Recently, the Economic Advisor to the Government of Pakistan, Dr Salman Shah, giving a live interview to a representative of an electronic media disclosed that during the current fiscal year, the government of Pakistan intends to issue GDRs of approximately 5 billion dollars in the international market.
The receipt of this money would greatly improve the country's foreign exchange position and would introduce Pakistan in the foreign capital markets. One of the entities for the issue of GDRs includes Oil and Gas Development Company (OGDC).
The government's decision to issue GDRs for Oil and Gas Development Company Limited before the year ends seems very ambitious and requires lot of organisational planning and corporate structuring before the GDRs should be launched at overseas capital markets. It is only then that the issue would become a success and should bring in any fruitful results for the country. There is no doubt in anybody's mind that the government was encouraged with the successful issue of GDR of MCB Bank, but it should not be forgotten that the management of MCB has endeavoured hard to meet the stringent corporate governance standards that are universally acceptable. We see OGDC no way nearer to those standards.
Originally, the government of Pakistan owned 100% equity in OGDC. It was only in 2002 that the government decided to sell 10% of its holding to the public as part of its privatisation process. Currently the government controls almost 90% of the paid up capital of the company that amounts to almost 39 billion rupees, having a market value of over 500 billion rupees which is equivalent to almost 8 billion dollars.
The government nominates the senior management of the company through its discretionary powers without any regard to merit or suitability. It sacks anyone if instructions are not obeyed to the satisfaction of the government functionaries. There is evidence that during the last five years, three of its managing directors have been changed.
The government not only appoints executive directors but also nominates non-executive directors at its will without any regard to their credentials. Government argues that there is an independent board that looks after the affairs of the company, but how far the board is independent has remained a mystery. On previous occasions, the managing directors were not replaced on the advice of the board, but on the instructions of the government. Therefore, this area remains a question mark for the government.
Some of the directors nominated did not contribute to the working of the company except becoming instrumental in leaking confidential financial results to the interested parties at the stock exchanges. In addition to this manipulative activity, they themselves indulged in the stock trading of OGDC shares. The directors, as well as governmental senior officials, have become a burden on the company's finances due to their excessive benefits-in-kind, that are booked under normal operational expenses. Under the current corporate structure of the company, the successful launching of its GDR seems not only confusing but strange also.
It is interesting to observe that soon after the decision of issuing GDR was made public, severe selling was witnessed. Some argue that, government intends to issue GDR at a substantial discount to its prevailing market price to make it a success, but others argue that due to these organisational and structural weaknesses, the share of OGDC is already over-priced and currently is being traded at almost at 13 multiple of its annual earnings. Therefore, it needed correction to arrive at a fair price, before it is offered to overseas investors.
But there seems to be no doubt that OGDC definitely suffers organisational and structural defects and these need to be corrected before a successful GDRs are launched. There seems to be no evidence that this restructuring has been addressed or any attention has been paid to these areas. The impression we gather is that the government is eager to launch the GDRs without a careful planning and it is being argued that if issue of GDRs is made in haste, it may not result in a way the government is expecting to see.
The OGDC's previous record of corporate performance relating to its responsibilities to its shareholders has not been satisfactory. OGDC failed miserably in this area, as it kept its organisational structure totally like a government department. The "couldn't care" attitude of this company in response to its obligations towards general investors made it a risky investment for private investors.
The attitude of its senior management remained indifferent to the latest global requirements, as it depended on everything through governmental approval.
SOME OF THE EXAMPLES OF THIS ATTITUDE ARE LISTED BELOW: Recently, a news item appeared that OGDC's board of directors had refused to approve the prospectus of the company for the purposes of the issue of GDRs and, therefore, the GDRs will not be issued in the near future till the directors are indemnified by the government for any misstatement that may be incorporated in the prospectus.
This news item was alarming for the investors because the government was announcing its issue almost on daily basis. In just one single day, of this news being published, its stock price declined by almost 5%, wiping out its value drastically.
Whether the news item was correct or not, that is not the issue currently under discussion. But the most important point that needs to be observed is, that no senior representative of the company took any initiative to come out at the earliest possible opportunity to speak to the print or electronic media to confirm the correctness or the denial of this news item. It is being alleged that print and electronic media representatives made several attempts to locate the senior management to respond to the situation, but all in vain and nobody was available to make any comment on this subject.
Whether this absence was intentional or it was due to their being too busy in their operational programmes remains to be seen. In the end, the clarification came from the government side by denying this news item. Had it been done timely, some of the value erosion could have been avoided.
This example demonstrates that it is not the senior management that controls the company; it is the government that is in command of the day to day affairs. It is also worth observing that no statement was even issued by any one of the stock exchanges where this security is listed to clarify the situation to the stakeholders.
It is a pity, that a company that is planning to issue its GDRs in the international capital market has no corporate sense how to comply with the corporate governance requirements or the listing requirements of the stock exchanges or how to build up good relationship with the investors despite the fact that all its senior management, executive and non-executive directors have been nominated by the government through its discretionary powers from a class of elite, that are supposed to be directing and implementing the company's policy.
In case, the news item was true and the directors wanted the government or the company to indemnify them in case of any loss to the directors in the event of any negligent statement that has been incorporated in the prospectus, that also demonstrates the untrustworthiness or unreliability of the senior professional management in whom the directors may not have enough confidence or they preferred not to rely on them. Under this situation, how a foreign investor would like to trust the management of this company when on any important matter, the spokesman is the government and not the company itself?
This is not the first time, that this type of carelessness has taken place by the senior executives of this company. It has become a routine affair and the following examples should be taken into account to determine, if the company can really come up to expectations and can qualify for a successful issue of GDRs in the international capital markets.
During the stock market crash of March 2005, the task force presented its finding to SECP, where it was highlighted that the stock price of OGDC was manipulated by rumours that several oil and gas finds were discovered in a matter of days.
This resulted in the stock price hike to around 190 rupees per share. OGDC management did not bother to either deny or confirm these market rumors. This resulted in large scale manipulation and thereby the public lost its huge capital from this one sided manipulation. We did not see any punitive measures taken either by the government, being one of the largest shareholder of this company, nor the SECP the regulator or the management of stock exchanges to enforce their listing requirements from this company. Why no investigation took place is also beyond anyone's guess. Again the answer may lie that the government should have made a statement because the company may not have been empowered to do so.
At another time, OGDC management communicated wrong figures to the stock exchanges relating to its financial results. Soon after the announcement, the market fell drastically. Investors sold their stocks in panic, but later on another announcement was made correcting the mistake. This resulted in huge losses to the traders and investors.
On a strong protest from all segments of investor's community, It was learnt that investigations were conducted for this incident. Nothing came out from these investigations and no one was aware, who was at fault? Was it intentional or unintentional mistake? All parties preferred to keep quiet, so the matter ended there and deemed as resolved. Had this mistake been made at London or New York Stock Exchanges where the GDRs are being planned to be listed, the company would have faced severe consequences for their negligence.
Whenever, any new oil or gas discovery has been made, OGDC's management would prefer to keep its historic silence and would never make a public statement for its investor community. The stock price would show a visible impact of these changes. Any statement issued in this regard is either so stale that market has already discounted its effect or it would be made subject to the governmental approval. This is another area, where OGDC's management lacks initiative and its indifferent attitude towards the investor's community.
This is one of the companies that are listed at stock exchange that believes in holding the payment of dividends to their shareholders till the very last day that is required to be disbursed by the listing rules, whereas, the government gets its dividend payment on the same day when the directors recommend distribution of dividends. This is not only a gross violation of the company's ordinance or listing rules but it also demonstrates how its management treats differently to the government as a shareholder compared with the general investors as shareholders. Thus it amounts to a gross violation of shareholders rights as all shares rank par-passu as far as shareholders rights are concerned.
The senior management of the company does not disclose enough information to its shareholders. This is reflected in their annual audited accounts as these accounts do not disclose the underground reserves of oil and gas for unknown reasons whereas it is shareholders right that this information should be disclosed annually and they should be aware of this information. The provision of this information is mandatory in those countries where the GDR is being planned to be listed.
Bearing in mind the above shortcomings of the company, it is arguable, if the government gets a lukewarm response from the overseas investors, if the company is not restructured and reorganised properly. Before going to overseas investors, it would be more prudent to re-engineer all areas of company's operations and its management structure. The possibility of another issue of 10% to local investors for placement at fair market price should be seriously considered so that government holding is diluted to a reasonable extent to encourage overseas investors.
The government by disinvesting its additional 10% holding in local market should encourage election of private sector directors that are in real terms independent and not controlled by the government. This step should create more trust and confidence in the company compared with 90% government ownership and asking a foreign investor to invest in an entity that is completely controlled by the government. That would in practice mean investment in governmental organisation, a concept that does not suit to foreign investors at this particular moment where they like to invest in private ownership rather than government ownership.
Under the current structure, it is arguable, if the government would get the desired response from overseas investors at a fair price. It is being feared that if no structural reforms are made prior to its issue of GDR and if the foreign investor becomes shy in investing in government controlled organisations, the Privatisation Commission would have to agree to a bigger discount from its fair market value that will be prevailing at that time. This may be disastrous for the existing investors including the government and it may result in another stock exchange crash and that may hamper government's very ambitious privatisation programme.
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