The Employees Old-Age Benefits Institution (EOBI) suffered a loss of Rs 12.928 million by accepting Term Finance Certificates totalling Rs 50 million (face value) in full and final settlement of institution's subordinated loan to Universal Leasing Corporation Limited (ULCL).
According to internal audit report of the institution for the period from May-November 2006, made available to Business Recorder on Wednesday stated that the decision to accept TFCs of Rs 50 million (face value) in full and final settlement of EOBI subordinated loan has cost the institution Rs 12.928 million. The report stated, "the institution extended subordinated loan of Rs 50 million to ULCL for three years as on 17-06-2004.
After the sale of 51 percent share holding and hand over management control of ULCL to Cres Leasing Company Limited, the management of ULCL offered TFCs of Rs 50 million (face value) in full settlement of EOBI subordinated loan to ULCL. The offer was under consideration and before it was accepted or rejected, the Security Exchange Commission of Pakistan (SECP), Islamabad issued a press note on 30th August 2006 regarding appointment of Administrator for Crescent Standard Investment Bank Limited (CSIBL).
Investment advisor informed the investment committee in its 111th meeting held on 16-9-2006 that according to press release of SECP, the entire Board of Directors of CSIBL has been suspended by the SECP under section 282E and 282F of Companies Ordinance 1984. Badruddin Khan, a top banker and former Chairman of NDFC was appointed as administrator.
The administrator shall exercise the powers of both the CEO and Board of Directors. He further added that separate letter to CEO, ULCL and Chairman, SECP were written on September 2, 2006 and September 4,2006 requesting to ensure that SECP's action, in any way, would not be detrimental to EOBI's interest in ULCL.
The Committee comprehensively deliberated on the action taken by the SECP regarding appointment of administrator for CSIBL and suspension of its Board of Directors.
The committee also discussed the matter of tenor, credit risk of principal repayment being transferred from ULCL to UBL. The debate was on superior credit of UBL/TFC as compared to subordinated debt obligation of ULCL interest rate differential and market value of TFC etc, and finally decided to accept the UBL TFC of Rs 50 million (face value) in full settlement of EOBI subordinated loan to ULCL.
The committee further decided to hold the TFC until its maturity date so that the institution does not suffer a loss of principal value due to premature redemption. The decision of the investment committee, to accept UBL TFCs of Rs 50 million (face value) in full and final settlement, has caused loss to the institution of Rs 12.928 million.
Had the principal amount of the subordinated loan received and invested at the rate of 10.25 percent per annum, the institution should have earned Rs 5.272 million for the period from 01-10-2006 to 10-08-2012. At the time of sale of 51 percent shares of ULCL to Cres Leasing Company, no bank guarantee was taken by the institution from the buyer to secure the subordinated loan of Rs 50 million.
The internal audit pointed out that bank guarantee was necessary to secure the loan. However, the audit department's observation was not considered and the shares were transferred to Cres Leasing Company without securing the loan.
If the internal audit observation was given due weight, the institution should not have suffered losses." However, the EOBI officials denied the audit report and said that the institution did not suffer any loss. The decision to accept UBL TFCs against full and final settlement of subordinated loan to ULCL was made in view of the peculiar circumstances at that time. "The ideas was to safeguard the institution from potential loss of principal in a distressed situation."
They said that the institution after considering all pros and cons, decided to accept the TFCs in full and final settlement of EOBI subordinated loan. They decided to hold the TFCs until maturity or sell them in the secondary market at any time provided its market price is equivalent to or more than its face value.
The market price fluctuation of TFCs could affect the institution only in case of sale and not in case of retention till maturity.
Providing the background of the matter, they said, "the EOBI acquired 72 percent holding of ULCL along with management control as a result of plea bargain through NAB. The institution extended a subordinated loan of Rs 50 million to ULCL to fulfil the equity deficiency. Later on the institution decided to divest 51 percent shareholding in the company and after due process sold it to Cres Lease at Rs 9.80 per share along with transfer of management control. It was part of negotiated price that EOBI subordinate loan to ULCL will stay up the expiry of the term ie June 2007.
The institution thus retained 20.56 percent stake in the company along with two board seats to derive the benefits of divestment in case of a turnaround under a renowned acquirer. The Cres Lease paid the full amount of Rs 104.958 million and the financial closure of the transaction took place."
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