In a perfectly functioning capital market, it is the role of the exchange to be the first regulatory body which looks out for the little guy. Investor confidence is built on the fact that when they take an investment decision, it will be protected and looked after by the regulator who calls the balls and strikes as it sees them. In the context of Pakistan, it seems that the exchange has a lax view. The latest case of this is Chakwal Spinning Mills.
Usually it is seen that the market is left to function unhindered in order to allow the demand and supply to lead to price discovery. An unfettered market is supposed to allow for the market to function smoothly with little uncertainty and interruption. In the case of Chakwal, the exchange was not able to force the company to follow the applicable regulations and then even contributed to the mess in the end. This is the story of how the exchange forgot to apply its own regulations properly while jumping the gun and then having egg on its face. While the exchange looks to save some grace, the cost of this fiasco is still weighing on the exchange as the investors are seeing their investment crumbling in front of their eyes.
To comprehend what has happened here, there is a need to step back one year into time. In November of 2023, Chakwal was a company which had not been operating for almost 6 years. Way back in 2017, the company had stopped manufacturing and had leased out its premises to Yousuf Weaving Mills Ltd. The company was sustaining losses and was accumulating them on its accounts. Due to its rising liabilities, the banks were knocking the doors of the courts in order to recover their outstanding dues. The situation had gotten so bad that the auditors felt that the company could not sustain itself and it was no longer a going concern.
Faced with these challenges, the company was touting a plan of a reverse merger where it was going to merge with another company in order to survive into the future. It was trying to come up with business plans and contingencies which were being argued and litigated in the courts. With accumulated losses of Rs89 crores and a negative equity of Rs13 crores, the liabilities were increasing day by day. At this point in time, the share price of the company was hovering at Rs1.27 per share which showed that the market was not valuing the company much higher based on its conditions. The exchange had placed the company in the defaulter segment. This might sound jarring to an investor but the exchange places certain companies in the segment to make the investor aware that the company has breached certain regulations of the exchange. Chakwal had been placed on this list as it had not restarted production for more than one year.
For the time being, the best course of action for the company was to carry out cosmetic changes like revaluing its plant and property to turn its equity positive. In terms of operations, it announced that a memorandum of understanding had been signed with an Information Technology related company and things were looking up as a debt restructuring plan was in the works. In January of 2023, the board announced that a merger had taken place between Chakwal and one of the largest technology companies of Pakistan which had presence in USA, UAE, Philippines and China.
While these developments were taking place, the stock price of the company saw slight changes. During November, the price was around Rs1.5 per share which increased to Rs12 by December end.
With progress taking place on this front there were talks of changing the name of the company in order to suit its new business as well. In February, the board changed the memorandum of association of the company by February 2024 and by July this was carried out. The stock price kept increasing while this was taking place in the background and hit a high of Rs50 by July of 2024.
This is where things start to go a little awry.
After the formalities of the name change had been carried out, the board approved the new name of the company as Quantum Cloud & AI Technologies Limited. In order to suit the name of the new company, they applied for the ticker symbol to be changed at the stock exchange as well. On the 12th of July, the board approves the name change and on the 25th of July, the stock exchange informs the market that the symbol will change from the 29th of July 2025. Sounds innocuous enough. The problem with this? The board has to get this move approved in an extraordinary general meeting that is to be held on the 2nd of August. Why and how did the Pakistan Stock Exchange (PSX) change the name even before the approval from shareholders was taken is a mystery. The exchange seems to be too antsy and desperate to approve the symbol change for starters.
The new symbol opened at Rs55 and increased to Rs 156 in less than a month. This was an increase of almost a 100 times from where the stock price was in November of 2023. It has to be noted that till now, only a merger was announced and nothing credible had been stated or presented by the company which could justify this price. Even when the exchange asked the company to provide rationale for the price increase, they stated that they had no material information in this regard.
On 2nd August, the shareholders resolved to change the name of the company after the symbol had already been changed. It seemed like PSX had gotten away with it. On the 9th of August, the company restated to the exchange inquiring about the reason behind the price increase and the company again reiterated that it had released all material information and there was nothing that needed to be disclosed.
But was it being honest?
News broke on the 5th of August 2024 that Huawei had joined hands with Quantum Cloud & AI and formed a strategic alliance going forward. The next disclosure that was made by Chakwal was that it had signed a term sheet worth Rs7.784 billion with PNO Capital to launch a data center and cloud operations in Pakistan. The investment would mean an injection of Rs 0.5 billion in Chakwal Spinning Mills after the sponsors of the company put up Rs 0.4 billion of their own equity injection. The remaining Rs 7.284 billion is a convertible bond of 3 years with an annual coupon of 10%. The company will be able to use these funds to pay off some of its liabilities owed to banks and be able to restart operations with a lower cost structure. There was no mention of any strategic alliance with Huawei till now.
Around this time, news had started circulating in the market that the company was involved in alleged insider trading with investors and the company was being investigated by the Securities and Exchange Commission of Pakistan (SECP). The company came out to defend itself stating that it was not involved in any such activity. A letter was also sent by PSX which needed clarification from the company. The Huawei deal should have been disclosed by the company as soon as it was formalized which it had not done. The company stated that it had not released any news to the media and their vendor had done so. According to the PSX regulations, the company should have disclosed it to the exchange which it did not. The company further stated that it had not gotten the documents from the SECP which it had applied for on 7th of August 2024. It was going to disclose the information to the market once these certificates had been issued by the SECP.
But it seemed that the saga was not over. While the market kept trading the company under the symbol named CLOUD, the SECP wrote back to the company that it had refused the application of the company to be able to change its name. The paperwork that had been sent to the SECP had been rejected and it was communicated to the exchange that the request had been refused. So now PSX had to walk back its decision to change the symbol being traded. A move that should have happened after all the necessary approvals had been received, it seems like the exchange was a little too trigger happy to carry out the change. The exchange had to take back its decision and carry out the necessary disclosures to communicate this reversal taking place. The question is then raised, why was the name changed in the first place without prior approvals? What was the hurry?
The cost of these decisions falls on the investors who were investing in the company from the get go. The share price of the company had started from Rs 1.5 in November and hit a high of Rs 156 when things were looking up in August. Currently, the share price is hovering at Rs 50 and the outlook is negative on the company going forward. The whole episode has shown that the PSX needs to implement its own rules and regulations in a much better manner in order to oblige the companies to make the proper disclosures and announcements to make sure the people are aware. In addition to that, the exchange also needs to follow rules and regulations itself rather than facilitate certain companies which can harm the image and trust of the investors in the exchange as a regulator and the market as an avenue of investment. The way the PSX had stumbled over its own tale goes to show that even a small scar on the trust of the consumer has a lasting impact.
