THE TUSSLE BETWEEN ADAMJEE

AND MANSHA GROUP

Huge loss and imprudent policies justify change in Board of Directors and management hierarchy

Fearing another attempt of hostile takeover of Adamjee Insurance Company (AIC), Adamjee Group has
filed a petition against Mian Mansha and others. Earlier an attempt was made in 1999 by another group to
takeover this largest insurance company of Pakistan. Though, the last attempt proved a futile effort, this
time Adamjee Group fear a major change in the composition of Board of Directors. Therefore, the move
by Adamjee Group is a precautionary measure and it is yet to be seen if they would be able to stop this
potential move.

The suit has been filed by AIC, Abdul Hamid Adamjee, Abdul Razak Adamjee and Ashraf Adamjee
against Muslim Commercial Bank (MCB), Mian Muhammad Mansha, MCB-Employees' Pension Fund,
MCB-Employees' Provident Fund, the State Bank of Pakistan and the Securities and Exchange
Commission of Pakistan (SECP).

The suit says, "That the Defendant bank has huge funds available and can proceed to acquire by hostile
takeover any company and if such an act is allowed it would create an uncontrollable acquisition by banks
and investment companies of specialized and profitable units which in fact, is not the job of the Bank as
such not provided in the Memorandum of the Bank. Such is also the intention of the Government of
Pakistan, where it is not the policy that financial institutions should effectively take over the management
of companies though they may hold shares."

The suit also says, "That the Plaintiffs assert that as a matter of public policy the takeover of the Plaintiff
by the Defendants is liable to be blocked by this Honourable Court whereby, the said banking Company
and the Mansha Group by a hostile takeover intends to takeover, the control and management of the
entire company namely, the Plaintiff which, otherwise cannot be acquired under the provision of the
Insurance Ordinance, 2000. The same is in violation of Section 23 of the Banking Companies Ordinance,
1962 where, in fact, the entire group has acquired directly and indirectly more than 40 per cent of the
equity in the Plaintiff company, thus causing the company to be a subsidiary de facto of the Defendant
No. 1."

It further says, "The Defendant's intention to takeover the Plaintiff (through a hostile takeover) having
violated the mandatory provisions of law is against the public policy and if allowed, would be to detriment
not only of the Plaintiff but would also cause injury to the general public as a whole, as it would: (a)
destroy a blue-chip and well-managed company by allowing a nominee of the bank to interfere in its
business; (b) set negative precedent as regards the aspects of good governance of the company; (c)
cause with the same ease as the Defendant has to acquire by hostile takeover of companies in Pakistan."

"That it would be unjust, unconscionable and inequitable if the Defendants be allowed to take over the
Plaintiff with malafide intention to destroy the Plaintiff by placing their nominee on the Board of directors
of the Plaintiff. Also the Defendants are liable to be restrained from acquiring shares of the Plaintiff as
such, acquisition would be against the spirit and the letter of law being in violation of the mandatory
provision of the Insurance Ordinance 2000 and the Companies Ordinance, 1984." The Plaintiffs have
prayed: "In view of the facts and circumstances stated above, it is prayed by the Plaintiffs above-named
that Hon'ble Court may be pleased to grant a Judgement and Decree against the Defendants jointly
and/or severally." The plaintiffs have also requested, "Grant a Permanent Injunction against the
Defendants from seeking election for themselves or their nominees, employees, representatives or
agents as Director on the Board of the Plaintiff directly or indirectly for the benefit and in violation of the
fiduciary obligations to the Plaintiff."
The first question which arises is, are the fears of Adamjee Group based on any concrete evidence?
Though, the Register of Shareholders cannot be examined, it is anticipated that Adamjee Group has a
small stake directly owned shares but may still enjoy reasonably large number of proxies. At the
same time it is being said that Defendants have accumulated as high as 40 per cent stake in AIC.
Therefore, they (Defendants) are in a position to bring a major change in the composition of Board of
Directors at the time of election of Directors.

The second question is, has Adamjee Group lost majority shareholding in AIC? Again the only document
which can prove this point is the Register of Shareholders. However, some analysts say that there are all
the reasons to believe that the Group has lost its controlling ability years ago. There are some 'ghost
shareholders' who own substantially large number of shares. They even go to the extent of saying that a
large number of shares still in the name of Adamjee family are virtually owned by these ghosts, who are
not invisible. It is being said that the suit filed by Adamjee Group has been moved, actually, by these
ghost shareholders.

The third question is, do the Defendants also falls in the category of ghost shareholders? The
circumstantial evidence, the petition moved by Plaintiffs saying that Defendants have acquired 40 per
cent shares, itself excludes Defendants from the category of ghost shareholders. Since Adamjee Group,
which has complete access to the Register of Shareholders, has disclosed this figure one has to accept
the fact on prima facie.

This leads to an interesting point, how and when Defendants attained such a large percentage of shares.
Theoretically, an enterprising businessman or a group could have made substantial investment in AIC
which had good track record to earn modest dividend income and make capital gains. Therefore,
investment made by Defendants may not have any ulterior motive. However, after AIC has posted nearly
half a billion rupee loss for the year ending December 31, 2001, they should be concerned about the
outlook of AIC.

As regards investment made by MCB in AIC, there are two different point of view: 1) MCB has taken over
these shares when people, who had pledged these shares, failed to discharge their liabilities and 2) MCB
also maintains investment portfolio which include AIC. Since AIC was making profit and issuing bonus
shares, MCB's investment in AIC has also grown.

Assuming the fact as stated in the petition, that Defendants own 40 per cent share of AIC and want to
bring their nominee on the Board of Directors, can the move tantamount to a hostile takeover? One must
keep a few facts in mind before making any statement. These are: 1) as such Mansha Group has an
insurance company, 2) AIC has posted half a billion rupee loss for the year 2001 and 3) Defendants have
a substantial stake in AIC. Therefore, the takeover may be an appropriate move to protect their
investment rather than increasing the number of listed companies in their basket. Even if one assumes,
for the sake of argument, that Defendants wish to takeover AIC, there seems to be nothing wrong. Such
incidents may be rare and/or exceptional in Pakistan but are common in the corporate world outside
Pakistan.

A point which bothers many analysts is, why AIC has posted such a huge loss for year 2001? Some
analysts say that the loss incurred during year 2001 has no plausible explanation. Whereas some
analysts term this loss as an attempt to siphon out funds. To substantiate their point they say that the
policy to commence car insurance business in the UAE was not a prudent policy. They also hint towards
a rather unusual relationship between AIC and its approved surveyors most of the large claims
submitted have been approved by a few specific surveyors. Analysts say, "Those who were able to read
the writing on the wall, could have made the attempt to make extraordinary gains, that too in foreign
exchange. The allegation of siphoning of funds seems to have some roots. Therefore, a point to be
probed is, who have benefited from payment of these huge claims in last couple of years?
Some analysts say that the loss posted by AIC is not an extraordinary event but it has been overplayed.
However, even when half yearly results were announced, posting quarter of a billion rupee loss, AIC
share prices continued upward movement. Therefore, it is difficult, at this point, to identify the suspects
responsible for loss as well as those who were involved in price manipulation of AIC shares.

Why should any one including Adamjee Group should be afraid of any attempt of hostile takeover of AIC?
Theoretically, Adamjee Group should not be afraid at all provided they have a reasonably substantial
holding as well as proxies. The last failed hostile takeover attempt, proved that they were able to solicit
enough proxies at the last minute and their opponent could succeed in bringing only one person on the
Board of Directors. However, the reality seems to be very different this time. Therefore, the stand taken
by Adamjee Group ((seeking a court order to stop Defendants from taking part in the election of directors)
is a precautionary move. Can Adamjee Group succeed in getting such a court order?

Experts say that in the light of what has happened in the election of directors of Engro Chemical Pakistan
(ECPL), the probability of stopping Defendants may be there. The shareholding percentage of Defendant
is a known secret. However, it must also be appreciated that Defendants, despite enjoying the advantage
have never made any attempt for the takeover in last couple of years. They could have changed the
composition of board of directors simply by demanding an extra-ordinary general meeting with specific
business of election of directors, which they never did. However, as a result of huge loss for year 2001,
they might have lost the faith in the existing board of directors and have the reason to bring their own
nominee on the Board to protect their interest. Some analysts believe that the ghost shareholders, having
keen interest in AIC, have succeeded in convincing Adamjee Group to go to the court of law.

MARRIAGE OF CONVENIENCE

The suit filed indicates the intensity of strangulated relationship between the Plaintiffs and Defendants.
However, annual reports of AIC and MCB term each other 'associate undertaking'. AIC report also
indicates investment in Mian Mansha's companies. These are Umer Fabrics (Rs 3.3 million), D. G. Khan
Cement (Rs 32.4 million), Nishat Mills (Rs 13.3 million) and even MCB (Rs 59 million). Why a sudden
change of heart?

MCB'S EXPOSURE IN AIC

MCB owns over 15.8 million shares directly and also another 4.5 million shares of AIC through MCB-
Employees Fund and MCB-Pension Fund. MCB has bought these shares at a cost of about Rs 944
million. Looking at MCB's paid-up of Rs 2.4 billion, the figure looks substantial. However, if one looks at
total assets of the bank exceeding Rs 187 billion including the investment portfolio of over Rs 55 billion,
the figure of less than a billion rupee looks too meager.

AIC FINDS A ESCAPE GOAT

In the annual report for year 2001, AIC has put the blame of large-scale claims relating to car insurance
business on its ex-General Manager for the UAE. AIC has also indicated towards future claims. The
management has identified a culprit or a escape goat. However, it was not indicated if any legal action
was taken against those who have caused huge loss to the largest insurance company of Pakistan and
deprived its shareholders from return on their investment. It was probably for the first time in the history of
AIC that it has posted loss and could not pay any dividend to shareholders.

ELECTION OF DIRECTORS NOT ON AGM AGENDA

It is almost a norm in Pakistan that election of directors is held at the Annual General Meeting (AGM). AIC
has been following the same practice and even election of directors in year 1999 were held in AGM,
despite the rumour of a potential threat of hostile takeover. However, this time AIC has taken extra
measure and election of directors is not on AGM agenda. It seems that Adamjee Group is eyeing a court
order barring the Defendants from participating in election of directors.

PLAINTIFFS AND DEFENDANTS

While Plaintiffs are Abdul Hamid Adamjee, Abdul Razak Adamjee and Ashraf Adamjee, the name of
Mohammed Hanif Adamjee, Chairman of Board of Directors is missing. Ashraf Adamjee is not on the
Board, whom does he represent? Mian Mansha's name is among the Defendants, who is also Chairman
of MCB's Board of Directors. Despite a non-banker he had served as President of MCB for a number of
years with the approval of State Bank of Pakistan.