COMPLIANCE REPORT ON AFTAB AUTOMOBILES LTD.

Executive Summary

The purpose of the report is to identify the objective of each and every condition of
the Securities and Exchange Commission notification, the impacts of the notification
in the annual report of Aftab Automobiles Ltd. etc.

As mentioned in the SEC notification the objective of the notification is to enhance

the corporate governance. We have identified that the objective of the SEC
notification is to ensure the interest of the shareholders and other stakeholders
especially the interest of the minority shareholders, by insuring the efficient internal
and external control. (employing independent director, audit committee etc).

Insuring the accountability of the board of director, true and fair view of books and
accounts and the independence of the external auditors. Aftab’s compliance report and
annual report shows that Aftab complied all the requirements. But it is difficult to
identify the actual impacts of the notification i.e. whether actually corporate
governance is insured. For example, we cannot know whether the independent
director was independent in his minds and activities. Most of the cases we have to rely
on Aftab’s declaration. For example, Aftab’s board report declares that financial report
prevented fairly and proper books and accounts have been maintained. We cannot
cheque all the necessary documents. We have to rely on board and the auditors report.
However, if all the requirements are complied such as independent director & audit
committee appointed, audit committee report to the SEC if necessary; external
auditors are really independent of the company, then it is expected that corporate
governance have been improved in a company like Aftab Automobiles Ltd.

We have analyzed each and every points of SEC notification company act 1994 and
IAS-1 relating to the requirements if the notification, Aftab’s annual report and
compliance report.

We think in addition to the compliance report disclosed in the annual report, SEC,
should require to be submitted in the SEC, elaborate compliance report with enough
explanation of the impacts of compliance or non compliance in the compliance details
duties and responsibilities to the directors and executives etc. Moreover independent
director should not be appointed by the board, it should be nominated by SEC or
register of joint stock company or in other ways.

Introduction:

The Securities and Exchange Commission Act 1993 provides that, the commission is
responsible for assuring the purpose insurance of securities, protection of the rights of
the investors and the development and regulation of capital and securities market. In
fact the ultimate objective of the commission is to create a organizational and
disciplined instrument in the investment and corporate sector. As part of the SEC role
SEC issued a modification in 2006 where it mentioned that the objective of the
notification is to enhance corporate governance listed with any stock exchange in
Bangladesh shall comply with the conditions of the notification or shall explain the
season for non compliances.

Nature of the Business:

The principal activities of the Company throughout the period were assembling of
Toyota Land Cruiser soft top/ Pick-up, Land Cruiser Prado, Hino Bus, Hino Mini Bus/
Truck Chassis with a production Capacity of 2400 units of vehicles in 3 shifts in
ASSEMBLING UNIT. But since inception, the Plant is running single shift
considering the market demand. The Company has added four units namely BODY
BUILDING UNIT, PAINT UNIT, BATTERY UNIT & FURNITURE UNIT
commercial production of which started w. e. f. May 5, 1997, November 01, 1999,
January 03, 2002 and May 01, 2002 respectively.

The main function of Aftab was it’s automobile assembly unit. But the production in
the assembling unit has declined due to discontinuation of Toyota Land Cruiser Prado
in CKD condition by Toyota Motor Corporation, Japan. You are also aware that
DGDP has been importing Toyota vehicles in CKD condition and assembling those at
their own facilities at BMTF, Gazipur since long. However, the Company has
assembled a total of 167 units of vehicles consisting of 101 units Hino Bus Chassis,
30 units CNG Hino Bus Chassis and 36 units Hino Mini Bus Chassis. An amount of
Tk. 65.32 crore has been contributed as net sales from this Unit to Company’s
turnover.
The Bus Body Building Unit of the company has completed fabrication of 128 units
of Hino Bus body and 23 units of Hino Mini Bus body, the net sales value of which
stood at Tk. 10.74 crore.
In the Paint Manufacturing Unit Paint” has produced 7.40 lac litres of paint products
and delivered to the dealers. An amount of Tk. 8.67 crore has been added to net sales
of this Unit.

From the Battery Manufacturing Unit of the Plant under the Brand name of “Navana
Battery” has produced atotal of 52,924 pcs. of Batteries for domestic and export
market. The Company sold 48,880 pcs. batteries which consists of Automotive,
Inverteraps and Solar Batteries. This Unit has contributed an amount of Tk. 21.20
crore of Company’s sales.

The Furniture Unit of the Company under the brand name of “Navana Furniture” has
produced office, home, industrial and medical furniture. From this Unit, an amount of
Tk. 24.64 crore has been added to Company’s turnover.

Corporate governance:

In the recent periods, corporate governance is the widely emphasized control

mechanism used for efficient utilization of corporate resources. It is a hybrid of
internal and external control mechanisms. Corporate governance involves monitoring,
evaluation and control of organizational agents to ensure that they behave in the
internal of the shareholders and other stakeholders. Presently it focused on matters
like the composition of board of directors, the duties and responsibilities of executives
and non executives directors, regular monitoring by shareholders voting rights of
shareholders minority shareholders interest and detailed disclose of company
information that are material for making decision by interested parties. Board
composition in concerned with board size, separation of Chairman and CEO’s
responsibilities of inside and outside director and independence of outside director
etc.
SEC Reasons/Objective of the Finding
Requirements requirements /Explanation

1.1 Board Size: The Directors of a company are Aftab’s board size
interested by law with the management consists of 6 member.
of the business of the company. To
direct the company and make effective,
efficient and timely decision there need
several diversified brains to think and
act. To less numerous may not tackle
all aspects and too many number may
create conflicts and costly. so, SEC
specified a range of number of board
size i.e. 5 to 20.

1.2 Independent Impendent director is expected to play Aftab’s board

Directors: an important role to ensure corporate includes one
governance minority interest etc. as he independent
is supposed to be unbarred because of directors. But it
his independence i.e. he has no interest cannot be understood
(or less than 1%) of ownership or he from the annual
has no otherwise linkage with the report whether he is
company or its subsidiary or with the actually or
stock exchange. Independent director is substantially
supposed to have core competences and independent in mind
he will give independent opinion, new and activities and
or different ideas etc. how much interest or
linkage he has or not
with the company.

Our personal opinion

is independent
director should be
elected by SEC or
minority shareholders
 or by govt. or in
some other ways.

1.3 Chairman of Chairman give the conclusive or final They are differed
the Board and decision and CEO is responsible to individuals but
chief Executive execute it. So they should be different whether roles and
individuals. If they are same person, responsibilities of
power can be misused by him/her and chairman and CEO in
accountability can be lost. Aftab is not clearly
defined or is not
found in their annual
report.

1.4 The Directors The directors of a company are Aftab automobiles

Report to entrusted by law with the management annual report include
Shareholders: of the business. The principle of directors report
separation of ownership and compelling all the
management underlies this provision. requirements of SEC.
According to the agency or stewardship But whatever they
theory directors are responsible or include in directors
liable to ensure all the well being of the report it is another
shareholders. Directors take crucial question of inquiry
decisions and most of the day to day whether their
operational function are delegated by inclusion are
the directors to the management. They substantially true and
can delegate authority but cannot fair.
delegate responsibility. So SEC as well
as company act 1994 u/s 184 require
that directors will provide some
additional statement as directors report
to ensure that directors have
accomplished all the responsibility. It is
the written declaration of the director
who are the ultimate responsible person
to the shareholders. As they have to
 declare explicitly they are assumed that
they have done as per declaration.

2.1 Appointment: Financing is one of the crucial Aftab declares in its

activities of business. To perform these compliance report
activities efficiently and to emphasize that, it has appointed
the function of finance SEC require to CFO, head of internal
appoint separate chief financial officer audit and company
(CFO). Effective internal control & secretary. But it
internal audit is also necessary to cannot be understood
ensure whether all activities are going from the annual
on the right way. So head of internal report whether each
audit is also necessary to lead the of their roles
internal audit system. Company responsibilities and
secretary is also needed to assist the duties are clearly
board to play the spoken person role of defined.
the board.

2.2 Requirement CFO is appointed to run the finance Aftab gave the tick
to Attend Board activities. In the board meeting he has mark as complied
Meetings: to get direction, approval as well as he with this requirement
has to inform his activities. Secretary but it is not clear that
has to attend in the board meeting to whether CFO and
assist the board as well as to play the company secretary
spoken person role of the board. attended all the board
meetings, because it
is not mentioned in
the meetings and
attendance report.

3. Audit An effective board of directors is

Committee: independent of management and its
members are involved in and scrutinize
management activities. To assist the
board in it’s over right the board
 created an audit committee that is
charged with over right responsibility
for the financing reporting process, the
audit committee is also responsible for
maintaining ongoing communication
with both external and internal auditor.
This allows the auditors and directors
to discuss matters that might relate to
such things as the integrity or actions of
management.

3.1 (i) Constitution The objective of this requirement is Aftab automobile has
of Audit that at least three members are required complied this
Committee to perform the duties of audit requirement.
committee efficiently and effectively.

3.1 (ii) The objective of this requirement is Aftab automobile has

that the audit committee should include complied this
at least one impendent director so that requirement.
the committee can be free from
business.

3.1 (iii) The objective of this requirement is Aftab automobile has

that any vacancy in the audit committee complied this
should be filled up immediately or not requirement.
later than one month from the date of
vacancy (ies) in the committee to
ensure continuity of performance of
work of the audit committee.
3.2 (i) Chairman The objective of this requirement is Aftab automobiles
of the Audit that the Board of Directors should Ltd. has disclosed
Committee select one member of the Audit that it has complied
Committee to be chairman of the Audit this requirement, but
Committee so that he can lead the it is not possible to
committee. know about the

3.2 (ii) The objective of this requirement is professional

that the chairman of the audit qualification on

committee should have a professional knowledge,

qualification or knowledge, understanding and

understanding and experience in experience in

Accounting and finance because of accounting or finance

most of the tasks of audit committee is of the chairman of
accounting and finance related. To lead the Audit committee
the audit committee the chairman of from the annual

this committee should possess these report.

qualities.

3.3.1 (i) Reporting The importance or necessity of audit Aftab declares that it
to the Board of committee is mentioned in section 3 has complied with all
Directors what 3.3.1 requires are just the audit the requirement of
committees duties and responsibilities 3.3.1. But we cannot
for which the committee is established. know what was the
So they should report to the board. conflicts of interest,
suspected fraud or
irregularity or
infringement of law
that the audit
committee has
reported to the board.

3.3.1 (ii) Committees intendance from Aftab has 3 members

management and knowledge of audit committee.
financial reporting issues are They declares that
 considered important determinants in audit committee has
their ability to effectively evaluate performed it’s duties.
internal controls and financial
statements prepared by management.
For this reason SEC requires to have an
audit committee.

3.3.2 Reporting to If audit committee reports to the board Aftab disclosed that,
the Authorities: that has material impact and board audit committee has
ignores it, it means that, board has not not faced such
understood the significance or it situation.
intentionally ignores it. But material
impact must be considered or rectified.
So audit committee should report it to
the SEC so that the board is bound to
take the necessary corrective action.

3.4 Reporting to SEC requires that audit committee’s Aftab declares that,
Shareholders and activities and reports to board should this requirement is
General Investors be disclosed in the annual report with complied. But
signature of the chairman of the audit actually audit
committee. The objective is to disclose committee’s report is
to the shareholders and general not disclosed in the
investors whether and what the audit annual report.
committee has done actually, to know
the transparency and effectiveness of
the audit committees work.

4. External/ The Principal statements that are Aftab has complied

Statutory Auditors distributed to external users are usually this requirements of
accompanied by a signed auditor’s SEC i.e. it engages an
report. The SEC, for example, requires external auditor
that all publicity owned companies file whether its financial
an audited annual financial statement statement is free from
with the agency. Moreover, since most all material fraud &
financial statement uses have come to biasness.
view the auditors opinion as an
essential component of the financial
report. The purpose of the external
auditors report in to inform financial
statement users about whether the
statements were prepared using
generally accepted accounting
principles and whether the reported
results fairly present the company’s
financial positions results of operation
& cash flows. As a consequence, the
auditors report represent an objective
assessment of the fairness of the
financial information contained in the
financial statement not to perform
valuation services of fairness opinions,
financial information system design
and implementation. Book-keeping and
accounting records service, broker
dealer, services, secretarial service,
internal audit services & any other
services that the audit committee
determines. External auditor normally
addressed to the shareholders &
directors of the client company through
its report that an expression of opinion
about the fairness of financial
statements prepared by the
management.
Company Act 1994

Sec-90: Number of director minimum 3 in public Ltd. Co. 2 in private Ltd. company
no upper limit. Independent director is not required by co. Act 1994.

IAS-1:

Directors report is not required by IAS-1 as part by annual report but if the firm depart
from any standard management shall disclose it in the annual report as specified by
IAS-1, Pec-18.

Conclusion:

SEC deems to ensure corporate governance and create a congenial and disciplined
environment in the investment and corporate sector. So SEC issue the notification that
is required to comply or give explanation if not complied by the stock listed
companies. Now SEC should observe assess and evaluate the present situation
whether companies are complying merely the forms of the notification or there are
significant and substantial positive changes to ensure the SEC objective. SEC should
rethink how real independence and effectiveness of independent director, audit
committee and internal auditors are ensured.