SECP seeks clarification from Pakgen Company: non-disclosure of risk in shares sale
June 28, 2011
The Securities and Exchange Commission of Pakistan (SECP) has reportedly sought clarification from Pakgen Power Limited for non-disclosure of the alleged risks in the sale of shares, sources told Business Recorder. A complaint was lodged against Pakgen and underwriters on allegation of non-disclosures of facts related to performance of AES Pakgen Company Limited as well as against SECP for approving the premium of Rs 5.17 per share based on insufficient due diligence reports.
It was reported that the company is seeking public subscription of 13.8 percent shares from total issued shares of 372 million on June 14-15, 2011. Pakgen's total transaction size is 51.69 million shares whereas 14.5 million shares were privately placed while 37.2 million shares are being offered to the general public. Offer of sale is at a price of Rs 19 per share, which is inclusive of a premium of Rs 9 per share, and the successful subscribers will be eligible to receive dividend of Rs 1 per share announced earlier. The complaint has reported that the following issue must have been mitigated by the SECP prior to approval of Rs 9 share premium. The company was at a rate of Rs 13.87 per share only 9 months ago.
The disclosure of risk factor does not include following alleged risk: previous reports indicate that Pakgen incurred fuel losses of 14 gms/kWh whereas comparable Nishat Power Limited and Nishat Chunian Power Limited experienced fuel saving of around 6 gms/kWh. This factor alone may cause a loss of around Rs 5.27 per share at a current furnace oil rate of Rs 65 per ton.
What the SECP has been apprised is that according to Pakgen's management, the plant has been incurring fuel losses since its inception and the gap cannot be bridged. The new fuel-efficient IPP will shift utilisation of load plant to new plants.
The SECP was also informed that the dividend of comparable IPP mentioned in prospectus namely Hubco and Kapco distribute all case flow as dividends, whereas Pakgen has been shifting dividends in the past to reserve fund which is around Rs 9 billion and the new management also empowered the directors to decide on the dividend distribution.
Transparency International Pakistan (TIP), in its letter to the SECP has alleged that there may not be any dividend from power generation, which is and will incur loss, and dividend if any may come from the earning of Rs 9 billion reserve fund and this fact is reflected for the information of public.
SECP, in its reply stated that the quantum of premium charged by the issuers on issue of shares through public offering is a deregulated area, and the SECP has no role in fixing it. However, under the law, an offer of shares to the general public at premium is required to be underwritten, and the underwriters should be independent and include at least two financial institutions.
"Fixing the quantum of premium/the offer price has been deregulated since the year 1995 to make the process more transparent and to empower the market forces to determine the quantum of premium instead of the regulator. Pakgen has profitable track record for last many years and fulfils all requirement under rule 9 of Companies Rules (issue of Capital), 1996 for charging premium.
According to the SECP Director (CI) Amir Khan Afridi, as regards non-disclosure of the alleged risks in the prospectus, the issue has been taken up with the company, and response received from it will be shared with the TIP. TIP rejected the clarification of SECP, referring to SRO 110(I) 96, Companies (Issue of Capital) Rules, 1996, and insisted that SECP is required to confirm that the issue of shares to the public on premium was complying with the conditions, and if the requirements are not met by the company, SECP is allowed to accord relaxation under certain conditions as per Rule No 10.
Disclosure of all information is a mandatory requirement to be disclosed in the prospectus of the company for the information of the public. In case the Company has violated this requirement, and/or the Underwriter has violated this requirement in its due diligence report, SECP is responsible for the wrong approval.
SECP replied that "as regard non-disclosure of the alleged risks in the prospectus, it is stated that the same has been taken up with the Company and response received from them will the shared with you". If SECP determines that the complaint was correct, action shall be taken against the responsible officers, who approved the premium, and also against the company as against the underwriters for the violations, sources quoted TIP as saying in its rejoinder.