Financial and corporate oil spill

SBP’s deputy governor Jameel Ahmad reported to the Senate committee on finance that the company took huge exposure to one client and something wrong happened there as there were also backward and forward links in this case. However, he said the financial market regulator SBP had examined the episode and the banks had not committed any regulatory violations while extending loans.

“There is misappropriation in Hascol in addition to inventory losses,” said SBP Executive Director Inayat Hussain. The company’s bank liabilities were only Rs24.3bn a year earlier and swelled to Rs56bn.

In its report, SECP said that as of June 30, 2021, Vitol Dubai Limited with 40.21pc shares was now the major shareholder. “The company has outstanding loans of Rs55.562bn from 19 banks and development finance institutions as of June 30, 2021, had defaulted in repayment of loans.” The banks have classified most of their exposure and created provisions of Rs39.34bn. The National Bank of Pakistan (NBP) has the highest outstanding exposure of Rs18.824bn while Habib Bank Limited (HBL) has the 2nd largest exposure of Rs5.44bn.

The last publically available financials of Hascol are as of September 30, 2020. In view of non-disclosure of subsequent financial statements and non-holding of Annual General Meeting, the PSX has put the company on the defaulters list. The Central Depository Company has frozen ordinary shares held in its system accounts of sponsors, directors and senior management.

“Moreover, even the financials as of September 30, 2020, cannot be relied upon” because of subsequent disclosures by the company on June 21, 2021, before the PSX that the company’s Internal Audit received a whistleblower statement and evidence regarding the creation of a series of false purchase orders in 2019 and the position was being investigated.

Subsequently, on July 08, 2021, the company clarified to the PSX that possibly fake purchases pertained to fixed assets and not to oil imports. In a meeting with the banks’ representatives on April 30, 2021, the newly appointed Hascol board Chairman, Alan Duncan — a British politician and a former minister — alleged that the prior management was “atrocious and had misused the trust, did not maintain proper records and ran the business unprofessionally”.

“In the presence of huge negative equity of Rs29.54bn as per latest available financials as of September 30, 2020, and expected further deterioration in the subsequent periods, the revival of Hascol appears beyond the capacity and intention of the major shareholder M/s. Vitol alone,” SECP told the senate forum.

It said it intends to initiate an investigation of Hascol to ascertain the factual position relating to the adverse financial position of the company. The result of the investigation may be helpful in further ascertaining the level of mismanagement in the affairs of the Hascol.

Till 2017-18, the company’s financial health was reasonable even though its growth model was apprehensive but as a commercial business model, the regulators did not intervene. Its market share was at 12.3pc which has dropped to 6pc now. The company’s sales dropped from Rs234bn in December 2018 to less than Rs85bn in September 2020 and its assets dropped from Rs74bn to about 60bn. The SECP noted huge losses of Rs25bn in the company’s annual accounts of December 31, 2019, published in August 2020 and restatement of 2018 accounts, converting profits into losses. The company also changed the name of a related party from Vitol Dubai to Vitol Bahrain in its previous accounts.

Perhaps mainly because of repeated re-statements of financial accounts for previous quarters, for half-yearly accounts for the period ended June 30, 2020, the auditors gave disclaimer of opinion. A disclaimer of opinion arises if the auditor simply refuses to provide an opinion, given limitations on the scope of the audit, or if significant material weaknesses in the internal controls and reporting material mean that an opinion can’t be delivered.

The SECP said as per unaudited accounts for nine months ended September 30, 2020, the accumulated losses have increased to Rs43bn and loss in nine months stood at Rs21bn. During the period from February 2020 till September 2020, three CEOs of the company resigned. The company blamed exchange losses, the difference between cost price and regulated price, decrease in sales due to the overall decline in sales of the petroleum sector underpinned by the economic slowdown.

Regarding the increase in the cost of sales, the company claimed unfavourable fluctuation in the international oil prices, market vitality in the backdrop of uncertain global and local economic conditions coupled with the massive devaluation of Pakistani rupees as reasons and said the cost of finance increased due to increase in borrowings by Rs21bn.“Excessive capital expenses and aggressive growth in multiple areas proved to be a drain on already weakened cash flows,” SECP noted.

In June this year, statutory auditor Grant Thornton Anjum Rahim Chartered Accountants resigned owing to concerns over the reliability of financial records, accounting system and record-keeping of prior years. SECP is now holding a couple of investigations before initiating “criminal and civil proceedings” against the company and auditors.

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