MicroPakistan

I am posting a press note that was issued a couple of weeks ago against the proposed sale of Saudi-Pak Commercial Bank. This note claimed that the proposed sale would be in violation of Pakistani laws and the Constitution. It does a good job of detailing all the possible violations. However, below you will find a response to this press note from a gentleman who has worked on the transaction and feels that the commercial and other benefits to the nation are much bigger than the legal violations. 

In my opinion the legal violations are compliance issues and can simply be complied with to avoid any future problems. If the Government doesn’t want another Steel Mills case, they should make sure they comply with these requirements. Obviously, the argument that it would be greatly beneficial to the Government if this enterprise is sold for such a high price is also strong. But nobody is above the law, regardless of how beneficial or useful a transaction might be.

Press Note Issued on March 27, 2008, on behalf of

Concerned Pakistanis Forum (CPF)

in relation to the

Proposed Sale of Saudi Pak Commercial Bank Limited in Flagrant and Intentional Violation of Pakistani Laws

Concerned Pakistanis Forum (hereinafter CPF) is a Lahore based body of concerned citizens who come from all over the country.  The members of CPF include academics, lawyers, doctors and retired civil servants who are disappointed with the current chaos prevailing in our national life where the state institutions appear on the brink of collapse.  CPF wishes to make meaningful contributions to the national life in order to improve the lives of Pakistanis belonging to all segment of the society.

Through today’s Press Conference CPF wishes to draw the attention of the Pakistani and international press and electronic media towards an unfolding event in Pakistan where a Pakistani commercial bank which is substantially owned by the Government of Pakistan is being sold in blatant violation of the Constitution of Pakistan, 1973; the Privatization Commission Ordinance, 2000; and the Listed Companies (Substantial Acquisition of Voting Shares and Take-overs) Ordinance, 2002.

CPF feels aggrieved as the previous government and the caretakers did not pay any heed to the landmark Supreme Court of Pakistan judgment in the Pakistan Steel Mills case where the sale of Pakistan Steel Mills was reversed by the Honourable Supreme Court of Pakistan on account of the irregularities that were committed in its sale.

The saddest part of the whole episode is that one of the buyers of this bank is the International Finance Corporation (hereinafter IFC), a member of the World Bank Group, whose logo for the general public is “Reducing Poverty, Improving Lives”.  It is unfortunate that an organization whose professed goal is to foster “sustainable economic growth in developing countries” and to “improve lives, especially for the people who most need the benefits of growth” would take advantage of the current chaotic situation in order to “illegally” acquire a piece of whatever now remains of the downtrodden of this country.

The Background

Saudi Pak Industrial and Agricultural Investment Company (Private) Limited (hereinafter SPIAICO) is a private limited company wholly owned by the Government of Pakistan (hereinafter GOP) and Government of Kingdom of Saudi Arabia (hereinafter GKSA) in equal proportion (50:50).  GOP is entitled to appoint 50% directors on the Board of Directors of SPIAICO.  SPIAICO in turn owns 68.01% shares of Saudi Pak Commercial Bank Limited (hereinafter Saudi Pak Bank), a listed Pakistani company licensed to carry on banking business in Pakistan.

On January 4, 2008, SPIAICO entered into an agreement with a foreign consortium consisting of Bank Muscat S.A.O.G., International Finance Corporation and Nomura European Investment Limited for the sale of its entire 68.01% shareholding in Saudi Pak Bank to the consortium.  It appears that an individual Mr. Shaukat Tareen also entered into an agreement for the purchase of 17% shares of Saudi Pak Bank (hereinafter Consortium).  However, various mandatory legal procedures were not followed by the parties while carrying out the transaction (hereinafter Transaction) and various constitutional as well as legal provisions appear to have been violated.

Violation of the Constitution of Pakistan, 1973 and the Privatisation Commission Ordinance, 2000.

Since SPIAICO is an enterprise which is 50% owned by GOP, out of its 68.01% shareholding in Saudi Pak Bank GOP’s proportionate shareholding comes to around 34%.  A perusal of the Privatisation Commission Ordinance, 2000, shows that the Transaction is covered by section 2(i) of the Privatisation Ordinance where privatisation is defined as follows:

” (i)  “Privatisation” includes a transaction by virtue of which any property, right, interest, concession or management thereof is transferred to any person from the Federal Government or any enterprise owned or controlled, wholly or partially, directly or indirectly, by the Federal Government“.

As SPIAICO is an enterprise which is partly (50%) owned and controlled by the GOP the disposal of 34% of SPIAICO’s shareholding in Saudi Pak Bank constitutes privatisation within the scope of Privatisation Ordinance with the result that the mandatory procedures laid down in the Privatisation Ordinance were required to be followed while carrying out the Transaction to the extent of GOP’s 34% shareholding in Saudi Pak Bank.

A perusal of the list of assets approved by Cabinet Committee on Privatisation (hereinafter CCOP) for the privatisation programme reveals that the Transaction was never placed before CCOP for its approval and is not included in the privatisation programme.  In addition, the mandatory procedures to be following in the privatisation process as laid down in the Privatisation Ordinance that ensure transparency like competitive bidding, the valuation of the property, etc. were not followed.  Furthermore, the Transaction which ought to have been carried out through the Privatisation Commission (PC) was carried out by SPIAICO without lawful authority and without any recourse to PC which is in sheer violation of the Privatisation Ordinance.

Most importantly, while carrying out the Transaction, the parties also failed to follow the mandatory procedures as laid down in the Constitution of Islamic Republic of Pakistan, 1973 (hereinafter Constitution) such as the prior approval of the Transaction by Council of Common Interest ((hereinafter CCI).  CCI is an important constitutional institution which was established by the makers of the Constitution in order to iron out differences, problems and irritants between the provinces inter se and the provinces and the federation in respect of matters specified in article 154 of the Constitution including, inter alia, matters relating to the institutions wholly or partially owned or controlled by the Federal Government.

These irregularities were formally brought to the attention of the Privatization Commission by CPF through Mr. Mansoor Hassan Khan Advocate on February 07, 2008, February 11, 2008 therein requesting PC to scrutinize the Transaction and pending such scrutiny immediately halt the Transaction to the extent of GOP’s shareholding in Saudi Pak Bank.  Furthermore, CPF got served legal notices on the Secretary Finance, Government of Pakistan, Secretary, Ministry of Privatization and Investment, Government of Pakistan, and the Chairman, Securities and Exchange Commission of Pakistan dated February 27, 2008 and March 04, 2008.  These public functionaries did NOT respond to any of these legal notices either defending the position of the Government of Pakistan / their respective bodies or denying the allegations made in the legal notices thus confirming the suspicion that they do not have anything to say in their defense.

It is however important that a leading Pakistani English newspaper Dawn which followed the legal notice served on the Privatization Commission on February 7, 2008, reported in its story published on February 9, 2008, as follows:

“Sources in the PC said technically and legally no government asset or interest could be sold without the approval of the CCI or the said cabinet committee, and apparently a ‘lapse’ had taken place by omission or commission on the part of the government“.

A legal notice was also sent to the International Finance Corporation on March 13, 2008, however, IFC sent an evasive response dated March 19, 2008, stating that it had “take note” of the views of CPF.  Additional opportunities were granted to IFC to explain its position on numerous occasions the last one on March 24, 2008, however, the Director Corporate Relations of IFC in Washington DC stated on the phone that IFC had nothing further to say on that issue.

Violation of Listed Companies (Substantial Acquisition of Voting Shares and Take-overs) Ordinance, 2002

Apart from above violations, the Transaction has been carried out by the parties in complete violation of various provisions of the Listed Companies (Substantial Acquisition of Voting Shares and Take-overs) Ordinance, 2002 (hereinafter Take-over Ordinance).  It is pertinent to mention here that under the Take-overs Ordinance, no person can acquire more than 25% shares or control of a listed company unless such person “makes a public announcement of the offer” (hereinafter Public Announcement).

The legislative intent behind the requirement of Public Announcement of the offer is that it enables other potential investors to make competitive bids which in turn ensures that the shareholders of the target company especially the minority shareholders get the best price for their shares.  Similarly, in order to protect the interests of minority shareholders, the Take-overs Ordinance also requires that in case the number of shares that are offered exceed the number offered to be acquired the acquirers shall accept the offers on proportional basis.

The procedure as laid down in the Take-over Ordinance requires the submission of the public announcement and the offer letter of the proposed acquisition to relevant stock exchanges and the Securities and Exchange Commission of Pakistan (hereinafter SECP) besides the publication of the public announcement of the offer in two national newspapers.

While the Consortium is acquiring 85.10% shares of Saudi Pak Bank from SPIACO and a JK Group (68.01 % from SPIAICO and 17.09% from a JK Group), no Public Announcement of this acquisition has been made by the Consortium.  Although the Consortium got published a Public Announcement on February 25, 2008 but it was only in relation to the acquisition of the offer of additional 1.46% shares of the Saudi Pak Bank.

Since no Public Announcement was made by the Consortium in relation to the acquisition of 85.10% shares, on February 27, 2008, followed by a reminder on March 4, 2008, CPF through Mr. Mansoor Khan Advocate sent a legal notice to the Chairman of SECP, Secretary to the Ministry of Finance and Secretary to the Ministry of Privatisation and Investment requesting them to investigate the matter by bringing the following material omissions to their attention:

• • 1. The Take-overs Ordinance envisages the making of a competitive bid by a competitor where any person can make a competitive bid within 21 days of the publication of the public announcement.  As no public announcement has been made in respect of the acquisition of 85.10% of the voting shares a potential competitor has been denied the chance to offer a better bid which would have in turn benefited the investors especially the minority shareholders.

• • 2. Under section 12 of the Take-overs Ordinance the public offer can be made by the acquirer for such percentage of voting shares as the acquirer wishes to acquire.  In case the number of voting shares that are offered exceed the number offered to be acquired the acquirer shall accept the offers received on a proportional basis.  The Consortium, however, is acquiring shares from different groups of shareholders according to its own liking completely ignoring the mandatory proportion as laid down in the law in that regard.  This illegality would adversely affect the minority shareholders of the Target Company.

• • 3. It appears that the Consortium has ALREADY entered into certain agreements for the purchase of 85.10% shareholding of majority shareholders.  Even though such agreements violate the spirit of the Take-overs Ordinance it is imperative, as a bare minimum, that these agreements are made public so that the minority shareholders could ascertain that the majority shareholders are not receiving any preferential treatment and that there is a leveled playing field for all.  In addition, any Shareholder Agreement proposed to be entered into between the parties shall also be made public in the interest of minority shareholders and the public at large.  A disclosure of complete texts of such agreements is crucial in the public announcement in order to maintain the transparency of this transaction.

• • 4. Under section 13 (5) of the Take-overs Ordinance where the acquirer is a company the public announcement etc. issued to the shareholders in connection with the public offer shall state that the directors accept the responsibility for the information contained in such document.  As the Consortium , apart from one individual, consists of Bank Muscat S.A.O.G.; International Finance Corporation; Nomura European Investment Limited which are all corporate entities, a specific statement was required in the purported public offer to the effect that the directors of these companies accept personal responsibility for the information contained in the public offer.  Similar statement is, however, not published in the public announcement.

      As always, CPF did not receive a response to this legal notice.

• END

And the response:

Re: Another case in the making that would make it look like children are playing (and being encouraged to play) with adult matters.

Read your posting with great interest and I have to say that people in Pakistan never give up trying to make something out of nothing. I have represented potential investors in acquisition of assets being disposed by the PC in Pakistan and have lost deals to others. So if anything I should be bitter at having lost but I have all the praise for the privatization effort of the country and its accomplishments. Can it be improved definitely yes, but in that environment it is one hell of a performance. Net net in this particular case the Shareholders of SAPICO (indirectly GOP and Saudi Govt) got a fantastic deal, so why the ruckus? Who lost out? The GOP of Pakistan made a handsome return from some buyers/investors who were willing to pay more than what it is worth at the moment. The outgoing management of the bank could not make a profit in an economic environment where the banking sector is highly profitable and the net spread is 7.7%, which would embarrass the Yakuza.  So why fault the government, it managed to dump a bad investment at a profit to someone who think they can manage it better and if they can so be it because they would have inject a lot more into the bank to make it a profitable venture. Sapico failed to attract good management and was not willing to invest the required capital into the bank. It was falling behind in capital adequacy. I do not understand where the learned forum member is coming from. Had it been sold at a loss following whatever procedures the member claims were overlooked then the problem would have been oh it has been given away for peanuts as a favor to someone connected? Where does this stop and we begin to look at things on their own merit.

SAPICO is owned by the Govt of Saudi through its pension fund and the GOP through the ministry of finance. This is an independent investment vehicle created to make investments in Pakistan. Its Charter allows it to do what it is doing. There are others like Pak Kuwait , Pak-Libya and Pak China and Pak-Brunei. Independent entities to operate on a commercial basis to promote investments. Both governments own 50/50. The entity has its own board and operates much like a private equity. The board approved the transaction when they acquired this bank and the board member from the GOP was part of it not the GOP/MOF directly same as the Saudi Board members representing the Pension Fund. The decision was again reached at the board level to divest and the entity was divested. I think there is no case here but for mischief. Just like the joke of the century Steel mill sale reversal. Will come to that later.

The sale was handled purely as a commercial transaction by SAPICO, however it left  a lot to be desired and that is where there are questions of corporate governance and conflicts of interests. I am writing here not as a bystander but as someone who was directly involved in the transaction (representing a potential buyer) and were adversely affected by the lack of transparency in the process of how the sale was handled by the sellers management.  No complaint with GOP only that it appointed below average management at SAPICO. That too has a counter argument that, no matter what I or anyone thinks the stupid management at SAPICO managed to squeeze a fantastic price for a sick asset. I cannot see the merit of the complaint. If anyone the buyer should be concerned, as to how did they justify what they paid for the acquisition. The sellers are laughing all the way to the bank.

Having worked on quite a few privatization transactions in Pakistan and elsewhere in the region, I have to say that given the level of cynicism and skepticism we should be proud of the Privatisation process in Pakistan. It is for Pakistan exceptionally transparent where people find it hard to believe that things can be done without vested and conflict of interests. I think I know where this motion to raise this as a failure of privatization process is coming from. It is exactly these types of issues that have made investors vary of Privatization deals in Pakistan. Therefore we look into the sellers representations and warranties as to their legal and regulatory authority to dispose of assets. We look into it carefully before spending/wasting money on getting seriously pregnant with transactions. It must pass the basic test of authority to sell. This one did too. Where it failed was in the corporate governance of the selle

Commercially speaking the seller and indirectly the government of Pakistan got a damn good return on their investment. We could not have recommended to our investor to pay what the ultimate buyers paid for this transaction. I believe had the transaction not gone through the GOP and Saudi would have lost money. The bank was poorly managed and was not going anywhere, it was a serious turnaround situation that was way beyond the capabilities of the management and the owners SAPICO. Where I would if anything question is that why did the highest bidder lose out on this transaction.

Orascom of Egypt who currently own Mobilink a highly successful telecom venture was the highest bidder. Naguib Swaris the owners of Orascom are very high on Pakistan and wanted like crazy to buy this bank and had outbid everyone. Travesty here is that the highest bidder lost.

Making it a PC issue demonstrates lack of understanding of such issues and points to some ulterior motive here in bringing up this issue in such a manner. If any case can be made it can be the lack of transparency on account of the SAPICO management. Not the GOP.

Now about the Steel mill case. Comedy of the millennium starring CJ. Please read the 120 page report of the supreme court. It blows one away at the poor shody quality of report coming from the supreme court and chief justice of Pakistan. The CJ demonstrated his lack of ability to comprehend the nature of the case he took on. I think the agenda was different and was accomplished. A bench of 12/13 ruled on it and not one dissenting  vote. Sindh high court ruled much more sensibly on the transaction and demonstrated its maturity and understanding of its writ. The CJ went beyond and demonstrated that not only did he lack ability to judge judicially but that he was out of his depth on both counts comprehending commercial and legal issues(political yes). As a consequence the nation and its people lost out big time. CJ won a political victory and not a legal one in my opinion. I respect him for taking a stand against his dismissal but as for the steel mill judgment he failed the nation miserably in more aspects than one. People who tout CJ’s accomplishments in that regards expose their own ignorance about matters and their vested interests. I have spent time and effort reading the full report by supreme court and discussing with a lot of highly professional and credible legal minds. The conclusion is unanimous: what a joke. I fault the previous government for not having defended the transaction vehemently.  The previous government should have fired the Minister of Privitazation, should have required its legal counsel to refund the fees amongst other things. The score on that one People of Pakistan 0: CJ 1.

I could go on and on but enough said. We need to give praise where it is due and move away from such counterproductive actions. If anything the management of SAPICO should be sued by whoever for managing the sale process in a convoluted manner. I would urge the forum member to not waste his time and that of the public prosecutor with such unnecessary cases. Our judiciary and the legal system is already on overload with more serious violations that have a direct impact on everyday life of everyday citizens. A case that would make this look like children are playing with adult matters.RegardTariq