‘Crescent Star Insurance raised capital deceptively’

SECP finds there was ‘established misstatement’

KARACHI: The apex regulator of the insurance industry has said Crescent Star Insurance deceptively raised capital by way of round-tripping of funds while circumventing corporate regulations.

In his written order regarding the show-cause notice served on the CEO and directors of Crescent Star Insurance, Securities and Exchange Commission of Pakistan (SECP) Commissioner Fida Hussain Samoo said there was “established misstatement” of facts in the case and that the company’s financial accounts had “material gaps” that cast doubt on their fairness.



An onsite inspection of the company by the SECP last year had revealed that the approval by the commission for  the issuance of right shares at a discount was violated. The approval required the company to issue shares for cash, but the inspection revealed that right shares were issued to Elahi Noor Enterprises and Weavers Pakistan to the extent of Rs230.82 million against properties.

The SECP order says the two companies had been “unlawfully engaged” as underwriters, as indulging in the underwriting business was beyond their scope given the object clause stated in their respective memoranda of association.

Elahi Noor Enterprises and Weavers Pakistan have paid-up capital of Rs20,000 and Rs1 million, respectively. Nonetheless, these companies engaged themselves in financial commitment as underwriters to the tune of Rs70.24 million and Rs164.57 million, respectively. As per the regulations, right shares of loss-making companies should be “fully and firmly” underwritten - a requirement that Crescent Star Insurance ignored, the SECP order said.

According to the regulator’s review of the bank statement of Crescent Star Insurance, an amount of “Rs20 million was used in such a way that bank statement of Crescent Star Insurance be portrayed receiving Rs230 million” against the right shares issued to the two underwriters. In reality, there was no net increase in the bank balance of Crescent Star Insurance, the order stated.

The current CEO of Crescent Star Insurance was appointed as CEO of Elahi Noor Enterprises and Weavers Pakistan subsequent to the right shares issue, it noted. “Therefore, the said series of events deceptive in nature raises serious concerns for sound and prudent management of company and their integrity,” SECP Commissioner Samoo wrote in the order.

An amount of Rs12 million appeared on account of advance for the purchase of properties as on Dec 31, 2013, which was subsequently adjusted through a refund of the amount rather than netting from the final payment, the order said. As much as Rs6.3 million out of Rs12 million was paid by Crescent Star Insurance CEO Naim Anwar - a fact that implied the CEO’s involvement in a personal capacity, Samoo said.



The order also pointed out that the issue of right shares to underwriters for consideration other than cash was “material information” for the rest of the shareholders of Crescent Star Insurance. The revelation could have an impact on the other shareholders’ decision about the subscription of shares. However, this information was also withheld in violation of Companies Ordinance 1984.

The order said the financial accounts and returns filed by Crescent Star Insurance to the SECP showed “significant gaps” that raised concerns about the authenticity of information. The statutory accounts did not represent the events in a fair manner, it added.

“Essentially, the funds were not received from the underwriters and the company deceptively raised capital by way of round-tripping of funds,” it said.

The SECP commissioner “sternly” warned the company and directed his offsite team to review the upcoming half yearly accounts for June 30 and refer the matter to the onsite team should they conclude another onsite inspection was necessary.

Crescent Star Insurance is a small non-life insurance company that posted a net profit of only Rs4.4 million in the first three months of 2016. Subject to regulatory approvals, the company is about to acquire PICIC Insurance, another non-life insurance entity.

Published in The Express Tribune, June 24^th, 2016.

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