In June 2006, Dewan Mushtaq Group’s (DMG) sales were over $665 million. It was under a long term debt of $175 million on the books and posted a net profit of $5.8 million. A year later it announced its first net loss ever recorded. And a year later it was Pakistan’s largest bank defaulter.
The scale of DMG was unprecedented. It was the largest manufacturer of polyester, produced cotton yarn, ran the biggest sugar mill, assembled Kia Classic, Hyundai Santro cars and Star bikes. It owned a cement company that had plants in south and north and its Dewan Petroleum was sitting on 235 billion cubic feet of gas reserves. The group was a distributor of BMWs and Rolls Royce and ran multiple businesses on the sideline including DMART shops. Sixteen thousand employees were on its payroll.
Dewan had never before defaulted on any loans. Its flagship Dewan Salman Fibre was the best rated private company in the country throughout the 1990s. In terms of industrial diversity, few Pakistani groups came close to matching them. They had nine listed companies.
“The question is if the drastic decrease in the group’s turnover 2007 onwards, which triggered the defaults, resulted from its failure to sell the produce or its inability to buy raw material,” remarked the ex CEO of a bank.
The answer to this question lies in a fateful meeting in 1992 that was held behind closed doors in Islamabad.
From Patiala to Haripur
Almost every successful Pakistani business has had ties with some pre-partition trading community. Memons, Bhoras, Khoja Ismailis and Isnasheris, Chiniotis and Punjabi Sheikhs. The Dewans belonged to none. They came from India’s east Punjab region of Patiala.
The family’s oldest registered company, Sh Dewan Muhammad Mushtaq, dates back to 1912. It was established by group founder Dewan M Mushtaq Farooque who traded in used garments. He would buy clothes in Karachi and sell in Delhi.
The family migrated to Karachi soon after partition and, in 1948, established Dewan Mushtaq Sons, housed in a small shop at the North Napier Road.
It is believed that “some curse” followed them from Patiala as every achievement was preceded by a family tragedy.
Dewan Khalid, the eldest son, died after a brief illness in 1958. Dewan Mushtaq himself did not live to see the family’s first factory and passed away in 1968.
On August 7, 1970, the foundation stone ceremony of Dewan Textile Mills, their first cotton spinning unit, was being held in Kotri. That was a big day for the family. Dewan Mushtaq’s wife, their second youngest son Noman, 30 and a daughter were on their way with some other family members when the car crashed on the highway. The three of them were killed.
The entire responsibility to look after the family and its interests fell on the shoulders of 36-year-old Dewan Umar Farooque, the second eldest son. After matriculation, he could not pursue education and helped run the shop.
He showed business acumen by becoming a major importer of second-hand clothes and tea within a few years. Eventually, he rose to the top of the Pakistan Secondhand Cloth Merchant Group and Tea Traders Association of Pakistan.
Between 1970 and 1978, Dewan Umar along with his younger brother Dewan Salman set up two more textile spinning units in Kotri and Hyderabad.
They also set up Pakistan’s largest sugar mills with a production capacity of 5,000 tons in Thatta.
By December 1988, the DMG’s four listed companies had a combined revenue of Rs1.5 billion. Dewan Textile’s share price was at Rs62. There was zero debt on the three textile units, which together were among the five largest spinning companies in the country.
It was time for DMG to embark on the most ambitious project — the largest polyester stable fiber (PSF) plant.
The use of man-made fibre had grown in Pakistan as price of cotton shot up due to shortages. Between 1981 and 1988, demand rose on a compound annual growth rate of 23% to 78,000 tons. Half was met through imports.
DMG wooed Japan’s Mitsubishi Corporation and Sam Yang Company of Korea to be equity partners in a polyester fibre plant with an annual capacity of 52,500 tons. Mitsubishi provided most of the financing.
Work on the project was completed in a record 19 months and production started on January 1, 1992. The PSF was branded Salsabil, which in Arabic meant the lake of paradise.
It was an industrial undertaking never seen in the private sector before. Initially christened as Salamese Fibre, it was spread over 140 acres. It had a staff and executive housing colony including a guest house and bachelors’ hotel. There was a labour colony that included a sports centre.
The project was located in an isolated place called Hattar, in district Haripur of North West Frontier Province because of tax exemptions on investments made in the area.
Just when work on Dewan Salman Fibre was being completed, DMG started to feel the heat from other PSF makers who were not in the incentive area and did not enjoy tax benefits.
Little over three months after production commenced, PSF producers called a meeting to discuss the issue. Dewan Umar Farooque was already suffering from heart complications.
On April 8, 1992, he flew to Islamabad where executives of another Lahore-based polyester company met him at the airport and assured him that they wouldn’t protest against the tax exemptions.
But later that day, the entire industry ganged up against him. He suffered a cardiac arrest during the meeting, succumbing a few hours later, not living to see even the first financial statement of his most cherished achievement.
Dewan’s decade of war
The fateful day was a watershed event for the businesses as president Ghulam Ishaq Khan promulgated the Protection of Economic Reforms Ordinance 1992.
Nawaz Sharif took over in 1990. Privatisation programme was in full swing. MCB Bank, Millat Tractors and Maple Leaf Cement had already been handed over to private investors. More selloffs were in the pipeline and investors sought protection.
The ordinance guaranteed private ownership and stopped the government from taking over privatised organizations. Another provision, which was particularly important for industrial ventures, was protection of fiscal incentives given to encourage investment.
The two key ingredients for making PSF – pure terephthelic acid (PTA) and mono ethylene glycol (MEG) – had enjoyed sales tax exemption since 1981. Both of them were imported. On May 14, 1992, sales tax of 12.5% was imposed on them.
Dewan Salman Fibre was located in Hattar Industrial Estate where the imported raw material reached after zigzagging 1,435 kilometers. The nearest customers were 400km away.
The incentive package for Hattar included sales tax exemption till 1997 and income tax holiday for nine years from the start of production. But sales tax benefit was on the sale of PSF and not the raw material.
Its imposition diluted the incentive for locating the plant far away from spinning companies in Karachi and Faisalabad. DSF’s competitors had won the first battle since they could offset the tax on polyester fibre against what they paid on raw material under the tax refund regime.
Despite the setback, the DMG under the leadership of Dewan Umar’s eldest son Dewan Ziaur Rehman was on its way to make history.
To regain the DSF’s cost advantage over competitors, it was decided that another unit would be added with a capacity of 56,000 tons. Unit II needed an investment of over Rs2.5 billion. There was no way local banks could fund that, especially as the government had limited the role of state-backed development financial institutions.
Something unprecedented tried
To raise funds, DSF went to international capital markets with Pakistan’s first and only Euro Convertible Bond issue by a private company to date.
Citicorp International and Hong Kong’s Crosby Securities came forward as underwriter and managers. Barclays, Bears Stearns, Baring Brothers, Nomura International, Societe General and others were part of the consortium. Road shows and meetings were held in Hong Kong, New York, Boston, Geneva, Zurich and London.
The convertible bonds were floated on May 5, 1994 with an overwhelming response from international investors. The company easily raised $45 million.
This feat propelled Dewans to the world stage. DSF had the second highest capitalisation at the Karachi Stock Exchange, literally deciding the fate of the daily index.
A few months later, DMG organised Pakistan’s first Euro money Conference in Karachi. It took Dewan’s reputation even higher. Delegates from around the world participated, including the best private equity firms, which stood ready to do business.
Production at the new unit began on June 15, 1995 following completion of work in a record 12 months. This took DSF’s overall capacity to 108,500 tons, making it the largest PSF producer in Asia — even ahead of India’s Reliance. The unit also enjoyed tax exemption including the income tax holiday till 2004.
Walls closing in on DMG
The noose around DMG’s fibre project was getting tighter.
One after another such policies were introduced by successive governments of Pakistan Peoples Party and Pakistan Muslim League-Nawaz that sales tax concession was diluted.
Sales tax of 12.5%, which was imposed in 1992 on raw material, was increased to 15% in 1994. When production from Unit II began another blow came in the shape of a change in official policy.
The sales tax on the PSF was reduced to 10% and excise duty of 5% was levied instead. The move was specifically aimed at DSF as it eroded company’s profit.
Hardest fiscal hit came in the 1996-97 budget as sales tax was imposed on the textile industry. DSF customers were now asking for a tax invoice. The company grudgingly relinquished its right to sales tax exemption.
“Your company has been methodically persecuted and placed into a tremendous disadvantage compared to other PSF players,” the company told shareholders in financial statements of 1995-96.
“All this is being done at the behest of competitors under the lead of a so-called multinational origin company which is famous in portraying itself as the most fair, ethical and professional player,” it wrote in another.
Entire feasibility of the DSF was based on the premise that it won’t have to pay tax on raw material or PSF. Everything from its financial close, interest rate, operational costs including the pricing was based on it.
By December 1996, import of PSF was taking toll on local producers yet new players – Dhan Fibre and Ibrahim Fibre – were entering the market. ICI had also expanded capacity to take country’s total output to 400,000 tons, at least 100,000 tons more than the demand.
Dhan, which means wealth, was also located in Hattar. From the start, this venture of Lahore-based Chakwal Group remained under attack from predatory investors who aimed for a hostile takeover.
The company approached DMG with a buyout proposal. After protracted negotiations, which went on for a couple of years, Dewan Zia finally decided to buy Dhan in 2000.
When DMG bought Dhan Fibres after paying Rs4.2 billion for a 67% stake, it was the largest takeover in Pakistan’s corporate history.
The combined capacity of the merged entity was close to 200,000 tons a year. More money was spent to take it up to 245,000 tons the same year.
In the same year, the company had also spent substantial money on building a 25,000-ton per year acrylic fibre and tow plant to make premium synthetic products. “This was a blunder. The plant was old and the market was not big enough for acrylic,” said a former DSF official.
Even as far back as 1999, internal finance managers at DMG were raising red flags. “There were people who resisted the expansion,” recalled a finance director.
“They were hoping to undercut the competition in polyester fibre business by having economies of scale. But money was being spent in many other non-core businesses.”
By June 2001, Dewan Salman Fibre had sales of Rs17.9 billion with net profit of Rs630 million. It had a long-term debt of Rs5.4 billion. The same year it settled entire foreign debt taken to finance the Unit II.
Three years later Dewan Zia set up Dewan Petroleum, 30% of which was owned by DSF.
The ‘Arabian stallion’
If Dewan Zia was a strategist then his younger brother Dewan Yousuf was a master executioner.
Dewan Umar’s second eldest son, Yousuf, was confused and frail as a kid. He would fall sick in his father’s absence. This became such a worry for the family that he was moved to Hyderabad where he would be close to his father.
He completed his matriculation from Hyderabad’s St Bonaventure’s High School and B.Com from Government Commerce College, Karachi. He might not have spent time with the Japanese like Dewan Zia but his raw energy would prove to be enough.
“This son of mine is an Arabian stallion,” Dewan Umar once told a gathering of family friends. “He runs so fast that he can win any race. But who will control him?”
While Dewan Zia called the shots at Dewan Salman Fibre, Dewan Yousuf managed the sugar mills. Similarly, the other brothers and cousins had varying degree of involvement with other sister concerns.
By 1998, Dewan Yousuf had come of age and wanted to play his part in adding to the group’s prestige. He infused new life into DMG.
A staunch believer that the auto industry propels real economic growth, he incorporated Dewan Farooque Motors Company Limited (DFML) in December 1998.
“In Europe it’s like every other person is associated with the auto industry,” he says.
When it comes to cars, Pakistanis have had limited options. Experiencing other manufacturers, particularly Korea’s Kia, had been unpleasant.
Naya Daur Motors was the first to introduce Kia in 1994. According to court filings, the company took over Rs800 million as booking fees from 16,000 people. Only a few hundred vehicles were delivered before the company went bankrupt.
But Yousuf entered the market on a strong footing. Named after his father, the Dewan Farooque Motors had agreements with Hyundai and Kia to assemble and sell their vehicles in Pakistan.
The plant built in rural Sindh’s Sujawal area at a cost of Rs1.8 billion was completed in seven months. It was the first automaker in the country to have robotic paint machines.
After a tumultuous decade, Pakistan entered a period of economic growth in 2001. Low interest rate and proliferation of consumer finance shot up demand for cars.
With the capacity to make 10,000 vehicles a year, DFML produced 95,429 vehicles between 2000 and 2011 which included Kia Spectra, Sportage and Hyundai’s Santro. It also sold 50,000 Shehzore trucks, which still dominate the one ton-truck category.
The sales revenue of Rs3.3 billion in 2001 would go up to Rs10.6 billion in 2006. It will post a net profit of Rs840 million for six-year period.
“Historically, Pakistan’s per capita usage of cars has remained low,” Dewan Yousuf says. “From 1993 onwards, car sales remained stagnant at 30,000 units a year. It goes to our credit that we helped revive an industry.”
DFML was the first to introduce car leasing through Askari Leasing.
Industry people say this was the time for DMG to slow down and consolidate. But there was no stopping Dewan Yousuf. He had big plans. He wanted to set up Dewan City at Sujawal where vendors would eventually localise every auto component.
In 2003, DMG invested in Dewan Farooque Spinning Mills — till then the most advanced spinning mill with 28,800 spindles to be set up in Kasur, Punjab.
The expansion binge had started. He bought Allied Motors Limited, a troubled tractor company. He would use its plant to launch Star bikes in a few years.
Sugar mills were expanded by adding polypropylene plant with the capacity to produce 2.5 million bags a year. A 125,000 litre-a-day industrial alcohol plant was built at a cost of Rs500 million to utilise leftover molasses.
The sugar company also imported fertiliser, wrapped it up in its own polypropylene bags and sold it to farmers under the brand “Salsabil.”
He also bought three more sugar mills – Khoski, Al Asif and Bawany.
But in 2004, Dewan Yousuf took a step which would pit him against many businessmen, including his own brother – Dewan Zia.
Tariq Mohsin Siddiqui, chairman and CEO of Pakland Cement, was in a desperate situation. His company owned cement plants in Karachi and Hattar with a combined capacity of 1 million tons. The once prolific corporate leader was also a victim of the government with regards to tax exemptions.
He had taken too much debt to complete cement production lines and was stuck in a quagmire of financial difficulties. Bankers were calling for liquidation.
Dewan Yousuf bought the company in 2004 for Rs1.1 billion in cash. He did that against his brother’s advice.
“Everyone had something bad to say about Tariq. They said that there are technical problems with Pakland,” Dewan Yousuf says. “But I saw things differently. It was a good investment.”
There were businessmen who wanted to pick up the pieces after the fall of Pakland. Dewan Yousuf did the honourable thing — he paid a fair price for the asset.
What many people don’t know is that after taking over Pakland, he had placed an order for Loesche’s cement mill in 2006. The powerful vertical mill, which is far more efficient than any existing plant in the country, would have made it unbeatable in Karachi. By 2008, the plant was ready to be installed. But by then it was too late.
To have is to owe
For the first time since its inception, Dewan Salman Fibre announced a loss in fiscal 2005. Just a year earlier, it had netted Rs327 million in profit.
The loss was a result of multiple factors. In the last few years, DSF’s tax concessions had expired and it was paying more in logistical cost because of its plant location in Hattar. Global PTA and MEG prices had also shot up, squeezing the margins of PSF makers.
But the loss should have been a one-off event considering the size of the company and the rising demand for polyester fibre. Instead it would cascade into problems for the entire group in just 24 months.
DSF incurred a further loss of Rs119 million in 2006. Its sales also took a hit, dropping to Rs16.7 billion from Rs21 billion just two years earlier as it faced difficulty in convincing banks to lend money to buy raw material.
Bankers had started to express their uneasiness over all the other companies.
By the end of next fiscal year in June 2007, DSF’s loss jumped to Rs808 million, machinery was running at only 20% capacity as other PSF producers ate into DSF’s market share.
Contrary to what is generally believed, the long-term debt of the nine listed firms was still Rs12.47 billion, a major chunk of which – Rs7.5 billion – stemmed from the acquisition of Pakland Cement, while group’s total sales were Rs38 billion.
This was also a tumultuous year for Pakistan. President Pervez Musharraf had sacked Chief Justice of Pakistan Ifthikhar Muhammad Chaudhry in March and lawyers were clashing with police in different cities.
All this coincided with differences between Dewan brothers that now came out in the open.
A few years back, Dewan Zia had moved to Islamabad from where he was running DSF and Dewan Petroleum, distancing himself from all the other firms.
“It was their mother who held the brothers together,” said a family friend. She passed away in 2007. The same year Dewan Zia handed over the group’s chairmanship to Dewan Yousuf and disappeared from public life.
Immediately after taking charge, Dewan Yousuf set upon re-profiling liabilities of the group companies. He faced two immediate challenges of negotiating a plan to defer current liabilities of DSF and refinancing the debt of Pakland Cement.
Dewan Yousuf was feeling the vibes of what would happen if time was wasted. In the last few months, banks had refused to fund Pakland’s second production line despite commitments. There was no choice but to divert working capital to complete its construction.
After consultations with the bankers, the mandate for restructuring DSF’s debt was awarded to Global Securities on July 2. Banks had initially agreed to convert short-term debt of Rs7.5 billion into long-term finance.
At the same time, bridge financing of Rs2 billion for the working capital was to be arranged. This money was supposed to come from five banks by November 2007.
DSF even collateralised its most valuable asset –30% shares in Dewan Petroleum worth around $100 million – against the bridge financing facility. Only Rs1.1 billion were released and that too after a delay of four months.
The delay resulted in all the money being consumed by cash losses. With no new credit lines, there was no raw material. All the fixed cost meant losses.
“A humongous amount of money is needed to run the PSF operation. For instance, if the company was consuming Rs100 worth of raw material, it needed credit lines for Rs500 to keep the supply chain intact,” said a company official.
But because of financial loss of Dewan Salman Fibre, working capital lines to all the other businesses including automobiles, cement and textile were squeezed. Dewan Yousuf was trapped.
Seeing how things were taking shape, DMG had started negotiations with Goldman Sachs and Merrill Lynch to refinance Pakland Cement’s debt.
By late 2007, the $120 million refinancing agreement was ready to be signed.
“Deal was called off at the last minute after the CEOs of a few banks persuaded Dewan Yousuf against it. They assured him that local banks would re-profile the entire debt of the cement business,” said a DMG official.
“He shouldn’t have trusted them. Or at least he should have made them put that commitment in writing.”
But the refinancing could not be closed as one bank, having little exposure, pulled out right before a potential default in early 2008.
The Express Tribune interviewed four CEOs of different banks. None wanted to come on record.
Some of them say bankers lost confidence in Dewan’s ability to run the business. Some say Dewan Yousuf shouldn’t have cruised around in a Rolls Royce Phantom when so much money was stuck.
“There is always a risk with consortium lending,” said a former president of one of the top three banks. “There was no need for the Dewans to strike a deal with 20 banks. Seven or eight are enough. Otherwise banks start to manage business.”
He also insisted that a conglomerate like DMG should have hired more professionals. “Dewans thought they could manage everything themselves.”
This reasoning is far from reality. Even as far back as 2006, DMG has 16 chartered accountants and some of the best professionals on key positions.
Some industry people point to shift in ownership structure of the banking industry as a reason behind group’s trouble as well. Up till late 1990s, the state-run banks were dominant lenders but by 2007 local private banks had 72% of the banking assets.
“There is no denying that some owners of large banks are carnivorous. They methodically create problems for their competitors in other industries,” said the banker. “But I am not sure if that happened in Dewans’ case.”
Dewan Yousuf’s faith in bankers was not without a good reason. He had grown up seeing many of them spending hours with Dewan Zia. Some were like family.
Another banker suggested Dewan Yousuf should have parted with some of the assets to settle part of the debt and come out of the crisis.
DMG earnings (Rs in millions)
Holding the ground
But there was another option which would have ended the crisis immediately. Instead of being forced to sell the units cheap, Dewan Yousuf approached a leading private equity firm to bail out the group in mid-2008.
Under the agreement, a copy of which The Express Tribune had seen, DMG was to transfer its shareholding in a holding company to be jointly owned by the two parties. The private equity firm was to hire people to run the companies while injecting $150 million.
The weekend before the agreement was to be signed, DMG pulled out. This time political compulsion was involved. An influential politician in Sindh had asked Dewan Yousuf to handover the cement company and sugar mills – excluding the debt.
Under these circumstances it was not possible for the deal to go through. It’s not like Dewans didn’t have connections. The group has deep ties with the military. Salman Farooque, a long time PPP stalwart, is a relative. But that wasn’t enough.
In July 2008, Dewan Yousuf wrote a lengthy letter to bank presidents Ali Raza, Khawaja Iqbal Hasan and Zakir Mehmod detailing everything that had happened over the previous year. He wanted answers. None replied.
Dewan Mushtaq Group defaulted. Dozens of recovery suits were filed against the group in a matter of days. The awe and shock worked. Dewans would eventually be declared the defaulters of over Rs40 billion.
The Dewans have vanished from mainstream news. Dewan Salman Fibre is shut. Stock analysts no longer follow the group companies. But Dewan Yousuf has held his ground.
He didn’t run away in desperation. Under him, DMG is contesting all cases. Settlements have been reached with some banks and working capital lines are open to few firms.
The group still employs over 7,000 people. Even when all the units were shut, no one was fired. Even today Dewan’s charitable hospital in Sujawal is the only place other than Karachi where people from Sindh can have dialysis procedures.
“Bankers had a problem with my lifestyle. They wanted to see me in slippers. Why should it bother them if I owned properties?” asked Dewan Yousuf in between sipping Perrier water during a recent interview. Having to see the companies, which made billions, come to a grinding halt, should have devastated him but he is still in control. It was the mention of Dewan Zia, which cracked his voice.
“I would have fought everyone and overcome every difficultly with any institution only if Zia bhai would have been there,” he said.
Dewan Zia lives in Dubai and could not be reached for his version.
Dewan Yousuf didn’t share much about what transpired during the two years from June 2006 onwards but spoke in a matter-of-fact way on the rise of the conglomerate and its existing potential. It has been five years since banks have not renewed the working capital lines.
“We only need new lines for working capital. Dewan Salman Fibre still has potential. It’s located in a province from where all the gas is coming. So it has a cost advantage over others,” he said.
“I am also in talks with a leading automobile maker. We will soon have the franchise to assemble the vehicles here.”
After going through such a see-saw ride, one would feel that the Dewan would crack. But, as they say, hope is a man’s biggest gift and Dewan Yousuf still seemed to have lots.
Dewan’s first factory inaugurated
Takes over a sick textile unit
Another textile mill set up
DMG, Mitsubishi Corporation sign agreement for Dewan Salman Fibre
Polyester fibre production starts.
Dewan Umar dies hours after participating in industry meeting. 12.5% sales tax imposed on PTA and MEG
DMG undertakes Pakistan’s first Euro Convertible Bond issue for Unit II.
Sales tax on PTA, MEG increased to 15%
Unit II starts production
DSF grudgingly forfeits sales tax concession
Dewan Farooque Motor’s foundation stone ceremony
First Kia Classic car rolls out.
DMG takes over Dhan Fibre in Pakistan’s biggest buy out till then
Work on Dewan Farooque Textile Mills starts
DMG acquires Pakland Cement.
Takes over Khoski, Bawany and Al Asif sugar mills.
DSF invests in Dewan Petroleum
First attempt to restructure DSF’s debt fails
Banks start to choke working capital lines.
Dewan Zia hands over chairmanship to Dewan Yousuf.
DMG books first net loss mainly because of DSF
All the companies post loss. DMG defaults.
Published in The Express Tribune, May 12th, 2014.
Re-print in Monthly AutoMark Magazine’s June-2014 edition