Sugar mill case: Political, economic trends cannot be considered as 'rare circumstances', rules SECP

An Appellate Bench of the Securities and Exchange Commission of Pakistan (SECP) has ruled that the political and economic trends cannot be considered as "rare circumstances"- an essential condition for reclassification of investment by any company or in case of a sugar mill.

In this regard, a two-member SECP Bench has issued an order here on Tuesday.

The SECP Appellate Bench has upheld an order of the Executive Director, Corporate Supervision Department (CSD) SECP against a sugar mill involved in reclassification of its investments.

The SECP Appellate Bench has also dismissed the appeal filed by the sugar mill.

The sugar mill informed the SECP Appellate Bench that due to economic and political situation in the country, the company was witnessing volatility in investments and therefore, unrealized gain/loss of investments was affecting the company's financial results. On the other hand, the SECP Bench is of the considered opinion that in the present case no apparent "rare circumstances" existed.

The Bench has carefully examined the arguments of the parties and found that there is no dispute over the company's right to reclassify its investment; however, the point of contention between the parties is existence or non-existence of "rare circumstances," an essential condition for reclassification of the investments.

The SECP Appellate Bench is of the view that the term "rare circumstances" denotes unusual or infrequent events; therefore, usual uneven political and economic trends cannot be considered as "rare circumstances" for reclassification of investments from short-term "fair value through profit or loss" category to long term investments under category "available for sale".

According to the Bench order, the examination of half yearly accounts of a sugar mill (company) for the period ended March 31, 2017 (accounts) revealed that short-term investments of "fair value through profit or loss" category had been reclassified as long-term investments under category "available for sale". As per the contents of the impugned order, aforesaid reclassification of the investments was contrary to the requirements of International Accounting Standards (IAS) 39; Financial Instruments: Recognition and Measurement.

The respondent (executive director SECP) sought explanation on reclassification of investments. The company replied that the reclassification of investments was made in accordance with the requirements of para 50-C of the IAS-39 and disclosure requirements of IFRS-7. On the contrary, the executive director SECP was of the view that precondition of reclassification of the investments i.e. existences of "rare circumstances" was not met before reclassification of investments, and reclassification of investments was not only against the mechanism envisaged under the IAS-39 but it also understated the Accounts by Rs 131,969 million. Therefore, a show cause notice (SCN) was issued to the appellants and the reply of the SCN was received. The respondent (executive director SECP), being dissatisfied with the response of the Appellants, imposed a fine of Rs 10,000 on each of the appellants (Aggregate Rs 70,000).

The Appellate Bench (Bench) has heard the parties and perused the record. The appellants' representatives, while reiterating the grounds of appeal, stated that the investments are still intact and the company has no intention to sell reclassified investments.

The appellants' representatives (sugar mill) further argued that there was no mala fide on part of company or its management and no personal benefit was drawn by reclassification of the investments. The appellants' representatives argued that from 2016 to date, due to lack of political stability, the stock exchange is observing abnormal trends therefore, for true and accurate reflection of the accounts, investments were reclassified in the best interest of the company and its stakeholders. The appellants' representatives contented that abnormal trends of stock exchange was a classic example of "rare circumstances" envisaged in para 50-B of IAS-39.

The sugar mill's representatives also argued that reclassification of investments from short term "fair value through profit or loss" category to long term investments under category "available for sale" was executed after third party auditor opinion. Lastly, the sugar mill's representatives requested to set aside the impugned order of the SECP executive director.

The respondent's representatives (SECP) reiterated the rebuttal arguments of written comments and prayed to dismiss the appeal.

The Bench has also reviewed the appellants' plea that before reclassification of investments, required approvals were sought from the investment committee, audit committee, BoD and impact of reclassification of investments on company's financial statements, which was disclosed in notes 8.1 and 8.2 of the condensed interim financial statements for the period ended on December 31, 2017.