5.

Investments, Contracts and Dividends (Solutions) Page 766

Ch # 5: Investments, Contracts and dividends

Q# Solution

Q1* Reg 3,4 of Employee Contributory Fund 2018

Under Employees Contributory Fund (Investment in Listed Securities) Regulations,2018
the trustees of employees provident fund can make the investment in IPO in the
following manner:
i. The investing limit of the fund for equity securities is 30% of the size of the fund. i.e
230x30% = 69 million
ii. The fund cannot invest in Home Appliances Limited because one of the
underwriters is the associated undertaking of the company.
iii. The fund can invest in the rest of the IPOs. However, the maximum limit of
investment in each IPO is 1% of the paid up capital of the investee company or2%
of the size of the investment limit (i.e 30% of the size of the fund), whichever is
lower. By considering this rule, the fund can invest the following maximum amount
in remaining three IPOs.
• First Energy Limited – investment of Rs. 1.38 million ( 1 % of the capital i.e Rs.7
million or 2 % of the total limit (69x 2%) i.e Rs. 1.38 million whichever is
lower).
• Medium Textile Limited – investment of Rs. 1.38 million (1 % of the capital i.e.
Rs.6 million or 2 % of the toal limit (69x2%) i.e. Rs. 1.38 million whichever is
lower).
• Mazboot Cement Limited – investment of Rs. 1.38 million (1 % of the capital i.e.
Rs.4 million or 2 % of the size of the fund i.e. Rs. 1.38 million whichever is
lower).
• Nice Pakistan Limited – investment of Rs. 1.38 million (1 % of the capital i.e. Rs.
5 million or 2 % of the size of the fund i.e. Rs. 1.38 million whichever is lower).

iv. The aggregate investment through IPOs shall not exceed 5% of the investment
limit. i.e. Rs. 3.45 million (69x5%) during every six months in a calendar year. In
the given situation, if all the IPOs are coming within six months, the fund maximum
aggregate investment in IPOs is Rs. 3.45 million. However, the aggregate
investments in listed equity securities shall not exceed 30% of the size of the
employees’ provident fund.
In view of this above rule the maximum investment in IPOs which provident fund
can make is 11 million as calculated below:

Rs. in million
Existing size 200
Additional funds 30
230
30% of 230 69
Equity investment in listed securities (58)
11
5. Investments, Contracts and Dividends (Solutions) Page 767

Q2* Reg 3,4 of Employee Contributory Fund 2018

a) The fund has already made investment in the listed securities equal to 44% of the
size of the funds i.e. 24% in listed equity securities and 20% in listed debt securities.
Under the EPF Rules:
(i) The maximum limit of investment in listed debt securities is 30% of the size of
the fund. The additional investment of Rs. 20 million would increase the funds
investment in debt securities to 24% which is within the allowable limit.
(ii) The maximum limit of investment in listed equity securities is 30% of the fund.
The additional investment of Rs. 40 million would increase its investment in
equity securities to 32% which is above the allowable limit. The fund can make
investment in BTL up to Rs. 30 million only (500 × 30% - 120).
(iii) The maximum aggregate investment in listed securities is 50% of the fund. The
additional investment of Rs. 60 million (i.e. Rs. 20 million in debt securities and
Rs. 40 million in equity securities) would increase its investment in listed
securities to 56% which is above the allowable limit.
(iv) The aggregate investment in listed equity securities of a particular company
shall be restricted to 10% of the investment limit (i.e 30% of the size of the fund
i.e Rs.150 million) (10%x150)i.e 15 million or 5% of the paid up capital of the
investee company i.e. (Rs. 30 million) whichever is lower, therefore investment
in BTL shares under this rule is allowed up to Rs. 15 million.
(v) The aggregate investment in listed debt securities of a particular company shall
be restricted to 10% of the investment limit (10% x 150= Rs.15 million) or 5%
of debt issue of the investee company i.e. Rs. 10 million, whichever is lower,
therefore investment in FL under this rule is allowed up to Rs. 10 million.

b) Other conditions to be met

For listed debt securities i.e. FL

(i) The securities must have been assigned a minimum rating of “A” by credit
rating company licensed with the Commission and with atleast a stable outlook
at the time of investment.
For listed equity securities i.e. BTL
(i) BTL should have a minimum operational record of three preceding years.
(ii) BTL must have paid average dividend of not less than 15% during 2 out of 3
preceding consecutive years.
(iii) Minimum Free Float of that shall not be less than 15% or 50 million shares
whichever is higher;and
(iv) STL has breakup value at least equal to par value of its shares.

Q3* Reg 5,6 of Investment of Associated Companies Regulations 2017

General conditions to be complied by PL:
(i) Since interest on previous loan is outstanding from AL, PL may grant further loan
only if repayment of such loan is rescheduled after approval of special resolution of
members of PL.
(ii) The investment shall be made within twelve months from the date of passing of
special resolution.
5. Investments, Contracts and Dividends (Solutions) Page 768

(iii) There shall be an agreement in writing and such agreement shall inter-alia include
the terms and conditions specifying the nature , purpose , period of the loan, rate of
interest, mark-up, profit, penalty clauses in case of default or late repayments and
security for the loan in accordance with the approval of the members in the general
meeting.
(iv) Interest shall be recovered periodically by PL in line with the standard terms
normally applied by the commercial banks.
(v) Interest rate on TFCs is in line with the prevalent market interest rate so no
adjustment is required in this regard.

Q4* Reg 5,6 of Investment of Associated Companies Regulations 2017

ABC Limited will have to comply with the following conditions while making any
investments in the subsidiary.
General conditions to be complied with under each options
(i) Pass a special resolution in the general meeting of the company.
(ii) The investment shall be made within a period of twelve months from the date of
passing of special resolution.

Conditions to be complied with in the case of option I (equity investment)

Since subsidiary is an unlisted company, the fair value of its shares shall be determined
by a person having such qualifications and experience and registered as a valuer in such
manner and on such terms and conditions as may be specified by the SECP (Sec 460 of
Companies Act)
Share deposit money shall be transferred for equity investment only after
announcement of the offer for issue of shares by its associated company and in case
shares are not issued within ninety days of the transfer of share deposit money such
share deposit money shall be treated as loan and interest/mark up thereon shall be
charged from the date of transfer of funds.

Conditions to be complied with in the case of Option II (funded and non-funded

facilities)
(i) The company shall not invest in its associated company by way of loans or
advances except in accordance with an agreement in writing and in accordance
with the approval of the members in the general meeting;
(ii) ABC Limited shall charge and recover interest in line with the standard terms
applied by the commercial banks on similar facilities. Mark-up for the grace
period is being charged at 50% less than the normal which seems not in
accordance with the standard terms normally applied. It should be re-considered
by ABC Limited.
(iii) ABC Limited shall not extend to its subsidiary any loan for a period beyond one
year provided that members may approve renewal of such loan.
(iv) In case of unfunded facilities (i.e. for a guarantee), rate of return shall be
determined based on the rate of commission charged by commercial or Islamic
banks on similar unfunded facilities.
5. Investments, Contracts and Dividends (Solutions) Page 769

Q5 Section 199 of Companies Act 2017

As SL and MPL would be regarded as associated companies, following conditions would
have to be fulfilled
 Company can make investment in any of its associated companies or undertakings
only under Special Resolution
 (It shall indicate nature, period, amount of investment and related terms and
conditions)
 It should be done through a written agreement specifying the terms and conditions
 Return on investment shall not be less than borrowing cost of investing company or
rate as may be specified by SECP.
 Directors shall certify that the investment is made after due diligence and that the
borrower has the ability to repay loan.

Q6 Section 244 of Companies Act 2017

In respect of all shares and dividend which remain unclaimed for a period of three years,
the company shall give a 90 days' notice to shareholders to file a claim by a registered
post acknowledgement due on his last known address. After expiry of 90 days, final
notice in specified form shall be published in 2 daily newspapers, one in Urdu and one in
English having wide circulation.

If no claim is made by the shareholders, the company shall after 90 days from date of
publication of 2nd notice, deposit the unclaimed amount with the Federal Government.
In the given case, Rs. 1,760,000 [(Rs. 10,000,000x8%)+(12,000,000x8%)] worth of
unclaimed dividend will be deposited i.e. the dividend becoming due on 28 February
2015 and 28 February 2016.

Further, the management shall report and deliver 800,000 shares to the Commission and
the Commission shall, after selling these shares in specified manner and period, deposit
the proceeds to the credit of Federal Government.

Q7 Section 243 and 242 of Companies Act 2017

Payment of interim dividend:
An interim dividend must be paid within 15 days (as may be specified by SECP) of its
declaration and in the given scenario, the dividend shall be deemed to have been
declared on 28 September 2018 i.e. the date of commencement of closing of share
transfer for determination of entitlement of dividend. Hence, AL should pay dividend
latest by 28 October 2018.

The circumstances in which non-payment of dividend by AL shall not constitute an

offence are as under:
(i) where the dividend could not be paid by reason of the operation of any law;
(ii) where a shareholder has given directions to the company regarding the payment of
the dividend and those directions cannot be complied with;
(iii) where there is a dispute regarding the right to receive the dividend;
(iv) where the dividend has been lawfully adjusted by the company against any sum due
to it from the shareholder; or
5. Investments, Contracts and Dividends (Solutions) Page 770

(v) where, for any other reason, the failure to pay the dividend or to post the warrant
within the period aforesaid was not due to any default on the part of the company;
AL may also withhold the payment of dividend of a member where the member has not
provided the complete information or documents as specified by the Commission.

Q8 Section 240,241,243 of Companies Act 2017

(i) The shareholders are not justified in their claim because as per the requirements of
the Companies Act, members are allowed to approve the dividend declared by the
directors. They can reduce that amount but cant increase it.
(ii) No. The Companies Act 2017 specifically prohibits the payment of dividend from
such profits.
(iii)Where a dividend has been declared by a company but is not paid within the
stipulated time, the chief executive of the company shall be punishable with
imprisonment for a term which may extend to two years and with fine which may
extend to five million rupees.
 A chief executive convicted as above shall from the day of the conviction cease to
hold the office of chief executive of the company and shall not, for a period of
five years from that day, be eligible to be the chief executive or a director of that
company or any other company.

Q9 Section 240,241 of Companies Act 2017

The statement is incorrect and contains the following errors. The chief executive of the
company does not declare the dividend. He informs the shareholders about the
percentage/amount of the dividend as recommended by the directors.
The dividend is approved by the members but the dividend so approved shall not exceed
the amount as recommended by the directors.

No dividend shall be declared or paid by a company out of the profits of the company
made from the sale or disposal of any immovable property or assets of a capital nature
comprised in the undertaking(s), unless the business of the company consists, whether
wholly or partly, of selling and purchasing any such property or assets, except after such
profits are set off or adjusted against losses arising from the sale of any such immovable
property or assets of a capital nature.

No dividend shall be declared or paid out of unrealized gain on investment property

credited to profit and loss account.
5. Investments, Contracts and Dividends (Solutions) Page 771

Q.10 Reg 3,4, and 5 of Employees Contributory Fund Regulations 2018

Q.11 Reg 5 of Investment in Associate Companies 2017

a) As per the requirements of the “Companies (Investment in Associated Companies or
Undertakings) Regulations 2017”, if shares are not issued within 90 days of transfer
of share deposit money; such share deposit money shall be treated as loan and
interest/mark up thereon shall be charged from date of such transfer.

Therefore we would be charging the interest on this share deposit money right from
the beginning i.e. February 17th 2015.
5. Investments, Contracts and Dividends (Solutions) Page 772

b) As per the requirements of the “Companies (Investment in Associated Companies or

Undertakings) Regulations 2017”, If the investing company has no borrowings, the
rate of return on loans / advances shall not be less than Karachi Inter Bank Offered
Rate (KIBOR) for the relevant period.

Therefore the decision to advance the loan on interest free basis is not valid and we
should be charging at least rate equivalent to the KIBOR

c) As per the requirements of the “Companies (Investment in Associated Companies or

Undertakings) Regulations 2017”, where approval is granted by members up to a
certain limit, such approved limit shall stand exhausted upon investment reaching
that limit on a cumulative basis, and approval shall not be valid for any recurring
investment even after divestment.

Therefore KIL would again have to pass Special Resolution in order to invest further
in its associate BBL.

d) As per the requirements of the “Companies (Investment in Associated Companies or

Undertakings) Regulations 2017”, In case of unfunded facilities the rate of return
shall be determined based on the rate of interest, mark up, profit, fees or
commission etc., as the case may be, charged by commercial banks or Islamic
Financial Institutions on similar unfunded facilities.

Therefore KIL have to survey the rates prevalent in the market for such sort of
guarantees in order to make a conclusion

Reg 6 of Investment in Associate Companies 2017

e) As per the requirements of the “Companies (Investment in Associated Companies or
Undertakings) Regulations 2017”, Unless otherwise specifically authorised by the
members in general meeting, special resolution shall be valid for a period of 12
months and shall stand lapsed after such period

Therefore KIL have to get another approval from members (special resolution) for
investment in BKL, because the validity period of 12 months has been lapsed.

Reg 4 of Employees Contributory Funds (Investment in Listed Securities)

Regulations, 2018.

Q12* Eligibility criteria ALUE BLUE CLUE

(i) Investee company should Eligible Not Eligible Eligible
have a minimum profitable
operational record of
immediate 3 preceding
years
5. Investments, Contracts and Dividends (Solutions) Page 773

(ii) Investee company has paid Eligible Eligible Eligible

average dividend of not less
than 15% during two out of 2017: 16% 2017: 18% 2017: 16%
three preceding 2018: 17% 2018: - 2018: 12%
consecutive years 2019: 18% 2019: 40% 2019: 15%
(iii) Minimum free float shall Not Eligible Not Eligible Not Eligible
not be less than 15% or 50
million shares whichever Free float Free float Free float
is higher 15m shares 7m shares 6m shares
(33%) (35%) (12%)
vs vs Vs
50m shares 50m shares 50m shares
(iv) Investee company has Eligible Not Eligible Eligible
breakup value equivalent
or more than the par value Breakup value Breakup Breakup
of the shares of such Rs. 12 value value
company. Rs. 9.50 Rs. 20
(v) Conclusion (eligible for Not Eligible Not Eligible Not Eligible
investment if all the above
conditions are met)
Q13 Sec 200 of Companies Act 2017
As per the requirements of Companies Act 2017 (Sec 200);
 The company may hold any shares in its subsidiary company in the name of any
nominee of the company, if it is necessary to do so, to ensure that the number of
members of the subsidiary company is not reduced below the statutory limit.
 Where the company has a right to appoint or get elected any person as a director of
any other company and a nominee of the company in exercise of such right has been
so appointed or elected, the shares in such other company of an amount not
exceeding the nominal value of the qualification shares which are required to be held
by a director thereof, may be registered or held by such company jointly in its own
name and in the name of such person or nominee, or in the name of such person or
nominee alone.
In the given situations:
(i) PTPL is wholly owned subsidiary company of OTL means it has one shareholder.
Whereas, PTPL being a private company must have at least two members, hence OTL
may hold any shares in the name of any of its nominee to ensure that the number of
members of PTPL is not reduced below the statutory limit.
(ii) OTL has nominated Sami as non-executive director by virtue of its investment in
TTPL. It means OTL have right to appoint or get elected any person as director of
TTPL, therefore, in the light of the provisions of Companies Act, 2017 OTL have the
right to transfer TTPL’s shares in the name of Sami up to an amount not exceeding
the nominal value of the qualification shares
Q14* Section 199 of Companies Act, 2017.
The term ‘investment’ shall include equity, loans, advances, guarantees, by whatever
name called, except for the amount due as normal trade credit.
5. Investments, Contracts and Dividends (Solutions) Page 774

Thus, TKPL would not be authorized to provide any security in connection with a loan
obtained by its associated company except under the authority of a special resolution
which shall indicate the nature, period, amount of investment and terms and conditions
attached thereto.
Q15* Regulation 3 and 5(4) of Companies (Investment in Associated Companies or
Associated Undertakings) Regulations, 2017.
(a) MFL shall disclose following information in the statement annexed to the notice of a
general meeting called for considering investment decision:
(i) Name of associated company i.e. Local Limited, basis of relationship, EPS for
last three years, break-up value per share, main items of financial statements:
(ii) Description of proposed mega project, starting date and expected date of
completion of work, time by which such project shall become commercially
operational, expected time by which the project shall start paying return on
investment i.e. first year of operations, and funds invested or to be invested
by the promoters, sponsors, associated company or associated undertaking
distinguishing between cash and non-cash amounts.
(iii) Maximum amount of investment to be made i.e. Rs. 300 million, purpose,
benefits likely to accrue to MFL from such investment and period of
investment, sources of funds to be utilized for investment, salient features of
the proposed agreement, direct or indirect interest of directors, sponsors or
majority shareholders and any other important details.
(iv) Where the investment is intended to be made using borrowed funds
justification for investment through borrowings, detail of collateral,
guarantees provided and assets pledged for obtaining such funds, and cost
benefit analysis.
(v) average borrowing cost of the investing company, the Karachi Inter Bank
Offered Rate (KIBOR) for the relevant period, rate of return for Shariah
compliant products and rate of return for unfunded facilities, as the case may
be, for the relevant period.
(vi) rate of interest, mark up, profit, fees or commission etc. to be charged by
investing company i.e. KIBOR + 2% or profit sharing.
(vii) particulars of collateral or security to be obtained in relation to the proposed
investment;
(viii) repayment schedule and terms and conditions of loans or advances to be
given to the associated company or associated undertaking.
If MFL is a listed company, it shall simultaneously dispatch a copy of
aforesaid notice and the statement of material facts to SECP, through fax or
email and courier service on the same day it is dispatched to the members.
The directors of MFL while presenting the special resolution for making
investment in LL shall certify to the members of MFL that they have carried
out necessary due diligence for the proposed investment before
recommending it for members’ approval. The duly signed recommendations
of the due diligence report shall be made available to the members for
inspection in the general meeting called for approval of the special resolution.
(b) MFL can accept LL’s offer if the transactions shall be structured in such a way that
the rate of return on such facilities is not less than (the higher of following):
5. Investments, Contracts and Dividends (Solutions) Page 775

(i) that earned by Islamic Banks or Islamic Financial Institutions in Pakistan on

similar facilities during the corresponding time period
(ii) the borrowing cost of MFL.

Q16* Regulation 2(viii), 3 and 4(4)(5)(9) of Companies (Distribution of Dividends)

Regulations, 2017.
The chief executive of TIL is responsible to make payment of cash dividend by 15th
November 20X1 i.e. within a period of 15 working days from the date of declaration of
dividend.
The payment of dividend shall be made in following manner:
(i) TIL may appoint a paying agent, directly or through its share registrar, and provide
it with details of entitled shareholders including its name, identification number,
information pertaining to designated bank account number and net amount
required to be paid into the designated bank account.
(ii) The net amount required to paid into the designated bank accounts of relevant
shareholders shall either be transferred to the bank account of paying agent or
made available to paying agent through any other mean for onward distribution to
the entitled shareholders.
(iii) If TIL is listed company, it shall ensure that payments have been made by the paying
agent within the stipulated time period.
(iv) The paying agent shall make payments as per details provided by TIL and in case of
failure to transfer any amount into any designated bank account for any reason,
promptly communicate the same to TIL.
(v) If TIL is unlisted company:
 The paying agent shall provide TIL with confirmations of payments into the
designated bank accounts of relevant shareholders for onward communication
to the relevant shareholders.
 If TIL is unlisted company, it shall provide shareholders to whom payment of
cash dividend is made with a certificate containing information for record
purposes or for tax filings.
(vi) If TIL is listed company:
 the shareholders shall be intimated by TIL, its share registrar or the paying
agent through SMS, e-mail, registered post or any other mode regarding credit
of dividend amount directly into the designated bank account of the
shareholder.
 the calculation of dividend amount including number of shares held, total
amount, tax and zakat deductions and net amount credited into the designated
bank account of the shareholder through the paying agent and a certificate
thereof shall be provided to the shareholders in electronic form through the
central depository.
 the central depository shall make available certificate received to the respective
shareholders through central depository system or any other system developed
by it, for the purposes of record and tax filings.