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Rs160b wake-up call of KSL: SECP initiates 62 show-causes, takes up 45 investor complaints, 30 proceedings

Rs160b wake-up call of KSL: SECP initiates 62 show-causes, takes up 45 investor complaints, 30 proceedings

ISLAMABAD: Securities and Exchange Commission of Pakistan (SECP) has started show cause proceedings against 62 violators of different legal requirements. These violations pertain to Auditors’ reports, directors’ powers, delayed/non-filling of cost audit reports, investment in associated companies, misstatement of facts, takeover regulations, disclosure of directors’ interests, circulation of financial statements, employees’ provident funds and security deposits. SECP has also issued directives to halt the trading facilities of KASB Securities Limited (KSL) at the Karachi Stock Exchange Ltd (KSE) and Pakistan Mercantile Exchange Ltd (PMEX).

As per details, the SECP Enforcement Department concluded 30 proceedings against companies and chief executives, directors and auditors of the companies during September and October. In one such instance, the detailed examination of financial statements of a listed company led the SECP to track and unveil material concessions extended by another listed company to its associates, in total ignorance of its shareholders.

The lender company had already extended a loan of Rs 50 million to its associate, which was further rescheduled for another three years, without obtaining the required approval from the shareholders.

The lending company also did not record this material information in its financial statements, to avoid surveillance of the SECP and general shareholders, which surfaced from the record of the borrowing company. The company admitted the default and deposited the fine imposed.

In another case, change in cost formula of inventory valuation was accounted for as ‘change in accounting estimate’ instead of as a ‘change in accounting policy’ in accordance with the requirements of International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS).

Since the change of cost formula represents a change in measurement basis therefore it should have been accounted for retrospectively as nothing to the contrary is mentioned in IAS.

Institute of Chartered Accountants of Pakistan duly endorsed SECP’s point of view on the issue.

Meanwhile, the SECP had levied penalty on the KSL vide its order of February 19, 2014 on account of failure to ensure appropriate segregation of client funds.

The six-month moratorium by the State Bank of Pakistan (SBP) and SECP directives have deteriorated the solvency and liquidity of KSL and also created systemic risk for the market. After the restrictions on the bank deposits with KBL, the net capital of KSL i.e. Rs267 million has declined considerably.

Moreover, KSE and PMEX are directed to ensure and continuously monitor that appropriate arrangements are made by KSL for timely payments, upon demand, to its clients, to whom money is payable by KSL. Central Depository Company has been directed to restrict all movement of securities from the participant umbrella of KSL and only allow portfolio transfers from the sub-accounts of the clients. It is pertinent to mention that quantum of client securities held in KSL custody is around Rs160 billion. The National Clearing Company has also been directed to facilitate all pending settlements of KSL in respect of trades executed till November 17, 2014 and net off the settlement obligations of KSL on November 18, 2014 with the settlement obligations of November 19, 2014.

It is pertinent to mention here that KSL is a majority owned subsidiary of KBL. KSL uses KBL as the settling bank for the purpose of settlement of transactions executed at KSE. Further, as on November 14, 2014, KSL had a deposit of more than Rs361 million with KBL primarily pertaining to its clients. In addition, KSE had deposits of more than Rs174 million at KBL which represented margins deposited by the KSL against trades executed at KSE.