An Appellate Bench of the Securities and Exchange Commission of Pakistan (SECP) has endorsed the viewpoint of the SECP that the basic purpose of section 224 of the Companies Ordinance is to protect small shareholders against short-swing/speculation by the beneficial owners/insiders who may have advance information about the company. According to the order the bench, it has disposed of appeal No 6 of 2015 filed under section 33 of the Securities and Exchange Commission of Pakistan Act, 1997 against the order dated 31/12/14 (Impugned Order) passed by the commission.
The facts of the matter are that the issuer company is a public listed company and the Appellant is a Director of the Issuer Company. The company made sale and purchase transactions in ordinary shares of the Issuer Company within the period of less than six months. The SECP's bench order said that the company has misconstrued the proviso to section 224(1) of the Ordinance which states that "nothing in this sub-section shall apply to a security acquired in good faith in satisfaction of debt previously contracted." The proviso of section 224(1) of the Ordinance provides the requirement of good faith relating to securities in satisfaction of debt previously contracted and does not apply to the' facts of the instant case.
The company has argued that section 224 of the Companies Ordinance requires proof of mala fide based on inside information before the relevant provisions of section 224 shall apply to the facts of the instant case. Furthermore, if the beneficial owner acted as bona fide then in such a scenario the beneficial owner can retain the gains instead of surrendering them to the Company. The company further contended that there was no tenderable gain and shares were sold in good faith to avoid capital tax. The commission has rebutted the argument by stating that the section is applied on a presumption that the person was privy to inside information and, therefore, mala fide is not required to be proved and the said section will automatically apply if the gains are not tendered to the company within six months. Further, transactions made in good faith to avoid tax are not exempted from the provisions of section 224 of the Companies Ordinance.
Appellant Bench was of the view that as per the observation in the Appellate Bench Order of Appeal No 14 of 2010, the question of whether the transactions are bona fide or not have to be decided on the threshold of the Supreme Court judgement. Section 224 of the Ordinance does not give exemption to transactions made for the purposes of tax and the proviso to section 2240) of the Ordinance gives exemption to securities acquired in good faith in satisfaction of debt previously contracted. In the instant case, therefore, it is difficult to establish whether the transactions were bona fide or not. The aforementioned Supreme Court of Pakistan judgement above has spelled out the purpose of section 224 of the Ordinance which states that that the gains made shall at all times remain the property of the Company and SECP has no entitlement thereto. In the instant case, the transactions were done in the ordinary course of business, however, we concur with the Respondent that tenderable gains were made on the sale and purchase transactions in the ordinary shares of the Issuer Company within the period of less than six months, therefore, any gains made by the Appellant shall vest in the Issuer Company. Appellate Bench concluded that the Impugned Order is upheld. The amount of tenderable gains of Rs 1,297,035 shall be transferred to the Issuer Company by the Appellant.
The SECP rebutted the arguments that there is a presumption, which is tacit, to the effect that the person has done something which is unjust or inequitable, or in violation of his duties and obligations to the company as a person falling within anyone of the prohibited categories, and thus should be compelled to surrender his gains to the company. Obviously, it would have been better if this presumption had been made explicit and not tacit but, accepting that the presumed legislative intent was the above, we can proceed further with our analysis..." As per the observation made by the Supreme Court of Pakistan, section 224 of the Ordinance is based on the presumption that persons mentioned in the said section are privy to inside information, therefore, the gain accrued on purchase and sale or sale and purchase, within the period of six months is required to be tendered to the Company and the Commission does not have entitlement thereto. Therefore, since it is not required to be proved that the person has acted on the basis of inside information, therefore, the said section will mechanically apply, without regard to the purpose of the trades or actual use of material, non-public price sensitive information. As in the instant case, if relevant purchase and sale or sale and purchase occur within the period of six months and yield gain, the beneficial owner/insider must tender the gain to the Company even in the absence of any wrongdoing. Further, the contention of the SECP that shares were sold in good faith after holding more than six months to avoid imposition of capital gain tax does not hold merit as the transactions made for tax purpose or any other purpose cannot be exempt from the purview of section 224 of the Ordinance, the SECP added.