CORPORATE LAWS

Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2020

A.1 (a) Impact of directorship of Nadeem Ghazi:

DECISION NO. (i)

It is necessary to establish whether AL and SL are associated companies or not; that
depends upon the nature of Nadeem’s directorship in these companies.

AL and SL shall be considered as associated companies due to Nadeem’s common

directorship.

However, AL and SL shall not be considered as associated companies if Nadeem is an

independent director or director by virtue of nomination of the Federal Government or
Provincial Government or a financial institution directly or indirectly owned or controlled
by such Government or National Investment Trust.

The impacts of both the decisions on AL are discussed in following paragraph.

 If AL and SL are associated companies then AL should not make any investment in SL
without seeking further approval.

 If AL and SL are not associated companies then the board’s decision may be
implemented.

DECISION NO. (ii)

Impact on the decision of loan will depend on as to whether Nadeem’s son is a minor or
major.
 If Nadeem’s son is minor then the Board’s decision cannot be implemented without
further approval.
 If Nadeem’s son is major then the Board’s decision may immediately be implemented.

(b) Requirements to be followed:

DECISION NO. (i)
If AL and SL are associated companies:
 Investment should be made under the authority of a special resolution.
 AL’s directors while presenting special resolution shall certify to the members that
they have carried out necessary due diligence with reference to the said investment
before recommending for approval.
 The aforesaid recommendations duly signed shall be made available to the members
for inspection in the general meeting called for approval of the special resolution.
 Latest annual audited financial statements of SL along with latest financial
statements, if any, shall be made available for inspections of the members of AL in
the general meeting called for considering investment decisions in SL.
 AL shall file duly authenticated special resolution within 15 days from passing
thereof with the registrar. AL shall ensure that investment should not exceed the
limit approved through special resolution and that it shall stand exhausted upon
reaching that limit on a cumulative basis even on piecemeal basis and shall not be
valid for any recurring investment even after divestment.
 AL shall maintain register of investment in associate in specified form and shall
enter the particulars after making investment.

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 CORPORATE LAWS
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2020

Requirements whether AL and SL are associate or not:

 AL shall make and hold the said investment in SL in its own name.
 If the said shares are registered in the name of central depository then AL shall
forthwith enter in a register maintained by it for the purpose at its registered office
the nature, value and other particulars to fully identify such shares.
 AL shall have to disclose such shareholdings in SL, to the SL, the securities exchange
and the Commission as required under the Securities Act, 2015 as it intends to
acquire more than 10% of SL’s share capital i.e. Rs. 85 million. (85 ÷ 800 x 100 =
10.62%)
 The aforesaid disclosure shall be made within two working days of the acquisition of
shares containing prescribed information.
 Further disclosure will be required if AL made investment in SL after a period of
twelve months.

DECISION NO. (ii)

If Nadeem’s son is minor:

 The loan has to be approved by a resolution of AL’s members.
 Moreover, being a listed company, approval of the Commission is also required
before sanctioning of loan.
 AL shall maintain register giving separately the particulars of all arrangements as
specified by the Commission. The said register shall be kept at AL’s registered office
and shall be open for inspection at such office during business hours and extracts
may be taken therefrom.
 The said register shall also be produced at the commencement of every annual
general meeting of the company and shall remain open and accessible during the
continuance of the meeting.

Requirement whether Nadeem’s son is minor or not:

Irrespective of whether Nadeem’s son is minor or major, the Company Secretary /
Chairman shall ensure that one of the directors who did not agree to the grant of the said
loan for higher studies, his dissenting note should be recorded in the minutes of the
meeting as required under the Listed Companies (Code of Corporate Governance)
Regulations, 2019.

A.2 (i) Under the Non-Banking Finance Company (NBFC) Rules or Regulations, there is no
restriction, with regard to the appointment of daughter of a major shareholder, as Chief
Executive, subject to compliance with the following requirement:
 Shaista Khalid must have to fulfil to the fit and proper criteria. Prior approval of the
Commission should also be obtained by RL;
 Shaista is not holding such office in any other company except for an investment
company being managed by RL, provided that prior approval of the Commission has
been obtained in this regard.

(ii) It is not mentioned in the question that whether RL is fund management NBFC or lending
NBFC. Therefore, both aspects are discussed as follows:

 In case RL is fund management NBFC:

A fund management NBFC is not entitled for seeking licence for any form of business
allowed to lending NBFC. So RL shall not be eligible to obtain licence for leasing
services.

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Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2020

 In case RL is lending NBFC:

A lending NBFC may be entitled to get the license for leasing business by making
separate application in prescribed form alongwith non-refundable processing fee to
SECP for grant of licence for carrying out leasing business, if RL is not part of a group
of companies already holding a license for the same form of business.

However, if RL has licence of investment finance services, then it shall be valid for
undertaking leasing business as well and RL shall not be required to make separate
application as discussed above.

(iii) NBFCs (Establishment & Regulations) Rules, 2003 specifically prohibits NBFCs to hold,
deal or trade in real estate, except for the use of NBFC itself or where specified by the
Commission by notification in the official Gazette.

In light of above, RL can purchase only two floors of the building which would be used by
RL for its regional office and RL should neither purchase nor rent out the remaining floors
of the building unless specified by the Commission as above.

Moreover, the purchase of two floors for regional office shall have to be approved in RL’s
Board of Directors meeting as required by the Companies Act, 2017.

A.3 (a) The distribution of sale proceeds of given assets of Behtreen Limited (BL) would take
place in following order:
Amount Balance
Rs. in million
Balance of cash and bank and amount realized (10 + 1200) 1,210
1. Retention of the amount necessary for the cost and
expenses of winding up i.e. his own remuneration and
other winding up cost of Rs. 9 million
[1 + 6 (1,200 × 0.5%) + 2] 9.0 1,201
2. Preferential payments [i.e. Income tax/ sales tax payable
(23) + penalty (5) + salaries and wages (144) + amount
payable to funded gratuity (30)] 202.0 999
3. Secured debts other than floating charge holders
 Secured against factory buildings
 Shandar Bank Limited (650 × 600 ÷ 800) 487.5
 Maldar Bank Limited (650 × 200 ÷ 800) 162.5
 Secured against plant and machinery
 Kamdar Bank Limited 125.0 224
4. Secured debts against floating charge
 Kamdar Bank Limited [ lower of 146 or (298-125)] 146.0 78
5. Unsecured creditors on proportionate basis:
Actual
Payment
liability
Rs. in million
SBL long term loan (600 – 487.5) 112.5 13.9
MBL long term loan (200 – 162.5) 37.5 4.6
KBL long term loan (298–125–146) 27.0 3.4
Legal and professional fee 12.0 1.5
Unsecured creditors 441.0 54.6
630.0 78 78.0 -
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Certified Finance and Accounting Professional Examination – Winter 2020

(b) Following payments to creditors and contributories would remain unpaid:

 SBL (600 – 487.5 – 13.9) 98.6
 MBL (200 – 162.5 – 4.6) 32.9
 KBL (298 – 125 – 146 – 3.4) 23.6
 Legal and professional fee (12 – 1.5) 10.5
 Unsecured creditor (441 – 54.6) 386.4
 15% Irredeemable preference share 160.0
 Ordinary share capital 580.0

A.4 (a) Number of voting shares to be acquired:

Upon acquisition of additional 100 million voting share capital through agreement, TPL’s
shareholdings will be 40% (60+100) ÷ 400 × 100) which means it crosses the threshold
limit of 30% given under the Securities Act, 2015.

Consequently, TPL have made a public announcement of offer. TPL has to acquire at least
50% of the remaining voting shares of VGL i.e. 120 million [(400 – 160) = 240 × 50%].

(b) Since Yasir intends to make public offer of acquiring further shares within 21 days of
TPL's offer, Yasir shall have to make a competitive bid and shall have to ensure that:
 the minimum number of shares that he has to acquire mandatorily through public
announcement of offer, shall at least be the same number of voting shares that TPL
will acquire i.e. 120 million voting shares.
 The offer price shall be at higher purchase price i.e. more than Rs. 45 per share that is
offered by TPL.

Considering the above, Yasir’s intention to acquire 60 million shares through Public Offer
is against the provisions of law and he shall have to revisit his intention in light of
aforesaid requirements.

(c) TPL cannot reject the acceptance made on the basis of public offer unless TPL has made
public offer conditional upon minimum level of acceptance and the acceptance didn’t
reach the minimum level specified by TPL in the public offer.

In the given scenario, TPL has received acceptances for 90 million shares. As per
regulations, the minimum level shall not be more than thirty-five percent of the remaining
voting shares of VGL that is 84 million (400 – 160 = 240 × 35÷100 ) voting shares.

(d) After acquisition of further voting shares, TPL cannot dispose the sizeable part of VGL for
a period of two years from the date of acquisition of the control, unless such intention was
stated in the public announcement or in the offer letter or disposal was made in the
ordinary course of VGL’s business.

A.5 (a) As suspension of DSL operations will directly impact the profitability of the company and
may be improved when the management will resume its operations after implementing all
Standard Operating Procedures. Hence, both the situations will be considered as material
information for investors and falls under price sensitive information under Securities Act,
2015.

Further, as per Pakistan Stock Exchange (PSX) Rules Book, the price sensitive information
includes delay or loss of production due to strike, fire, natural calamities, major
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Certified Finance and Accounting Professional Examination – Winter 2020

breakdown, etc.

Therefore, DSL should disclose the following in the light of Securities Act, 2015 and PSX
Rules Book:
 Inform forthwith to the Commission and the Exchange prior to its release to any
other person or print/electronic media.
 Inform to the public about these facts both at the time of suspension of operations
and also when resumes the operations.
 Ensure that information should be disseminated in such way that it equally, timely
and effectively provides access to DSL’s securities holders and investors.

(b) Sikander Niaz being Operation Manager is an executive officer of DSL and according to
Securities Act, 2015 falls under the definition of Insiders. Accordingly, the shares sold by
him two days before the suspension of operation will fall under the definition of insider
trading as he did the same before the dissemination of information to the general public
by DSL, hence this will be considered as an offense.

Further, if Sikander Niaz repurchase the shares within a period of six months he shall:
 make a report to the Commission in the prescribed form before the expiration of a
period of seven days beginning with the day on which the gain accrues and
 tender the amount of such gain to the Commission within the period of six months of
the accrual of gain.

A.6 (a) In order to buy back its own shares, BCL should take into account following requirements
of the Companies Act, 2017:

1. There are following two possibilities for maximum number of shares to be purchased
by BCL, if it wants to:

Possibility No. 1: cancel its shares

BCL could buy-back shares up to maximum amount of distributable profit as per the
provisions of the Companies Act, 2017 i.e. Rs. 300 million as shown in the financial
statements as on 30 September 2020.

Since the buyback is required to be made at the spot / current share price, the
number of shares to be bought back would be 15 million (Rs. 300/20).

Possibility No. 2: hold it as treasury shares

Under the Listed Companies (Buy-Back of Shares) Regulations, 2019 the treasury
shares shall not at any time exceed 20% of the total paid up share capital of the
company. Hence, BCL can buy-back up to Rs. 100 million (Rs. 500×20%).

Since the buyback is required to be made at current market price, the number of
shares that could be bought back are 5 million (Rs. 100/20).

By considering the above, BCL can buy back following number of shares under each
possibility as follows:
No. of shares to Cushion available BCL can buy
Possibility
be purchased in free float No. of shares
No.
(A) (B) (Lower of A and B)
1 15.00 *1 8.33 8.33
2 5.00 *2 7.50 5.00

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 CORPORATE LAWS
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2020

*1 10%(50 − 𝑥) = 12.5 − 𝑥 ⟹ 5 − 0.1𝑥 = 12.5 − 𝑥 ⟹ −7.5 = −0.9𝑥 ⟹ 𝑥 = 8.33

*2 50×(25  10)% = 7.5 million shares

2. Purchase of shares shall always be made in cash. As the purchase requires more than
Rs. 55 million, BCL may generate the differential cash either by disposing its assets or
through obtaining loan etc.

(b) Draft special resolutions for buy back of shares by BCL:

Possibility No. 1: cancel its shares

“RESOLVED THAT subject to compliance with the provisions of applicable laws,
regulations and permission required, if any, approval of the members of Bari Chemicals
Limited (the company) be and is hereby accorded, under Section 88 of the Companies Act,
2017 read with Listed Companies (Buy-Back of Shares) Regulations, 2019, to buy-back up
to a maximum of 8.33 million issued ordinary shares of the company having paid up / face
value of Rs. 10 each i.e. 16.67% of the total outstanding shares of the company) at the spot
/ current share price through Pakistan Stock Exchange Limited.”

Possibility No. 2: hold it as treasury shares

“RESOLVED THAT subject to compliance with the provisions of applicable laws,
regulations and permission required, if any, approval of the members of Bari Chemicals
Limited (the company) be and is hereby accorded, under Section 88 of the Companies Act,
2017 read with Listed Companies (Buy-Back of Shares) Regulations, 2019, to buy-back up
to a maximum of 5 million issued ordinary shares of the company having paid up / face
value of Rs. 10 each i.e. 10% of the total outstanding shares of the company) at the spot /
current share price through Pakistan Stock Exchange Limited.”

“FURTHER RESOLVED THAT the ordinary shares buy-backed pursuant to these special
resolution(s) shall be:

Possibility No. 1 cancelled and issued share capital shall accordingly be reduced by the
aggregate paid up / face value of the cancelled shares.

Possibility No. 2 held as treasury shares.”

“FURTHER RESOLVED THAT buy-back shall be made through Pakistan Stock Exchange
Limited and the purchase period shall start from 12 January 2021 (this is the last date) to
3 April 2021 (both days inclusive).”

(c) The requirements that need to be complied with by BCL after the closing of the purchase
period are as follows:
1. intimate to the Commission and the securities exchange on the day of the closing of the
purchase period the number of shares purchased.
2. advertise the number of shares purchased within two days of the closure of purchase
period in the same newspapers in which the public announcement was published.
3. cancel the shares purchased within ten days of the closing of the purchase period under
possibility no. 1 above.
4. submit a final report on the purchase to the Commission and the securities exchange
on the specified format within fifteen days of the closing of the purchase period.

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Certified Finance and Accounting Professional Examination – Winter 2020

A.7 (a) Prerequisites that the book runner should verify while vetting bid applications
The book runner shall vet the bid applications and accept only such bid applications that
are duly filled in and supported by a crossed cheque or demand draft or pay order or
confirmation from the Banker to an Issue that Bid Money has been electronically debited
from the bidder account or is blocked in the bidder account.

The book runner shall have to verify while vetting each bid application that the bidder
have not:
 made bid below the Floor Price and above the upper limit of the Price Band;
 made bid for more than 10% of the shares allocated under the Book Building
Portion;
 made bid with price variation of more than 10% of the prevailing indicative strike
price or such other percentage as may be specified by the Commission;
 made consolidated bid;
 made more than one bid either severally or jointly;
 made downward revision both in terms of Bid Price and Bid Volume;

(b) (i) At the close of bidding period, strike price is determined by the designated
institutions which includes securities exchange, central depository and clearing
company on the basis of Dutch Auction Method through which strike price is
determined by arranging all the Bids in descending order based on the bids prices
along with the number of shares, by lowering the bid price to the extent that the
total number of securities offered under the Book Building Portion are subscribed.

Accordingly, the strike price in case of FCL is Rs. 55 where 100% of offer size i.e. 200
million shares are subscribed.

(ii) The bids received from the associates i.e. G, I and K were rightly accepted as the
aggregate bids received from G and I is 14 million share i.e. 10% of the book building
which is according to the law.

The bid received from K will not be taken in the aggregate of associates being an
insurance company.

(iii) The shares shall be allotted to the bidders as follows:

 On the highest bid priority i.e. the bids made at the highest price by ‘Bidder U’
to ‘Bidder E’ shall be considered first for allotment of shares. This would
accommodate 189 million shares above the strike price.
 11 million shares are still available for allotment shall be allotted to
‘Bidder C and D’ on proportionate basis as they have made the bids at the Strike
Price hence they will get 5.08 million and 5.92 million shares respectively.
 However, successful bidders would be allotted and issued only seventy percent
of the offer size i.e. 70% of 200 (189+5+6) = 140 million shares.
As the Consultant to the Issue has allowed bidders to place bids for hundred percent
of the offer size, and the bidders must have given an undertaking along with the
application (equivalent to the retail portion i.e. for 60 million ordinary shares) then
unsubscribed shares of retail portion would also be allotted to them on pro-rata
basis.

(iv) Requirement in respect of the leftover/excess amount received through book building
The treatment of the leftover/excess amount of bid money shall be as follows:
 The bidders i.e. A & B who have made bids below the strike price shall not
qualify for allotment of shares and the book runner shall intimate their
respective banks for unblocking their bid money within one working day of the
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Certified Finance and Accounting Professional Examination – Winter 2020

close of the bidding period.

 The bid money of bidders who have undertaken to subscribe the unsubscribed
retail portion shall remain deposited or blocked till allotment of unsubscribed
retail portion, if any, to them on pro rata basis.

(c) According to the aforesaid Regulations maximum seventy-five percent of the offer size
could be allocated to book building portion and the remaining minimum twenty-five
percent shall have to be allocated to the retail investors.

Hence if FCL in the offer size have allowed the book building portion up to maximum of
75% and the retail portion to the minimum level i.e. 25%, then it could have avoided the
undersubscribed situation.

A.8 (a) Removal of nominee directors before disposal of 20% of PIL’s shareholding in SHL on
31 December 2020:
SHL falls under the Public Sector Company as defined under the Companies Act, 2017
because of PIL’s 55% shareholdings in SHL.
Being the public sector company in accordance with Public Sector Companies (Corporate
Governance) Rules, 2013 (PSC-CGR, 2013), SHL may remove the nominee director of PIL,
only if:
 the director has not performed up to a standard, determined through a performance
evaluation;
 the director is found to be in non-compliance with the provisions of the Act or these
rules;
 the director fails to fulfil his duties and responsibilities under these rules;
 the director fails to comply with or deliberately ignores policy directives of the
Government;
 the Government decides to withdraw the nomination due to any administrative
reasons such as posting, transfer, retirement, etc.; and
 the director is involved in misconduct.

Removal of nominee directors after disposal of 20% of PIL’s shareholding in SHL on

31 December 2020:
After the disposal of 20% of PIL’s shareholding in SHL, the status of SHL after 31
December 2020 would not be as Public Sector Company; hence the procedure for removal
of director shall have to be followed in accordance with the provisions of the Companies
Act, 2017.

According to the Companies Act, 2017 a nominee director can only be replaced by the
nominating body and shall hold office during the pleasure of the nominating body. Hence,
PIL’s nominee director cannot be removed.

(b) As discussed in (a) above, after disposal of shares by PIL the status of SHL after 31
December 2020 would not remain as Public Sector Company; hence SHL shall then only be
required to follow the requirements of Listed Companies (Code of Corporate Governance)
Regulations, 2019 (CCG Regulations, 2019).

Under the CCG Regulations, 2019 the composition will be as follows:

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Certified Finance and Accounting Professional Examination – Winter 2020

Independent director:
A listed company shall have at least two or one third members of the board, whichever is
higher, as independent directors.

Hence, SHL may continue with the same number of independent directors or may opt to
remove one of the independent director. However, in case SHL opt to remove one director,
it would have to explain the reason in the compliance report why the fraction is not
rounded up as one.

Further, in case of removal of one director, in order to maintain the minimum level of
directors i.e. eight either a non-executive or an executive director be appointed.

Female director
At present SHL has no female director on its board of directors. It is mandatory that the
board shall have at least one female director. However, this appointment can be made
when the board is reconstituted after the expiry of current term.

Executive director
At present, SHL has two executive directors. After resignation of Mr. Imtiaz Ali SHL will
have only one executive director on its board, however, SHL may continue as CCG
Regulations, 2019 requires that executive directors including the chief executive shall not
be more than one third of the board.

(c) Vacancy in the office of the executive director:

Since Imtiaz Ali is holding the position of an executive director, hence, SHL shall have to
ensure that the requirements of minimum eight number of director shall be maintained in
accordance with the requirement of its articles of association.

If such appointment could not be made till the last working day of Imtiaz Ali then a casual
vacancy will arise in the office of director that shall have to be filled by SHL board within
90 days from Imtiaz Ali’s last working day.

It is to ensure that the person so appointed shall hold office for the reminder of the term of
office and shall give his consent in writing to SHL for such appointment and SHL shall file
the same with register within 15 days.

It is pertinent to note that SHL’s board of directors may appoint a non-executive director
to fill the vacancy rather appointing an executive director.

Moreover, at this point in time SHL may consider appointing a female director as
discussed in (b) above.

Vacancy in the office of chief financial officer and company secretary:

Furthermore, as discussed in (a), prior to disposal of shares by PIL, SHL was required to
make compliance of PSC-CGR, 2013 also that empowers a person to hold both the
positions of chief financial officer and company secretary. However, according to CCG
Regulations, 2019 the same person shall not be eligible to simultaneously hold office of
chief financial officer and the company secretary of a listed company; hence SHL’s board
shall have to appoint separate person to fill the vacancy of chief financial officer and
company secretary.
SHL have to ensure that chief financial officer shall have managerial experience in fields of
audit or accounting or in managing financial or corporate affairs functions of a company
with:
 at least three years’ experience and is a member of the Institute of Chartered
Accountants of Pakistan or Institute of Cost and Management Accountants of Pakistan;
or
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Certified Finance and Accounting Professional Examination – Winter 2020

 at least five years’ experience and is either a member of professional body of

accountants whose qualification is recognized as equivalent to post graduate degree
by Higher Education Commission of Pakistan or has a postgraduate degree in finance
from a university in Pakistan or equivalent recognized and approved by the Higher
Education Commission of Pakistan; or
 at least seven years’ experience and has a suitable degree from a university in Pakistan
or abroad equivalent to graduate degree, recognized and approved by the Higher
Education Commission of Pakistan.

(d) SHL directors in their report to members shall state the remuneration policy of non-
executive directors including independent directors, as approved by the Board, which
shall also include disclosing the significant features and elements thereof.

Moreover, SHL’s Annual Report shall also contain details of aggregate amount of
remuneration separately of executive and non-executive directors, including salary/fee,
perquisites, benefits and performance-linked incentives etc. SHL may provide aforesaid
details of remuneration of individual directors in its annual report.

(The End)

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