Islamabad: In a significant regulatory intervention, the Securities and Exchange Commission of Pakistan (SECP) has directed Mughal Iron & Steel Industries Limited to halt its proposed issuance of unlisted Class C shares under the Securities Act, 2015. The directive, issued on February 3, 2025, underscores the SECP's concerns over the governance implications of the proposed transaction, which aims to issue 50.00 million Class C ordinary shares.

Mughal Iron & Steel Industries Limited had submitted a draft right offer document to the SECP, proposing to issue these shares at an offer price of Rs. 30 per share. This issuance, which accounts for 14.90% of the company's existing paid-up capital, would significantly alter the company's voting dynamics. The new shares would carry 50 voting rights each but would not be entitled to dividends, bonuses, or right issues. Before this transaction, the company's ordinary shares had 335.60 million voting and dividend rights, fully vested in these shares.

According to information available from the Pakistan Stock Exchange (PSX), the introduction of the Class C shares would create an additional 50.00 million shares with 2,500.00 million voting rights, reducing the voting power of the ordinary shares from 100% to 1.7%, while the dividend rights remain unchanged. Conversely, the Class C shares would see their voting rights surge to 88% without any dividend entitlements. This scenario raised alarms regarding potential perverse incentives and distorted governance structures, as the shares wielding significant voting power would not benefit from dividends.

The SECP analyzed the transaction's implications on corporate governance, shareholder rights, price discovery, fairness, and public interest. The regulatory body emphasized that any deviation from the one-share, one-vote principle should be justified and limited, noting that the proposed transaction seemed a drastic departure from this principle. Concerns were also raised about its fairness to minority shareholders, who might face reduced incentives and liquidity due to the unattractive nature of the unlisted Class C shares.

Stakeholders, including the Pakistan Stock Exchange, Mutual Funds Association of Pakistan, Pakistan Stockbrokers Association, and CFA Society Pakistan, voiced concerns about the potential erosion of investor confidence and market integrity due to the proposed issuance. They highlighted the risks of undermining the capital market's stability and investor trust.

The SECP's directive, issued under section 100 of the Securities Act, 2015, mandates the company not to proceed with the issuance until further notice and requires Mughal Iron & Steel Industries Limited to address the concerns in a meeting scheduled for February 3, 2025. The SECP's stance reflects its commitment to safeguarding public interest, promoting good governance, and protecting minority shareholders' rights in corporate entities.