or rules made there under or a directive
or order of the Commission or other officer or authority
empowered to issue a directive under any provision of this
Ordinance, the same shall be adjudged and imposed by the
Commission or any officer of the Commission empowered,
in writing, to exercise the said powers in respect of any case
or class of cases, either to the exclusion of, or concurrently
with, any other officer of the Commission:

Provided that the fine or penalty as aforesaid shall be

imposed after giving the person concerned an opportunity to
show cause why he should not be punished for the alleged

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 offence, contravention, default or non-compliance, and if he
so requests, after giving him an opportunity of being heard
personally or through such person as may be prescribed in
this behalf.

(2) No Court shall take cognizance of any offence punishable

under section 282 K except on a complaint in writing made
by an officer of the Commission generally or specially
authorized in writing in this behalf by the Commission and
no Court other than the High Court shall try such offence.

JURISDICTION OF THE COURTS

Section 7 deals with the jurisdiction of the courts. It is provided that court
having jurisdiction under the Companies Ordinance, 1984 shall be the
High Court having jurisdiction in the place at which the registered office
of the company is situated. However, it is further provided that the
Federal Government may, by notification in the official Gazette and
subject to such restrictions and conditions as it thinks fit, empower any
civil court to exercise all or any of the jurisdictions by the said Ordinance
conferred upon the Court.

Full provisions dealing with jurisdiction of Courts are contained in Part II

of the Ordinance and contents of Section 7 are reproduced:

Jurisdiction of the Courts

1. The Court having jurisdiction under this Ordinance shall be the High
Court having jurisdiction in the place at which the registered office of the
company is situated:

Provided that the Federal Government may, by notification in the Official

Gazette and subject to such registrations and conditions as it thinks fit,

empower any civil court to exercise all or any of the jurisdiction by this
Ordinance conferred upon. the Court, and in that case such court shall, as
regards the jurisdiction so conferred, be the Court in respect of companies
having their registered office within the territorial jurisdiction of such
court.

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2. For the purposes of jurisdiction to wind up companies, the expression
“registered office” means the. place which has longest been the registered
office of the company during the six months immediately preceding the
presentation of the petition for winding up. .

3. Nothing in this section shall invalidate a proceeding by reason of its

being taken in a court other than the High Court or a Court empowered
under sub-section (1).

CONSTITUTION OF COMPANY BENCHES

There shall in each High Court be one or more benches, each to be known
as the Company Bench, to be constituted by the Chief Justice of the High
Court to exercise the jurisdiction vested in the High Court under Section
7.

PROCEDURE OF THE COURT

1. Notwithstanding anything contained in any other law, all matters

coming before the Court under this Ordinance shall be disposed of, and
the judgment pronounced, as expeditiously as possible but not later than
ninety days from the date of presentation of the petition or application to
the Court and, except in extraordinary circumstances and on grounds to be
recorded, the Court shall hear the case from day to day.

Explanation: In this sub-section, 11judgement” means a final judgment

recorded in writing.

2. The hearing of the matters referred to in sub-section (1) shall not be

adjourned except for sufficient cause to be recorded or for more than
fourteen days at any one time or for more than thirty days in all.

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3. Nothing in this section shall invalidate a proceeding by reason of its
being taken in a court other than the High Court or a court empowered
under sub-section (1).

APPEALS AGAINST COURT ORDERS

(1) Notwithstanding anything contained in any other law, and appeal

against any order, decision or judgment of the Court under this Ordinance
shall lie to the Supreme Court where the company ordered to be wound
up has a paid-up share capital of not less than one million rupees; and,
where the company ordered to be wound up has a paid-up capital of less
than one million rupees, or has no share capital, such appeal shall lie only
if the Supreme Court grants leave to appeal.

(2) • Save as provided in sub-section (1), an appeal from any order made
or decision given by the Court shall lie in the same manner in which and
subject to the same conditions under which appeals lie from any order or
decision of the Court.

(3) An appeal preferred under sub-section (2) shall be finally disposed of

by the Court hearing the appeal within ninety days of the submission of
the appeal.

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15
Practical
study

PLATINUM INSURANCE COMPANY

LIMITED
Platinum Insurance Company Limited (PICL) was incorporated as a public
limited company in 1981 to carry on all kinds of General Insurance business
and commenced its business in 1982. PICL shares are quoted on Karachi
and Lahore stock exchanges. The company is engaged in general insurance
business comprising of fire and property, marine, motor, etc through a
network of three branches in Sindh Zone, six branches in Punjab Zone and
two branches in NWFP Zone. Number of company employees at the end of
2006 was 18 (2005: 18 employees). The authorized capital of PICL is Rs 80

16
million, comprising eight million shares of Rs 10 each. As on December 31,
2006 the paid up capital was Rs 80 million, which was held by 374
individuals. No other details on the company ownership have been provided.
The notice of next AGM included a proposal to raise the authorized capital
from Rs 80 million to Rs 120 million.

Penalty for false statement

The Auditors in their Report to the Members, before expressing an opinion,
make an exception for the effect of the matters referred to in the preceding
paragraphs (i) to (iv), which read: "

i) As stated in Note 11 to the financial statements, no provision for

amount due against degree in the sum of Rs 31,614, 808 has been
made in these accounts. The matter has been referred to Assistant
Session Judge, Islamabad for the execution of degree amount.
ii) As stated in Note 8 to the financial statements, no details for leased
vehicles has been provided to us. Accordingly the amount of the
leased vehicles and related liabilities could not be ascertained.
iii) The company has not carried out actuarial valuation to determine
the present value of defined benefits obligations relating to
gratuity, in accordance with International Accounting Standard -
19 [Employee Benefits]. Consequently we are unable to report on
the amount of Provision for Gratuity required as at December 31,
2006.
iv) The company has not adopted IAS 12 [Income Taxes] relating to
provision for deferred taxation. Accordingly we were unable to

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 report on short fall if any on the provisions for deferred taxation."
According to Note 11, the Degree amount [M/s High Ways Bridge,
contractors International (Pvt) Limited] represents claim paid to
Daewoo Corporation against performance and mobilisation
advance guarantee. The company filed counter suit and got the
degree in their favour. On Staff retirement benefits, according to
Note 4.10, the company operates an unfunded retirement gratuity
scheme. Gratuity is accounted for as and when paid. The
requirement of IAS-19, Employee Benefits (revised) has not been
complied with.

Review Report

In their Review Report, the Auditors on Statement of Compliance with

Best Practices observed 101 million on December 31, 2006 compared to
Rs 103 million on December 31, 2005. The increases or decreases in
assets or liabilities are relatively small. Shareholders Equity on December
31, 2006 as percentage of Total Assets was 73% (2005: 71%), which
reflects PICL's financial strength. During the year ended December 31,
2006, PICL has Written Premium of Rs 8.3 million. The net premium
revenue for the year however saw 9% increase to Rs 5.002 million as
compared to Rs 4.576 million in 2005. As percentage of Net Premium
Revenue, Net Claims have dropped from 45% in the previous year to
34% in the year 2006. However, for the year under review there was big
increase in Net Commission over the previous year and consequently,
underwriting profit for the year was at Rs 2.153 million (43% of net
premium revenue) compared to Rs 2.159 million (47% of the net
premium revenue) for the previous year. PICL closed the year with Loss
after tax at Rs 0.488 million as compared to Rs 0.588 million Loss after
tax for 2005, a decrease of 17%. Performance statistics are given below.

Allegations
a) In the notes to the Accounts the accounting period was wrongly stated
as 31-12-07.

b)
In note No. 1 of the Accounts, it was stated that the Appellant is only
listed in Karachi Stock Exchange (“KSE”). The fact that Appellant

18
 was also listed in Lahore Stock Exchange (“LSE”) was not disclosed.

c) The pattern of share holding annexed to the Accounts of the Appellant

reflects that there was a shareholder, holding 3,058,200 shares
constituting 25.48% of the total shares issued. The Appellant failed to
disclose separately the name of the person holding more than 10% of
total capital as required by the Code of Corporate Governance.

d) The total number of shares reported in the said pattern of shareholding

was not accurate4 The shares reflected in the detailed note were
11,951,700 which were in disagreement with the total of 12 million
shares issued. that the implementation of Code of Corporate
Governance was still in process. The Directors in their Report state
that the board of Directors remained engaged in performing their
duties as required under the code of corporate governance, which has
been adopted for compliance. Total assets of PICL decreased slightly
(by 2%) to Rs

Court Order

(a) The penalty was not imposed on just one misstatement but was
a collective penalty for all the misstatements made by the
Appellant. Further, these were not just typographical errors as
the whole annual report was dubious due to the fact that
Hameed Khan and Co shown as auditors in the annual
accounts who had conducted the audit of the Appellant in fact
through their letter dated 17-9-09 informed the Respondent
that they have never audited the Accounts of year 2007 and
2008 of the Appellant. It was contended that the annual report
is false and forged, and the management of the Appellant has
defraud its stakeholders. It was further argued that the
requirements of disclosing the pattern of shareholding in the
annual report and in form A are two separate requirements of
the Ordinance, and mere correction in the latter does not
exempt the Appellant from applicability of section 492 of the
Ordinance.

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 (b) The Appellant has made misstatement in the Accounts and
have submitted fake audited annual accounts which is violation
of the Ordinance and not that of Code of Corporate
Governance. Section 492 of the Ordinance was invoked to
penalize the Appellant for making wrong statements in the
Accounts.
(c) The penalty imposed on the Appellant is in accordance with
the provisions of section 492 of the Ordinance. The maximum
penalty Rs. 500, 000 could have been invoked, however, a
lenient view was taken by the Respondent and a penalty of Rs.
100,000 was imposed on the Appellant.

The Data Collection

Primary Data

BOOKS

Company Law in Pakistan (khawaja Amjad Saeed)

5th Edition

Page # 179,183,187

Business Law

Web site

www.karmayog.org
www.wikipedia.org

20
 www.corporatewatch.org.uk
http://www.investopedia.com

Secondary Data
Organization

Platinum Insurance Company Limited

Web site

www.picl.com.pk /

http://www.csrpakistan.pk/

http://secp.gov.pk

Conclusion:

We know that business is an economic activity, which is carried out on a

regular basis to earn profit. The biggest challenge today is linking
incentives to performance both large and small organizations have made
a variety of efforts to do so, with mixed results. The problems have
ranged from a lack of communication to a change in the business
environment. Another aspect is to knowing the rules of regulation which
is very primary thing to follow as we above discuss and analyze that how
companies doing irregularities and punished by the authorities.
There is the need for SECP to fix limits on insurance companies
generating premium income. According to them, the mad rush for
generating premium income be better tied to an agreed uniform method
of indexation, its net solvency margins, paid up capital and free reserves
etc. Such a prudent policy adopted by SECP is deemed necessary for the
industry to grow on healthy lines which would help and guide the
insurance companies to undertake proper risk analysis, adopt risk
management techniques and rate the risk adequately. Insurance
companies with good arrangements must not waste their automatic
reinsurance capacities due to arbitrary fixation of single risk limits

21
 imposed by the banks. Here again there is no uniform policy adopted by
the banks and it is expected of SECP to play its due part in resolving the
issue.

Recommendations:

Companies showing wrong statements to attract new customer and

shareholder which is totally wrong thing. My recommendation is only to the
organization that they should conceder the rules and regulation which is the
essential part of business. There is nothing above from the law and its
respect is significant part of our life.

References

BOOKS

Company Law in Pakistan (khawaja Amjad Saeed)

5th Edition

Page # 179,183,187

Business Law

Web site

www.karmayog.org
www.wikipedia.org

www.corporatewatch.org.uk
http://www.investopedia.com

22
www.picl.com.pk /

http://www.csrpakistan.pk/

http://secp.gov.pk

23