The government is confused over the provision of ' special dividend' to investors for the sale of 20 percent additional shares of Kot Adu Power Company (Kapco), sources in Privatisation Commission told Business Recorder. "The idea of 'special dividend' was floated by 'Independent Power' (IP) because it may want to remit some of its investment from Kapco through this channel," sources said with reference to a recent meeting of the Privatisation Board.
They said that one member of PC Board was of the view that rejection of dividend might be treated as government's intervention in the matters of a private company.
"If we say 'no dividend', IP may say 'no' to the proposed amendments in Articles of Association and Shareholders Agreement (AASA).
The Board, sources said, has been asked to examine whether 'special dividend' was permissible/admissible under the law, and what are the tax implications.
According to a document made available to Business Recorder, the Board was told that Kapco was privatised in 1996, and management control was transferred to the new owners by the government along with 26 percent shares.
Subsequently, additional 10 percent shares were also divested to the new owners. The government now holds 563,362,062 (64 percent) shares of Kapco.
Initial Public Offering (IPO) of Kapco, with an offer for sale of 10 percent shares, including 1 percent for the employees of Kapco, with a green-shoe option of another 10 percent shares including 1 percent for the employees, is in process.
Global Securities Pakistan Limited, Lead Manager for the transaction, made a presentation to the Privatisation Commission Board on October 4, 2004, giving recommendations on the offer price.
The Board directed that the Lead Manager to give another presentation providing more justification for some assumptions including details of the earlier privatisation of Kapco.
The Board constituted a committee comprising Saquib H. Shirazi and Saad Ahsanuddin, members, for providing guidance to the Lead Manager for preparation of the presentation.
THE LEAD MANAGER MADE THE PRESENTATION, INDICATING THE FOLLOWING: Since divestment of first tranche (26 percent shares of Kapco in a strategic sale and second tranche of 10 percent shares), major changes have taken place since privatisation of the company.
Comparison of Kapco with Hubco.
Transaction update, transactional issues, capital restructuring of Kapco.
Pre-emptive rights of 'Independent Power' (International Power Private Limited (IP) the buyer of Kapco ) and its consent for the waiver of subject amendments in Articles of Association and Shareholders Agreement (AASA).
Un-provided Workers Profit participation Fund (WPPF) and Workers' Welfare Fund (WFF) as well as its impact on the price.
Likely declaration of special dividend by Wapda and IP as well as its disclosure to the IPO shareholders.
The following observations were made with regard to WPPF and WFF issue.
The WPPF and WFF issue, if not resolved or resolved during the offering process, may have high speculative impact.
Secretary, Ministry of Water and Power said that the Ministry had approached the Deputy Chairman, Planning Commission and the Chairman of the ECC, in writing, to finalise committee's recommendations. The said recommendations were, however, still awaited.
THE MEETING MADE FOLLOWING OBSERVATIONS WITH REGARD TO THE SPECIAL DIVIDEND AND TAX ISSUES: Magnitude of the dividend was Rs 13 billion and there would be impact or Rs 15 per share on value now and the value after IPO.
Secretary, Water and Power informed that the participants had spoken to and advised Wapda to come to the government before taking a decision on the matter.
The impact of Rs 15 per share may not be in GOP interest.
The Government, through Wapda, is the owner of 64 percent and Independent Power (IP) of 36 percent. If dividend is allowed, there would be two beneficiaries. If impetus is intended to be given to Wapda, pre-IPO dividend may be allowed. 'Special dividend' (pre-or post-IPO) is, however, not a concern or issue for Independent Power.
Sources said that one of the stakeholders said that the government is shareholder as well as tax collector.
However, the Lead Manager clarified that the impact of hike in fuel price was passed on to Wapda during the agreement between Wapda and Kapco. It said that the weighted average of price range under DCF, discounted dividend, earning per share was Rs 32-42.
While privatising Kapco in 1996, government had thought that the UK company ie IP, would give a boost to the power sector. Price of Kapco share at which its privatisation took place in 1996 was Rs 33 and after 9 years it has come to Rs 34.
The private sector efficiency appeared to have gone down despite the offload of manpower, fuel availability and no pending issues, they maintained.
All assumptions may not be consideration. It was clarified that growth projection of Independent Power might have gone down. Transfer of management plus 36 percent shares in 1996, inter alia, included the premium on price. It appears that either the price was too much in 1996 or no improvement has taken place in the company, the Lead Manager continued.
The Board, however, advised that valuation may also be worked out by the Lead Manager on assumption of (i) 10 years basis and (ii) bond issue basis. The Lead Manager worked out the same and indicated that it gives almost the same results.
Sources said the Board was apprised that Kapco had taken a loan from Wapda, which was in process of payment, but one member said that Wapda's loan was at high cost to Kapco.
"We have handed over the company's management but are not allowing them to take commercial decision about dividend. What will be the perception of foreign investors?" questioned another member.