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Petitioner: Dr. AKHTAR HASSAN KHAN and others VS Respondent: FEDERATION OF PAKISTAN and JUDGMENT
Court Name: Supreme Court of Pakistan Judge(s): Mian Saqib Nisar, Tasaddaq Hussain Jillani, Ejaz Afzal Khan Title:Dr. AKHTAR HASSAN KHAN and others vs FEDERATION OF PAKISTAN and
JUDGMENT
Reported As: 2012 CLD 520 Result: Petitions dismissed Judgment JUDGMENT TASSADUQ HUSSAIN JILLANI, J.---Privatization of Habib Bank Limited [hereinafter referred to as the "HBL"] effected through open bidding held on 29-12-2003 has been challenged through these two petitions filed under Article 184(3) of the Constitution of Islamic Republic of Pakistan. Having heard learned counsel for the parties at length, the issues which crop up for consideration broadly are as follows:-- (i) Whether the privatization of HBL was carried out in utter haste and on the desire of the International Monitory Fund? (ii) Whether the procedure adopted to privatize HBL was tainted with mala fides and violative of the provisions of Privatization Commission Ordinance and the Rules framed thereunder? (iii) Whether the approval of the, highest bidder AKFED by the Cabinet Committee on Privatization in its meeting held on 1-1-2004, was an improper exercise of discretion and amenable to interference in accord with the well recognized principles of judicial review of administrative action; (iv) Whether injecting an amount of Rs, 17.7 billion in HBL and thereafter offering it for privatization was an act of financial mismanagement of a financial institution causing loss to the public ex- chequer and against the best practices? And (v) Whether the petitioners have locus standi to challenge, the privatization of HBL? 2. Facts giving rise to these petitions briefly stated are that the decision to privatize HBL though taken in 1995, but a decisive step culminating in its sale was taken in the year 2000, when the Privatization Commission Ordinance was promulgated and the Privatization Commission [hereinafter to be called the 'P.C.'] appointed an accountancy firm of Pakistan AF Ferguson as the
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Financial Advisor for valuation of the HBL. It invited Expressions of Interest [hereinafter referred to as the "EOIs'[from prospective bidders in June 2002 but on account of sluggish response, the process was called off. In the following year (April 2003), the PC again called for EOIs and this time 19 parties submitted EOIs followed by submission of Statements of Qualification [hereinafter referred to as the 'SOQs']. The SOQs of the bidders were examined by a Pre-qualification Committee and these bidders were also granted access to the Data Room prepared by the Bank and the PC. It was opened on September 8, 2003 and closed on 21st of November, 2003. However, only three parties entered the Data Room to conduct due diligence. 3. In November 2003, with a view to provide further incentive to the prospective bidders, the PC decided that while bidders would be required to bid for 51% of the issued and paid up capital of the Bank, they would also have the option of either purchasing the entire 51% stake at once or first to acquire a 26% or more stake with management control and then pay for the remaining stake within a period of not exceeding two years. The reference price recommended by the Financial Advisor (AF Ferguson & Co.) was Rs, 20.609 billion for the value of government stake of 51% in the Bank which was being invested. However, this reference price was revised by the PC itself and fixed at Rs,22.143 billion in its meeting held on 26th of December 2003. This price was later approved by the Cabinet Committee on Privatization [hereinafter to be referred to as the 'CCOP']. 4. The Pre-qualification Committee formed by the PC in its meeting dated 20th of December, 2003 permitted three potential bidders to participate in the bidding process. Agha Khan Foundation for Economic Development [hereinafter referred to as the "AKFED"] was declared the highest bidder in the bidding for sale of 51% shares of HBL held on 29-12-2003 and it was higher than the reference price of Rs,22.143 billion. 5. he State Bank of Pakistan also provided their clearance for declaring AKFED as successful bidder vide letter dated 31st December 2003. The CCOP accepted the recommendation of the PC in its meeting held on Ist of January, 2004. AKFED then paid the initial sale price and entered into an agreement on 26th of February 2004 with the PC and the State Bank of Pakistan for the purchase of 51% share of the government stake in Habib Bank Limited and for taking over the management of the HBL. 6. Petitioner Dr. Akhter Hassan Khan (in Const. P. No,5 of 2004) is a former Federal Secretary Planning, Government of Pakistan. According to him, the process of bidding was not transparent; that prior to bidding (dated 29th of December, 2003) on 23-12-2003, the Economic Coordination Committee of the Cabinet [hereinafter referred to as the "ECC"] decided to make Habib Bank attractive for privatization. The ECC approved issuance of bonds amounting to Rs,9.84 billion against income tax funds due to the HBL. The Ministry of Finance also advised transfer of Rs, 9.00 billion of HBL's bad debts to the Corporate and Industrial Restructuring Corporation [hereinafter referred to as the "CIRC1 and in this way a benefit of Rs,18.84 billion were given to the Habib Bank after short listing of three bidders. According to him if these benefits had been announced before the Expression of Interest, the response would have been much greater and multinational banks would have expressed interest. His learned counsel Mr. Muhammad Ikram Chaudhry, Advocate Supreme Court contended as follows:- (i) that the net assets of the HBL valued more than the highest bid at which it has been sold; (ii) that in the year 2003 it had 1425 branches in Pakistan and 48 branches in 26 countries of the world including USA, UK, Fr,ance, Germany, Saudi Arabia and UAE and had a staff of 17000 employees. The good will of the bank can be gauged from the fact that at the time of privatization, it had 20% of the overall business in the banking sector with subsidiary companies; (iii) that good will of the bank, the value of movable and immovable properties as also assets were not correctly valued by the Financial Advisor and the decision was taken in posthaste by the
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Privatization Commission and the CCOP in violation of the Privatization Commission Ordinance, the Rules and other relevant laws; (iv) that it is on record that respondent No, 5 (Central Insurance Co. Ltd.) could not manage the earnest money of U.S Dollars 20 Million and respondent No,6 (State of Qatar) were not found up to the mark having proposed a bid of Rs,21.09 billion in comparison to the successful bidder's bid of Rs,22.4 billion. If this was the state of affairs, the Privatization Commission should have restarted the process of inviting parties for fresh bidding process as contemplated in the Privatization Commission Ordinance 2000, Privatization Commission Valuation of Property Rules, 2001 and Privatization Modes Procedure Rules 2001; (v) that the appointment of AF Fergusan and others etc. Was flawed because the procedure adopted for appointment of Financial Advisor and other consultants was violate of the Privatization Commission Ordinance, 2000 and the Rules/ Regulations framed thereunder; (vi) that the method of valuation adopted by AF Ferguson and Co. As DDM was not suitable as it caused huge financial loss to public at large and Pakistan. The decision taken to sell 5% shares by public offering in the case of National Bank of Pakistan, OGDC, and SSGC having multiple responses could have been replicated in HBL. The sale of its shares could have brought a huge money of Pakistanis residing abroad (which in the present case would not be) and it would have also given fresh impetus and a better and positive idea to correctly evaluate the assets of HBL including goodwill and a base for determining better Reference Price; (vii) that the decision of Privatization Commission and CCOP seems to be made in posthaste as most of the proceedings are relatable to specific dates i,e, in a short span of time bidders entering the data room, on or before 21-12-2003, final reference price approved by December 26, 2003 bidding on 31-12-2003, approval of the final bid of AKFED on 1-1-2004. It is not humanly impossible to go through all the details/documents, in merely 8 days or so to arrive at a decision of approval by CCOP on December 17, 2003 and the steps taken thereafter for appointment of advisors, consultants and valuation of the assets etc. Of HBL were also done in a hurried manner. The enhancement of sale of shares from 26% to 51% was also not publicized in the manner required by law and till 23rd December, 2003, Rs, 9.84 billion investment made by issuance of bonds and also transfer of bad debts of Rs,9 billion of HBL to CIRC as referred in the preceding paras were also not earlier, or thereafter advertized to the public which could have brought more money. It is evident from the record as well that IMF and World Bank pressure was also cause of hasty and undervalued sale of HBL of course violated the law as well; (viii) Dilating on the financial worth of the HBL, learned counsel placed on record the following table of the yearly profit of the bank (after privatization) indicating that respondent AFKED had recovered the entire sale price of Rs,22.4 billion in a period of five years. The table is given below:- Year Profit before tax Profit after tax AKFED Share of 2004 7,163 5,679 2,896 2005 13,834 9646 4,909 2006 18840 12700 4677 2007 13127 8041 4100 2008 15855 10000 5100/23492 2009 21000 13400 6834 (ix) That the real worth of HBL is evident from the fact that the Government in October, 2007 decided to sell 7.5% shares of the HBL in the market and they fetched Rs,12.61 billion. Calculated at this price, the value of 51% share, according to him, comes to Rs,82.7 billion instead of 22.4 billion for which it was sold. He referred tp the World Bank Paper No, 403 by Mr. Dick Welch Oliver Fremond titled as "The Case-by-Case Approach to Privatization Techniques and Examples" to contend that
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the Privatization Commission should have conducted the privatization process in accord with the recommendations of such competent academics who have expertise in the field and in the afore- referred paper, he has proposed various steps for a credible process of privatization. 7. Learned counsel for the petitioner, Barrister Zafarullah, Advocate Supreme Court in Constitution Petition No,15 of 2004 in addition to the contentions which in substance were similar to the ones canvassed by petitioner's learned counsel in Constitution Petition No,5 of 2010 argued as follows:- (i) that the process of privatization has not been transparent inasmuch as although section 23 of the Privatization Ordinance, 2000 specifically mandates that advertisements for Privatization will be placed in newspapers with an "international circulation", the respondent-PC placed the advertisements in Statesman of India, Express, Nawa-i-Waqt, Dawn, Frontier Post, the News, Jang in Pakistan; Arab News of Jeddah and Khaleej Times of UAE. The advertisements in Pakistani newspapers were large and in some detail whereas advertisements in foreign newspapers were short and cryptic; (ii) that AKFED, had offered the highest bid of Rs,22.409 billion or Dollars 350 million for 51% shares and QSCEAI offered Rs,21.99375 billion which indicates very marginal difference between the two bids and it could be termed as collusive i,e,, based on previous arrangements between the parties since QSCEAI joined the sale proceedings later on. The bid was confirmed by CCOP within forty eight hours which was unholy haste; (iii) that the two bidders, neither had any experience of owning or managing an operation as expansive as the HBL, in such a situation, a prudent course would have been to postpone the sale so as to analyze and ascertain the reasons behind this lack of interest and to take corrective measures so as to make the Bank and Pakistan's investment climate more attractive. Instead by processing this complex transaction within 48 hours on the strength of only two bids, it has created the impression of not only distressed sale but also not completely above board; (iv) that with the control of HBL in selected geographical areas, the AKFED will be in possession of a combination of financial power and mind controlling influence like East India Company; that after privatization a new branch of HBL was immediately opened in Afghanistan i,e, the hub of terrorism which is unfortunate and the possibility cannot be ruled out that other interested actors in Afghanistan can infiltrate and misuse the organization for noncommercial objectives; (v) that this is not surprising that AKFED's core competence is that for profit development urgency creating economic capacity and opportunity and is region specific in the developing world. Apart from this there is reason for concern on two other counts:- (i) The new Board (Privatization Commission Board) was unable to successfully resist political pressure or stay aloof of crony capitalism. Already there are ethical problems with AKFED nominees on board, one being closely connected with security brokerage i,e, a Financial Advisor to the PC and other being Legal Advisor to several corporate borrowers of HBL. (ii) In Pakistan the AKFED is known too deeply involved in executing the educational reforms with an agenda in the wake of post 9/11 developments. (vi) that in any case the net result of restructuring by the Privatization Ministry's Financial Advisor leaves the people of Pakistan out of pocket by Rs,14 billion when it is realized that Rs 17.7 billion of public money was injected by the State Bank of Pakistan to "fill a hole" in HBL's balance sheet and further in December 2003, just week before the bidding, the Finance Ministry first authorized transfer of Rs, 9.00 billion of HBL bad debts to the CIRC (Corporate Industrial Restructuring Corporation) and then issued another 9.00 billion rupees worth of bonds to cover a tax liability to CBR now FBR this all amounts to Rs,27 billion to get Rs,22.4 billion only for sale of HBL. 8. Learned counsel for the applicant, Mr. Iftikhar Gillani in C.M.A. No, 742 of 2011 who wanted to be impleaded as party as he represents ex-employees of HBL who were laid off during the process of downsizing by various modes including the golden handshake scheme also questioned the
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transparency of the entire exercise of privatization and in addition to the submissions which were similar to the one's made by learned counsel for the petitioners in the connected petitions, contended as follows:-- (i) that the privatization of the Bank was undertaken on the dictation of IMF. The Memorandum of Economic and Financial Policies for January-June 20Q3 states in Para 23 that potential investors in HBL have been pre-qualified and have started due diligence and bidding will take place in December. The bidding did take place on 29th December, 2003 in compliance with the undertaking given to the IMF; (ii) that on 23rd December, 2003 a few days before the bidding the government decided to issue bonds worth 9.84 billion against the taxation liability of the Bank to get it ready for privatization and in the same month the Finance Minister authorized transfer of Rs,9.00 billion of the bank's bad debts to the CIRC (Corporation Industrial Restructuring Corporation), besides Rs, 17.7 billion were injected by the State Bank of Pakistan to "fill a hole" in the Bank's balance sheet. Thus Rs, 36.84 billion; and the AKFED have recovered the entire sale price of Rs,22.4 billion in five years. This is a very short period in the life of a bank or any other service industry because in such institutions there is very little depreciation and the normal pay out period is about 15 years or even more. 9. Learned counsel for the PC, Mr. Aitzaz Ahsan, Advocate Supreme Court defended the privatization of HBL and submitted as follows:-- (i) that these petitions have been filed under Article 184(3) of the Constitution which are not maintainable as neither any question of public importance with reference to enforcement of fundamental rights is involved nor the judicial review is tenable in policy making domain of the executive authority; (ii) that the policy decision to privatize the strategic assets taken by the competent authority in the Federal Government cannot be assailed as the courts in exercise of power of judicial review have refrained from interfering in this domain; (iii) that the petitions have raised multiple disputed questions of fact entailing factual enquiry which exercise cannot be undertaken in a Constitution petition; (iv) that the argument that HBL should not have been privatized once it had become a profit- earning enterprise is inherently flawed. If accepted, the logic of the argument would mean that an institution can never be privatized because if it is making losses, very few will be interested in buying it. More seriously, the fundamental argument behind privatization is that the private sector can be more reliably depended upon as a source of profits than the public sector. Thus, the decision in relation to the privatization of an asset is really a decision as to which mode of operation or control is likely to provide results in the long run. And, from that perspective, it is submitted that the results are clear: (1) It is not in dispute that the nationalization of the banks in Pakistan caused financial havoc and the destruction of a once-proud industry. (2) HBL was indeed rescued from collapse through a massive effort, by the Government of Pakistan but the effort and the cash injections required were not a sustainable commitment from the Federal Government's perspective. (3) By comparison, HBL, since privatization, has only gone from strength to strength as can be seen from its annual reports. The privatization of HBL has thus caused no loss to the nation but has instead greatly benefited it. (4) More specifically: (a) The net assets of HBL in the year 2008 were worth Rs, 66.3 billion and the net profit (before taxation) was Rs,16.9 billion (USD 200.9 million) (in contrast to USD 52 million in June 2003). (b) Similarly, the net assets of HBL in the year 2009 were worth Rs,84.3 billion and the net profit (before taxation) was Rs,21.3 billion (USD 253.8 million).
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(v) The privatization of HBL has been a huge financial success from the perspective of the Federal Government: (1) As of 31-12-2003, the accumulated losses of HBL were Rs,13 billion. (2) From 2004 till date, the Federal Government has made a profit of Rs,60.5 billion from HBL (inclusive of tax receipts, dividends and income from sale of shares). (vi) that the allegations leveled by the Watan Party against the Ismaili community are despicable, based on communal hatred and deserve to be censured. They are also entirely unsustainable. Other international banks operating in Afghanistan include the National Bank of Pakistan and Standard Chartered Bank, neither of which has ever been accused of patronizing terrorism by virtue of a branch in Kabul; (vii) that the process of privatization of HBL does not reflect an undue haste as it commenced in the year 1995 and decisive decision was taken in 2003; (viii) that the privatization of the Bank was part of an overall policy decision taken by the Federal Government to dispose of State owned enterprises and the first step in this regard was the establishment of Privatization Commission in the year 1991 for supervision and oversee of the disposal of State owned enterprises; (ix) that nationalized banks were privatized because they were no longer profit bearing enterprises; that balance sheet reflected losses on account of overstaffing, over-branching, huge portfolios of non-performing loans, poor customer services, under-capitalization, poor management and undue interference in lending and recovery of loans; that the banks and financial institutions privatized during the period in question are as follows: (i) In April 1991, 26% of the shares of Muslim Commercial Bank Limited in April 1991 were sold to the National Group. (ii) In September 1991, 26% of the shares of Allied, Bank of Pakistan Limited were sold to the Allied management Group. (iii) Bankers Equity Limited was privatized in 1996. (iv) Habib Credit and Exchange Bank Limited (presently Bank Alfalah Limited) was privatized in June 1997. (v) United Bank Limited was privatized in October 2002. (x) that the privatization of HBL was a careful bipartisan exercise which commenced in 1995 and completed in 2004. During this period, where steps were taken by successive Governments (detailed breakup is given in concise statement) culminating ultimately in the approval by the CCOP of the highest bid on 15th of January 2004 reflect that the process was bipartisan and in accordance with the Privatization Ordinance and the Rules framed thereunder. (xi) In support of the submissions made, learned counsel relied on: (1) Suo Motu Case No, 10 of 2007 (PLD 2008 SC 673 and 689) (2) Gatron (Industries) Limited v. Government of Pakistan (1929 SCMR 1072) (3) All Pakistan Newspapers Society v. Federation of Pakistan (PLD 2004 SC 600) (4) Syed Zulfiqar Mehdi v. Pakistan International Airlines Corporation (1998 SCM R 793 at 801). 10. Mr. Makhdoom Ali Khan, learned counsel for HBL also filed a detailed concise statement narrating the history of the institution; its corporate profile; how it was ranked as one of the largest , Banks in Asia prior to privatization; how the nationalization of the institution in 1974 reduced its market share from 15 to 18%; why it was deemed appropriate by the Federal Government to privatize it; how the process initiated in 1995 got delayed; why various attempts to privatize it remained abortive; and the various steps taken from 2002 to approval of the final bid and signing of the share-purchase agreement in February 2004 reflect due diligence, transparency and a continued object to ensure that the ownership of this important national strategic asset does not go in the hands of buyer who does not have credible credentials. Explaining the rationale of the
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establishment of Corporate and Industrial Restructuring Corporation [hereinafter referred to as the "CIRC"I he argued that this corporation was established to plug the holes in various banks/financial institutions. The portfolio of non-performing loans in HBL had become huge and unless the State had intervened, it would have collapsed and thereby would have led to the economic meltdown in the country. Under this scheme, the HBL in 2001 transferred 22 non-performing loans worth Rs,309.815 million to CIRC followed by transfer of 69 loans worth 894.587 million in 2003. These loans were transferred back and various other amounts were also adjusted by mutual consent and an amount of Rs,994.076 million was paid to HBL by CIRC on 18-9-2006 through letter bearing No, CIRC/MF-MA3665. Defending the issuance of bonds by the Federal Government against the latter's admitted liability of refunding the tax which were collected in excess of what was due from HBL, learned counsel submitted that this liability was a matter of record and no exception could be taken to it. This was a sensible decision taken by the Federal Government to maximize the privatization value of HBL; all the bidders had been informed about the transfer of non-performing assets to CIRC and they had accordingly factored this development into their bid values. 11. Repelling the argument of petitioners that the Government had sunk Rs,17.7 billion into HBL and then sold it for Rs, 22.409 billion at a loss of Rs,4.4. Billion, learned counsel contended that if the Federal Government had not contributed Rs, 17.7 billion to recapitalize the HBL, it would have been close to bankruptcy. This financial bail out, he argued was not unique in Pakistan but the governments world over in the 1980s injected billions of dollars to save their financial and banking institutions and thereby stalled the process of further deterioration of economies. In this regard, he referred to the two recent books titled, 'Beyond the Crash' authored by former Prime Minister of UK Mr. Gordon Brown and the book titled, 'On the Brink' authored by Mr. Henry M. Paulson, Jr. Former US Treasury Secretary, whereby the authors explain various steps taken by these countries to assist the banks and economy. A special law was enacted to save these financial institutions called the Troubled Assets Relief Program and a sum of US Dollars 150 billion were given to five banks alone to keep them afloat. Defending the mode of valuation of the bank by the Financial Advisor, learned counsel submitted that Discounted Dividend Model (DDM) takes into account, inter alio, the potential development of the entity/financial institution and its capacity to…
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