April 13, 2023 (MLN): The Mutual Fund Association of Pakistan (MUFAP) has asked the proactive action of the Securities Exchange Commission of Pakistan (SECP) on the matter pertaining to JS Bank Limited (JSBL)’s working towards obtaining a controlling stake in Bank Islami Pakistan Limited (BIPL), in the interest of the minority shareholders and the sanctity of the capital markets.

Masooma Zehra Majeed Chief Executive MUFAP in its letter written to Chairman SECP highlighted that the proposed transaction takes advantage of several material weaknesses of the current regulations, detrimental to the interest of minority investors and the sanctity of the capital markets.

She also indicated that there are two major stages that JSBL intends to go through before majority control of BIPL is secured. In the first stage, JSBL has entered into Share Purchase Agreements with existing shareholders comprising 42.45% of outstanding shares of BIPL. 

This exchange has been mutually agreed between parties at a swap ratio of 1.1318 shares of JSBL for 1 share of BIPL. Post this transaction, the holding of JSBL in BIPL will rise from 7.79% to 50.24%.
Under the second stage, JSBL will need to make a public offer for a minimum of 24.88% shares to minority shareholders of BIPL at the book value per share of Rs.24.0, translating into a total maximum value of exchange with minority holders at Rs. 6.63bn.

“JSBL intends to avoid cash payment by using relaxations introduced into the Companies (Substantial Takeover and Acquisition) Regulations, 2017 which were modified through a notification dated September 30, 2022,” she noted.

On November 15, 2022, JSBL notified the official intention to acquire 51% shares of BIPL.  Under the new amendments, the transaction with minority shareholders can be settled using equity / debt instruments in place of cash. 

For this purpose, JSBL intends to exchange its shareholding in financially weak subsidiaries such as JS Global Company Limited (JSGCL) and JS Investment Limited (JSIL) against shares of BIPL instead of issuing shares of JSBL which are being issued to the majority shareholders, she added. 

She also unveiled the chronology of events that portrayed the proposed transaction as more skeptical. 

Accordingly, the transaction appears to go against the intent of the regulations. 

The way in which the acquisition of BIPL is proposed to be executed by JSBL and its sponsors, not only makes the entire regulation ineffective but also sets a dangerous precedent for future transactions at the PSX.

The regulation change in Sep-2022 actually defeats the objective by allowing to swap of any listed shares in exchange for shares held by minority shareholders.

Minority shareholders will no longer be allowed an exit since the exchange of shares will obviously be against shares of companies held by the same Group. Therefore, the group exposure of the investors will remain the same.

Offering illiquid shares of JS Global/JS investments with manipulated prices in exchange to minority shareholders of BIPL is a clear hardship, injustice, and an act of injustice as no minority shareholder will opt for this offer ab initio as the manipulated prices of these illiquid shares of companies, that already are running in losses or exhibiting lackluster performance, appear to be artificially inflated for this tender offer and will drastically fall once the tender is executed or expires.

This is a clear violation of Regulation 29 as an oppression of minority shareholders for exercising Rights of Control in the Company, she said. 

Offering Non-Shariah Compliant Shares of JS Global/JS Investments in exchange to minority shareholders of BIPL (a shariah compliant bank) is again a clear hardship and injustice as minority shareholders who do not invest in non-Shariah compliant shares will not opt for this offer ab initio. 

This is again a clear violation of Regulation 29 as an oppression of minority shareholders for exercising Rights of Control in the Company with not in good faith and clear malafide intent.

The same concerns were raised by Mettis Link News earlier in March 2023, wherein we suggested the group offer cash against BIPL’s shares to the minority shareholders so they can take a smooth exit. 

Otherwise, the PSX and SECP must take swift action to investigate the matter and protect the interests of minority shareholders.

Copyright Mettis Link News 

Posted on: 2023-04-13T11:59:31+05:00