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September 23, 2023 (MLN): A recent corporate quandary has come to light as a minority shareholder of Security Papers Limited (SEPL) has launched a scathing critique of the company’s management and board, shedding light on the plight of minority shareholders who have silently borne the brunt.
In a strongly worded letter authored by Mohammad Javed Akhtar FCA, a shareholder and prospective Independent Director candidate in the upcoming Board election, minority shareholders were exposed to damning evidence, laying bare a litany of mismanagement, questionable decisions, and negligence that has plagued the company for an extended period.
JV between Pakistan, Iran, and Turkey
Established in 1965 by the State Bank of Pakistan (SBP) to produce specialized paper for printing currency notes, SEPL became a Joint Venture of Pakistan, Iran, and Turkey under the RCD Protocol in 1967. It is also listed on the Pakistan Stock Exchange (PSX).
SEPL is primarily owned by Pakistan Security Printing Corporation (PSPC), a wholly owned SBP subsidiary. Indirectly, the Government of Pakistan, through PSPC, holds more than 51% of the company’s shares, translating to 63% ownership, making it a State-Owned Entity (SOE). SEPL’s product range includes paper for currency notes, ballot papers, passport booklets, chequebooks, and college degrees.
The following text details issues raised by Mr. Akhtar who alleges gross incompetence in managing the company’s affairs.
Financial Negligence and Mismanagement
Minority shareholders of SEPL are deeply discontented due to a significant erosion of value in the company. From September 2020 (market capitalization of Rs12.6bn), there has been a staggering 52% decline in market capitalization as of July 2023 in a monopoly business that historically generated profits.
The market capitalization currently hovers at a meagre Rs6.04bn (having briefly dropped to Rs5.2bn), despite the business holding cash and near-cash assets worth more than Rs5bn. The company’s equity value, without revaluation, stands at Rs6.7bn, raising doubts about investor confidence in the business and management quality.
A closer look at financial performance suggests potential ‘transfer pricing’ activities, with PSPC, the largest shareholder and primary customer of SEPL, allegedly benefiting at the expense of minority shareholders.
The shareholder’s analysis highlights suboptimal decision-making by the management and the board, without accountability from relevant authorities, regulators, policymakers, auditors, or investors.
Transfer Price Agreement: Favoring the Inner Circle
SEPL’s transfer pricing arrangement is under scrutiny. All sales transactions with PSPC are conducted using the “Cost Plus Mark-Up Method.” Curiously, SEPL’s historical gross margins exceeded 40%, but recent years have seen margins averaging around 37%, despite inflation, rising material costs, machinery expenses, and increased interest rates.
The company reported operational losses in its 9-month results, primarily attributed to lower gross margins provided by PSPC.
The current board of nine members, with insufficient independent representation, has drawn criticism for its competence, education, and professional backgrounds. Given SBP’s substantial shareholding, there is a call for improved corporate governance within the company.
Ownership Dispute Over RO Plant
A review of the company’s annual financial statements from June 2022 reveals a legal dispute initiated by AIL against SEPL. Questions arise about the selection of AIL and the ownership status of the RO plant, which should have ideally been transferred to SEPL’s name by 2010. The shareholder questions why the agreement with AIL was not terminated in 2018 and why payments continued.
Calls for Change
The shareholders insist that SBP and PSPC should appoint directors capable of transforming the company, improving decision-making, disrupting the status quo, and enhancing governance standards.
Otherwise, they should consider purchasing the entire company and bringing it fully under their control under relevant regulations.
Mohammad Javed Akhtar is a Chartered Accountant, who currently leads the finance function at a major Chemicals/Fertilizer manufacturer based in Pakistan.
Posted on: 2023-09-23T15:59:33+05:00