The Islamabad High Court (IHC) has maintained its injunction preventing Greentree Holdings Limited and its advisor, AKD Securities Limited, from proceeding with the acquisition of a controlling stake in TRG Pakistan Limited.
Allegations of Fund Misuse
The IHC had initially issued the stay order based on concerns that Greentree was not using independent funds for the acquisition but was instead utilizing TRG Pakistan’s own capital. In 2021, TRG Pakistan transferred approximately $200 million to its Bermuda-based affiliate, TRG International, in which it holds a 69% stake. TRG International then provided these funds to its wholly owned subsidiary, Greentree, which subsequently used them to purchase TRG Pakistan’s shares.
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In 2022, the Securities and Exchange Commission of Pakistan (SECP) determined that this transaction violated Section 86 of the 2017 Companies Act. The SECP issued a show-cause notice to TRG Pakistan regarding this and other regulatory concerns. However, TRG Pakistan obtained a stay order from the Sindh High Court, which halted further investigation and enforcement actions.
Ongoing Concerns Over Corporate Governance
Greentree has now attempted a similar approach to acquire a controlling interest in TRG Pakistan. Industry analysts suggest that this move is aimed at retaining the current management despite financial challenges, including a decline in TRG Pakistan’s share price, losses exceeding Rs 30 billion, and the bankruptcy of its primary subsidiary, Afiniti Limited.
TRG Pakistan has also delayed its board elections, which were due since January 14, following the expiration of the current board’s term. Greentree had sought a court order from the Sindh High Court to postpone the elections until after its acquisition, but the court declined to halt the process.
Market Reaction and Regulatory Considerations
The IHC’s decision has impacted brokerage firms that had advised clients to invest in TRG Pakistan shares based on expectations of a quick return. Following the court’s injunction, market sentiment has shifted, with TRG Pakistan’s share price trading at a 20% discount to Greentree’s offer price of Rs 75 per share.
Greentree and TRG Pakistan’s management maintain that the acquisition would bring $50 million in foreign investment to Pakistan. However, financial experts argue that the purchases were conducted through a Special Convertible Rupee Account (SCRA), meaning no actual foreign exchange was entering Pakistan. Additionally, they note that when Greentree eventually sells its shares, the funds may be repatriated back to Bermuda.
Experts have also raised concerns that the transaction structure does not provide the same rights adjustments as a formal share buyback, which would involve voting rights and dividend adjustments. Furthermore, they estimate that the deal may bypass approximately $30 million in potential tax obligations that would otherwise apply if TRG Pakistan directly reclaimed its funds and distributed them to shareholders.
Dispute Over Control of TRG Pakistan
The ongoing acquisition efforts are part of a broader contest for control between TRG Pakistan’s current management and its former CEO, Zia Chishti. While the current management holds less than a 1% stake in the company, Chishti controls approximately 25%, prompting the purchase of shares through Greentree as a countermeasure.
Both parties recently claimed favorable outcomes in a U.S.-based arbitration ruling. TRG Pakistan’s management asserted that Chishti had violated contractual agreements by pledging certain shares, whereas Chishti contended that the ruling affirmed his right to sell over 90% of his holdings.
Regulatory Review and Next Steps
The SECP and the Competition Commission of Pakistan (CCP) are expected to present their positions before the Islamabad High Court, which has scheduled a hearing for March 13. Analysts suggest that the SECP’s interpretation of the law, particularly regarding Section 86(2) of the Companies Act, will play a significant role in determining the viability of Greentree’s acquisition. If the SECP upholds its previous stance that public companies cannot finance the purchase of their own shares, it could further complicate Greentree’s efforts to complete the transaction.
This article was received directly from the reporter. The content may or may not align with editorial policy of GVS.