Case Study

National Fibres Limited

A Dilemma of Privatization
Tariq Jalees
Associate Professor, Director CoMS
PAF-Karachi Institute of Economic & Technology

This case study has earlier been published in “Select Cases in Management”, of the Institute of Management
126 Technology, Ghaziabad, India.

1. INTRODUCTION Ltd. (HBL) for which it pledged the shares of the NFL
National Fibres Limited (NFL) a public sector unit was as a security. However, the Privatization Commission
financed by National Development Fianance of Govt. of Pakistan could not invoke the bank
Corporation (NDFC) and Islamic Development Bank guarantee as the Schon Group obtained a stay order
(IDB), Jeddah. The unit was the first man made fibre from the Lahore High Court, Rawalpindi Bench.
plant of the country, and had various technical and
marketing problems since inception in 1981-82. Some After the takeover by the Schon Group, NFL’s financial
of the problems were (1) size of the project, (2) health deteriorated. By the year 1996, the unit had a
producing polyester fibre of 1.5 denier whose demand loss of Rs.285.000 million along with the accumulated
in last few years had reduced to 10% of its initially liability of more than Rs.1.00 billion.
projected demand.
In view of the above, the equity holders/creditors through
NDFC and IDB tried to revive the unit by providing the High Court of Sindh obtained the Management of
technical and marketing inputs, and also converted their the Company on December 05, 1997 with the objective
long-term loans into equity so that the unit could service of revival / rehabilitation. This was the first time in the
its loans, and also have sufficient cash flows for operations. history of the Pakistan that a unit was taken over by the
By the year 1992, the unit became healthy. Its pre-tax minority-share holders and creditors under section 292
profit was Rs.131.00 million, and was in the process of of the Companies Ordinance 1984.
Balancing, Modernization and Rehabilitation (BMR).
The court appointed management prepared several
The unit was privatized and handed over to the Schon rehabilitation packages for the approval of the
Group (a private sector business entity) on February government/ consortium members. However, the
02, 1992, despite the fact that the group only paid 50% banks were not willing to make further investment in
of the bid price (Rs.735 million) and for the balance the unit. Finally the assets of the units were sold at
50% it arranged a bank guarantee through Habib Bank the price of Rs.800 million. The funds however could

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not be distributed to the creditors as per statutory summarized operating results of the units are presented
requirement as once again the Schon Group obtained below:
a stay order against the decision of selling the assets
of the company. EQUITY SHARES (Million ) PERCENT
FCC&CL 27.764 61%
An analysis of the operations of National Fibers Ltd. IDB, JEDDAH 8.050 20%
demonstrated that the project was viable upto the
point of its privatization. The new private sector NDFC 08.120 19%
management added a substantial debt burden on the
project without enhancing the capacity in any a) The unit had a net profit of Rs.78.938 million in
meaningful manner. It was not possible for the project the year 1989, which increased to Rs.108.372 in
to sustain its accumulated debt burden. The technology the year 1992.
base of the project was old and its size was small
relative to its current competitors. However, if the b) The net equity during the year 1989 was
Rs.418.563 million, which increased to Rs.1.148
debts were appropriately restructured and competent
management was inducted, the project could have billion by the year 1992. 127
been successfully rehabilitated.
c) Total liability in the year 1989 was Rs.504.614
million, which decreased to Rs. 98.705 million
2. BACKGROUND
by the year 1992.
2.1 NFL in Public Sector (1981 t o 1992) 2.2 Privatization of the Unit
National Fibers Limited (NFL) was the first man made The unit was privatization under the Government
fibre Unit of the country. The unit was commissioned Privatization Program. The management was transferred
in the year 1981-1982. The installed capacity of the to Schon Group, along with the majority shareholdings
unit was 12,000 tons of Polyester Fiber per annum. of the company as on February 02, 1992. The share
Additionally, the unit had a capacity of producing holding pattern after the privatization was as follows:
polyester yarn of various specifications. The unit was
based on old batch technology, and faced problems
EQUITY SHARES (Million) PERCENTAGE
since inception. It was originally envisaged that the
product specification would be 90% and 10% for 1.5D FCC&CL 4.145 05%
and 1.2D of fiber. However, by the time the unit got IDB, Jeddah 17.932 21%
commissioned the market demand had reversed. The NDFC 17.112 20%
market share for 1.5d of polyester was 10%, and for
1.5D was 90%. During this period ICI’s fiber unit with Schon 44.324 52%
the same capacity of 12,000 tons was commissioned. Others 01.265 5%
This unit was also based on the old batch technology
and had the same capacity as NFL, but had the right After the takeover by the Schon Group, the NFL’s
product mix. NFL thus was not able to operate at the financial health deteriorated. By the year 1996, the unit
desired capacity level and continued to accumulate had a loss of Rs.285.000 million along with accumulated
debts. liability of more than Rs.1, 000 billion. The operating
results are presented below:
With the efforts of NDFC, the unit was finally revived.
The revival package included conversion of a portion a) The unit had a net profit of Rs.47.491 million in
of long-term loans into equity. The equity pattern and the year 1993, which converted to a loss of

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Rs.42.344 million by December 04, 1997, at the NDFC was the only institution, which
time of the take over by the court appointed provided cash funding of Rs.80.00 million
management. that was not sufficient to re-commission the
entire plant. In view of the shortfall in the
b) The net equity during the year 1993 was Rs.1.145 funds, the new management could only made
billion, which decreased to Rs.247.782 million the yar n sections operational and was
by December 04, 1997. operating these sections at about 90%
capacity utilization. As the polymer and fiber
c) The total liabilities during the year 1993 were sections, could not be made operational due
Rs.457.07 million, which increased to Rs.1.274 to paucity of funds, the sales revenue
billion by the year 1997. dropped by 50% as against the projected
sales target. In view of such a huge short
2.3 NFL Under Court Appointed Management fall in the revenues, the unit was unable to
It was the first time in the Pakistan’s Banking history absorb all the fixed costs and therefore
128 that the creditors took over the management of
the unit. The equity holders/creditors filed the
incurred loss.

petition under section 292 of the company’s 2.4 Project Facilities

ordinance 1985. While the petition was still in the The total land of the unit was 42 acres. The covered
High Cour t of Sindh, the cour t g ave the area of the company was about 33,300 sq. meters.
Management of the Company to the petitioner on The premises which NFL was utilizing covered
December 05, 1997 under section 290 of the 17.269 acres; the balance of about 25 acres was
companies’ ordinance 1985. The company was surplus land with NFL.
under the operation of the court appointed
management from December 05, 1997 to December The summary of constructed area is presented
2006. below:

After the take over of the unit, two different sets Description Covered area Description Year of
of rehabilitation plans were developed. The first (Sq. Meter) construction
part was to make the unit operational with minimum Production Area 16,000 RCC & MS 1980
possible finance. The second Rehabilitation plan
was developed for the Task Committee formulated Workshop & others 10,000 RCC 1980
by the Government of Pakistan for the rehabilitation Ware House 6,000 RCC 1980, 90, 92
of the sick units in Pakistan. The purpose and
Office Building 1.300 RCC 1980, 92
objective of the task committee was to ascertain
the marketing, technical, and financial viability of
a) A brief summary of the plant and machinery
the units that were sick and revive those that had
is presented below:
the potential to become competitive.

The performance under the new management is l The polymer section consisted of three
discussed below: production lines. The aggregate installed
capacity of these three lines was 60 tons a
a) M/s. Rahman & Sarfraz and Co., Chartered day (based on old batch technolog y).
Accountants worked out a detailed plan that
envisaged a funding of Rs.235.00 million to l There were two lines in the Fiber section.
make the plant operational. However, the The installed capacity of this section was 40

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tons per day 290/292 of the Companies’ Ordinance 1984. Since
the takeover on December 5, 1997 it was being
l There were two sections in yarn processing. managed by the Court appointed management;
Filament one was based on high speed the details of that and other litigation/legal status
spinning and nine texturising machines. Of are discussed below:
these nine machines, only six machines were
in operation. The rated capacity of these six The main petition i.e. J.M. 39/97 filed by the
texturizing machines was 9 tons per day. Equity-holders u/s 290 of the Companies
Filament two consisted of two lines of high- Ordinance 1984 to protect the interest of Equity-
speed spinning units and five Zinser machines. holders and all the Creditors for the purpose of
The rated capacity of flat yarn (Zinser) was rehabilitation of the company, was still pending
seven tons a day. in the High Court of Sindh. However, an Interim
Order dated December 4, 1997 allowed NDFC
l The twister section consisted of 14 twister and others to take over the management of the
machines. The average capacity of this section
was two tons per day.
Company. 129
Later on, the Schon Group filed a petition
l There were two generators of 3.2 MW each. opposing the nomination of Mr. Riaz Niazi,
Of this, one was operational and other was praying that their objections on the nomination
decommissioned. were not placed before the Hon’ble High Court.
The High Court of Sindh after hearing their
2.5 Ownership Pattern & Related Issues objection, in October 1998 appointed Mr. Khalid
Schon Group was the majority shareholder of the Mumtaz, a representative of Schon Group to
company. The shareholding pattern of the company coordinate and assist the Court appointed Chief
along with details such as shares pledged by the Executive of the Company.
Schon Group against borrowing of NFL and its
sister concerns is discussed below: As the company was being run by the Court
appointed management, therefore, CLA’s statutory
a) The Schon Group owned 44.324 million requirement such as, holding Board of Directors’
shares of NFL. Of this about 90% or 43.1 Meetings, appointment of Auditors, and approval
million shares were pledged by the Schon of Annual & Semi- Annual Accounts could not
Group as a security for the liabilities created be undertaken. The Court appointed management
against several companies of the Schon therefore approached Corporate Law
Group. Of this total, 24 million shares were Authority/Securities Exchange Commission of
pledged by Schon Group against loan facilities Pakistan for waiver/postponement of the statutory
of other companies of the Schon Group and requirement till the decision of JM-39 (Petition
19.1 million shares pledged with various filed u/s 290 of the Companies Ordinance, 1984)
institutions on account of NFL. by the High Court of Sindh.

2.6 Pending Litigation 3. REVIEW OF MARKET SITUATION

The Schon Group had 52% shares of the company, IN 1999:
therefore, were the majority shareholder. However,
in order to protect the interest of the Equity
3.1 Existing Units of Polyester Fibre
holders/Creditors, the minority shareholders got
In 1999 there were six polyester fibre units in the
the management of the company under section
country. The total installed capacity of the units was

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about 393,000 tons. The details are presented below: tons of polyester fiber was expected to be
imported. The reason for such a variation was that
Polyester Units Location Capacity (per annum) the above-developed schedule by NDFC was
1 Dewan Hattar-NWFP 105,000 inclusive of the production by NFL, which was
2 Dhan Fiber Hattar-NWFP 90,000
not producing Fiber.
3 ICI Punjab 64,000 3.3 Polyester Yarn (Existing Units in 1999)
4 Ibrahim Fibre Punjab 70,000 In 1999, there were about 22 units of polyester
5 PSL NWFP 28,000 yarn in the country, details of which are presented
below:
6 Rupali Limited Punjab 22,000
7 National Fibres Karachi 14,000 Name of the units Location Capacity
in tons
Source: Filament Yarn Manufacturers Association 1 Ms. Rupali Polyester Shiekhupura 11,000
130 Dewan Salman was the largest unit followed by Dhan 2 M/s Rupafil Sharqpur 14,000
Fiber, ICI and Ibrahim Fiber. While PSL, Rupali and 3 M/s. Gatron Industires Ltd-1 Hub-Balouchistan 13,000
National Fibers were small units ranging between 28,000 4 Gatron Industries Limited-2 Hub Balouchistan 8.000
tons to 14,000 tons per annum.
5 National fibre Limited Karachi 5600

3.2 Demand And Supply Analysis of Sub total based on PTA/MEG technology 51,600
Polyester Fiber 6 Spintex Azad Kashmir 10,000
The demand and supply situation of polyester fibre in 7 S.G Fibers Karachi 9000
the country during the period 1999 to 2004 is given
8 Polyron Hub Baluchistan 4000
below:
9 Pak Fibre Hub Baluchistan 2000
Year Supply Demand Gap
10 Progressive fibre Hub Baluchistan 1400
1999 393,000 393,807 (807)
11 Fayyaz Filament Hub-Baluchistan 3000
2000 393,000 433,1888 (40,188)
12 Tilon Limited Hub_baluchistan 700
2001 449,000 476,506 (27,506)
13 Bengal Fibrer Karachi 3000
2002 504,000 524,157 (20,157)
14 Dilon Limited Karachi 1000
2003 517,000 576,573 (59,573)
15 Kohinoor Fibre Faislabad 1,5000
2004 523,000 634,230 (111,230)
16 Ahsan Industires Faislabad 600
Source: NDFC’s Estimates
17 Ahmed Factory Failsabad 600
The above demand and supply situation estimated by 18 Tristar Polyester Karachi 3000
NDFC in 1999 shows that there was a deficit of 807 tons 19 Sindh Star Industires Karachi 500
in the year 1999, which was expected to increase by 40,108
20 Indus Polyester Hattar-NWFP 2000
in the year 2000. In subsequent two years, the deficit would
have been in the range of 20,157 tons to 27,506 tons. 21 Tawwakkal Polyester NWFP 1600
Finally, in the year 2004, there was expected to be a deficit 22 Papa Sierra Fibers Hattar NWFP 2100
of 111,230 tons. SUB TOTAL BASED ON CHIPS 46,000
GRAND TOTAL 97,600
It may be noted that in the year 1999, there was
a deficit of 807 tons. Comparatively, about 13000 Source: FYMA

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The total installed capacity of these units was 97,000 The above analysis indicates that there was a surplus
tons per annum. Of the 22 local units, only five units supply of 2700 tons in the year 1999. This would change
had the capability of making polyester chips, a raw to a deficit supply of 2318 tons in the year 2001, which
material for producing polyester yarn. The installed would have further increased to a deficit of 10, 424 tons
capacity of these units was about 51,600 tons per by the year 2004.
annum. The other 17 units were either purchasing the
polyester chips from the local units or importing the It may be noted that although there was an excess supply
same for making polyester yarn. in the year 1999 there were imports of 7000 tons in the
same year. The reason for such a glut in the market was
3.4 Shutdown Units of Polyester Yarn that, the polyester companies of the developed countries
Of the 22 units in the country, five units were not in were dumping the yarn at throwaway prices in the local
production (shut down). The details of these units are market. As a consequence, the local units could not
presented below: operate at optimum level.

1
Unit
Polyron
Capacity in tons
4000
4 REHABILITATION PLAN OF NDFC
NDFC once again took the lead to develop a
131
2 Progressive fibre 1400 comprehensive rehabilitation plan. The plan along with
details of the basic assumptions on which the plan was
3 Fayyaz Filament 3000
based is discussed in subsequent section.
4 Papaseira 2100
5 Pak Fiber 2000 The following section of the case study has deliberately
TOTAL 12,500 been written in present tense rather than past tense to
give one the feel of the plan as developed by the NDFC
Source: FYMA team.
The actual production of the local yarn units was about 4.1 NFL’s Market Position
74,000 tons for the year 1999. If the capacity of the Considering the market environment given above, the
shut down units is excluded, the capacity utilization NFL position will be as follows:
comes to 87%.
4.1.1 Polyester Fibre
3.5 Demand And Supply Analysis Polyester Yarn The installed capacity of the NFL polyester fiber is 14000
Following estimates of supply and demand were tons per annum. Conversely, the deficit supply in the
prepared by NDFC in 1999.It was assumed that the projected period is as low as 20,157 tons in 2002 and as
shutdown units will remain closed during the projected high as 11,230 tons in the year 2004. In view of that, the
period. NFL will not have any problem in marketing its fiber.
YEAR SUPPLY DEMAND GAP
a) The quality of NFL’s fiber is not the same as the
1999(Base year) 85100 82400 2700
modern plants based on continuous process (the
2000 85100 84872 228 NFL technology is based on old technology of
2001 85100 87418 (2318) batch process).
2002 85100 90041 (4941)
b) In view of the low quality of NFL’s fiber, and the
2003 85100 92742 (7642) fact that NFL does not offer credit sales, transport
2004 85100 95524 (10424) facilities, and insurance, the prices of NFL fiber
will therefore be lower than the market rate.
Source: NDFC’s Estimates

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c) In view of the low prices and the quality of NFL IDB, Jeddah nor to the other equity holders such as
polyester fiber, the NFL clients are generally old NDFC and FCC&CL. Therefore, a debt equity swap
spinning mills producing lower count yarn. The has been suggested, so that the equity holder and
NFL’s fiber is more compatible to the old spinning creditors are able to reconstitute a Board for running
mills, therefore they will remain NFL’s clients. the unit.

4.1.2 Filament Yarn The Schon Group has 44.324 million shares. Against this,
The above discussed demand and supply position suggests the Schon Group has pledged 43.030 million shares at
that there will be excess supply of 228 tons in the year various Banks and DFI as a security against the loans
2000. However, in subsequent years, the deficit will be taken for the sister concerns of the Schon Group. This
2318 tons which is expected to increase to 10424 tons is inclusive of 19.11 million shares pledged by the Schon
by the year 2004. It may be noted that the supply schedule Group against the loans for NFL.
developed and discussed above is inclusive of NFL’s
capacity. Thus, in view of the deficit situation, NFL may It is recommended that the 19.11 million shares pledged
132 not face any problem in marketing its filament yarn. The
quality of NFL filament yarn is competitive to the market.
by the Schon Group against the liabilities of the NFL
may be converted to equity at a par value of Rs. 10 per
However, as in the case of fiber, NFL does not give share. In view of this debt equity swap, the Creditors’
credit, transport, and insurance coverage; therefore, its forum would have the majority share holding of 70%,
prices are expected to be comparatively lower than the and thus would be able to form its own Board. With the
competitors. suggested debt equity swap, the equity holding pattern
will be revised as follows:
4.2 The Restructuring Plan
The NFL has accumulated liabilities of more than 1.5 Before Debt Debt Equity After Debt
billion. Considering the prevailing market conditions and Equity Swap Swap Equity Swap
the size of project, which is based on old technology it Schon 443.24 52% (191.11) 252.13 29.74%
could not service all the accumulated liabilities, efficiently. NDFC 171.12 20.18% 171.12 20.18%
Therefore, the restructuring is required to be based on
IDB 179.32 21.15% 179.32 21.15%
the debt servicing capability of the unit after rehabilitation.
The parameters of the restructuring plan are discussed FCCCL 41.45 4.89% 41.45 4.89%
below: OTHERS 12.65 1.49% 12.65 1.49%
HBL 0 0 191.11 191.11 22.54%
1. Debt equity swaps amounting to Rs.191.000 LEASING
million.
The principal outstanding of Bank / DFIs as on
2. Capital injection of Rs. 125.000 million. June 30,1999 is Rs.900.39 million. With the proposed
debt equity swap of Rs. 191.110 million, the principal
3. Restructuring of existing loans. outstanding amount will decrease to Rs.709.28
million.
4. Capital generation of Rs.150.000 million by
selling surplus land. 4.2.2 Capital Induction
An amount of Rs.125.00 million will be inducted into
4.2.1 Debt Equity Swap NFL, which will be utilized for operating the unit at
Presently, the Schon group with 53% share holding, is optimum level, by re-commissioning the polyester fiber
the majority shareholder of the company. Any and polymer sections and carrying out other repair and
restructuring of loans will neither be acceptable to the maintenance related to the yarn sections.

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The proposed funds will be mainly utilized for the Rs.295.64 million. Total out standing liability thus
following: is Rs.853.16 million. These liabilities will be frozen.

Rs. In Million l NFL’s shares amounting to Rs.19.11 million are

l Utility (Generator) 30.000 pledged with the HBL and others. Based on the
debt equity swap at Rs.10/ share, the principal
l Agitator 10.000
amount will be reduced to Rs.441.52 million, which
l Chiller (Fiber) 05.000 will be liquidated in ten years, starting from the
l Compressor (Fiber) 05.000 third year of operations.
l BMR (Yarn) 25.000
l The mark-up on above amounting to Rs.295.64
l Working Capital 50.000
million will be liquidated in 12 years, starting from
125.000 the fifth year of operation, after rehabilitation.

4.2.3 Restructuring of Loans

l The servicing including repayment of principal of
l The total principal outstanding of lease facility as on
June 30, 1999 is Rs.256.39 million. Outstanding mark-
133
the freshly inducted loan of Rs.125.00 million for up as on June 30, 1999 is 96.71 million, and penal
rehabilitation purposes will start from the first year interest is Rs.87.73 million. Thus, the total outstanding
of operation, after rehabilitation. liabilities against the leasing companies as on June
30, 1999 are Rs.440.38 million. The total outstanding
l NDFC had provided Rs.50.000 million bridge loan dues against the leasing companies will be frozen.
and Rs.30.000 million for working capital. The total
outstanding liability as on June 30, 1999 against l With the suggested debt equity swap of 7.511
the above loans is RS.96.98 million. million shares at the par value of Rs.10/shares, the
leasing company’s principal amount of Rs.256.39
l The total to liabilities of Rs.96.68 million towards million will be reduced to Rs.181.27 million, to be
NDFC will be frozen and will be liquidated in four liquidated in ten years in equal instalments starting
years starting from the second year of operation, from the third year of operations, after rehabilitation.
after rehabilitation.
l The mark-up amount of Rs.184.44 million will be
l Allied Bank had created a forced financing PAD liquidated in 12 years, starting from the fifth year
of Rs.9.14 million against NFL, by retiring the LC of operation.
documents from their own resources. The total
outstanding amount against this facility as on June 4.2.4. Sale of Surplus Land
30, 1999 is Rs.10.080 million The National Fibers Limited has a surplus land of 25
acres, of which 17 acre can be carved out and sold out.
l This amount will be frozen and will be liquidated The sale of surplus land is expected to generate Rs.150.000
in four years, starting from the second year of million. This can be utilized for:
operation, after rehabilitation. The spares and raw
material against this facility are in the possession o Liquidating the fresh borrowing under the
of the Allied Bank, which the ABL shall release rehabilitation, or
under the rehabilitation program. o Carrying out diversification such as color fiber and
yarn. This is highly value added product line and
l Out standing principal of Banks and DFI as on can generate additional revenue Rs.150.000 million
June 30, 1999 is Rs.557.52 million and mark-up is per annum.

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4.3 Prospects after Rehabilitation will have surplus of Rs.6.51 million in the first year
With the induction of Rs.125.000 million and proposed of operation, which has an increasing trend. By
rehabilitation the plant can be operated at optimum level. the sixth year of operation, the accumulated surplus
At the optimum level the unit can produce; position will increase to Rs.157.39 million. The
accumulated surplus in tenth year of operation will
ITEM TONS / ANNUM be about Rs.259.53 million.
l Polyester fiber 14,000 tons per annum
l Polyester yarn 5600 tons per annum 4.3.3 Breakeven
l Polyester chips 21000 tons per annum (an The commercial breakeven, in the first year of operations
intermediate raw material) will be 96.97%, which will decline to 67.58% by the sixth
year of operations. In the tenth year it will further reduce
The projected operating results of the rehabilitated project to 57.92%.
are discussed below:
The cash break even in the projected period is as low as
134 4.3.1 Projected Income Statement:
For the projected income statements see Appendix A
61.02% first year and as high as 113% fifth year. From
the sixth year of operation the cash breakeven is 88.12
% in the rest of the projected period. The reasons for
l The net annual sales will be about Rs.1.177 billion such a fluctuation are that the unit will be servicing the
per annum. interest and repayments of old loans as well. It may be
l Total variable cost will be 81% of revenue noted that although in the cash break-even in the fifth
throughout the projected period year of operation is as high as 113%, the unit may not
require borrowing of additional funds as the cash surplus
l There will be a net profit of Rs.6.52 million in the carried forward from the previous year is about 161.000
first year of operation, which has an increasing million.
trend. By the sixth year of operation it will increase
to Rs.69.87 and by the tenth year of operation it 4.3.4 Sensitivity Analysis
will increase to Rs.90.68 million. 1) Decrease of Sale Price by 5%
l The marginal contribution will be Rs.215.51 million l Profit will decrease from Rs.59.77 million to

per annum; This indicates that the unit will be able Rs.35.62 million.
to absorb all the variable cost and total fixed cost, l Commercial breakeven will increase from

including the debt servicing and repayment of 72.27% to 81.37%.

principal of the fresh loans amounting to Rs.125.000 l Cash breakeven will increase from 113.67% to

million, and a portion of old liabilities. 128.03%.

l It may be pointed out that the above adverse

4.3.2 Projected Cash Flow position due to decrease in price of yarn of

The projected cash flow with detailed assumptions is 5%, is also due to the fact that the unit is
enclosed as Appendix B and summarized working is servicing substantial portion of old liabilities.
presented below: Moreover, the unit has sufficient accumulated
cash surplus to absorb such a high cash
l The above projected cash flow suggests that the b r e a ke ve n / c o m m e r c i a l b r e a ke ve n .
unit after rehabilitation will absorb all its fixed and l Marginal contribution will decline from

variable cost, including payments of interest and Rs.215.51 million per annum to Rs.191.24
debt servicing of proposed funds of Rs.125.000 million.
million, and a portion of old loans. In fact, the unit l Accumulated cash available will decrease from
Rs.131.46 million to Rs.10.71 million.

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2) Sale Prices Remain Constant & 90% Cu IV. Action can still be taken for misappropriation and
l Profit will decrease from Rs.59.77 million to ultra vires action u/s 296 of the Companies
Rs.36.87 million. Ordinance, 1984 to recover liabilities from the
l Commercial breakeven will increase from personal assets of the Schon Group nominees.
72.27% to 80.80%.
l Cash breakeven will increase from 113.67% to V. The JM.39/97 could be withdrawn. However, there
127.27%. will be no possible representation by the Schon
l Marginal contribution will decrease from Group, since they cease to be shareholders/members
Rs.215.51 million per annum to Rs.192.03 and thus their role as Respondents in the JM 39/97
million. also becomes infractuous. This will save NFL from
l Accumulated cash available will decrease from any further possible litigation and aid them in the
Rs.131.46 million to Rs.16.96 million. smooth running of the affairs of NFL, unhampered.
The above analyses indicate that in case of the above VI. In order to maintain the continuity of operations, it
variations, the company will be able to absorb all the
fixed and variable cost including the repayments of
is necessary that Rs.25.000 million as an interim
arrangement may be immediately inducted in to
135
principal and markup of the current borrowing of NFL.
Rs.125.000 million and a portion of old loans. Moreover,
the unit will have sufficient accumulated cash surplus to 6. AFTERWARDS
absorb such a high cash breakeven/commercial breakeven. Forced liquidation, generally, results in scrapping of the
plant and machinery and selling the land to real estate
5. RECOMMENDATIONS builders. Filing the petition under section 292 of the
In order to give effect to the rehabilitation plan, it will be Companies Ordinance 1984 was a “test case” which was
necessary for the following actions to take place: undertaken with the following vision.

I. A new Board of Directors will be appointed by a) NDFC’s vision was to takeover the sick units, revive
the Federal Government to take complete and rehabilitate them and then sell them to the
management and control of NFL. potential buyers. This would have ensured that the
projects continued running and contributing
II. The rehabilitation plan as proposed in the subject towards the economic development.
report will also be notified by the government. b) NDFC and the banks were fully aware of the
The proposed debt equity swap will be fact that running, takeover units, and selling
implemented, immediately. The new equity holders them to the potential buyers was not their forte.
will enter into a joint venture agreement amongst Had the test case of NDFC’s takeover been
themselves with respect to their rights and successful, the NDFC/Banks would have
obligations as the new sponsors of NFL. The developed a team or “expert working group”
agreement will also specify the conditions on which who, on behalf of the NDFC/Banks, would
the shares may be dis-invested. The agreement will have run, rehabilitated, and sold the taken over
be structured, binding and effective. units to the potential buyers.
c) One of the key reasons for the failure of the test
III. The articles and memorandum will be amended case was extra ordinary delay by the court in giving
to ensure that the Schon Group or any of their the verdict on the main petition. Banks, generally,
nominees cease to have any voting rights in terms are reluctant to make investment in the units that
of the annual general meeting, and any rights vis- are still in litigation, therefore, they did not
à-vis the management of the company. participate in the rehabilitation of NFL.

MARKET FORCES OCTOBER-2008

 Case Study
APPENDIX-A

PROJECTED INCOME STATEMENT

1st yr 2nd yr 3rd yr 4th yr 5th yr 6th yr

Sales 1177.48 11177.48 11177.48 1177.48 1177.48 1177.48
Raw material and packaging 711.15 711.15 711.15 711.15 711.15 711.15
Other variables 250.82 250.82 250.82 250.82 250.82 250.82
Total variable cost 961.97 961.97 961.97 961.97 961.97 961.97
Total fixed cost 166.49 156.24 147.02 138.71 131.24 124.52
Cost of sales 1128.45 1118.21 1108.98 1100.68 1093.21 1086.48
Gross profit/(loss) 49.03 59.27 68.50 76.80 84.27 90.99
136 Total operating cost 36.62 32.12 27.62 23.12 18.62 15.24
Other income
Profit/(loss) before income tax 12.41 27.16 40.88 53.68 65.66 75.75
Turn over tax 5.89 5.89 5.89 5.89 5.89 5.89
profit/(loss) after tax 6.52 21.27 35.00 47.80 59.77 69.87

APPENDIX-B
PROJECTED CASH FLOW
1ST YR 2ND YR 3RD YR 4TH YR 5TH YR 6TH YR
Inflow
Net profit/(loss) after tax 6.52 21.27 35.00 47.80 59.77 69.87
Depreciation add back 102.49 92.24 83.02 74.71 67.24 60.52
Financial charges (add back) 21.38 16.88 12.38 7.88 3.38 0
Working capital 125.000
Total inflows 255.39 130.39 130.39 130.39 130.39 130.39
Out flow
Principle repayment 25.00 25.00 25.00 25.00 25.00 0
Repayment of mark up 21.38 16.88 12.38 7.88 3.38 0
repayment of old loans/mark up 0 26.69 88.97 88.97 131.46 104.77
Capital cost bmr 75
Working capital/inventory 50.00 0.00 0.00 0.00 0.00 0.00
Total out flow 171.38 68.57 126.34 121.84 159.84 104.77
Surplus/(deficit) 84.01 61.82 4.04 8.54 (29.45) 25.61
Closing balance 86.51 148.33 152.37 160.91 131.46 157.07

MARKET FORCES OCTOBER-2008