Sale of KES''s shares in K-E: final approval now subject to deal ratification by Cabinet

Cabinet Committee on Privatisation (CCoP) which met with Prime Minister Shahid Khaqan Abbasi in the chair approved to issue National Security Certificate (NSC) for sale of KES''s 66.40 per cent shares in K-Electric Limited to Shanghai Electric Power. The final approval would be subject to the ratification of the deal by the Federal Cabinet.
K-Electric Ltd. formerly Karachi Electric Supply Company Ltd. (KESC) is partially owned by KES Power Limited (previously a consortium member of the SPA dated November 14, 2005 "Original SPA", a company incorporated under the laws of the Cayman Islands now comprising Abraaj Entity 50%, Al Jomaih Power Limited 30% and Denham Investment Limited 20%). KES total share holding of K-Electric is 66.40% and it entered into a Sale and Purchase Agreement (SPA) on October 28, 2016 with Shanghai Electric Power Company Ltd. (incorporated under the laws of the People''s Republic of China).
The progression of the transaction is subject to issue of National Security Certificate (NSC) from the GoP represented through the Privatisation Commission in accordance with the original SPA signed on November 14, 2005.
Material extract of clause 5.3(b) of the said SPA stipulates "...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 its Strategic Equity Stake after the expiration of 3rd (third) anniversary of the Closing Date provided that prior (emphasis added) 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..."
Sources said, on receipt of an application by KES Power seeking NSC of the GoP, the PC according to due diligence process wrote to the following related Ministries/regulatory bodies'': Competition Commission of Pakistan (CCP), Securities and Exchange Commission of Pakistan (SECP), State Bank of Pakistan (SBP), Law & Justice Division (L&JD) Board of Investment (BOI), Finance Division (FD), Ministry of Water & Power (MOW&P) now Ministry of Energy, Power Division (MOEPD), M/o Petroleum & Natural Resources (MoPNR) now Ministry of Energy, Petroleum Division, Revenue Division (FBR), Nepra, Ministry of Defence (MoD) and Ministry of Interior (MoI).
Most of the public sector stakeholders have provided their NoCs though the Ministry of Petroleum has not provided its NoC raising the issue of liabilities towards K-Electric and requesting PC not to issue the NSC.
The Ministries of Interior and Defence have given conditional NOC and requested a copy of SPA of October 28, 2016 between KES Power and SEP. However, No Objection from security point of view, is subject to following conditions: (i) KEL (Abraj Group) will remain liable for its all liabilities b obligations including outstanding dues of SSGC and issues related to overbilling; (ii) KEL to submit written guarantee from buyer (M/s Shanghai Electric Power Company Ltd.) that it will abide by all obligations as of KEL; (iii) currently out of 13 Directors, 9 belong to KEL. The buyer (Shanghai Electric Power Company Ltd.) may be bound to have at least 3 Pakistani national Directors; and (iv) a special clause be incorporated in the sale agreement imposing obligation on the SEPC for ensuring provision of uninterrupted electricity supply to all Armed Forces/Military installations/ infrastructure at Karachi, especially during emergencies/ war and training/ operational periods in/outside cantonments.
The PC has examined the issue and argues that the issuance of NSC by the PC is governed by the provision 5.3 (b) of the original SPA. This clause makes it incumbent upon the KES Power (the then purchaser) to obtain the seller''s (PC) certification that the proposed transfer / transaction does not affect the national security interest of Pakistan and that the SPA signed between KES Power and SEP on October 28, 2016 is a main constituent document of the proposed transfer/transaction. The transaction is of national importance and may have a direct bearing on issues related to Karachi. The covenants signed between KES Power and SEP need to be examined before the transaction is legally said to have been considered. The PC may not issue the NSC without actually having seen the constituent document of the proposed transaction. Section 36 of the PC Ordinance, 2000 empowers the PC to ask for this information/document.
In response to PC''s request KES Power has stated that issuance of the NSC has no relationship to KE''s current operational situation and the outstanding liabilities and that KE will remain a going concern and post transaction completion will not extinguish responsibility for any of its liabilities. They further maintain that the SPA is a private bilateral agreement between the KES Power and the SEP (together the parties) governing rights and obligations of the parties and terms therein are in relation to the sale and purchase of the shares between two offshore entities. It is their stance that this is an agreement between two offshore companies and neither the Company (K-Electric) nor its management is party to the SPA.
No doubt, SEP China has very high technical, operational and financial capabilities, its sister organizations, Chinese firms are working in Pakistan in various other business and strategic ventures. However, matter of concern is highlighted above, which needs clear resolution from the GoP stakeholders before issuance of NSC.
Privatisation Division proposed that before issuance of NSC the following issues related to this transaction may be resolved/settled by the respective GoP Ministries/departments under their legal and regulatory framework: (i) non provision of SPA by KES Power of October 16, 2016. KES Power may provide the said SPA to the PC; (ii) issues related to liabilities raised by Ministry of Defence, Ministry of Interior, Board of Investment (BoI) and Petroleum Division may be resolved between the respective stakeholders and KES Power and communicated to PC; and (iii) before issuance of NSC, the matter may be discussed at the relevant Cabinet forum.
However, the Privatisation Division made the viewpoint of Minister of Privatisation part of the summary who claimed that on receipt of an application by KES Power seeking NSC of the GoP, the PC as due diligence process wrote to all possibly relevant Ministries / regulatory bodies each of whom have granted consent/NoC for issuance of NSC. The conditions set by each stakeholder are already part of the summary.
The PC requested KES Power for provision of SPA between KES and SEP signed on October 28, 2016. Such requests were also made to them by the MoD and Nepra, however, NoC was issued by both MoD and Nepra. The SPA was rightly "awaited" by MoD as the original SPA 5.3(b) requires NSC prior to SPA.
Privatisation Division further quoted the Minister as saying that the PC has received agreements in the shape of Extinguishment Deed and Deed of Undertaking, drafts of which have been agreed between the PC, KES Power and the proposed purchaser SEP signing of which would extend the provisions of the Original SPA to the current purchaser as well.
He noted that Pakistan''s law with regards to submission of any SPA is regulated by the Listed Companies (Substantial Acquisition of Voting Shares and Takeovers) Regulations, 2017. The Schedule VIII of said Regulation stipulates the submission of SPA for listed companies. As mentioned in 5.3(b) of the original SPA the NSC must be available prior to the requirement for submitting SPA under the said regulation, as the SPA cannot be valid without NSC. The KE is a listed company with PSX and any SPA would be governed by the said Act.
The Companies Act, 2017 separately provides for national Security Protection in Section 461, in any subsequent eventuality, specifically with regards to security clearance that may be invoked at anytime is reproduced below:
"The Commission may require the security clearance of any shareholder or director or other office bearer of a company or class of companies as may be notified by the concerned Minister-in-charge of the Federal Government ".
He further stated that SEP is regarded as a Chinese company with high standing and is already working in Pakistan in other important projects. Its parent company, State Power Investment Incorporation, has assisted in the design of Chashma Nuclear Power Plant via Shanghai Nuclear Engineering Research and Design Institute.
To sum up, firstly, in view of the above continuing legal safeguards; secondly, the law relating to governing SPA submission; thirdly, the entities previous involvement in Pakistan of strategic nature; fourthly, its preparedness to provide a highly significant investment in electricity sector & economic hub of Pakistan; fifthly, to preserve Pakistan''s international reputation ensuring no departure from policy; sixthly, as the agreement states that it would not be unreasonably withheld, which has been pending since over a one year; seventhly, all the departments have given their consent.
The Minister for Privatisation has recommended to approve signing the Extinguishment Deed & Deed of Undertaking and issuing the NSC. Cabinet Committee discussed various issues relating to the privatization of Pakistan Steel Mills and restructuring of PIACL. The committee asked the sponsoring divisions to resubmit proposals in a cohesive and comprehensive manner in light of earlier decisions on this issue.