Pakistan Credit Guarantee Company: Karandaaz becomes major shareholder

ISLAMABAD: The government has approved the sale of majority shareholding of the state-owned Pakistan Credit Guarantee Company (PCGC) to the UK-funded entity — Karandaaz — by converting billions of rupees worth of unspent grants into equity.

The sale was approved despite the fact that the Ministry of Finance had raised key questions in writing at the initial stage.

Out of grant money of £50 million, the unspent funds stood at Rs3.5 billion lying with the State Bank of Pakistan (SBP).

The funds were invested into T-bills so the principal and mark-up amount increased to Rs6.5 billion in the last 12 years from 2008 through 2020.

Now the ECC has approved a change in the shareholding structure of the PCGC under which the shareholding of the Government of Pakistan in the company has been reduced to 49 percent from the earlier 70 percent.

Any dividends announced by the PCGC against shares held by the State Bank of Pakistan or any proceeds from the sale of shares in PCGC, held by the SBP, shall be remitted to the government treasury.

Documents from the Ministry of Finance, State Bank of Pakistan and others available with The News show that the British government and Northern Ireland acting through Department for International Development (DFID) under its Financial Inclusion Program (FIP) provided a grant of £50 million comprising £40 million to support SBP’s FIP and £10 million in form of Technical Cooperation for Challenge Fund for Financial Inclusion Innovation vide MoU signed on July 3, 2008 between DFID and EAD/SBP. This programme has been extended till March 2021.

The DFID has been renamed Foreign Commonwealth and Development Office (FCDO). However, vide amendments letter signed in January 2015, after closure of the programme, all unspent funds will either reverted to FCDO or provided to FCDO’s enterprise and Asset Growth Programme against results and reporting framework.

Now FCDO intends to become shareholder of Pakistan Credit Guarantee Company Limited (PCGC) by utilizing grants allocated for Credit Guarantee Scheme as its own equity in PCGC including the amount of markup of the grant amount.

The Finance Division is of the view that the MoU between EAD/SBP and FCDO was a grant arrangement. Grants are one way transaction. They may be tied to specific purposes but are non-refundable. If they are otherwise, they are not a grant. Any clause signed subsequently that runs counter to the main/primary agreement within the MoU is ab-initio invalid.

The Finance Division’s propriety rights of the grant money and markup earned rest with the Government of Pakistan and cannot be utilised as equity of some other entity.

The SBP holds a different view as evident from its letter. As per Rules of Business issues relating to foreign aid/assistance fall within the ambit of EAD, It is therefore requested to clarify that

(i) Can DFID (FCDO) invest the grant given to GoP as it equity in shareholding of PCGC?

(ii) Is the markup earned on grant the property of DFID (FCDO)?

The early response of EAD will enable the Finance Division to finalize the shareholding structure of PCGC at the earliest.

When this reporter contacted a top official of EAD on Sunday, he said this reference had been forwarded to the EAD but when the meeting was convened, it was informed that the FCDO, Ministry of Finance and SBP had mutually agreed so the EAD remained neutral on this issue.

When a top official of the Finance Division was contacted, he replied that the unspent grant money of Rs3.5 billion was given to Karandaaz Pakistan, a subsidiary of FCDO working for providing loans to the SMEs sector in Pakistan. The markup earned by SBP will remain in their kitty.

Now the Karandaaz Pakistan will utilise these unspent funds in Pakistan after becoming major shareholder of PCGC being 51 percent as per agreement among FCDO/Ministry of Finance and SBP.

When asked why the Ministry of Finance raised key questions, he replied that it would be an earlier letter, as the Finance Division raised questions but after getting a reply it had satisfied the ministry after which the ECC granted its approval on the changed structure of PCGC.