A specific purpose modaraba involved in PSF manufacturing

Apr 21 - 27, 2003

Fayzan Manufacturing Modaraba (FMM) is managed by Faysal Management Services. It was incorporated pursuant to a joint venture agreement between Faysal Bank, Meezan Bank and Pak Kuwait Investment Company. The modaraba is a specific purpose modaraba and for a period of five and a half years, commencing from March 22, 2001. The modaraba manufacturers polyester staple fibre (PSF) and its variants for ICI Pakistan under a Toll Manufacturing Agreement signed on March 28, 2001 between the modaraba and ICI Pakistan, for a period of four and half years from the commencement of commercial operations. The agreement with ICI Pakistan can be renewed with the mutual consent of both the parties.

After the expiration or termination of the License Agreement and the Toll Manufacturing Agreement, the plant shall be sold to ICI Pakistan at a price to be mutually agreed between the modaraba and ICI Pakistan, reflecting the fair market value of the plant. The sale proceeds of the plant, after setting off all expenses and payment of liabilities will be distributed along with the accumulated reserves to modaraba certificate holders upon winding up or dissolution of the modaraba.

The modaraba commenced its business operations from April 1, 2002. The production facility has been set up at a capital cost of Rs 1,356 million and it is capable of producing 44,000 tonnes of PSF annually. The project was completed expeditiously and commenced production within 12 months of establishing of letter of credit with the main contractor, despite aftermath of September 11, 2001 incident and subsequent events. During the construction phase 1.1924 million accident free man-hours were clocked. Conformance to high standards of engineering and planning during construction and commissioning phases of this project resulted in achievement of designed capacity within four days of the trial runs.

The plant, as planned, commenced commercial production on April 1, 2002 and has operated smoothly since then. During the first three months of its operation 9,050 tonnes of PSF was produced. The modaraba posted Rs 62.4 million operating profit from its toll manufacturing operations. After accounting for financial charges, workers' funds and Modaraba Company's management fee, the profit came to Rs 38.5 million. An amount of Rs 7.7 million was transferred to statutory reserve, Rs 30.6 million was distributed among the modaraba certificate holders and Rs 0.198 carried forward as un-appropriated profit. The modaraba certificates got Rs 0.34 per certificate having a face value of Rs 10.00 only.

For the first half of year 2002-03 the modaraba posted Rs 80.345 million after accounting for Management Company's fee. Out of this Rs 16 million was transferred to statutory reserve, a sum of Rs 32.400 was distributed among the certificate holders and an amount of Rs 31.500 was distributed as final dividend among the shareholders. For January-March 2003 quarter the modaraba posted Rs 42.368 million after deducting Management Company's fee. Out of this amount Rs 34.200 was distributed among the certificate holders and a sum of Rs 8.473 million was transferred to statutory reserve.

A closer look at shareholding pattern reveals some interesting details. As on June 30, 2002 there are 495 individual shareholders. They held 469,500 certificates or 0.52% of the total certificates. Faysal Bank (47.68%) held bulks of the certificates, followed by Meezan Bank (23.84%), Faysal Management Services (20%) and Pakistan Kuwait Investment Company (7.95%). Therefore, it may not be incorrect to say that the ultimate beneficiaries are the financial institutions having the largest stake in the modaraba and ICI Pakistan.

The operating assets comprising of building on lease hold land, plant and machinery, furniture and fixture and office equipment had a book value of Rs 1,094.4 million as on June 30, 2002. Assets subject to Ijara financing had a book value of Rs 247.5 million as on June 30, 2002.

Most probably such a project, based on Riba free financing, has been established for the first time in the history of Pakistan. It needed unequivocal commitment from both the lenders as well as the borrowers. So far the arrangement has worked exceptionally well and can be termed a mile stone in the financial history of Pakistan. The only point of concern could be the outlook for PSF sector. However, with textile industry getting ready to face post quota era, the market for PSF is expected to remain vibrant. The GoP must address the issues facing the PSF manufacturers.