1988 M L D 1408

[Lahore]

Before Muhammad Afzal Lone, J

BANKERS EQUITY Ltd.--Petitioner

versus

GENERAL PUBLIC--Respondent

Civil Original No.14 of 1988 (LHR) 2 of 1988 (Rawalpindi), decided on

22nd June,1988.

(a) Companies Ordinance (XLVII of 1984)----

---Ss.96, 97 & 160(b)--Reduction of subscribed and paid-up capital of

company- Application for confirmation of Scheme--Authority to reduce
capital was conferred on Company under para.11(iv) of its Articles of
Association and exercise of that power was reflected by resolution
passed by majority of shareholders of the Company to whom material
facts concerning reduction of capital under a statement envisaged by
Cl.(b) of S.160 of Companies Ordinance, 1984 had been conveyed--
Public shareholders were not debarred from converting their
shareholding into the investment in the long term finance certificates as
it was in the resolution that first preference would be given to them in
case they chose to go for such conversion--There was a possibility of
overall improvement in the return on paid-up capital by virtue of
implementation of proposed Scheme and alteration in framework of
capital structure would be of some advantage to Company and its
shareholders--Proposed Scheme of reduction in capital of
Company, held appeared to be quite viable, fair and reasonable.

(b) Companies Ordinance (XLVII of 1984)----

---Ss.96 & 97--Reduction in capital of Company--Extent and mode of--
Extent anal mode of reduction of capital of Company, being a domestic
affair of the Company, decision of majority of shareholders in that
respect, held, must prevail--Whether reduction of capital was conducive
to business of Company and how much capital ought to the reduced,
shareholders would be the best Judge in the matter--If their verdict
expressed through resolution, was fair and not prejudicial to interest of
minority, Court should not hesitate to confirm such a Scheme.

Jawad S.Khawaja for Petitioner.

Nemo for Respondent.

Date of hearing: 22nd June, 1988.

JUDGMENT

This order shall dispose of an application under sections 96,97 of the

Companies Ordinance, 1984, filed by the Banker's Equity Limited, for
confirmation of reduction of its subscribed and paid-up capital to be
made; in pursuance of special resolution passed by the shareholders in
the annual general meeting held on 30th December, 1987.

2. The petitioner-Company was incorporated as a Public Limited

Company in the year 1979 and is quoted on the stock exchange. It has an
Authorised Capital of Rs.5,000 million and subscribed and paid-up
capital of Rs.1,033.92 million divided in to 103,392 shares of Rs.10
each. The present shareholding position of the Company is shown here
under:-

"Shareholders Nos. No. of shares %

1. State Bank (1) 35,365,100 34.20
2. NCBs (5) 52,297,600 50.58
3. PBC (1) 711.900 O.69
 Sub - Total: 88,374,600 85.47
4. Insurance Companies (6) 2,950,000 2.85
5. DFIs & others (2) 1,010,000 0.98
6. General Public:
a) Overseas (2422) 5,612,100 5.43
b) Local (5614) 5,445,300 5.27
Sub - Total: 15, 017 14.53
Total: 103,392,000 100.00"
3. The circumstances which compelled the Company to initiate
proceedings for reduction of its subscribed and paid-up capital are, that
ever since its ;c=,e:%r p0ration, its income was exempt from payment of
income Tax. However, under the Finance Act, 1986 this exemption was
withdrawn and from the assessment year 1986-87 onward its profit
became taxable. In the estimation of the management of the Company
the imposition of the income Tax necessitated the balancing of the
capital structure of the Company. This prompted the Managing Director
to take up the matter to the Board of Directors. The factors which
weighed with him to make such a move, as disclosed in para No.1.03 of
the petition are:-

"(i) since the Income-Tax has become applicable to the profits after
counting of the borrowing and administrative general expenses, the
dividend is distributed to shareholders out of the after tax profits,
low debt-equity ratio with a large capital base of the petitioner's
would inevitably lead to a poor rate of return on the capital. This
would cause erosion in the pre -tax pool of funds available for
plough back and would have adverse implications for the growth
of the petitioners business;

(d) the available amount of distributable profits would be inadequate to

declare a reasonable dividend on the existing paid-up capital which
would affect the quotation of the shares of Bankers Equity on the
stock market; and
(iii) Bankers Equity has chalked out an elaborate plan to mobilise funds
from the general public through sale of PLS Certificates of
Investment (COI).

The declaration of un attractive rate of dividend by the petitioners

would deter the saver from investing in these Certificates of
Investment (COI)."

4. It is discernible from the record that the Board of Directors in the

meeting dated 16-8-1987 passed a resolution accordingly; the extract
whereof has been appended to the petition as Annexure A/2. The matter
was then placed before the shareholders of the Company, in the annual
general meeting held on 30-12-1987; the resolution passed therein is
reproduced below:-

"(i) the issued, subscribed and paid-up capital of the Company be and is
hereby reduced by a sum of Rs.700 million i.e. from Rs.1,033.92
million to Rs.333.92 million.

(ii) the reduced capital, aggregating to Rs.700 million shall be converted

into Term Finance Certificate (TFCs) redeemable by the Company
in 10 equal annual instalments after a grace period of 15 years with
a return of 10 per cent per annum of their face value;

(iii) against the redemption of capital by Rs.700 million, SBP, PBC and
NCBs shall surrender their shares for conversion into TFC.
However, if any public shareholder desires such conversion, he
shall be given the first preference, and

(iv) the Managing Director is hereby authorised to do all acts, deeds and
things appertaining to the reduction of the capital, and all that may
directly or indirectly appertain to it, including accepting surrender
of shares and by way of conversion, issuing the requisite TFCs and
to authorise his officers and subordinates with such authority as he
may deem expedient or necessary in or about the circumstances."
5. I have heard Mr. Jawad S.Khawaja, Advocate at some length and
examined the available record. The authority to reduce capital is
conferred on the Company, under para 11(iv) of its Articles of
Association and the exercise of this power is reflected by the resolution
dated 30-12-1987 passed by the majority, of the shareholders of the
Company, to whom the material facts concerning reduction of capital,
under a statement envisaged by clause (b) of Section 160 of the
Companies Ordinance had been conveyed.

6. As stated by the learned counsel for the Company, under the Scheme
of the reduction of the capital, the scribed and paid-up capital shall be
scaled down from Rs.1,033.92 million to Rs.333.92 million and thus
reduced by Rs.700 million. This, according to him shall not affect the
basic capital structure of the Company as on its request the amount of
Rs.700 million well be made available to it for conversion into Long
Term Finance Certificates, carrying a rate of return of 10 per cent per
annum. These certificates would be redeemed by the Company in ten
equal instalments, after a grace period of 15 years from the date of
issuance thereof. As a matter of fact reduction shall be made in the share
holding of the State Bank of Pakistan, 5 Nationalised Commercial Banks
and the Pakistan Banking Council, who hold majority of shares and shall
surrender their shares to the tune of 70 per cent, for investment into the
Certificates aforesaid. Thus, in the revised paid-up capital structure,
55.03 per cent of the shareholding will be held by these Financial
Institutions and the remaining 44.97 per cent by the general public and
other investors. The public shareholders are not debarred from
converting their shareholding in to the investment in the Long Term
Finance Certificates. It is in the resolution dated 30-12-1987 that first
preference shall be given to them, in case they chose to go for such
conversion. The Scheme appears to be quite viable.

7. A question arises as to whether or not the alteration in the frame-

Work of the capital structure, will be of some advantage to the Company
and its shareholders. According to the figures for the year ending 30th
June, 1987, disclosed to the Court, the expenditure incurred on
borrowing in the form of return on Long Term Finance Certificates will
amount to 70 million rupees.

Obviously, this will be an admissible expenditure which will ultimately

help in improving the tax structure in favour of the Company. It has
rightly been canvassed, that by virtue of the implementation of the
proposed Scheme, there shall be over all improvement in the return on
the paid-up capital. The contemplated benefits attributed to the proposed
reduction in capital, on the basis of the calculations relatable to the
financial year 1987 as mentioned in para 2.02 of the petition are
portrayed as under:

Existing

Rupees (in million)

After giving effect to the
proposed reduction in
paid capital

Profit before return 230 230

on L.TFCs and Tax
Less: Return on L- -/230 70/160
TFCs
Less: Provision for 92 64
Tax @ 40%
Paid-up capital 1033.920 333.920
Rate of Return on 13.35 28.75
paid-up capital (%).

8. It has been pointed out that in case the proposed reduction in the
capital is not affected, the large capital base of the Company coupled
with the low debt equity ratio would result in poor yield on the capital
and thus the Company shall not be in a position to declare a reasonable
dividend. Consequently, its quotation on the stock market would become
un attractive. It is submitted that the Company wanted to mobilize public
funds by the sale of PLS Certificates of Investment, but due to the poor
dividend, the investors would remain off the floor

9. It is obvious that the Company has the power to reduce its capital. The
extent and mode of reduction of capital is a domestic affair of the
Company and in this respect the decision of the majority of the
shareholders must prevail. The resolution dated 30-12-1987 is the
manifestation of such a decision. Whether the reduction of capital is
conducive to the business of the Company and how much capital ought
to be reduced, the shareholders are the best Judge m the matter. If their
verdict expressed through resolution, is fair and not prejudicial to the
interest of the minority, the court should not hesitate to confirm such a
resolution. The Scheme of reduction of the capital placed before me
appears to be quite fair and reasonable and seemingly, would not work
to the disadvantage of those shareholders who abstain to participate
therein; rather as demonstrated in the earlier part of this order, its
implementation would result in an overall gain Needless to state that
under its Memorandum of Association, the Company has ample power
to borrow and raise funds for its business. The issuance of the Long
Term Finance Certificates falls within the ambit of such power.

For all these reasons the reduction of the scribed and paid-up capital in
terms of the Company's resolution dated 30-12-198' is confirmed.

H.B.T./B-71/L Application accepted.