Dawood Capital: SECP realises mistake after two years, restores licence

Its bench finds no evidence that Dawood gained from redemption of investments.

KARACHI:

Imagine this: the regulator finds your financial services firm guilty of fraudulent practices, imposes a hefty penalty, freezes your assets and cancels your licence to operate. Your company shuts down and your goodwill goes away with all your clients – perhaps forever.

But almost two years later, the regulator suddenly realises the decision against your company was illegal: the officer who passed the original order lacked authority to do so and no ‘substantial evidence’ of wrongdoing on part of company officials could actually be found. Washing its hands of the issue after 22 months, the regulator restores the company’s licence to operate and asks everyone to quietly get back to business as usual.

This would be incredible if it was not the story of Dawood Capital Management, an asset management company that ran three mutual funds with combined assets of more than Rs1 billion until March 2013.

Word on McLeod Road has it that the powers that be were out to ‘get’ the family that owns Dawood Capital in addition to an investment bank, a family takaful company and two modaraba firms. From old family feuds to underhand deals going wrong, conspiracy theories abound as to why the First Dawood Group has come under financial duress in recent years.

Officials of the group refused to take questions on the issue.

Cancellation of licence

Securities and Exchange Commission of Pakistan (SECP) Executive Director Nasim Shahid cancelled the licence of the asset management company on March 22, 2013. He concluded in his order that Dawood Capital Management CEO Tara Uzra Dawood used privileged information and forged documents to avoid an imminent loss of Rs18.2 million.

By redeeming the investments of Dawood Capital Management and her close relatives just before making provisions for non-performing debt securities, Shahid stated that Dawood hurt the interests of investors. He also imposed a penalty of Rs20 million on her. It was the first time in the history of Pakistan’s asset management industry that the regulator cancelled a company’s licence and imposed such a heavy fine on its CEO.

The U-turn

The appellate bench of the SECP comprising commissioners Zafar Abdullah and Tahir Mahmood set aside the earlier order on January 22, saying the SECP executive director “did not have the power to pass the impugned order”.

The bench also overturned parts of the 17-page original order that held Dawood guilty of having defrauded investors in the run-up to the write-down in the value of the mutual funds.

Contrary to the commission’s earlier investigation, the bench said there was no ‘substantial evidence’ to prove that the company, its CEO and CFO gained from the redemption of investments.

Questions abound

Disregarding the merits and demerits of the SECP’s initial order and its subsequent reversal, many questions arise about the way the apex regulator handled the issue.

Firstly, the general public deserves to know if the SECP intends to take action against the officer who issued an order without having the legal authority to do so. After all, it is extremely difficult for a financial services company to regain credibility once the regulator shuts it down on charges of fraud and insider trading.

Moreover, freezing the assets of Dawood Capital Management – a publicly traded company – on a flimsy pretext hurt financial interests of its shareholders for almost two years. How exactly the SECP intends to compensate for the shareholders’ loss of profits remains unclear.

Besides the shareholders, the SECP left ordinary certificate-holders of Dawood Capital Management in the lurch, as they were not allowed to make redemptions for 22 months. Their investments remained stuck in the mutual funds while the benchmark index of the Karachi Stock Exchange grew more than 90% over the same period.

The SECP spokesperson did not respond to these questions. “The decision of the SECP’s appellate bench can be challenged in the court of competent jurisdiction,” he said in an email sent to The Express Tribune.

Published in The Express Tribune, February 13^th,  2015.

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