August 13, 2020 (MLN): The Supreme Court of Pakistan today gave its verdict on the long-pending issue of GIDC, thereby passing judgment in favor of the government. The apex court also ordered the companies to pay the outstanding GIDC amount of Rs. 417 billion
It is pertinent to mention that the companies have paid a total of 282 billion so far out of the total Rs. 722 billion charged to them by the state, with the remaining Rs. 440 billion being accrued.
Another interesting point to note here is that out of the three possible scenarios discussed previously, this verdict falls within the ‘100% payment’ option.
While the decision was not taken in the favor of the industry, the court, however, directed the government to not levy further GIDC on the companies on account of under-utilization of the funds collected previously.
‘We restrain the Federal Government from charging Cess which power of the Federal Government shall remain suspended until the Cess-revenue collected and that which is accrued so far but not yet collected is expanded on the projects’, the judgment said
Discussing the impact of this decision on the financial wellbeing of the companies, AKD Securities stated that the fertilizer sector, which is likely to suffer the largest brunt, will see an approx. the outflow of Rs. 110 billion. This constitutes around 26% of the total GIDC payment. The impact will be even worse for companies such as FFC and FFBL in terms of earnings, as the former is already suffering from loss in non-core income on short term investments while the latter is facing significant liquidity issues.
Going by the official document issued by the SC, as a concession, the outstanding amount shall be recovered in twenty-four equal monthly installments starting from 01.08.2020 without the component of late payment surcharge. This means that the impact of outflow on the earnings of these companies will be realized in the short to medium term.
The Cement Sector, on the other hand, is likely to see minimal impact on its financials as only three cement companies, namely LUCK, MLCF, and DGKC, will face the brunt of the verdict. According to AKD, the outstanding amounts for these companies stand at Rs. 4-5 billion, Rs. 0.4-0.5 billion, and Rs. 1-1.12 billion, respectively. It is reasonable to mention that Luck and MLCF are both well to do companies, which makes them capable enough to make the payments. DGKC, on the contrary, might have to take on short to medium-term loans to pay off the outstanding taxes.
With regards to the chemical sector, the report said that verdict might take a toll on EPCL, which is currently undergoing major CAPEX investments, which means that it will have to resort to taking short-term loans. However, provided that the deadline for payments is eased, the internally generated funds of the company will suffice to cover the outstanding payments.
It is being widely held that the concerned parties will go for a new petition of the verdict. However, the probability of that happening is quite low, as rightfully pointed out by Al Habib Capital Markets, as the case involves several parties and it may be difficult for the aggrieved party to get everyone on the same page. In other words, some companies who are financially sound might be willing to clear their dues and not get involved in the fuss all over again, whereas those with the minimal financial backup will try to file a review petition. A report by Insight Securities has also pointed out a possibility of a ‘settlement’, whereby affected parties may reach a consensus with the state.
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