Securities and Exchange Commission of Pakistan starts probe into Attock Refinery affairs

KARACHI (January 17 2003) : The Securities and Exchange Commission of Pakistan (SECP) has appointed an inspector to conduct an investigation into the affairs of Attock Refinery Ltd, to check whether the company was not transferring its profit to its associated undertakings.

According to the press release of SECP the inspector among other matters would also determine that the transactions with associated undertakings/related parties were at arms' length and the company was not transferring its profit to its associated undertakings.

During the examination of the accounts, the Enforcement and Monitoring Division (EMD) of the SECP0 noticed that the performance of the company had been on the down side since 1998.

During the years ended June 30, 1999 to 2001, the company sustained heavy losses from refinery operations and obtained subsidies amounting to Rs 1.379 billion from the government as per import parity pricing formula which guarantees the profit after tax from refinery operation at 10 percent of the paid up capital of the company.

In order to probe the matter, the company was asked to provide certain information regarding prices of products and transactions with its associated undertakings.

This information was specifically called for that the company has not transferred its revenue to associated undertakings though transfer pricing mechanism.

The company did not provide the information to the SECP even after several reminders.

The Commission issued a show cause notice to the company as instead of providing the relevant information/documents, the company furnished irrelevant and misleading information.

Furthermore, the company did not take any steps to reduce the suspicion of the Commission and prolonged the matter.

The SECP, in view of the following factors has appointed an inspector to investigate the affairs of the company:

There is a reasonable basis that justifies that the company's transactions with its associated undertakings were not arms' length and there might be an issue of reduced transfer pricing.

Subsidies obtained by the company from the government.

Incorrect statements in the information provided to the SECP.

The company has made misleading statements regarding fixation of prices of its products, which might be an attempt to divert the attention from the main issue.

Inadequate and incorrect disclosures in the financial statements regarding transactions with associated undertakings.

Disclosure regarding the holding company was not in conformity with the books of account.

The SECP has advised the inspector, who shall submit a report within 30 days to determine and include in his report the names of persons responsible for irregularities and mismanagement in the affairs of the company and to give his report, among other issues, on the following matters:

a) Whether the transactions with associated undertakings/related parities were arms' length.

b) Reasons for incurring losses on account of refinery operations and justification for subsidy obtained from the government of Pakistan during the years 1997 to 2001.

Whether these losses could have been reduced by competitive pricing of products, and whether the losses were due to mismanagement, imprudent policies or some other reasons.

c) Investigation of sales/revenues of the company with particular reference to procedure for price fixation particularly with related parties/associated undertakings.

d) To check and review the minutes of meeting of Board of Directors or Price Setting Committees to ensure that the prices are not set arbitrarily.

e) To check and review the suitability of prices on the basis of the geographically segmented markets, customer based market, market's share of the company, demand for the company's products, and impact of price elasticity of demand for the products.

f) To perform horizontal as well as vertical analysis of the price margins of deregulated products before deregulation and after deregulation.

g) To check and ensure that the company is not transferring its profit to its associated undertakings by a detailed review of the transfer price of all products, which are fixed by the company and in the adverse situation the amount of siphoned funds along with supporting evidences and persons responsible for the same, together with recommendations to ensure that such practices do not occur in future.

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