Certified Finance and Accounting Professional Stage Examination

The Institute of 8 December 2021

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Corporate Laws
Instructions to examinees:
(i) Answer all EIGHT questions.
(ii) Answer in black pen only.

Q.1 Green Chemicals Limited (GCL) has issued and paid-up capital of Rs. 50 million comprising
of 4 million class A ordinary shares of Rs. 10 each and 1 million class B ordinary shares of
Rs. 10 each. Each share of class A and class B has one and four voting rights respectively.

Nehal Hyder (NH) and his family have been actively involved in the trading of shares
including GCL’s shares, on Pakistan Stock Exchange (PSX). Their investments in
GCL’s shares as on 30 June 2021 are as follows:

Purchase price
Shareholders Purchase date No. of shares
per share (Rs.)
Class A shares
NH 4 Nov 2020 225,000 80
Salman - NH’s son aged 15 years 24 Nov 2020 25,000 81
Rabia - NH’s wife 1 Feb 2021 50,000 84
Erum - NH’s daughter aged 19 years 18 Feb 2021 40,000 86

Class B shares
NH 19 Dec 2020 90,000 190

Moreover, NH also holds 8% ordinary shares of Azure Oils Limited (AOL), a listed company
and 25% ordinary shares of Navy Chemicals (Private) Limited (NCPL).

AOL and NCPL hold 200,000 and 400,000 class A ordinary shares of GCL that were
purchased on 2 April 2021 and 28 April 2021 at Rs. 84 per share and Rs. 88 per share
respectively.

Since 1 July 2021, details of NH’s transactions made in GCL’s shares are as follows:

Date of Class of No. of shares Purchase / sale price

S. No.
transaction shares purchased / (sold) per share (Rs.)
1. 1 Jul 2021 A 110,000 95
2. 30 Aug 2021 A (250,000) 120
3. 30 Sep 2021 B 70,000 225
4. 20 Oct 2021 A (20,000) 70

Required:
In the light of the provisions of the Securities Act, 2015, discuss the responsibilities of
Nehal Hyder after each transaction made in the shares of GCL since 1 July 2021. (18)
 Corporate Laws Page 2 of 6

Q.2 Golden Apparels Limited (GAL) was incorporated as a public unlisted company on
15 July 2016, with paid-up capital of 15 million ordinary shares of Rs. 10 each. Since
incorporation, all the shares of GAL are held by Adnan Shahid and his four brothers who are
also GAL’s directors and actively involved in the business.

In a recent meeting of the board of directors, Noman Shahid, one of the brothers who is CEO,
has proposed the following to the board:

(i) Expand GAL’s operations by introducing the company’s products in European

countries. To cater the demand of the new segment of the business, he believes to
expand the production capacity to three times of the existing capacity.

(ii) In order to finance the new production capacity, raise the funds using the following
sources:
 Issue 1.5 million shares through private placement at a premium of
Rs. 175 per share by 22 December 2021.
 Issue 1.0 million shares through PSX at a premium of Rs. 195 per share. The
proposed date of commencement of public subscription is 15 April 2022.

(iii) Suggest to give him additional charge for looking after the overseas operations so that
he can aggressively work on introducing GAL’s products in European market and the
remaining brothers would continue to work on their existing positions.

(iv) Suggest to allocate 35% of shares issued through PSX to persons resident outside
Pakistan including foreign entities who are interested in GAL’s products.

After deliberation, GAL’s board has agreed in principle with all the proposals. The board has
asked you to evaluate the above proposals in the light of requirements of corporate laws.

Required:
Advise GAL’s board regarding the shortcomings and necessary changes to be made in the
proposals. (15)
(Ignore the provisions of the Companies Act, 2017)

Q.3 Peach Bank Limited (PBL) is a public unlisted company having 900 million shares of
Rs. 20 each. The Federal Government through Ministry of Finance owns 500 million shares
of PBL.

Subsequent to election of PBL’s board of directors held on 30 November 2021, one of the
independent directors, Zubair Saleem, having rich experience in the banking sector was
appointed as chairman on 6 December 2021. In his initial speech to the board, Zubair Saleem
thanked the board members and expressed that as PBL’s chairman, he will attend and chair
all board meetings and general meetings to be held during his tenure.

Zubair Saleem wants to make himself fully aware of his responsibilities in order to serve as
PBL’s chairman.

Required:
Under the applicable corporate laws, prepare a checklist listing statutory duties and
responsibilities of Zubair Saleem, as PBL’s chairman. (07)
Note:  Duties and responsibilities of Zubair Saleem as PBL’s director is not required.
 Ignore the provisions of the Companies Act, 2017.
 Corporate Laws Page 3 of 6

Q.4 The external audit team of Beige Bank Limited (BBL) has submitted observations on non-
performing loans to the bank’s management which are summarized as under:

(i) Antique White Limited (AWL)

On 1 July 2017, Rs. 40 million was sanctioned to AWL for five years, repayable in
equal quarterly instalments. The principal amount outstanding as on
30 September 2021 was Rs. 20 million.

The said facility is secured against charge on plant and machinery having fair value of
Rs. 20 million and pledge of 2 million shares of Indigo Limited, listed on PSX, having
market value of Rs. 11 per share on 30 September 2021.

External audit team’s observation:

 AWL has not made any payment of principal and mark-up since January 2020.
 A provision of Rs. 2 million has been made against AWL’s facility as on
30 September 2021. However, on the basis of time based criteria, 100% provision
is required.

(ii) Fuchsia Limited (FL)

On 1 January 2019, Rs. 80 million was sanctioned to FL for four years, repayable in
equal bi-annual instalments. The principal amount outstanding as of
30 September 2021 was Rs. 50 million.

The said facility is secured against mortgage over factory building having fair value of
Rs. 25 million and charge on plant and machinery having fair value of Rs. 50 million.

External audit team’s observation:

 FL has not made any payment of principal and mark-up since July 2020.
 A provision of Rs. 12 million has been made against FL’s facility as on
30 September 2021. However, on the basis of time based criteria, 100% provision
is required.

(iii) Khaki (Private) Limited (KPL)

On 1 July 2020, Rs. 36 million was sanctioned to KPL for three years, repayable in
equal monthly instalments. The principal amount outstanding as of 30 September 2021
was Rs. 29 million.

The said facility is secured against charge on plant and machinery having fair value of
Rs. 25 million and pledge of stock-in-trade having fair value of Rs. 15 million.

External audit team’s observation:

 KPL has not made any payment of principal and mark-up since February 2021.
 A provision of Rs. 3 million has been made against KPL’s facility as on
30 September 2021. However, on the basis of time based criteria, 50% provision
is required.

Required:
In the light of the Prudential Regulations for Corporate / Commercial Banking, advise BBL’s
management about adequacy of provisions made against each of the above parties as on
30 September 2021. (09)
 Corporate Laws Page 4 of 6

Q.5 (a) The shareholders’ equity as shown in the financial statements of Indigo Fabrics Limited
(IFL), a public unlisted company, as on 30 September 2021 is as follows:

Rs. in million
Paid-up ordinary share capital of Rs. 10 each 500,000
Accumulated loss (350,000)
Total shareholders’ equity 150,000

IFL has been incurring net losses for the last five years. Moreover, since the outbreak
of the COVID-19 pandemic in March 2020, IFL’s sales has significantly declined.

Considering this situation, Fahad Karim, IFL’s CEO, initiated a discussion in the
board meeting to consider winding up of IFL. He informed the board that Green
Fabrics Limited has shown its interest in purchasing IFL’s plant and equipment. He
also proposed that Ahmed Amin, IFL’s CFO, can be appointed as a liquidator and
since he is well conversant with IFL’s affairs, he would be able to wind up the
operations efficiently.

Required:
Under the provisions of the Companies Act, 2017, advise the steps to be taken by IFL
before commencement of winding up if both proposals of Fahad Karim are agreed by
the board. (08)

(b) Assume that Ahmed Amin has been appointed as liquidator and the date today is
31 March 2022.

On 31 March 2022, Ahmed Amin has determined that Rs. 3,500 million can be
collected by disposing of IFL’s remaining assets whereas IFL’s outstanding liabilities
on that date are Rs. 4,000 million.

Required:
Under the provisions of the Companies Act, 2017, explain the responsibilities of
Ahmed Amin in the given situation. Also identify the effect(s) of his determination on
IFL’s stakeholders. (07)

Q.6 Crimson Investments Limited (CIL) is a public unlisted company having NBFC licence to
provide asset management services. CIL manages various collective investment schemes. It
has paid-up share capital of Rs. 600 million comprising 60 million shares of Rs. 10 each.

On 30 June 2019, Zahid Abbas and Shahid Malik were elected as directors by securing
40 million and 30 million votes respectively whereas the remaining seven directors were
elected each by securing 50 million votes. After election, Zahid Abbas was appointed as CEO.

On 31 August 2019, Zahid Abbas resigned from the board and Benjamin Brady, a foreign
national, was appointed as CEO and director in his place. As Benjamin had to relocate to
Pakistan for his role as CEO, CIL’s board agreed to insert a clause in his appointment letter
prohibiting his termination before expiry of the contract term.

On 4 December 2021, Shahid Malik resigned from the board due to serious illness and his
position is still vacant.

Benjamin has not been able to achieve the performance benchmarks and CIL reported net
losses for two consecutive years. Further, there is news circulating in the market that he has
grossly misused his position by sharing price sensitive information with unauthorised persons.

Required:
Discuss how Benjamin Brady may immediately be removed from CIL. (06)
 Corporate Laws Page 5 of 6

Q.7 Bronze Cement Limited (BCL) is a listed company engaged in the manufacturing and
marketing of cement. BCL has issued 80 million ordinary shares of Rs. 15 each.
Shareholdings details and board composition of BCL as at 30 September 2021 are as follows:

Shareholding details:
Shareholders Rs. in '000
Teal Bank Limited (TBL) 300,000
Peach Limited (PL) 250,500
Olive (SMC-Private) Limited (OL) 235,000
Magenta Associates 113,000
Ruby & Co. 95,000
Coral & Sons 70,500
Grey Textiles Limited 50,500
Individuals 85,500
Total 1,200,000

Board composition:
Non-executive directors Executive directors Independent directors
Fahad Noor Tariq Ali Aurangzeb Khan
Safdar Kamran Saad Naeem Saima Arif
Rahim Zain Ahmed Sultan
Arham Ghafoor

Information related to each member of BCL’s board is as follows:

(i) Fahad Noor, a financial expert, represents TBL which is owned by the Government of
Sindh.
(ii) Safdar Kamran is a director since December 2020, nominated by White Bank Limited
which has provided a loan of Rs. 500 million to BCL for enhancing the production
facilities. The loan is to be re-paid on 30 June 2022.
(iii) Rahim Zain, finance director at PL, represents PL.
(iv) Arham Ghafoor has been elected on the board with the support of some individual
shareholders. He ensures that their interests remain protected.
(v) Tariq Ali has been appointed as CEO on 10 January 2019 by the directors from
amongst themselves. Saad Naeem is the head of operations at BCL.
(vi) Aurangzeb Khan, a renowned lawyer, has been appointed as director on 30 November
2019, due to demise of Zahid Shah who was elected unopposed on 31 December 2018.
(vii) Saima Arif and Ahmed Sultan are technology and cement production experts. They
have been elected members of the BCL’s board since December 2012 and
December 2015 respectively.

Next election shall be held in the extraordinary general meeting scheduled to be held on
30 December 2021. Number of directors fixed for the next election is the same as was elected
in the previous election. BCL has no plan to change the composition of the board.
All directors intend to continue to serve on BCL’s board.

Required:
(a) Discuss the course of actions required to be taken by each of BCL’s directors to contest
upcoming election. (05)
(b) Calculate the number of votes available to TBL, PL and OL in respect of upcoming
election of directors. (04)
Assume that the date today is 31 January 2022.
Sikandar Niaz, a non-resident Pakistani and business tycoon, has been appointed as
non-executive director of BCL to fill a casual vacancy.
(c) Advise Sikandar Niaz regarding information to be submitted to BCL within 30 days of
becoming the director. (05)
 Corporate Laws Page 6 of 6

Q.8 Following are the extracts from the latest statement of financial position of Scarlet
Investments Limited (SIL), an unlisted non-deposit taking NBFC:

Rs. in Rs. in
Equity and liabilities Assets
million million
Ordinary shares (Rs. 10 each) 900 Property and equipment 830
Preference shares class A (Rs. 10 each) 150 Intangible assets 80
Preference shares class B (Rs. 20 each) 500 Investments at cost:
General reserves 280 Mauve Steel Limited 120
Share premium 550 Umber Limited 350
Unappropriated profit 700 Cash and bank 950
Long term liabilities 140
Current liabilities 200

All shares issued by SIL carry equal voting rights. Preference shares of class A are
irredeemable whereas each preference share of class B shall be converted into two ordinary
shares on 31 July 2022.

Following proposals are under discussion in SIL’s investment committee:

(i) Sell entire shareholdings in Umber Limited (UL):

SIL purchased shares of UL in September 2019 from PSX with intention to hold them
till June 2030. However, since acquisition, UL’s performance has significantly
deteriorated and therefore, SIL should consider selling entire shareholdings in UL.

(ii) Purchase 10 million shares in each of the following companies:

Paid-up Other Face Market

Name of companies capital reserves value value
--- Rs. in million --- --- Rs. per share ---
Unlisted companies:
Mauve Steel Limited (MSL) 1,200 30 20 -
Jade Textile Limited (JTL) 3,820 50 15 -
Listed companies:
Neon Fertilizer Limited 4,200 650 10 25
Scarlet Bank Limited (SBL) (Note) 6,000 2,000 15 30

Note: SBL holds 80 million ordinary shares in SIL and 60 million shares in JTL.

Required:
(a) Advise the steps to be taken to divest shares held in UL. (03)
(b) Determine feasibility of investment in each of the proposed companies and summarize
requisite conditions to be fulfilled before making the purchase. (Assume that shares of
MSL and JTL may be purchased at face value) (13)

(The End)