KARACHI SCHOOL OF BUSINESS & LEADERSHIP (KSBL)

hip (KSBL)

2022
HASCOL FINANCIAL Scandal

It’s all about making money FIA has registered a case

against 30 people,
including former and
current officers of the
NBP and Hascol, on the
basis of evidence found
in an inquiry into bank
default, financial fraud
Ethical Scandals, and Remedial Actions and money laundering
Report of more than Rs54
Assadullah Qureshi billion by the petroleum
M Zeeshan Jaffer
Ibrahim Khan Turk
company.
 Hascol
Scandal

1. Hascol Company

Hascol Petroleum Limited (HPL) is engaged in purchasing, storing and

selling petroleum products such as High-Speed Diesel, Gasoline, Fuel Oil
and Lubricants.
In February 2005, Hascol was granted an oil marketing license by the
Government of Pakistan. Since then, Hascol has been engaged in
developing a retail network under the Hascol brand and has
commissioned over 600+ retail outlets in the four provinces of Pakistan,
Azad Jammu, and Kashmir.
The rise of Hascol began with a "smart and opportunist" management
team taking the company's reigns in 2009. In 2013-14, aggressive
expansion began taking place, and its market share peaked at 12 percent
in 2017-18 – surpassing the likes of Attock Petroleum and Shell Pakistan. It
was reported to offer a substantial retailing and sub-distribution discount
in an industry that operates on razor-thin margins.

The company was listed at PSX in 2014. Its share price increased manifold
within a couple of years – investors were ecstatic. In 2015, Vitol Dubai
Limited (VTL) – a global energy trading giant – bought 15 percent shares
of the company and later increased its holding to 25 percent by 2016. The
company's financials flourished with Vitol on Board. This integrated the
backend supply chain. Everyone was happy and making money.

The dramatic rise was too good to be true. Yet, the Board of directors was
happy – as the company was making money. The banks were happy to
lend as bank spreads were too lucrative.

2. The foreground of the Scandal

In its initial years, Hascol made money by importing and selling furnace oil
(FO). FO sales jumped further after Vitol's investment. It purchased FO on
credit and was able to extend credit to its clients. That is how it increased
its market share and used that money to expand its franchises and storage
capacity.

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Scandal
Throughout its existence, the company has always managed to increase
revenues. It saw a revenue increase from Rs 10.3 billion in 2009 to Rs 274
billion in 2018, with only a slight dip in 2015. Indeed, between 2010 and
2018, the company saw its revenues climb at an astonishing average of
52.7% per year.

What in the world went wrong in 2018 - 2020?

In 2018, when the PKR started depreciating, the situation started

unraveling. At the same time, FO sales started dropping due to RNLG
power plants, exacerbating the financial stress. In the quarter ending Dec-
18, the company showed a loss for the first time. The loss started
increasing in 2019 and 2020.

The Covid pandemic did not help either. In June 2020, all OMCs were under
stress when the international oil prices fell, and the government passed
on the benefit to consumers while companies were holding inventories
(as sales were low in April and May due to the lockdown), and they
incurred inventory losses.

The fall was too steep for Hascol. Their high-cost overheads were
becoming visible. The higher throughput charges and substantial
unsecured credit aggravate their situation. There was no cushion from FO
sales. The hour of reckoning was upon it. The company defaulted on its
loans and has not published its latest accounts – thus on the defaulter's
list on PSX.

The year 2020 has been full of controversies for Hascol. For instance, in
October 2020, the Oil and Gas Regulatory Authority (OGRA) suspended its
marketing and distribution license in KPK. Hascol had been operating
illegal and unauthorized storage and selling of petroleum products (petrol
and diesel) at Amangarh Depot, despite OGRA's clear directives for the
stoppage of operation of Amangarh Depot.

But perhaps most importantly, the company took a whopping Rs7.6 billion
impairments against receivables and revealed hardly any details on who
the counterparties were.

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Scandal
3. The Scandal

Hascol Petroleum Ltd (HPL) through its directors/management, in

collaboration with directors on behalf of its stakeholders -- M/S Vitol Dubai
Ltd, Fossil Energy (Pvt) Ltd, Marshal Gas (Pvt) Ltd, and officials of NBP and
other commercial banks -- from 2015 to 2020 in the form of bank loans, and
funded and non-funded financing facilities, which were granted to Hascol
by the NBP in violation of prudent banking laws and practices, which
amounted to criminal breach of trust, causing a wrongful loss to the
NBP/national exchequer and wrongful gain for Hascol.

The total default of 14 banks was Rs54 billion. The default of the NBP was
Rs18 billion alone. FIA inquiry substantiated the following illegalities and
infractions committed by the sponsoring directors and officers of HPL in
collaboration with the then-sanctioning, implementing and monitoring
officers of the NBP. HPL's first significant borrowing relationship was
initiated with the Summit Bank in 2009, which remained its main banker
until the entry of the NBP.

NBP granted its first facility of Rs2 billion to HPL on June 16, 2014, in
response to HPL's request. As if these rapid enhancements were not
enough, the NBP further enhanced its LC facility on October 8, 2018, by
another Rs18 billion and increased the NBP's total sanctioned limits to
Rs21.65 billion.
NBP opened fake LCs to the tune of Rs95 billion for Hascol in favor of Byco
Petroleum. No fuel was underlying for this quantum of LC, and these were
opened only to increase the liquidity in Hascol. Other banks, including the
NBP, opened non-product LCs to Rs540 billion for Hascol. Hascol and Vitol,
through over-invoicing, transferred $42 million illegally outside Pakistan.
Insiders suggest several methodologies were used. They insist that higher
FO margins partly financed credit sales; by selling fuel close to port while
booking sales at far-flung areas to pocket inland freight equalization
margin (IFEM).
The company was opening usance(deferred payment) LC (letter of credit).
OMC business needs higher working capital (WC) financing, which is
extended to LCs. It is a high-margin business, and banks were happy to
lend and make easy money.

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 Hascol
Scandal
Hascol, in talks with banks, offered to partially convert debt into equity
and restructure all of the company's short-term debt into long-term
facilities. The banks seem to have no choice but to play ball.

4. Hascol Replies to Scandalous Allegations

Hascol Petroleum Limited has issued a detailed clarification over the

allegations doing rounds on social media and messaging apps. The
company has denied the allegations, saying that the recent Scandal
regarding fake purchase orders does not relate to oil imports. Hascol also
admitted in a letter submitted to the Pakistan Stock Exchange (PSX)
manipulation in the accounts of 2019 and reported that it had accepted
the external auditor Grant Thorton for 2020 with immediate effect. PSX
Hascol Petroleum Limited has been excluded from the list of SLB, MF and
MTS Eligible Securities with immediate effect from June 28, 2021. The
NCCPL informed the PSX in a notice on Monday that the company had
allegedly been involved in the misleading reporting of import figures for
oil.

➢ The trigger point of the Scandal

Auditors Resign
Most unusually, the company's auditors, EY Ford Rhodes, resigned as co-
auditors. It is always a cause of concern when an auditor resigns –
particularly when it is one of the 'big four' firms: Deloitte, PwC, Ernst &
Young, and KPMG.

Essentially, it boils down to this: it is very stressful to be an auditor for a

Pakistani company. There is immense pressure from the global heads of
accounting companies on their local Pakistani subsidiaries to apply an
extra layer of scrutiny on Pakistani companies. Why? Because the world
does not trust them. It is an unfair assumption, but it explains why auditing
companies are extremely wary of having real estate companies in Pakistan
as clients. It is simply too dodgy.

Simply performing poorly is no indication of fraud. But since Hascol has

performed so poorly, it is also likely under immense pressure to perform
and show better financials. EY seems to have wanted a fair amount of
distance between itself and Hascol. When contacted, the CEO was

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 Hascol
Scandal
unwilling to disclose why the auditor resigned, despite multiple attempts
at contact.

Change Management

In 2019, Mumtaz Khan (Chairman of HPL) had this to say:

"The same management was delivering excellent results. Between 2011
and 2017, we were growing very rapidly. They are competent people and
they are all professional people. There is no one from my family like a
nephew or son or something. The company has been run professionally
just like Shell or Total…It is a professionally run company. That is why Vitol
has taken shareholding. The management, they are good people,
competent people, honest people. And they have been delivering good
results often. Every company faces bad times."

So much for that. 2020 has been a series of revolving doors for major
management members. First, let us look at the CEOs. On February 19, *-
+2020, Saleem Butt resigned, citing personal reasons. On February 24,
Waheed Ahmed Shaikh was appointed CEO. Shortly afterward, on April 2,
Aqeel Ahmed was appointed as CEO. On September 17, he was
reappointed as CEO. On September 22, just a few days later, he resigned
as the CEO of Hascol Lubricants, a subsidiary, and Adeeb Ahmed was made
the CEO instead.

Now, for the CFO (an important job, considering the state of the
company's financials. On February 19, Khurram Shehzad ceased to be CFO,
and Muhammad Ali took his place. On July 17, the two CFOs were swapped
out (Khurram became CFO again). Then on September 10, Shahid Bhutto
became CFO before resigning from that position on January 22. The
position is yet to be filled.

And finally, the chairman. On March 31, Mumtaz Khan was replaced with
Alan Duncan. He has the most colorful past lives of all the people
mentioned so far: he was a director of Vitol Dubai Ltd., the parent
company.

5. Corrective Actions on the part of Hascol

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 Hascol
Scandal
Vitol started taking more control of the company by acquiring shares of
the then chairman and CEO and brought in new management that
disclosed to banks that the company's loans must be restructured if the
default was to be avoided.
The consortium of banks is negotiating with the new management. Banks
need to understand that they have to take a haircut. They will live in a
fool's paradise if they expect a full recovery. The other problem with banks
is that each tries to undercut the other by insisting that it has the first
charge. Each bank wants to recover its full amount, but in the process,
everyone would lose. It has happened in the past, and it can happen now.
In game theory, it is referred to as the prisoner's dilemma.
The other problem is that banks have to trust Vitol. The company must
restructure. Banks will convert part of their debt into equity and part of it
into long-term financing. Then the company would need working capital
to revive. For this to happen, banks would need to put more money into
the company. They are contemplating putting good money into bad in
anticipation of turning bad into good.

6. Ethical and Moral Lapses

a. Ethical System of HPL

Hascol Business Ethics charter from 2015 annual report.

"We have a Business Ethics Charter by the name of BUSINESS,
COMPLIANCE & ETHICS GUIDELINE that dictates our commitment to fair
dealing and highlighting ourselves as a professional entity in the oil
marketing sector. Our initiative is to avoid any consequential events due
to non-conformance of local and foreign legislation and be subjected to
penal scrutiny. Apart from General Business Principles; Hascol Petroleum
Limited has placed this additional guideline for its operational
engagement with the relevant stakeholders."
There appears to be a difference between HPL's management's words
and actions. Overall scam doesn't show compliance with the statement.

b. Corruption in Mafia Style (Mutual Profit Interests)

HPL used to siphon off funds through mediators to bribe their bankers. In
just one such instance, cheques for Rs117 million were issued by HPL to
Tahir Ali and his several companies without any underlying contract(s).

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 Hascol
Scandal
NBP credit heads Reema Athar and Irtiza Kazmi were the key players in
maintaining credit lines for HPL; Reema Athar remained a director in
Clover Pvt Ltd, a company owned by Saleem Butt, and also remained a
director on the Board of Fossils Energy, a subsidiary of Saleem Butt (CEO
of HPL).
Two NPB presidents, Syed Iqbal Ahmed Ashraf and Saeed Ahmed, have
prima facie abused their official position as public servants while
sanctioning through their credit committees the above huge financial
facilities to the HPL.

c. Focus on Profit only

The Hascol management was desperate and in a beg, borrow, steal frame
of mind. But the saga of the scam also reads like an indictment of the
regulators, courts, auditors, Byco and even the banks. They were focusing
on their business interests without due diligence or fraud assessment.

7. Literature Review:

a. The News July 27, 2021

ISLAMABAD: The Senate’s Standing Committee on Petroleum on Monday
expressed serious concern over the massive corruption scandal of multi-
billion rupees in Hascol Petroleum by its top management and summoned
SECP, State Bank, Ministry of Petroleum, FIA and other relevant
departments in its next meeting.
The committee met in the Parliament House on Monday with Senator
Abdul Qadir in the chair and discussed this huge corruption in this public
listed company in which tens of billions of rupees of investors had sunk.
Senator Afnan Ullah Khan said that the management of Hascol had made
Rs7.5 billion of fake purchase orders while its Chief Executive Officer (CEO)
has done fraud of Rs8 billion in oil. This company has made accumulative
fraud of around Rs75 billion. He asked the chair to summon the relevant
investigative bodies to know their progress in the case.
Senator Mohsin Aziz said that this committee should hold a combined
meeting with the Senate’s Standing Committee on Finance and review the
case and progress.
Senator Saadia Abbasi said it would be appropriate that the committee
summoned all the relevant ministries, SECP, SBP, FIA to know its status
and, if required, ask for stern action as it involved huge losses of investors.
The committee unanimously decided to summon these ministries and
departments and hold a one-point agenda meeting in a few days.
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 Hascol
Scandal
The committee was briefed on the steps taken to promote foreign
investment in the oil and gas sector in the country. The secretary
petroleum informed that the Pak-Russia pipeline would be 1,040-km-long.
This will cost 2.25 to 2.5 billion dollars and is being built under G2G
arrangement.
The standing committee was informed that there is a GIDC of Rs790 billion
out of which till April 2021, Rs321 billion had been recovered and deposited
in the national exchequer. The remaining Rs473 billion was to be
recovered from various parties. The committee was further informed that
there was a high court stay on the recovery of Rs356 billion. The CNG
sector has also been given a GIDC waiver of Rs50 billion. The standing
committee postponed the rest of the agenda till the next meeting.

b. DAWN January 24, 2022:

KARACHI: The Federal Investigation Agency (FIA) on Sunday arrested
Mumtaz Hasan, founder of Hascol Petroleum Limited (HPL), in an Rs54
billion scam.
Director of the agency’s Sindh Zone Amir Farooqi said a total of 30
suspects — including present and former top officials of the National Bank
of Pakistan (NBP), HPL and other organizations — had been booked in the
case and that efforts were under way to arrest the remaining suspects.
The FIA Sindh’s chief described the scam as the “country’s biggest
financial fraud” that was committed by the HPC in connivance with the
NBP’s top management and those of other commercial banks, who would
be investigated separately.
“During the period (from) 2015 to 2020 in the shape of bank loans, funded
and non-funded financial facilities were granted to the HPL by the NBP in
violation of prudent banking laws, and practices, which amount to criminal
breach of trust causing wrongful loss to the NBP/national exchequer and
wrongful gain to HPL,” said documents seen by Dawn.
Agency’s director says a total of 30 suspects booked in the case
Mr Farooqi said the total amount of default stood at Rs54bn, of which
Rs18bn pertained to the NBP alone.
Sharing details of the FIA inquiry, he said Hascol’s credit line was increased
by NBP presidents and credit group officials from Rs2bn to Rs18bn against
‘weak securities’.
The NBP’s credit heads, namely Reema Athar and Irtiza Kazmi, were the
‘key players’ in the episode.
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Scandal
Ms Athar was a director at the Clover Pvt Ltd, a company owned by Saleem
Butt, a co-accused, and also served as a director on the board of the Fossils
Energy, a subsidiary of Saleem Butt’s company.
The NBP opened fake letters of credit (LCs) to the tune of Rs95bn for
Hascol in favour of Byco petroleum. The official said Byco’s part (now
named Cnergyico) will be investigated as a separate criminal inquiry.
“No fuel was underlying for this quantum of LC and these were opened
only to increase the liquidity in Hascol,” said the FIA director.
Apart from the NBP, several other banks opened non-product LCs to the
tune of Rs54bn for Hascol.

“Hascol and another company Vitol (exclusive supplier of POL products to

HPL) through over-invoicing transferred $42 million illegally outside
Pakistan,” said Mr Farooqi.
He alleged that “Hascol siphoned off funds through fake contractors to
the tune of Rs117 million”.
In addition to possible money laundering, the FIA is also looking into the
possibility of tax evasion by Hascol of up to Rs5bn.
According to the FIA documents, HPL was incorporated by Mumtaz Hasan
as a private limited company in 2001 for procurement, storage and
marketing of local/imported petroleum products, chemicals and LPG. It
was converted into a public utilized company in 2007 and listed on the
Pakistan Stock Exchange in 2014.
The HPL’s first significant borrowing started with Summit Bank in 2009,
but the NBP entered the scene in 2014 when it gave Rs2bn to it “in
response to HPL’s request addressed to accused Ms Reema Athar who
had moved from Pak-Iran Investment Company (PIIC) to the NBP as its SVP
(senior vice president)”.

Conclusion / Ultimate Looser

Nothing is bad in business, and it is the survival of the fittest. In the

corporate world, the only moral obligation for the employee is to earn
profit for the company.

It is one of the biggest sagas of incompetence and corruption in Pakistan.

The major loss was on NBP, a government bank, and the share lost its
value. Therefore, the ultimate loser is the general public and the people.

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 Hascol
Scandal
A business organization that embraces ethical ways of conducting its
business affairs is more likely to achieve employees' commitment, loyalty,
and satisfaction which in turn lead to quality of work and increased
performance and this can happen Vice versa as well if the company
doesn’t value ethics in general or indulges in unethical business practices.

Similarly in the Hascol case, the company got involved in unethical

commercial practices and fraudulent activities. It falsified its books and
financial statements in 2019, it also created a series of false purchase
orders and entered into the company’s books. This, coupled with
mounting losses resulted in the company's share price tumbling from
over Rs. 300 in 2018 to about Rs. 5 in 2021, and the Pakistan Stock
Exchange declaring the company to be in default.

The company had its assets frozen by the High Court of Sindh upon the
request of the company's creditors. In addition, the company also lost its
good fill and trust among internal and external stakeholders. Hascol
denied all allegations and accepted resign for its external auditor.

The company has resumed its operations but its goodwill and trust have
been badly hampered. It has become a high-risk investment option. Hascol
Petroleum Ltd real-time share price is equal to 6.800 PKR at 2022-12-20,
but the current investment may be devalued further in the future.

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