AN ATTEMPT TO TAKE OVER ADAMJEE INSURANCE

The case study of a failed hostile take over move

By SHABBIR H. KAZMI
July 12 - July 18,1999

List of Directors

Mohamed Hanif Adamjee
Abdul Hamid Adamjee
Abdul Razak Adamjee
Iqbal Adamjee
Mohammed Choudhry
Izaz Ahmed Rafiqui
Akhter K. Alavi
Mian Asif Said
Saad M. Ali

Two new outsiders have been elected on the Board of Directors of Adamjee Insurance Company Limited (AIC) which in its entirety consists of nine members. These are Saad M. Ali, Executive Director of IP Securities and Mian Asif Said of Habib Bank Limited (HBL). These two gentlemen were the 'take over artists' of what has been termed a failed attempt for the hostile take over of the largest general insurance company of Pakistan.

During the Annual General Meeting (AGM), the Adamjee Group managed to get seven directors while IP Securities-led group and HBL succeeded in getting one director each elected to the Board. It may be of some interest to recap the proceedings of a failed take over attempt, it is more important to understand the motive for the move, its effects on the capital market and future strategy of listed companies controlled by various business groups. It is also appropriate to explore the possible impact of this attempt on capital base, shareholding pattern and dividend payout policies of public limited companies in the future.

According to some securities analysts, the episode also demands amendment in Companies Ordinance 1984. The changes should facilitate take over of the companies which are not managed prudently by the sponsors. The new laws should also safeguard the interest of sponsors who are keen in expanding the shareholder base from the potential threat of a hostile take over by those who manipulate such moves only to make 'quick buck'.

Some analysts termed the attempt to take over AIC an act to sabotage the process of expanding the shareholder base of public limited companies. They say that in future, sponsors of good performing companies would like to retain the controlling shares which will make most of the good scrips illiquid. The process of expansion of capital base through Bonus Shares will be stopped which may result in no further BMR. This can decelerate the whole process of industrialization in the country.

The AGM was termed to be a ritual or nothing more than accusations that the Group was not managing the Company in an effective and efficient manner. In the election of directors the Adamjee Group managed to retain seven slots but proxies played a key role. HBL was able to solicit a large number of proxies from financial institutions and was also supported by IP Securities-led group of shareholders. However, the elections were held in a congenial environment and Adamjee Group welcomed the new members on the Board with an open heart. In the first Board meeting new directors were given a briefing about the operation of the Company and it is expected that the new directors will make a positive contribution in improving the operations of AIC.

The scrip was selling at a substantial discount. The net asset value per share (NAV) was around Rs 55 but shares were traded in the vicinity of Rs 30. Therefore, IP Securities suggested its clients to buy and accumulate AIC shares. These clients made large scale buying. They also contemplated nominating their representatives for the election of the Board of Directors to protect their interest. Since Saad Ali was instrumental in the buying process, these investors nominated him for the directorship.

Similarly, HBL owning around 600,000 shares, tried to solicit proxies from other financial institutions having sizable stake in AIC. The Bank succeeded in getting the nomination of Asif Said to represent the financial institutions and some individual investors. The interest of HBL management in getting its nominee elected on the Board was based on the outcome of its efforts to revitalize the national airline — PIA. It is said that HBL nominee on the Board of Directors of PIA has been playing a key role in the efforts to turnaround the national flag carrier.

However, some of the analysts are not able to swallow this pill. They say that HBL's money is stuck in many sick units. If the Bank has the aptitude, the real test is to use its ability to turnaround some of the sick units rather than trying to influence the policies of a company which already enjoys the status of 'blue of the blue chip companies'. Even if the objection regarding inefficient management of investments is accepted, for the sake of argument, it does not justify hostile take over by those who lack credentials of running an insurance company effectively and efficiently.

Despite the excellent track record of AIC, some equities analysts say that while the risk management was very prudent, investment management was definitely lagging behind in AIC. They believe that a proactive approach in investment management can enhance income of the Company significantly. Apparently the same conviction encouraged IP Securities and HBL to manipulate the hostile takeover.

Securities analysts say that the management of AIC is not entirely responsible for the poor returns on its investment portfolio. In a country where the economic growth has been stagnant for the last five years, less than 20 per cent of total listed companies declare cash dividend; share prices of most of the companies are quoted below par and the law and order situation is not satisfactory; investors, individual or institutional, are not left with any option for investment .

The efficiency and effectiveness of policies of AIC management are evident from the growth in business during the last twenty years and dividend payouts. At present AIC is the largest general insurance company in Pakistan. The paid-up capital of the Company was less than Rs 3 million in 1960 which has been increased to Rs 390 million by December 31, 1998. It has further increased with the declaration of 10 per cent Bonus Shares. The capital base of most of the general insurance companies is much smaller than the paid-up capital of AIC. The Company has also an elaborate network of branches outside Pakistan. At an average the Company has been declaring around 40 per cent cash dividend annually. Still, some people believe that AIC having such an elaborate network has been concentrating only on risk management and grossly ignoring investment management. They say that the Company operating for the last 38 years should be drawing bulk of its income from investment management rather than risk management. The new directors are expected to influence investment management policies of the Company.

However, some analysts differ from this rationalization. They say that the investors led by Saad Ali bought the shares of AIC with only one motive — profit making. They wanted to take advantage by investing in shares of a company which were selling at discount. IP Securities, being a brokerage house, knew that the scrip was selling at discount and annual general meeting has been scheduled. Therefore, they orchestrated the whole drama. Their massive buying pushed the share price from Rs 30 to Rs 62. Even when they stopped accumulating shares, the price continued upward trend and touched as high as Rs 73. These analysts say that price escalation was the outcome of short selling (people selling share which they did not have) by some brokerage houses. It was also said that IP Securities sold part of the holding of its clients to defuse the price escalation which had no bearings.

But, why all this happened? Theoretically, Adamjee family had the fullest control of the Company. Even IP Securities and HBL were not sure that they would be able to get the majority position on the Board. But, they knew that in such a situation whether they got the required directors on the Board or succeed in selling shares back to Adamjee Group, they would be the sole beneficiary.

However, it is important to bring on record that in such a situation, proxies are sold for a consideration and the same cannot be ruled out in case of AIC. It has been reported many times that the group which initially claimed a significant share holding did not succeed in bringing the required number of directors on the Board simply because they preferred to sell the shares to the sponsors at considerably higher price. All such tactics are based on profit making motive. It has been witnessed repeatedly that whenever there is such a 'tug of war' people with small holdings are able to make quick bucks in no time.

Some analysts suggested that the election of directors should be only for one year rather than the existing practice of three-year tenure. They say that in such a case the persons or groups will be required to permanently hold its investment. They fear that once a person is elected on the board he may sell off his stake but continue to hold the directorship. In this regard sale of shares by the directors should be reported to Securities and Exchange Commission as well as to all the stock exchanges in the country to determine the legitimacy for occupying the office.

This raises some basic questions about the ownership of shares and efforts to solicit proxies in case the recent election of directors of AIC. Section 222 of Companies Ordinance 1984 stipulates submission of a return to the registrar of the company and Securities and Exchange Commission of Pakistan, pertaining to the beneficial ownership if it exceeds 10 per cent of total capital. The person is also required to notify of any change in the interest. In case of AIC, while IP Securities-led group and HBL claimed nearly 30 per cent of the votes, it is necessary to find out how many shares were actually owned by them collectively or it were simple proxies for the purpose of getting the directors elected on the Board? It is necessary to watch that the shareholders who brought these two directors on the Board of AIC continue to hold their stake. Some analysts fear that these shareholders will not hold the shares for a long period. The AIC share price has already plunged to around Rs 40 after the announcement of Bonus Shares in the AGM.

According to some analysts, while it may be true that Adamjee family had diluted its shareholding in the Company, it never expected any hostile take over attempt. Mainly because such moves are rather un-common in Pakistan. It was also not expected that any other group will acquire any threatening percentage of Rs 390 million paid-up capital.

Some analysts say that 'Benamee' shareholders are the real hindrance in the development of capital markets in the country. It was expected that with the establishment of Central Depository in the country there would be no such holding. But 'Benamee' ownership has continued for which all the stock exchanges and brokers are responsible who compelled the Central Depository to allow continuation of this practice. Unless the capital market operations become fully transparent, companies would continue to face a situation experienced by Adamjee Group.

In this regard, it is a near unanimous statement that often there are clear cut laws but due to ignorance of law enforcers people invariably flout these laws. Or the enforcers keep their eyes closed after accepting the necessary gratification. However, if the law enforcers decide to teach a lesson to any one they can also do this in the most convenient manner as ample evidences of violation are available on record.

OUTLOOK

The decision of financial institutions to play more active role in the policy making of listed companies is driven by their new strategy. These institutions often have considerable stake in public limited companies but hardly receive any return on their investment. Razi-ur-Rehman, the past chairman of NIT was the leading force behind the revised strategy of these institutions. He was able to get NIT nominees elected on the board of directors of many listed companies where the Trust has sizable investment to protect its own interest and the interest of minority shareholders. The efforts started paying off and it is expected that in future these institutions will play more important role in the formulation of policies of listed companies.

According to some securities analysts, AIC is not the only company where sponsors have diluted their shareholdings. In a large number of public limited companies the sponsors hardly own any sizable chunk of equity. Many of these companies have been declaring huge Bonus Shares. These shares were sold by the sponsors and were the source of income for these people. These people were making millions of rupees from sale of Bonus Shares but never realized that their holding was being diluted. Even if they knew they could not avoid selling these shares as they did not have any other source of income. The result is that the sponsors' shareholding has diluted considerably and they cannot resist a hostile takeover, if some one tries. The AIC incident will force many sponsors to redefine their strategy, if they wish to avoid take over by those who really enjoy majority shareholding now.

Analysts fear that after the failed hostile take over attempt, the capital base of AIC will be reduced. This reduction cannot be ruled out because company has ample surplus cash which can be invested in treasury stocks. The same is also expected in case of many other listed companies.

They also say that Engro Chemical Pakistan faces constant threat of hostile takeover. A leading business group, which also manages a fertilizer unit, has been trying to get control of Engro but has not succeeded so far. The employees of the Company own around 26 per cent shares while balance is held by financial institutions including Commonwealth Development Corporation and International Finance Corporation. The day these institutions decide to sell their shareholdings or give their proxies to any financially strong group the composition of the board of directors of Engro will be changed entirely. The probability of such scenario may be very low but cannot be ignored altogether.

Whatever happened in case of AIC is history now. It is the responsibility of the new incumbents on the Board to work for the best interest of the Company. It is also expected that Adamjee Group would accept them as extra vigour to run the Company in the given but difficult economic conditions. All the Board members must work with open heart and clear mind to further expand the operations of the Company.

Investors and shareholders in other companies should also take a cue from AIC episode and prepare plan to take over the management of companies where present board members have been failing to discharge their duties. But, the objective should be to make the companies healthier rather becoming a director to satisfy the ego or further rip off the unit.

There is also an urgent need to amend Companies Ordinance. Take over law should be promulgated immediately. The maximum shareholding by the sponsors, including shares owned by associate companies, has to be fixed. There should be mandatory declaration if shares owned by an individual or a group exceeds five per cent of total paid-up capital in a listed company. There should also be a complete ban on 'Benamee' shareholding. All the securities should be settled only through Central Depository System. All the listed companies should be forced to comply with Central Depository Company programme to make all the securities live. If they resist, trading in the shares of these companies should be stopped and subsequently delisted if they fail to follow the instructions of Central Depository.

 

20 Years' profit appropriation at a glance-1979 to 1998

Year ended

Cash

Bonus

Dividend

Shares

December 31,

Rate  %  

Rate %

1979

50.0

33.3

1980

40.0

20.0

1981

50.0

25.0

1982

45.0

33.3

1983

40.0

40.0

1984

35.0

30.0

1985

55.0

30.0

1986

37.5

20.0

1987

37.5

20.0

1988

40.0

15.0

1989

45.0

10.0

1990

40.0

10.0

1991

50.0

15.0

1992

40.0

20.0

1993

40.0

20.0

1994

40.0

25.0

1995

35.0

25.0

1996

35.0

25.0

1997

35.0

25.0

1998

30.0

10.0

Total  820.0     451.6
Average   41.0%   22.6%

                                             

 

GROWTH AT A GLANCE

Year

1961

1970

1980

1990

1993

1994

1995

1996

1997

Paid-up Capital

2.50

2.50

10.18

87.78

133.25

159.90

199.87

249.84

312.30

Direct Premium

3.79

25.69

185.45

942.33

1,750.79

2,045.06

2,458.22

2,855.83

3,123.26

Retained Premium

1.15

15.41

138.96

610.11

1,140.48

1,210.38

1,536.85

1,894.00

2,208.50

Net Losses Paid

& Outstanding

0.34

6.69

67.20

360.35

576.13

695.79

812.15

1,077.71

1.450.90

Profit after Tax

0.04

1.29

10.87

53.68

155.09

176.08

186.55

221.87

290.50