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Countering corporate default and fraud 

Dr. Ikramul Haq & Hassan Aslam Shad

The reports of corporate corruption or cartelization by certain companies, within a particular sector, keep on appearing and fading in Pakistan with promises of punishing the culprits. It is a bitter truth that in the investigations reports, serious allegations are levelled, projected in media, but before the trial stage, interim orders are obtained from the high courts. After the restrain orders, the law enforcing forces (LEFs) and regulatory bodies like Security and Exchange Commission of Pakistan (SECP) and Competition Commission of Pakistan (CCP) and other become toothless. In some cases, fines are imposed and happily paid but no conviction takes places. The culprits—acting alone or with the connivance of state officials—are seldom punished. This is the dilemma of Pakistan being a “soft state”—famously articulated by the Nobel Laureate, Swedish sociologist Gunnar Myrdal in his 1968 three-volume work, Asian Drama: An Inquiry into the Poverty of Nations. It is a broad-based assessment of the degree to which the state, and its machinery, is equipped to deal with its responsibilities of governance. The more soft a state is, the greater the likelihood that there is an unholy nexus between the law- maker, the law-keeper, and the law-breaker.

The case study of Hascol Petro­leum Ltd  [it received an oil marketing company (OMC) licence in 2005 as small-time operator], based on Press reports not contested till today, provides challenges faced by LEFs, banks and the authorities responsible for countering corporate crimes. What can be viable solution(s) to counter such frauds, malpractices and organised crimes like money laundering (ML) and combatting terrorist financing (CFT) are discussed in the light of world best practices.

The facts about Hascol Petro­leum Ltd [hereinafter “Hascol], narrated in various Press reports, have been succinctly summarised by economist Ali Khizar in his op-Ed [The Hascol fiasco, Business Recorder, July 13, 2021]: “It is a combination of governance failure—from banks to board of directors of Hascol and fiduciary malfeasance by the management. Loans worth Rs 58 billion given by 18 domestic banks have turned bad. Investors at Pakistan Stock Exchange (PSX) are said to have lost tens of billions of rupees”.     

For record, the facts with sources/references are hyperlinked and reproduced below so that the maladies pointed out by Ali Khizar and others can be highlighted:

  • “Hascol Petroleum Limited was incorporated in Pakistan as a private limited company on March 28, 2001. On September 12, 2007 the Company was converted into a public unlisted company. The Company is engaged in the business of procurement, storage and marketing of petroleum, chemicals, LPG and related products. The Company obtained oil marketing license from Ministry of Petroleum and Natural Resources in the year 2005 and acquired assets of LPG licensed company in the year 2018”.

Source: https://dps.psx.com.pk/company/HASCOL

  • “Vitol, which now holds 27.5% in Hascol, has gradually increased its stake since first acquiring 15% in April 2016. A Vitol spokeswoman in London declined to comment. An official from Hascol didn’t immediately respond to a request for a comment. Hascol posted a net loss of 5.4 billion rupees in the April-June (2019) period, the biggest quarterly loss since at least 2014, when Bloomberg started compiling the data. The retailer last month announced it’s looking to raise 6 billion rupees ($39 million) through the rights issue”.

Source: https://dailytimes.com.pk/492890/worlds-biggest-independent-oil-trader-vitol-makes-new-move-in-pakistan/

  • “The 12 months ending June 2019 have wreaked havoc to a company that has been the bright star of the Pakistani energy business as recently as last year. From minnows in the oil sector, Hascol Petroleum had risen above just about every other company in the oil marketing space except the state-owned Pakistan State Oil (PSO) during the last decade. But now, it appears to have suffered a stunning set of reversals and has been hemorrhaging money”.

Source: https://profit.pakistantoday.com.pk/2019/09/23/the-extraordinary-rise-and-spectacular-crash-of-hascol-petroleum/

  • “Hascol Petroleum Limited and TOTAL PARCO Pakistan Limited entered into Joint Storage Agreement for Sahiwal & Daulatpur. The Agreement was signed by Mr. Mumtaz Hasan Khan, Chairman Hascol and by Mr. Oliver Sabrie, CEO, TOTAL PARCO in a ceremony held at Hascol’s Thalian Depot on 25th March, 2019. The arrangement between the two Companies is on equity participation basis which will have a significant impact on the optimization initiative for storages and infrastructure. The Management of both the companies remained committed to strive for safe and reliable business operations and thanked all the project team members for having reached a milestone in the Petroleum Sector for the betterment of the Country”.

Source: https://dailytimes.com.pk/370358/hascol-total-parco-sign-joint-storage-agreement/

  • “The National Clearing Company of Pakistan Limited (NCCPL) on Monday [June 28, 2021] excluded M/s Hascol Petroleum from the list of eligible securities after the Pakistan Stock Exchange (PSX) placed the oil company into the defaulter segment. In a notice sent to the PSX on Monday, the NCCPL said that placement of M/s Hascol Petroleum Limited (HASCOL) in the defaulter’s segment with effective from June 28, 2021, leads to action under Clauses 7A.3.5 and 7B.3.1.4 of NCCPL Regulations, 2015. Accordingly, in pursuance of provisions stipulated in the above referred clauses of NCCPL Regulations, 2015, M/s Hascol Petroleum Limited shall be excluded from the list of SLB Eligible Securities, MF Eligible Securities and MTS eligible Securities with effect from Monday, June 28, 2021”.

Source: https://dailytimes.com.pk/781232/hascol-excluded-from-list-of-eligible-securities-nccpl/

Note: SLB stands for ‘Security Lending & Borrowing’, MF for ‘Margin Finance’ and MTS for ‘Margin Trading Securities’.

At this point of time, it deems imperative to highlight how a small company rose to a level of a listed company, having the biggest share in oil marketing after state-owned Pakistan State Oil (PSO), secured loans of billions from banks. All this happened despite notices of malpractices issued by SECP and a red flag against its fraudulent practices. This is not limited to Hascol but many other entities—we have taken this as a case study not for targeting any single entity.

The action of suspension of licence of Hascol by Oil and six others oil marketing companies by Oil & Gas Regulatory Authority (OGRA) for failure to acquire the required reserves was stayed by the Sindh High Court as reported in Press on September 7, 2011. The banks, even after this showed no retrain in giving huge running finance and loan facilities to Hascol.

Role of State Bank and Credit Rating Companies

According to an insider, who requested anonymity, “credit rating companies are the right entities to predict the future credibility. However in Hascol’s case credit company did lower its rating back in 2017. However, unfortunately bankers followed the herd approach and continue lending. It is unfortunately collective failure of banking industry than anyone else”! The question is whether State Bank of Pakistan (SBP) under the law had any role to avert the fiasco. The SBP, as the regulators of banks, never took notice of continued lending to Hascol even after lowering of its rating in 2017 by a credit company—https://www.tasdeeq.com/. In case, there is a lacuna in the law it needs to be identified and rectified by the Parliament.

Role of Courts

According to a  report, the Hascol on September 8, 2011 issued a Press release claiming: “The Chief Justice of the Sindh High Court on Thursday [September 7, 2011] allowed the company to resume its marketing activities on the grounds that the ministry of defence was responsible for the delays to make the storage depots operational”. Though red flag was raised by OGRA and SECP, yet none of LEFs, including the National Accountability Bureau (NAB), could stop the entity from defrauding all e.g. foreign investors, banks and all other stakeholders as the matter was stayed by the Sindh High Court. This is very unfortunate that in cases involving the predatory corporate entities, stay order are obtained under Article 199 of the Constitution of Islamic Republic of Pakistan [hereinafter “the Constitution”] and LEFs are barred to take actions to safeguard the interests of stakeholders. Article 199 of the Constitution cannot be invoked in such situations where the interests of private parties/stakeholders are involved (after detailed discussion and relevant caselaw the Supreme Court held in latest case Civil Appeal No.1729 of 2019 decided on January 28, 2020).   

Role of SECP

The ultimate delisting and fall of a ‘corporate giant’ and the ground realities are aptly concluded by Ali Khizer in The Hascol fiasco : “Given the existing dynamics, there is no way for banks to recover, albeit partially, money, without restructuring and restrengthening the franchise value of the business. With the Federal Investigation Agency (FIA) and others probing the company, there is a slim chance that lenders will be able to salvage their loans. It appears to be a mega scam, and it is likely to be dealt with as such”.  

The term “mega scam” is so often used in Pakistan for corporate and financial crimes without any success to counter it as the following events in the case of Hascol Petro­leum Ltd prove:

Role of SECP is depicted in a Press report as under:

The Securities and Exchange Commission of Pakistan (SECP) took notice of Hascol’s reported accounts for the period ending June 30, 2019 during October 2019. In this regard, the SECP has diligently followed its requisite internal protocols in compliance with its mandated role and responsibility. However, being the apex corporate regulator of the country, SECP has to conclude its proceedings after following due process as envisaged under the law. The SECP does not comment on its regulatory actions until they are finalised and orders are issued, at which stage they are published on its website without any exception. However, recently some misreporting in the print media has been undertaken that is devoid of facts and has been published without seeking SECP’s version. The SECP has been and continues to remain vigilant and proactive in swiftly dealing with any regulatory violations that fall within its ambit. SECP greatly respects and values its ongoing relationship with the media which almost invariably reports on SECP’s activities in a measured, responsible and fair manner. However, it expects that reporting on matters currently under consideration of SECP should not be based on conjecture or incorrect hearsay”.

[underlined by us for emphasis]

The SECP as regulator was denying what is called “hearsay” by media. This is where the fault lies. The regulator was vigilant for what? The SECP and the company should have been investigated by the FIA having jurisdiction in corporate frauds and malpractices, but as usual its customary and habitual inaction caused “mega scam” to take place. Now, there is no use crying over spilled milk! This is the standard practice by all LEFs. These either lack capacity to preempt such scams or are a part of criminal culpability.

The lawmakers also show extreme apathy and insensitivity. The issue is why? Is due to sheer incompetence or temporal gains or saving the rich and mighty—this is what a soft state is all about!

No standing committee ever considered the matter while numerous reports were published in the media and LEFs were restrained by courts to take any action. The Auditor General of Pakistan, a constitutional post under section 168 of the Constitution failed to perform his fuctions and powers duties as enumerated in Article 169 of the Constitution as under:

“The Auditor-General shall, in relation to—

  • the accounts of the Federation and of the Provinces; and
  • the accounts of any authority or body established by the Federation or a Province, perform such functions and exercise such powers as may be deter-mined by or under Act of Majlis-e-Shoora (Parliament) and, until so determined, by Order of the President.”

It is pertinent to reproduce Article 171 of the Constitution and its blatant violation in the present case.

“The reports of the Auditor-General relating to the accounts of the Federation shall be submitted to the President, who shall cause them to be laid before the both Houses of Majlis-e-Shoora (Parliament) and the reports of the Auditor-General relating to the accounts of a Province shall be submitted to the Governor of the Province, who shall cause them to be laid before the Provincial Assembly”.

No such reports were presented to the President in utter violation of the supreme law of the land. Even no member in Senate, National Assembly or provincial assemblies has ever raised the issue of Hascol’s mega scam during any session while media was reporting and the company defrauding public funds was getting stay orders from high courts! The unholy alliance of lawmakers, law-keepers and law-breakers in this case is visible beyond any iota of doubt. What makes the situation more painful is the fact that judiciary under the Constitution instead of playing its role to safeguard public money has been granting stays—unlimited and unconditional as in this case study establishes.

Political connotations

The following report shows that even after the Hascol was issued notices by the SECP, blocked by the High Court, lowering of credit rating, as discussed above, the political maneuvering was used to hide its malpractices and continue further fraudulent actions.      

PM meets global energy firm’s delegation

On August 23, 2019, Prime Minister Imran Khan met a delegation of leading global energy firm “VITOL” and its partner in Pakistan HASCOL along with Sahibzada Jahangir, Prime Minister’s spokesman on Trade & Investment for UK & Europe. The prime minister was apprised of VITOL & HASCOL expansion and investment plans in the oil industry in Pakistan. Christopher Bake, Senior Director VITOL, Chairman HASCOL Mumtaz Hasan and CEO HASCOL Saleem Butt comprised the delegation. The VITOL and HASCOL, along with Sahibzada Jahangir, also met Dr Abdul Hafeez Shaikh, Adviser to Prime Minister on Finance. VITOL is an energy and commodities giant managing a global chain of Oil & LNG supplies with offices in 40 countries. HASCOL is the leading private sector Oil Marketing and Distribution company in Pakistan with a developing portfolio of other energy products—source: The News, August 24, 2019

More facts narrated below, confirm that the company was guilty of corporate crimes and other serious malpractices and financial crimes without huge public funds squandered:

  1. The investigative report, What Hascol is hiding [Profit magazine, April 25, 2021, accessed at1:10 pm on July 20, 2021] reveals that:
    1. “Between 2010 and 2018, Hascol saw its topline surge by an astounding 52.7% per annum, from Rs7.9 billion to Rs234 billion. And while there are concerns over a looming crisis, all he has [Chairman of Hascol] to do is keep a steady ship sailing smoothly”. 
    1. The company is crippled by severe debt, which stands at Rs. 58 billion. The 14 banks Hascol owes money to are now forming a consortium to get the company potentially restructured. As one source put it, Hascol’s rise and fall is a reminder of the damage that can be shaped by obtaining heavy loans and giving unnecessary discounts to achieve growth.
    1. Sitting on top of the rubble from the destruction of the past year is Alan Duncan, a former Member Parliament of the United Kingdom House of Commons that has remained minister of state in both the May and Cameron cabinets in the United Kingdom. A staunch conservative politician with links stretching back all the way back to Margaret Thatcher and John Major, more telling for the purposes of our story is his past as a business executive. He broke out from Oxford working for Shell, but more famously found his sea legs working for notorious financial criminal Marc Rich, who was indicted in the United States on federal charges of tax evasion and making oil deals with Iran during the Iran hostage crisis. 
    1. As Profit lays out what happened to Hascol this year, and all the drama that the company kept seeming to land in, two former CEOs–Saleem Butt and Aqeel Ahmed–declined to comment for this story. And the current CEO, Adeeb Ahmad, tried to avoid Profit as best as he could, saying anything he had to say could be found in the latest report, and did not want to answer the trouble within the financials.
    1. Hascol’s fortunes changed in 2009, when veteran energy executive Saleem Butt took over as the executive director and chief operating officer of the company. Under Butt’s leadership, the company was able to expand its access to debt. Previously banks had been somewhat less forthcoming with this new entrant in the oil market, but as COO, Butt established a strong relationship with Summit Bank, one of the smaller banks in the country, to begin extending the company the credit needed to expand. From then onwards, Hascol started to become bigger every year with Saleem Butt at the helm of affairs, first as COO, and then as CEO. Interest grew in the company, and in 2015, Dutch energy giant Vitol acquired a 15% stake in the company, and bought another 10% in 2016 to become the largest shareholder in the company. Hascol and Vitol also entered into a joint venture deal for marketing of LNG with a 30-70 ratio respectively. By 2017, Hascol rose to become the second largest oil marketing company in the country, overtaking both Shell and Attock Petroleum, and behind only the government-owned PSO.
    1. Over the course of its existence, the company has always managed to increase revenues. It saw a revenue increase from Rs 10.3 billion in 2009, to Rs 274 billion in 2018, with there being only a slight dip in 2015. Indeed, between 2010 and 2018, the company saw its revenues climb at an astonishing average of 52.7% per year (Hascol Petroleum’s financial year ends December 31 of each year.).
    1. For most of its existence, it has just about managed positive net incomes, as cost of sales has also been quite high. It experienced a loss of Rs275 million in 2010, and Rs123 million in 2018, but in the three years prior to 2018, it has a net income greater than Rs2 billion.
    1. And then in 2019 what happened. Typically, when a figure is that absurd, we avoid making a graph of it, for risk of spoiling the aesthetics of the magazine, but we have included it here just to show how truly bizarre that year was for Hascol. Revenue dipped from Rs 274 billion in 2018 to Rs180 billion in 2019 and net income went from a loss of Rs123 million in 2018, to a loss of Rs 26 billion in 2019. Also observe net cash flow: Hascol had one remarkable year in 2015, where net cash flow stored at Rs22 billion, but in 2018, its net cash flow was negative Rs12 billion, which fell to negative Rs16 billion in 2019.
    1. By way of explanation, at the time, Hascol’s chairman had very little to say. “There has been significant volatility in the international oil market, and serious currency devaluation in the local economy. This has combined with punitively high interest rates, which has placed a severe burden on the company’s cost of financing,” he wrote in the company’s annual report that year.
    1. For the nine month period ending September 30, 2020, the company’s net revenue stood at Rs99.4 billion, significantly lower than the Rs130 billion achieved in the same nine month period in 2019. The company’s loss for the nine month period ending September 30 stood at an astonishing Rs20.9 billion, compared to a loss of Rs14.4 billion in 2019. If one looks at the annualized data, then the company’s net loss for the year 2020 stands at Rs32 billion.
    1. In 2020, with the repeated pattern of poor performance, the company decided to elaborate in its quarterly report, writing that “during Q1 2020, the shareholders injected Rs. 8 billion as additional capital, to bolster the operations and address the liquidity position of the company, both of which had been adversely affected in fiscal year 2019. But due to the lockdowns imposed by the government to tackle the C-19 situation; not only the sales volumes decreased due to a drop in consumption of oil products, the unprecedented fall in oil prices and devaluation of currency also had a severe dampening effect on the Company’s financial performance”.
    1. Admittedly, the year 2020 has not been good to most major oil companies. Consider Shell Pakistan. For the nine month period ending September 30, its gross revenue stood at Rs135 billion, (compared to Hascol Rs99 billion) while its net loss stood at Rs6 billion (compared to Hascol’s loss of Rs20.9 billion).
    1. Both Attock and Pakistan State Oil have financial years that end on June 30 (Hascol’s financial year ends on December 31). But if one looks at the quarterly report for the first quarter for both those companies i.e. the quarter that ends on September 30, the figures tell a different story.
    1. In Attock’s case, sales stood at Rs46 billion, while net loss stood at Rs562 million. The same figures for Hascol for the quarter of September 20 are very different. Gross sales for that quarter stood at Rs30 billion, while net loss stood at Rs3 billion. PSO is the only company in this case which managed to post a profit during this period. In PSO’s case, sales stood at Rs333 billion, while net profit stood at Rs5 billion.
    1. While other companies have posted losses, they are not close to the scale of financial losses that Hascol is experiencing. So what else is plaguing the company?
    1. The year 2020 has been full of controversies for Hascol. For instance, in October 2020, the Oil and Gas Regulatory Authority (OGRA) suspended its marketing and distribution license in KPK. Apparently, Hascol had been operating illegal and unauthorised storage and selling of petroleum products (petrol and diesel) at Amangarh Depot, despite OGRA’s clear directives for the stoppage of operation of Amangarh Depot.
    1. But perhaps most importantly, the company took a whopping Rs7.6 billion impairment against receivables, and revealed hardly any details on it who the counterparties were. It also leaves unanswered questions: how many counterparties were there? What was the credit policy? Was the parent company, Vitol, aware?
    1. To understand how this could have happened, it helps to know how petrol is sourced and distributed. Roughly, most OMCs in Pakistan source petrol either through refineries locally or through imports. A company like Hascol does both. The oil is then sold either to dealers (who are petrol pump owners) or to end consumers through company operated pumps. Hascol has a mixture of both dealer-operated and company-operated pumps, though in its case, the dealer operated is far larger.
    1. In the OMC business, one can only sell direct through one’s own pumps, or through dealers that operate one’s company-branded pumps. If it is the latter, then the usual credit terms are three to seven days and sometimes collateralized by guarantees or bonds. Which leads to the ultimate mystery that the market is asking: who was allowed this much credit by Hascol?
    1. One explanation floating in the market: that the petrol was actually sold to a middleman, who then “dumped” this stock into other OMCs petrol stations, such as PSO and Total etc.
    1. Before we try to uncover this middleman, let us pause for a moment and first understand what dumping is and how it takes place. Let us say there is OMC A. Its dealer operated pump is committed by law and contracts of Pakistan to purchase petrol and diesel from OMC A. The price at which that transaction happens is at a regulated price established by the federal government. ‘Dumping’ is when another company, say OMC B, basically decides to sell to OMC A’s dealer at a lower price, which OMC B is not legally allowed to do. Why would OMC B do this? If both OMC A and B are sourcing their fuel from a refinery in Pakistan, then they are receiving it at the same price and there is no reason to dump. But if OMC B is able to procure smuggled fuel or otherwise offshore fuel at a better price, then they have a price advantage, and they can ‘move’ that fuel. OMC A may sell to their own dealer for Rs100, but OMC B may come to that dealer and sell at Rs98. This transaction typically happens off the books, and in the middle of the night.
    1. According to one source, some of the amazing volatility in certain OMC sales is not just related to a lack of supply, but also related to the fact that there has been a crackdown on this dumping practise. And the rumour about Hascol persists, in part due to the perception that dumping within the OMC market has been particularly prevalent in the last few years.
    1. Another way OMCs could dump and make money is by manipulating the inland freight equalisation margin (IFEM).  The government of Pakistan has set the price of petrol the same across the country, whether you are buying it in Gilgit or Karachi. Obviously to transport petrol all the way to Gilgit is a lot more expensive than to Karachi. OMCs report their sales to the government, and charge the government what is called IFEM; or a way of getting reimbursed for freight costs.
    1. Now, here is where it gets interesting. The company called ‘Fuel Experts’ isn’t confidential at all. In fact, the company, along with the founder Khan, were named in the ‘Report of the Inquiry Commission on Shortage of Petroleum Products in Pakistan’, headed by FIA Additional Director-General Abubakar Khudabaksh, and commissioned by the Pakistani government in July 2020, to probe the shortage of petroleum products. That damning 155-page report leaked in December asked for the dissolution of the industry regulator for a litany of failures starting from 2002.
    1. On top of pointing out malpractices of the OMC industry in general, that report said two things of particular relevance to Hascol. First, it confirmed the theory of smuggling and dumping, noting it is an open secret that petrol products are being smuggled into Pakistan from the western border of Taftan, Iran. The second thing the report went on to mention were the dealings of Hamid Khan with Hascol. “Hamid Khan is reported to have extensive business dealings with Hascol,” it reads. “However, after reportedly defaulting on huge credit in Hascol, he has now established a company by the name Fuel Experts Pvt Limited. Although Fuel Experts is not an OMC, it is dealing with the supply of petroleum products by procuring it from different OMCs (read Hascol) and openly supplying it to several retail outlets countrywide on his self generated invoices and delivery notes in violation of OGRA rules”.
    1. At least according to this report, Hascol seems to have lost a lot of money on this one middleman. Or did they? While Adeeb Ahmed was reticent, Profit did manage to contact the head of sales at Fuel Experts, Wasif Khan. The tale he told was very different, and according to his version of events, while Fuel Experts did do significant business with Hascol, they did not owe Hascol anything. “Fuel Experts have paid off all invoices that were raised by Hascol in the name of Fuel Experts and one can check the official books of Hascol to confirm this,” said Khan while maintaining that his company is not liable for any other dealings of the company. “Where is the old CFO and where is the old CEO?” he asked rhetorically. When asked if his company was involved in dumping on behalf of Hascol, he naively explained “If an old PSO pump owes money to PSO and is not in good financial health, then PSO would not supply fuel to this pump. Now the owner of the pump will not close his business just because of this. He will obviously look for other suppliers of fuel”.

The story of “mega scam” is still not complete. The startling facts above calumniated in what is totally a bizarre scenario for any corporate lawyer—both the authors have expertise in this field. The role of Auditor General, internal and external auditors and SECP in the entire scenario is highly questionable. The following facts and in the end conclusions drawn by economist Ali Khizar testify to the fact that we need structural changes as early as possible as was done by China once faced with the similar conditions:

  • “But something still does not make sense. If it is not Fuel Experts that owes Rs. 8 billion to Hascol, then where did this money get lost? And why would a company like Hascol allow one middleman such lenient credit terms? Unless of course, if the middleman was only a front man for Hascol own management at the time. Indeed, a related party to the controversy heavily insinuated that that is exactly the case, and that Hascol used to maintain multiple sets of books to do just that.
  • Investigators of Profit told that Hascol has managed to get a stay order against the Securities and Exchange Commission of Pakistan, which wanted to conduct a thorough investigation into the accounts of the company but with recent reports of the National Accountability Bureau and FIA taking interest in the affairs of OMCs, things may heat up soon.

[underlined by us for emphasis]

The sordid story of getting stay orders in matters not covered under Article 199 of the Constitution, yet entertained puts a huge question mark on the conduct of lawyers and the role of judiciary. This is the crux of the matter that nobody has highlighted yet in the Press. It ultimately paved a way for the company to deceit and cheat the banks as following facts from the story of Profit show:  

  • “The banks are not happy with Hascol, and they have been publicly getting passive aggressive with them. Take Meezan Bank for example, which in its analyst briefing for their fourth quarter of calendar year 2020 results, made a special mention to Hascol alone. The bank said that the higher provision charge in the fourth quarter mainly relates to Hascol, which has a negative equity and has been delayed on its debt servicing obligations.
  • As early as late 2019, Hascol had become the target of rumours that banks had stopped lending to the company. To understand why, one needs to remember that much of the company’s success before 2018 had been based on huge loans. The company’s rise had relied on a very aggressive pricing strategy where discounts were offered to capture market share. This allowed for huge investments in retail outlets and storage facilities.
  • Then, as already mentioned, the company in 2019 began to suffer losses because of the macro-economic issues, such as devaluation and plummeting inventory prices. Yet despite these issues, according to sources, the company kept on borrowing for working capital. but allegedly diverted these loan proceeds for other than their initially stated use.  So rather than managing its working capital requirements, the company continued to expand its retail network on a fast track basis, adding almost 100 outlets per year with these short-term borrowings. This made the company over-leveraged and caused a mismatch in borrowings. Currently, the company’s debt stands at Rs58 billion, and it owes money to at least 14 banks. 
  • Part of the problem with Hascol is a larger problem with companies borrowing from banks in general. In Pakistan, there is no disgrace attached to defaulting on bank loans. This has in part to do with the lengthy judicial process it takes for banks to retrieve their money from defaulters, often between five to 10 years. This gives a defaulter a lot of time to go about their business, while the case is pending in court. As per one source, this practice gives a sense of liberty among industrialists, many of whom are politically connected as-well, and can drag the legal case on for years. 
  • So, what can a bank do in this situation? Banks in Pakistan usually try to make the company operative through restructurings, rather than demand their money. And that is exactly what happened. 
  • In its quarterly report, Hascol said “…The Company’s lenders agreed to partially convert short-term debt to long-term (which completed subsequently in September, 2020) to improve the Company’s debt maturity profile. However, due to the subdued economic conditions and volatility of the oil markets, the expected results were not achieved.”
  • Similarly, Hascol also said it was in talks with banks (though it did name which banks) to partially convert debt into equity and restructure all of the company’s short term debt into long term facilities. The banks seem to have no choice but to play ball.
  • Most unusually, the company’s auditors, EY Ford Rhodes, resigned as co-auditors last year. It is always a cause of concern when an auditor resigns – particularly when it is one of the ‘big four’ firms: Deloitte, PwC, Ernst & Young, and KPMG. 
  • Essentially, it boils down to this: it is actually very stressful to be an auditor for a Pakistani company. There is immense pressure by the global heads of the accounting companies on their local Pakistani subsidiaries to apply an extra layer of scrutiny on Pakistani companies. Why? Because the world simply does not trust them. It is an unfair assumption perhaps, but it does explain why auditing companies are extremely wary of having or real estate companies in Pakistan as clients. It is simply too dodgy.
  • Simply performing poorly is no indication of fraud. But since Hascol has performed so poorly, it is also likely under immense pressure to perform, and show better financials. EY seems to have wanted a fair amount of distance between itself and Hascol. When contacted, the CEO was unwilling to disclose why the auditor resigned, despite multiple attempts at contact. 
  • After the sugar inquiry report, international accounting firms have also come under their fair share of criticism for giving a clean chit to companies that were clearly maintaining two books of accounts and making off the books sales.  According to a senior member of the accounting fraternity, the problem in Hascol was with the opening balances and the records presented by the management very obviously not enough for EY to verify these independently. EY Ford Rhodes also declined to comment for this story citing client confidentiality. Instead, Grant Thornton Anjum Rahman Chartered Accountants alone reviewed the books and expressed doubt about the proposed plan to fix the financials, saying: “The management’s assessment highlighted that the liquidity of the Company is dependent upon the proposed restructuring arrangement of the Company’s overdue financial liabilities. However, we were unable to obtain sufficient appropriate evidence to support our conclusion in respect of the proposed restructuring. These condensed interim unconsolidated financial statements do not reflect any adjustment that would be required should the Company be unable to continue as a going concern…we have not been able to obtain sufficient appropriate evidence to form a conclusion on these condensed interim unconsolidated financial statements.”
  • In 2019, Mumtaz Khan had this to say: “The same management was delivering excellent results. Between 2011 and 2017, we were growing very rapidly. They are competent people and they are all professional people. There is no one from my family like a nephew or son or something. The company has been run professionally just like Shell or Total…It is a professionally run company. That is why Vitol has taken shareholding. The management, they are good people, competent people, honest people. And they have been delivering good results often. Every company faces bad times.”
  • So much for that. The year 2020 has been a series of revolving doors for major management members. 
  • First, let us look at the CEOs. On February 19, 2020, Saleem Butt resigned, citing personal reasons. On February 24, Waheed Ahmed Shaikh was appointed CEO. Shortly afterwards, on April 2, Aqeel Ahmed was appointed as CEO. On September 17, he was reappointed as CEO – except on September 22, just a few days later, he was resigned as the CEO of Hascol Lubricants, a subsidiary, and Adeeb Ahmed was made the CEO instead.
  • Now, for the CFO (an important job, considering the state of the company’s financials. On February 19, Khurram Shehzad ceased to be CFO, and Muhammad Ali took his place. On July 17, the two CFOs were swapped out (Khurram became CFO again). Then on September 10, Shahid Bhutto became CFO, before resigning from that position on January 22. The position is yet to be filled. 
  • And finally, the chairman. On March 31, Mumtaz Khan was replaced with Alan Duncan. Of all the people mentioned so far, he has the most colourful past life: he was a director of Vitol Dubai Ltd., the parent company. He had studied at Oxford with former Prime Minister Benazir Bhutto, helping her campaign for the President of the Oxford Union (which she won). He then stayed in close contact with her, and was one of the few people she emailed right before she died in 2007.
  • That is not his only connection to Pakistan. During 1990-92, following the invasion of Kuwait, he was a major supplier of refined products to Pakistan following the termination of the country’s supplies from Kuwait Petroleum. In 2001, Pakistan opened up an investigation into the supplies: allegedly, British firm Vitol sold 280,000 tonnes of ‘contaminated’ oil to Pakistan State Oil in 1993, picked off the coast of Kuwait and contaminated it with sand and salt. The oil caused £100 million worth of damage after one of Pakistan’s main power stations broke down in January 1994, plunging Lahore and Karachi into several hours of darkness. According to a Guardian article from the era, “At the time of the blackouts, the Pakistan government, then ruled by Benazir Bhutto, began an inquiry into the scandal that was subsequently dropped with little explanation.”
  • Duncan, clearly, moved on: he was International Development Minister 2010-14, and Foreign Minister 2016-19. And now, he is the chairman of the equally worrisome and controversial Hascol.
  • So, concerns about dumping, debt, and an interesting chairman: what will Hascol do now? In its report, the company said it would try the following: significant reduction in operating costs, recapturing and growing sales volumes and market share, disposal of non-core assets, shoring up working capital and raising of additional equity to reduce leverage and address negative book equity. And on March 1 of this year, it sold two properties it held in Dolmen Sky Tower, as part of its restructuring to improve cash flows. 
  • Good for them: but what about the people who lost their money in the meantime? Consider this: between January 2018 and November 2018, the share price of Hascol stood between Rs270 to Rs310 range. On November 1, the price stood at Rs287. By December 31, it crashed to Rs148. And by September 2019, it had fallen to a shocking Rs22. As of April 23, 2021, it is now trading at Rs9.13. 
  • Considering their track record, their insistence to keep things secretive, can anything the company says now be trusted? One sure hopes so, for the sake of their lenders and investors at least”. 

The story of Profit ends here. The real issue is loss caused to lenders and investors. The question is why no accountability of regulators—SECP and ICAP. Why did ICAP fail to take action against the company working as auditor? This core issue needs to be highlighted and investigated in its proper perspective—how to counter mega corporate crimes. The matter is more serious as highlighted in The Hascol fiasco below:    

  • “The company was said to be doing unusual transactions. The market share was growing too fast. It was reported to be offering a substantial retailing and sub-distribution discount in an industry that operates on razor thin margins. The meteoric rise was too good to be true. Yet, the board of directors was happy – as the company was making money. The banks were happy to lend as bank spreads were too lucrative. The company was listed at PSX in 2014. Its share price increased manifold within a couple of years – investors were ecstatic. In 2015, Vitol Dubai Limited (VTL) – a global energy trading giant – bought 15 percent shares of the company and later increased its holding to 25 percent by 2016.
    • The company’s financials flourished with Vitol on board. This integrated the backend supply chain. Everyone was happy and making money. But overall, the business model was not sustainable which was ignored by investors and lenders. The company was expanding too fast. It was acquiring new location/sites by bidding higher. New storage depots were established.
    • In its initial years, Hascol made money by importing and selling furnace oil (FO). FO sales jumped further after Vitol’s investment. It purchased FO on credit and was able to extend credit to its clients. That is how it increased its market share and used that money to expand its franchises and storage capacity. In 2018-19, FO sales fell industry-wise as new power plants based on RLNG, and other fuels started coming online. Hascol’s edge was in importing FO by having Vitol on board. The company landed in a tight spot with other costs beginning to hurt the company.
    • Vitol started taking more control of the company by acquiring shares of the then chairman and CEO and brought in new management that disclosed to banks that the company’s loans must be restructured if default is to be avoided. However, the story is not that simple. Vitol could probably try to recoup its money through charging higher amount in trading and other businesses. There are allegations of transfer pricing and misuse of power by the previous management team.
    • For example, Hascol Terminal Limited (HTL), a joint venture of Hascol and Vitol, was commissioned in 2019. Twenty four percent shareholding in HTL is held by another firm called Fossil Energy. As per a whistleblower (in April 2020), Hascol paid throughput charges to HTL at Rs1.3 per litre on annual volume of 1.2 million metric ton as against the industry average of Re 0.3 per litre. How can a company pay half of its total margins to its terminal handling company and survive?
    • Then there were other issues. Vitol’s interest is in trading. Higher the volumes traded more money it makes. Hascol is a marketing company, and it supposedly operates on thin margins. The business model was rigged. For example, Hascol extended unsecured credit to one sub-supplier in Punjab to the tune of Rs 10-12 billion of which Rs 8-10 billion landed in default. Usually, the industry gives 5-10 days credit supply of 1-2 tanker loads. But the decision-makers at Hascol were said to be more interested in trading volumes than anything else.
    • It is pertinent to mention here that allegations of financial irregularities are said to pre-date investment by Vitol. It is said that the purported modus operandi was to make sales on credit to attain market share in petrol and diesel sales. Insiders suggest several methodologies were used. They insist that credit sales were partly financed by higher FO margins; by selling fuel close to port while booking sales at far-flung areas to pocket inland freight equalization margin (IFEM). Moreover, it is said that the company sold fuel to other companies’ retail franchises. While there is no concrete evidence of these allegations, it, however, does not make sense that a company would sell fuel at Rs3 per litre discount when the gross margin on the products is regulated and is less than Rs 3 per litre.
    • The question is how these elements were not observed by the then board of directors of the company, banks, and Vitol (which purchased its stake in the company beginning 2015). The company was opening usance (deferred payment) LC (letter of credit). OMC business needs higher working capital (WC) financing, and which is extended on LCs. It is a high margin business and banks were happy to lend and make easy money.
    • In usance LC, the company is exposed to foreign exchange movement risk. The price is locked in dollars and payment is made later. Usual OMC cash cycle is 15-30 days (it’s higher on FO and lower on petrol/diesel). Hascol issued LCs for 90 days which increased its currency exposure excessively.
    • In 2018, when the PKR stared depreciating, the situation started unravelling. At the same time, FO sales started dropping too, exacerbating the financial stress. In the quarter ending Dec-18, the company showed loss for the first time. And the loss started increasing in 2019 and 2020. The Covid pandemic did not help either. In June 2020, all OMCs were under stress when the international oil prices fell, and government passed on the benefit to consumers while companies were holding inventories (as sales were low in April and May due to lockdown) and they incurred inventory losses.
    • The fall was too steep for Hascol. Their high-cost overheads were becoming visible. The higher throughput charges and substantial unsecured credit were aggravating the situation for them. There was no cushion from FO sales. The hour of reckoning was upon it, the company defaulted on its loans and has not published its latest accounts – and is thus on the defaulters list on PSX.
    • Meanwhile, the company issued right shares. Vitol increased its shareholding. Right now, 40 percent shares are held by VTL, and rest are in various hands. The control is with Vitol and banks have formed a consortium to negotiate with the company. Now, it is in the best interest of the banks to revive the company or else, they will not be able to recover anything – especially, since more losses will accrue as the company recently stated that Rs7.5 billion worth of fake purchases were booked against its fixed assets.
    • OMC business is based on franchise value. It operates on high volumes and low margins. Fixed assets have a lower share. As per OCAC in 2020, there were 531 retail outlets of Hascol in Pakistan out of 9,113 in total. The current number is 675. Around 95 percent of these are franchise owners while the remainders are company operated. Some storage facilities are leased as well. The company has a good retail network with pumps at key locations.
    • For the company to revive, these outlets need to survive and thrive. However, with investigation agencies poking in, the brand equity of Hascol will diminish. Consumers may stop buying petrol/diesel from it. Franchises may go to other OMCs, as all they need to do, is enter in a new agreement and change sign boards and branding. But if that happens, the company will die. Banks will not be able to recoup even Rs10 billion out of their outstanding Rs58 billion.
    • The consortium of banks is negotiating with the new management. Banks need to understand that they have to take a haircut. They will be living in a fool’s paradise if they expect full recovery. The other problem with banks is that each bank is trying to undercut the other by insisting that it has a first charge. Each bank wants to recover its full amount, but in the process everyone would lose. It has happened in the past, and it can happen now. In game theory, it is referred to as the prisoner’s dilemma”.

So conclude the Ali Khizar the entire enigma:

The other problem banks have is trusting Vitol. The company must restructure. Banks will convert part of their debt into equity and part of it into long-term financing. Then the company would need working capital to revive. For this to happen, banks would need to put more money into the company. They are contemplating the option of putting good money into bad in anticipation of turning bad into good.

Banks want Vitol to make full disclosure on long-term contracts. Banks expect Vitol to put further equity into the company. Additionally, Vitol, in principle, should not be the sole supplier of fuel to the company. There are too many ifs and buts. Seeing the past, it is in the best interests of the financial system to find a new buyer for Hascol and let Vitol make an exit.

If Pakistan had strong bankruptcy laws, this management shift could be easier. Still, this can happen. But with FIA (and possibly NAB) in the picture, no new player would like to burn their hands. That is why it is important to deal the case as corporate default and fraud. Here the SBP-SECP role is critical. But SECP is toothless and does not have history or capacity to unearth and handle corporate frauds. It is high time for SECP to pull its socks up and do its job.

The SECP, as suggested above, to pull “its socks up, is not the solution as narrated below.  

Conclusions and suggestion

The countering of corporate default and fraud was discussed in an op-ed in two parts [China’s lawfare against corruption—lessons for Pakistan—I and China’s lawfare against corruption—lessons for Pakistan—II, Daily Times, November 10, 2018], by us as under:

Although Pakistan and China are poles apart in terms of the constitutional framework, forms of government and state structure, Pakistan should undertake a detailed study of the Chinese anti-corruption lawfare model from all perspectives.  Some questions that Pakistan needs to address include (but are not limited to) the following: Does Pakistan require stand-alone superagencies to separately regulate the public and private sectors? To answer this question, Pakistan may need to take a holistic view at the National Accountability Ordinance, 1999 (NAO) with a new set of legal eyes. Another important question that Pakistan needs to ask is what are the different forms of corruption that are rampant in Pakistan that require laws, and whether the existing anti-corruption laws are adequate to tackle exiting corruption and corrupt practices

The remedy was discussed in the light of how China through lawfare uprooted corruption that can briefly be stated as under:   

  • In March 2018, two new “super agencies” were established to regulate both the public and the private sector.
  • For the public sector, National Supervisory Commission (NSC) replaced all previous agencies. Its scope was extended covering investigation and to act as watchdog for all state-owned enterprises, public health care, research and educational institutes. The NSC secures executable evidence and recommends cases for prosecution.
  • ‘State Administration for Market Regulation (SAMR), is the “super agency to regulate the private sector.
  • Anti-Unfair Competition Law (AUCL) deals with commercial bribery by individuals and companies. 

It is pertinent to mention that under SAMR political heavyweights who were previously considered untouchables were punished e.g. General Xu Caihao (former Vice Chairman of the Central Military Commission) and Bo Xilai (former Minister of Commerce between 2007 and 2012, and a prominent member of the Politburo and Communist Party Secretary). Recently, on April 9, 2021, Alibaba, China’s biggest online retailers, faced fine of four percent of its 2019 domestic sales that is three times higher than the $975 billion fine China imposed on US chip company Qualcomm back in 2015. Our successive governments are more interested in media trial of opponents using “corruption” (unapproved) as tool for victimisation. This is the main difference between our ineffective system and China’s lawfare against corruption.  

We cannot strictly follow the China’s lawfare as they have one-party rule. However, we can follow on the basis of their experience to successfully counter the corporate defaults and frauds within the State. The term “the State” is different from ‘government’ as people usually think. It is defined in Article 7 of the Constitution as under:

In this Part, unless the context otherwise requires, “the State” means the Federal Government, Majlis-e-Shoora (Parliament), a Provincial Government, a Provincial Assembly, and such local or other authorities in Pakistan as are by law empowered to impose any tax or cess”.

We need to safeguard “the State” by—

  1. dismantling alliance between robber barons and state functionaries ensuring nobody is above law.  
  2. a “Regulatory Entity” through special enactment with an independent board, resources and operations. This entity [say Pakistan Financial Crime Monitoring Bureau (PFCMB)] should work as watchdog for all financial crimes and passing incontrovertible evidence to a competent and independent National Prosecuting Agency (NPA) to take the offenders to task in special speedy trial courts where judges have expertise in laws relating to financial crimes to deliver judgements swiftly but strictly following Article 10A of the Constitution which says:  “For the determination of his civil rights and obligations or in any criminal charge against him a person shall be entitled to a fair trial and due process”.
  3. The proposed structure of PFCMB is given below:
  • PFCMB with multi-source financial intelligence and analysis network will help to detect, investigate, analyse and prosecute corruption by any citizen as per Article 5(2) of the Constitution that reads: Obedience to the Constitution and law is the inviolable obligation of every citizen wherever he may be and of every other person for the time being within Pakistan.
  • PFCMB will implement financial crimes related laws and regulations ensuring reporting of high-end financial data/information for expert analysis and utilisation to counter corporate frauds and defaults. It will also be the apex watchdog against corruption, and ML/CFT. It will provide training to the law enforcement officials and financial sector and prosecutors.

The autonomous PFCMB would be responsible to ensure timely collection, preservation, examination, and transmission of information necessary to counter corruption, corporate default and frauds/ It will ensure the reporting regime by introducing legislative, operational, and technical changes in the existing laws.

The PFCMB as centralised agency with skilled manpower in all areas of financial crimes alone can ensure uprooting corporate frauds and defaults, corruption and meeting mandates of Financial Action Task Force (FATF) and affiliated Asia Pacific Group (APG) that we joined voluntarily in 2000. The above actions need to be completed by June 2022 if we have to come out of grey list and more importantly preempt all kinds of crimes—financial, corporate and organised [ML/CFT] in official and private spheres.

Dear Hassan pleases review, add/alter, and insert your own comments and notes wherever necessary. I have added my resume in the end. Kindly add yours as well. After your input and note as corporate lawyer par excellence, the final draft will be requested for peer review by Abdul Rauf, LLM, based in USA, expert in ML/CFT/ corporate crimes and Rashid Jahangir, FCA, a seasoned banker having rich experience in matters relating to corporate default and fraud.

The length is no issue as it will be published as such by Daily Times in web version with wide coverage to all social media platforms. Since the footnotes are not possible in their web version, I have hyperlinked all.


Dr. Ikramul Haq, Advocate Supreme Court, specialises in constitutional, corporate, media, IT, intellectual property, arbitration and international tax laws. He established Huzaima & Ikram in 1996 and is presently its chief partner as well as partner in Huzaima Ikram & Ijaz. He studied journalism, English literature and law. He is Chief Editor of Taxation.  He isVisiting Faculty at Lahore University of Management Sciences (LUMS) and member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE).

He has coauthored with Huzaima Bukhari many books that include Tax Reforms in Pakistan: Historic & Critical Review, Towards Flat, Low-rate, Broad and Predictable Taxes (revised & Expanded Edition,  Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020), Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary andMaster Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis).

The recent publication, coauthored with Abdul Rauf Shakoori and Huzaima Bukhari is Pakistan Tackling FATF: Challenges & Solutions

available at:  https://www.amazon.com/dp/B08RXH8W46

He is author of Commentary on Avoidance of Double Taxation Agreements signed by Pakistan, Pakistan: From Hash to Heroin, its sequelPakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax. He regularly writes columns for many Pakistani newspapers and international journals and has contributed over 2500 articles on a variety of issues of public interest, printed in various journals, magazines and newspapers at home and abroad.

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