KARACHI, May 6: The Karachi Electric Supply Corporation Limited (KESC) announced on Monday that it proposed to reduce the nominal value of share in the company from Rs10 to Rs3.50 by the cancellation of Rs6.50 per share or Rs57.2 billion of its issued paid-up capital. The face value of stock to be cancelled was said to be that portion as was “lost or un-represented by available assets”.

The company did explain the reason for the reduction, but most investors drew their own conclusions. And the stock suffered a sharp drop of Rs1.30 to close at Rs4.95 from the opening price of Rs6.25. Nearly 8.3 million shares changed hands on Monday. KESC explained that the reduction in share capital would be subsequent to the completion of conversion of GoP and GoP guaranteed loans of Rs65.3 billion into equity.

As a part of restructuring of the KESC’s unhealthy balance sheet, the conversion of debt into equity has since long been on the agenda, but the reduction of capital is believed to be an afterthought.

The proposed reduction (or ‘deduction’ as company terms it) of capital was not on the agenda of the extraordinary general meeting (ExGM) of shareholders earlier scheduled for May 18. The ExGM now to be convened on May 27, would take up reduction in capital as the fourth item on the agenda, after the formality of confirmation of minutes of previous AGM; approval of increase in authorized capital from Rs50 to Rs100 billion and the approval of conversion of loans totalling Rs65.3 billion into equity, subject to approval by competent authority.

In relation to the proposal to reduce capital, the KESC observed that the company had been suffering substantial financial losses for the last couple of years which had left a gapping hole of Rs57.3 billion in accumulated losses on the company’s balance sheet (Rs60.6 billion at end-March 2002). The utility stated that the accumulated deficit now far exceeded paid-up capital of the company, creating negative equity to the tune of Rs46.6 billion.

“This means that the KESC would not be able to declare any dividend to its shareholders till such time this accumulated loss is extinguished,” the corporation argued and said that the board proposed to seek approval of shareholders through the special resolution for writing off a substantial portion of the accumulated losses.

The KESC noted: “This would not only facilitate privatization but would also help achieve a fair value of this national asset. Moreover, assuming profits are available for distribution in future as a result of complete financial restructuring of the KESC already in process, it would permit the KESC to declare dividend at an earlier date than would have been the case otherwise.”

The company emphasised that the capital reduction and writing off accumulated losses would brighten the chances of shareholders to receive return on their investment out of the future earnings of the KESC, at an earlier date than would be possible if all of the past losses remain.