ISLAMABAD: The Ministry of Law and Justice has held that National Security Certificate (NSC) is obligatory for transfer of shares of K-Electric, which is not just a business entity but a strategic asset of the country and any alteration in its shareholding structure should be subject to a rigorous evaluation process.
Ministry of Law and Justice has given its clear observations on letters written by the Ministry of Privatisation titled “first meeting of Ministerial Committee on K-Electric issues”.
In its letter, Law Ministry referred to Ministry of Privatisation’s (Privatisation Division) letter of October 26, 2023 and subsequent reminder of even number of November 17, 2023, in which Privatisation Division sought the opinion of Law Division on whether any change in the shareholding of KES Power (CKESP), directly or indirectly, mandatorily requires acquisition of National Security Clearance (NSC) from the Government of Pakistan, in terms of provisions of Share Purchase Agreement of November 14, 2005 (SPA).
Accordingly, the transfer of shares of K-Electric is addressed in Article 5 of the SPA. For ease of reference, the relevant clauses, 5.2 and 5.3 of the SPA, are as follows:
Clause 5.2 Restrictions on transfer: except as expressly permitted in this Article V, the Purchaser shall not sell, transfer, assign or pledge any of its Shares or permit such Shares to become subject to any Lien; and in no event may the Purchaser transfer any of its Shares to any Person that is specifically prohibited by the Laws of Pakistan.
Any attempted sale, transfer, or assignment of the Shares, or the creation of a Lien thereon by the Purchaser of any of it Shares which is not in compliance with the provisions of this Article V will be void and of no force or effect.
Clause 5.3 Purchaser Transfers: Notwithstanding the provisions of Section 5.2 (other than the prohibition against transfer in violation of the Laws of Pakistan), transfers of Shares may be made by the Purchaser as follows: (a) Permitted Transfers.
The Purchaser may make the following transfers at any time following the Closing Date;(i) subject to the national security interests of Pakistan (as such interests shall be determined in the sole discretion of the Seller) and in compliance with the provisions of Section 5.3(c), a transfer to an Affiliate of the Purchaser; or; (ii) a transfer required by any Laws of Pakistan, by the operation of the Laws of Pakistan or by order of a court, tribunal, or governmental authority or agency with appropriate jurisdiction; (b) Additional Transfers; the Purchaser may directly or indirectly sell, transfer, encumber or otherwise dispose in any form or manner any of its legal or beneficial interest in all or any part of the Strategic Equity Stake after the expiration of the third anniversary of the Closing Date, provided that prior to such transfer/transaction, the Purchaser shall have obtained the Seller’s certification stating that the proposed transfer/ transaction does not affect the national security interests of Pakistan, which certification shall not be unreasonably withheld. The Purchaser may directly or indirectly sell, transfer, encumber or otherwise dispose in any form or manner any of its legal or beneficial interest in all or any part of the Equity Stake (other than the Strategic Equity Stake which shall be governed by the immediately preceding sentence) after the expiration of the first anniversary of the Closing Date, provided that prior to such transfer/ transaction, the Purchaser shall have obtained the Sellers certification stating that the proposed transfer/transaction does not affect the national security interests of Pakistan.
A careful examination of the provisions of the SPA reveals four potential scenarios for the transfer of shares of K-Electric, whether directly or indirectly. These scenarios are the transfer to an affiliate, transfer mandated by applicable Laws, transfer of Strategic Equity Stake, and the transfer of Equity Stake.
Clause 5.3 (a) pertains to the transfer of ownership to an ‘affiliate’ company, while Clause 5.3 (b) addresses the transfer of KESP’s Strategic Equity Stake or Equity Stake. For these mentioned scenarios, obtaining National Security Clearance is an obligatory requirement. The final scenario, detailed in Clause 5.3(a) (i), is the only circumstance where the issuance of a National Security Clearance is not obligatory.
A comprehensive analysis of Clause 5.2 and 5.3 leads to the conclusion that the only permissible transfers of shares are those outlined in Clause 5.3. Any deviation from these stipulations would constitute a breach of the terms of the SPA. Therefore, it is abundantly clear that, apart from transfers required by law, the procurement of a National Security Clearance is an essential prerequisite for any transfer of shares of K-Electric.
The sources said, based on discussion of different clauses, it is evident that any modification to the shareholding structure of KESP affecting the ownership of K-Electric’s shares would be deemed an indirect transfer of shares, adding that as previously emphasised, obtaining a National Security Clearance is imperative for any such transfer to be authorised.
The Law Division was of the firm opinion that failure to comply with this requirement would result in the transfer being rendered null and void in accordance with the terms of the SPA.
The sources further quoted Law Division as stating that in emphasising the critical nature of K-Electric as the sole privatised distribution company and a strategic asset for Pakistan, it is imperative to underscore that any alteration in its shareholding structure should be subjected to meticulous scrutiny.
Given its pivotal role in the country’s power distribution, any change in ownership could have far-reaching implications for the nation’s energy security and stability.
In this context, Law Division is of the view that it is crucial to reiterate that K-Electric is not just a business entity but a vital component of Pakistan’s infrastructure, and any shift in its ownership must be approached with the utmost caution and consideration for the nation’s well-being.
Therefore, any alteration in the shareholding structure should be subject to a rigorous evaluation process, with a focus on safeguarding national interests and maintaining the stability of this crucial strategic asset.
Copyright Business Recorder, 2023