PC board endorses sale of majority stake in PSM

Privatisation Commission overrules objections raised over proposed transaction structure

Shahbaz Rana September 24, 2020


The Privatisation Commission (PC) board on Wednesday upheld its three-week-old approved transaction structure for selling a majority stake in Pakistan Steel Mills (PSM) and overruled the objections raised over the proposed transaction structure.

The board’s decision of not changing the previously approved transaction structure would result in foregoing approximately Rs35 billion in tax credit, which otherwise would have been available to new buyers over a period of six years.

Headed by Privatisation Minister Mohammad Mian Soomro, the board also kept unchanged its earlier decision to go ahead with the plan of offloading stakes in two blue-chip companies – Oil and Gas Development Company (OGDC) and Pakistan Petroleum Limited (PPL).

The board decided to go ahead with the divestment plan despite depressed market conditions that did not favour any capital market transaction at this point in time.

In its last meeting, the PC board also decided to hire a financial adviser for the sale of 10% stake in PPL and 7% shares in OGDC. Share prices of both the companies are nearly half of what their values were five years ago.

The board also did not change its decision to privatise House Building Finance Corporation (HBFC) and would place its recommendation before the Cabinet Committee on Privatisation (CCOP).

The federal cabinet had asked the PC board to review its earlier decision of selling HBFC.

The PC board approved the transaction structure for privatisation of Heavy Electrical Complex (HEC) - an entity that the PML-N government too had tried to privatise.

However, the HEC transaction could not materialise after a series of stories in The Express Tribune, highlighting financial wrongdoings in the deal.

“The transaction structure for the revival of Pakistan Steel Mills was further discussed, before taking it to the Cabinet Committee on Privatisation, and other details were thoroughly discussed as the PSM CEO was also present in the meeting,” said a statement issued by the privatisation ministry.

PSM has not been operational since June 2015.

On September 2, the PC board had approved the setting up of a wholly owned subsidiary of PSM under the Companies Act 2017 and then the sale of a majority stake of the subsidiary.

According to the structure, which was reinforced on Wednesday, core operating assets would be carved out, excluding land. About 7% of the total land or 1,268 acres of core land will be leased out to the subsidiary for its use by PSM.

The remaining land value of over Rs310 billion will remain with PSM Corporation. PSM will sign a land lease agreement with the new subsidiary for the sole purpose of steel manufacturing, according to the decision.

PSM’s bad assets would be retained in the corporation that included Rs67.3 billion liabilities of banks, Rs61.7 billion liabilities of Sui Southern Gas Company (SSGC), employees’ liabilities of Rs53.6 billion and Rs33.5 billion worth of contingent liabilities.

The PC board discussed the objections raised by some members and PSM’s new management over the transaction structure.

PSM accounts showed that it had accumulated losses of Rs120.7 billion including business losses of Rs117.4 billion.

As per the financial adviser’s structuring, the privatisation process would be completed by June next year and Rs103 billion in business losses will be available to investors.

Under the Income Tax Ordinance, the company or its subsidiary can offset future tax liabilities with past six years’ tax credits.

Financial advisers were of the view that after privatisation, PSM would still not be in a position to earn any profits during the initial phase of commercial production, expected to commence from 2023, hence brought forward business losses and consequent tax - reversal benefits will lapse during the said period.

But some committee members were of the view that a new subsidiary or holding company should be created where all assets except for plant, core land and taxation should be parked.

The financial advisers conceded that the views that brought forward business losses available with the corporation would have to be forgone upon selection of any option recommended were legally correct.

However, considering the commercial and legal aspect of the transaction, the option of carving out core assets of PSM into a wholly owned subsidiary and thereafter executing a sale of share transaction was proposed.

Sources told The Express Tribune that apart from the board members, the PSM management had also objected that incentives offered to the investors required further discussions and negotiations.

But the financial advisers were of the view that these incentives had been offered only after initial discussion with the prospective investors, said the sources.

The PSM management was also of the view that the financial advisers would not be able to bring in new investors except for those who were already known to the management.

The PSM management had also raised the issue of valuation of assets stock and trade, plant and machinery, stores and building should be conducted by the financial advisers, as it was done last time.

Also, the assets had been valued on the cost-based model, said the sources.

But the financial advisers were of the opinion that it was the responsibility of PSM management to prepare the bifurcated statement of financial position.

Certification by the auditor on the assets to be transferred to a new subsidiary via scheme of arrangement is a standard requirement for the approval of the scheme.

Furthermore, valuation of the plant and machinery via PSM will minimise/eliminate the valuation disagreements. Sources said that the financial advisers also argued that there was a risk that the valuation exercise may render a value, which could be unacceptable to the potential investor.


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