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Ministry 'challenges' PSM transaction structure

ISLAMABAD: Ministry of Industries and Production (MoI&P) has reportedly "challenged" Pakistan Steel Mills (PSM)...
23 Oct 2020

ISLAMABAD: Ministry of Industries and Production (MoI&P) has reportedly "challenged" Pakistan Steel Mills (PSM) transaction structure, to be submitted to the Cabinet Committee on Privatisation (CCoP), sources close to Industries Minister told Business Recorder.

Sharing details, the sources said Privatisation Commission pursuant to Cabinet Committee on Privatisation (CCoP) decision dated June 17, 2019 advertised for recruitment of transaction advisor for Pakistan Steel Mills Corporation (PSMC), i.e., to bring in a party for revival of Pakistan Steel Mills without transfer of full ownership.

PC after conducting due process appointed Pak China Investment Company (PCICL) and BOC International (BOCI) as joint lead Financial Advisor (FA) along with Deloitte (Accounting Firm), Sinosteel (Technical Firm), Cornelius Lane & Mufti (CLM) (Legal), Abacus Consulting (HR) and Nanjee (Valuator) as Sub-Contractors. Financial Advisory Services Agreement (FASA) was signed on Jan 10, 2020.

Chairman, PC on April 13, 2020 constituted 'Transaction Committee on Pakistan Steel Mills Corp. (PSMC) to oversee the transaction process of PSMC and facilitate in clearing any impediments related to PSMC transaction besides submitting recommendations, as deemed appropriate and required, to the PC Board.

FA and its Sub-Contractors conducted due diligence and submitted preliminary due diligence reports during 30 Mar-06 Apr, 2020 and presented key findings including recommendations to the Transaction Committee on PSMC in nine meetings held between April and August 2020.

On the basis of due diligence findings & recommendations, FA proposed the following Transaction Structure Options: (i) transferring of identified core operating assets into wholly owned subsidiary of PSMC through a scheme of arrangement (as provided in the Companies Act 2017) followed by sale of majority shares of the newly formed subsidiary (without transferring of full ownership) to strategic private sector partner; or (ii) transferring of identified core operating assets to private sector strategic partner through concession /lease agreement for 30 years.

Furthermore, on July 27 and August 28, 2020 Minister for Industries & Production and Minister for Privatisation/ Chairman, PC co-chaired meetings to discuss impending issues and update on the transaction structure options, wherein a detailed presentation was made on key findings of the due diligence besides highlighting features of transaction structure options proposed by the FA. Benefits, challenges and risks in each mode were highlighted while presenting a comparative analysis.

It was highlighted that in either of the proposed transaction structures, core land area would be leased on a similar pattern of earlier precedents, whereby, PSMC leased its land to private sector investors for setting up various industrial units. It was also emphasized that FA could not bring forward any domestic global precedent in support of transferring of PSMC core assets /operations through Concession/Lease Agreement.

Accordingly, a detailed presentation encompassing features of the transaction structure

options including ancillary details was made to the PC Board in its 4th meeting held on Sep 2, 2020 whereby after a detailed and threadbare discussion PC Board approved the following transaction structure to proceed with the privatization of PSMC and recommended it for consideration of the CCoP notably transferring of identified core operating assets into wholly owned subsidiary of PSMC through a scheme of arrangement (as provided in the Companies Act 2017) followed by sale of majority shares of the newly formed subsidiary (without transferring of full ownership) to strategic private sector partner.

However and despite the fact that both Mol&P and PSMC remained part of nine transaction committee meetings as well as PC Board besides meetings co-chaired by Minister for Industries & Production and Minister for Privatisation on the PSMC matter held on July 27 and August 28, 2020 and were fully on-board in formulation and finalization of transaction structure, MoIP, in a letter of September 8, 2020 forwarded PSMC of Sep 3, 2020) bearing subject "Transaction Structure-key issues and way forward", for necessary action.

MoI&P also communicated its observations on this issue, in its letter of September 16, 2020. Furthermore, one of the PC Board members also highlighted concerns with respect to foregoing of potential tax reversals on account of carry-forward business losses incurred by PSMC on YoY basis and proposed to carve out non-core assets out of PSMC while leaving core assets within PSMC and divesting its majority shares.

Nevertheless, considering the sensitivity of this issue and before proceeding further, it was necessary to respond to the belated observations raised by the PSMC in the said letter, most of which were either pre-emptive in nature or were not relevant to the transaction structure approved/recommended by PC Board.

Accordingly a detailed response to each of the observation of the MoI&P, PSMC and PC Board member was made for their perusal and acknowledgement besides submitting it to the PC Board, in a summary, in its 5th meeting held on Sep 23, 2020, wherein, FA presented detailed responses to each of the observation.

The sources said PC Board discussed in detail the viewpoint expressed by one of the Board Members (Ashfaq Tola, Member, PC Board) submitted through an email of September 15, 2020 regarding foregoing of potential tax reversals on account of carry-forward business losses incurred by the PSMC on YoY basis, proposing to carve out the non-core assets out of PSMC, while leaving the core-assets within PSMC and divesting its majority shares.

In this regard, the FA and its sub-contractors, namely Deloitte and CLM made a detailed presentation explaining that this aspect was discussed in detail in the transaction committee meetings adding that the proposed suggestion made by the Board Member is not tenable as it transpires from the projections prepared by the FA that the revived PSMC is not expected 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 would lapse during this period.

FA also presented year-wise amount of expected tax reversals before the PC Board for perusal and acknowledgment. It was further highlighted that in the PC Board approved transaction structure, PSMC will continue to act as a holding company (wholly owned and managed by the GoP) and carried forward business losses and consequent tax benefits besides legacy loans, liabilities, assets excluding identified core operating assets, etc., will continue to make part of the PSMC financial statements.

Therefore, tax benefits accruing from any adjustments against the carried forward business losses will remain available to the PSMC (owned and managed by the GoP as sole shareholder) and will not be divested/passed on to the subsidiary, whose shares will be divested to private sector.

The CEO, PSMC was apprised of the steps to be taken by the Mol&P, PSMC and PC to make the transaction successful. The CEO, PSMC while acknowledging explanations, ensured PSMC's full cooperation.

The MOI&P representatives did not attend the meeting and sent a letter of September 23, 2020 via fax received during the Board meeting. Contents of the fax were read out to the PC Board, whereby PC Board re-affirmed that it has resolved its recommendations independently, however appreciated that since its recommendations will be placed before the CCoP, of which Minister for I&P is a member for final approval urging that it is of utmost importance that principal stakeholders hold consensus opinion. The Board resolved to communicate the responses prepared by FA to MoI&P for acknowledgement.

After thorough deliberations and discussion, PC Board acknowledged and accepted the explanation and justification rendered by the FA on the observations of MOI&P, PSMC and PC Board member and endorsed its earlier decision for the transaction structure approved in the meeting held on September 2, 2020.

Accordingly, PC will request CCoP to consider the following recommendations of the PC Board, initially approved in its 4th meeting held on September 2, 2020, re-affirmed on September 23, 2020 in its 5th meeting, in order to proceed with the privatisation of PSMC "transferring of identified core operating assets into wholly owned subsidiary of PSMC through scheme of arrangement (as provided in the Companies Act 2017) followed by sale of majority shares of the newly formed subsidiary (without transferring of full ownership) to strategic private sector partner."

Copyright Business Recorder, 2020