SERF’ defaulting drama shows ugly side of PSX

After a new business plan, rights issue, and AGM – the PSX moves the company to the defaulters segment through an ill thought decision

Defaulter. The word elicits horror from investors and appears in the nightmares of CEOs. Which is why it is relatively understandable Service Fabrics Limited (SERF) has been less than happy with a notification of the Pakistan Stock Exchanged (PSX) that has placed it in the defaulter’s segment. 

SERF’s crime? Revamping their once dormant business that has existed only in name for years now. For years SERF was dead, and the PSX was happy enough to let it carry on with 100% of its shares floating in the market. There was no real business activity going on in the company and investors were essentially just trading on paper. 

This once dead company has now very quickly become not just the subject of the PSX’s attention, but also the talk of the town. Finance and stock market whatsapp groups are exploding in equal parts confusion and outrage over why the PSX has placed SERF under 

A dead company that was finally being revamped, getting a CEO, and coming back to life has been shot down and thrown to the defaulter’s segment. With a spotty past and a heartening hope for revival still alive, the story of SERF is worth telling because it also says a lot about the PSX, and there is also a lesson to learn for others in similar positions.

What is SERF?

Service Fabrics Limited (SERF) was incorporated in December 1987. The principal business of the company is manufacturing and selling of fabrics as per the PSX website. The company, however, had not been operational for years. However, SERF hasn’t been involved in the fabrics business since 2004. At one point in time it had also bought a brokerage firm from Noor Capital and then ended up selling it back to Noor Capital.

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In 2016, the SECP initiated winding up proceedings on the company. Winding up is the process of dissolving a company. While winding up, a company ceases to continue with business as usual. The purpose of winding up is to sell off stocks, pay off creditors and distribute the remaining assets to shareholders. While the company could not continue its core operations since 2004, some shareholders wanted the business to go into the FMCG sector. This would have been a complete overhaul and a switch in business trajectory. Essentially, shareholders wanted to use the remaining resources of SERF to set-up a new business. For this purpose, key investors approached the Ghani Group to take over the company. 

The role of management was then assumed by the Ghani Global Group which has been in the business of glass manufacturing, gas and chemical sales. The Ghani Global Group already has two listed companies, both operating in unique industries. Ghani Global Glass (GGGL) produces Ampoules and Vials for the medical industry, and Ghani Global Limited (GGL) is a holding company that owns 75% equity in Pakistan’s largest producer of medical and industrial gases-Ghani Chemicals or GCIL. 

In the case of SERF, the group stepped in with an aim to revive the company. This resulted in the Lahore High Court throwing out the winding up proceedings for SERF. The court dismissed the case following shareholder approval of the revival business plan. As per SERF’s website, the company is in the process of changing its name to G3 Technologies with a revised memorandum. Spearheaded under the chairmanship of Aftab Ahmed Chaudhry, former Managing Director of the Lahore and Islamabad Stock Exchange. 

At this point, the company’s financial position was weak. It had a negative net worth and liabilities of more than Rs 210 million outstanding. To make matters worse, approximately 100% shares were free float which meant no majority ownership. In the absence of majority ownership, there is unlikely to be any entrepreneurial stake or leadership to bring changes. However, what they did have was a solid business revival plan. 

The revival plan 

The revival plan for the business entails changing the name to G3 Technologies Limited in order to represent that the company is revising its intended business activities. Changes in the Memorandum and Articles of Association of the company are also subsequently needed. In addition, the authorized share capital was to increase from Rs 160 million to Rs 2500 million.

In addition, a joint venture agreement is being made with Ghani Global Holdings Limited (GGL) to make a joint investment in their “Supercapacitor project”. Super capacitors are electrochemical energy storage devices that store and release energy by reversible adsorption and desorption of ions at the interfaces between electrode materials and electrolytes. These are a modern and more efficient replacement to batteries.

The hope is that the joint venture would result in the manufacturing and sale of super capacitors which will be used in electric vehicles, solar and UPS battery solutions, telecom, micro-grid, locomotives, industrial equipment, energy harvesting, and green technology, etc. in Pakistan. They also plan to export to other countries. The joint venture will be with Kilowatt Labs Technologies Limited (KLTL) as the implanting entity.

The manufacturing facility is to be set up in Faisalabad. To get things going, the Ghani Group’s independent subsidiary, GGL, would make an investment in the now rebranded G3 Technology Limited and G3 would make a joint venture agreement with KLTL and its associates, which would bring expertise, technology, intellectual property, and territorial rights. However, KLTL would have 50% ownership despite only putting in 35% investment because of everything else they were bringing to the table. The remaining 50% lies with G3.

“We plan to capture the Rs 100 bn battery market. The start of production of the super capacitors in Pakistan will enable more efficient storage of energy,” Aftab Ahmed Chaudhry, Chairman of SERF told Profit. ”The first phase will require Rs 1,000 million project cost which excludes the capital requirement. The second and third phases include manufacturing processes and new product lines being added.”

In addition to super capacitors, there are also plans to set up a calcium carbide plant. Ghani Global is in the business of importing calcium carbide. This is primarily used for fruit ripening amongst other uses which include the manufacturing of acetylene, iron, steel, ductile steel, alloys, welding material, and cutting metals. In an attempt to substitute import, the group plans on setting up a calcium carbide chemical plant through SERF.

The country meets its entire calcium carbide demand through imports, mainly from China. This adds around $ 12-15 million annually to the nation’s import bill. The group not only plans to address local demand but aims to make exports worth Rs US$ 3-5 million every year of the chemical.

In a bid to raise funds, the company in a filing to the PSX had informed that it would issue a further 234,116,328 ordinary shares at par value (ie at Rs10 each) by the issue of right shares to be offered to the members in proportion of approximately 1,486 right shares for every 100 ordinary shares held. This means a 1486% rights issue at par value.

Rights issuance is done for existing investors. The investors had the right to subscribe or decline to subscribe. Ghani Group was able to buy approx 29% stake through investors that chose not to subscribe through its associated companies and individuals.

Why is the company on the defaulter’s list?

Before we explain why SERF is on the defaulters list, it is important to know what type of companies find themselves in this segment. A listed company is placed in the defaulters segment for a number of reasons. If a business has not commenced commercial activity such as production or business operations within 90 days of listing, or has suspended commercial production and business operations for a continuous period of one years. Similarly, companies that have failed to hold one Annual General Meeting, and submit their annual audited accounts are also added to the defaulters list. If a company hasn’t paid its listing fee for 2 years, any penalties imposed, or any other dues owed to the PSX or SECP they may find themselves on the list. Issues with the CDS such as revoking CDS eligibility, not joining CDS can result in being put on the list and also result in suspension in trading of shares.

A company can also be placed on the defaulter list if the auditors flag it as a going concern or when a show cause notice for winding up has been issued to the company by the SECP. A winding up petition filed by creditors or shareholders, or voluntary winding up proceedings through a special resolution also land you on the defaulters segment. The last two reasons are more pertinent to know for this story.

SERF was added to the defaulters segment because it has suspended commercial production and business operations for a continuous period of one year and the auditor has flagged it as a going concern in its report for the year ended June 30, 2021. However, this makes very little sense. 

The notice doesn’t make much sense as it has been given based on last year’s accounts. The decision to move the company to the defaulters segment is primarily based on what was said by the auditors for FY 21. Back then the company merely operated as a shell company. Following that, the revival business plan was submitted, an AGM was conducted, and a rights issue was also undertaken.

“This makes absolutely no sense. The business model has changed, the exchange was aware. What good does a default counter do anyway other than hampering price discovery and trading in the market while hurting the minority investor? Such arbitrary decisions by the exchange should be avoided,” says economist Ammar Habib Khan. 

The company is now submitting a response auditors’ certificate that will enable the company’s removal from the defaulters counter. “The Auditor has certified that the company is no longer a going concern,” said Chaudhry.

About the other reason for the placement of the Company’s shares on the defaulters’ counter, Chaudhry said “the Company’s revised Memorandum and change of name matters have been submitted to the CRO, Lahore since July. The approval is expected shortly as the confirmation from a bank for the settlement of a loan from the 1996 period is in process”.

Is the PSX at fault here?

If you look at things technically, the PSX is right to put the company in the defaulters segment as per the rules. However, that raises the question why the PSX waited till after the AGM, corporate briefing sessions, and rights issue to do so. The company had been deserving of being put into the defaulter’s segment for a long time now, and the timing of the PSX is incredibly strange. 

It is even more important to note that while the company was flagged as a going concern, the revival business plan was to be taken into consideration. Moves like this damage investor confidence.

“Without proper interpretation of PSX rules and without reading the business plan and company’s perspective, how can the PSX just make this decision one day and damage investor confidence?” says economist Baqir Jafri. “Either this is a lack of professionalism from PSX management or a case of manipulation to accumulate more shares from the market by market makers and then you will see that company will get out of the defaulters counter.”

While the rules for the defaulter segment exist, it is important to look at companies on a case to case basis. Not doing so will only deter investors to come in and revive companies. Moreover, correspondence with company officials before changing the status of a company is important. This could’ve been explained in a meeting. 

“There are about 122 companies on the defaulter counter. That is equivalent to around 20% of the total listed companies. These companies need to be revived. You will soon hear of our future revival plans,” said Chaudhry.

Ariba Shahid
The author is a business journalist at Profit. She can be reached at [email protected] or at


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