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 through PSPC, along with other govt entities holds directly more than 51% of the company's shares, while indirectly owns more than 63%.

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." Other expenses are reimbursements of shared expenses.

"SEPL used to notch up consistent Gross margins of more than 40% till FY2010 (I have analysed from 2007 onwards) while Gross margins in the last 15 years averaged around 37%," the letter reads.

While in 9mfy 23 gross margins came in at only 17.4%.

Board Controversy

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 of June 2022 reveals a contingency on account of a legal proceeding by AIL against the company, which raises many questions.

AIL appears to have been incorporated in May 2005 and entered into an agreement with the company in August 2005. It appears that the selection of the party was not a result of due diligence.

Secondly, suppose a BOT agreement of 5 years was executed in 2005.

In that case, the RO plant ownership should have ideally been transferred in the name of the company by 2010 and if it is presumed that AIL was engaged through supplemental agreements to only operate the RO plant. Then how come a leasing company is claiming the ownership of the RO plant?

"Why was the agreement with AIL not terminated in 2018 and why did the company continue to pay AIL? All that can be said with certainty is that the Management of the company and the Board failed to look after the interest of the company while making sure that ‘favours’ may have been extended to third parties," Mr Javed said in a letter.

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