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Case Study

Mr. Asif Sheikh joined Sindh Refinery Limited in 1972 as an officer in its sales
department. He was intermediate in arts at the time of joining Sind Refinery Limited,
with the passage of time he has improved his qualification as well designation. He
became a CEO of the company in 1994, served that office for three years in a Sind
Refinery Limited and retired from CEO position in 1997. During his services he
remained close to the chairman of the company and due to this close relationship he
elected as Deputy Chairman of Sind Refinery Limited. Mr. Kashif is the serving CEO of
the company, he is from engineering background and he is promoted from Assistant
General Manager to CEO. He has worked under Asif Sheikh more than ten years at
different designations.

Mr. Atif is the Chief financial officer and has experience of last thirty years in different
companies of oil sectors. He is responsible for overall financial planning, funds
management, management of information systems and optimal utilization and
safeguarding of corporate resources. The role of the department includes re-engineering
of business processes and internal controls by best utilization of state of the art
information technologies. It also renders support services to other functional areas for
enhancing organizational efficiency and effectiveness for long-term value creation.

Mr. Salaman, Mr. Kamran and Mr. Nouman are three alternate Directors in the company
board of Directors. They all have nominal shares in the company. Mr. Salman is well
known figure of the country and having multi businesses related to banking in the
country as well as branches in outside the country as well. Mr. Kamran is running
pharmaceutical business at large scale and Mr. Nouman is a retired civil servant. Out of
these three alternate directors first represents chairman of the company Mr. Shah Abdul
Kareem and the remaining two alternate directors represent chairman’s sons who are not
available in the country for attending maximum meetings of the company.

Sindh refinery board structure is staggered in nature. Mr. Shahid and Mr. Zahid are the
only two non executive directors in the company board. Mr. Shahid is close friend of
Mr. Asif and Mr. Zahid is a retired CEO of one of the largest gas company in the
country. Asif sheikh used to invite the board members on quarterly basis in private
functions arranged by him in the form of dinners, musical events etc in which high
protocol has been given to them and he used to see off them with precious gifts.

History of Sindh Refinery Ltd:

Sindh Refinery Limited is fully integrated energy company and is one of the largest
companies in the Pakistani corporate sector with an asset base exceeding Rs. 100 billion.
Sindh Refinery Limited (SRL) was incorporated as a Private Limited Company in
December, 1970 to take over the business of the Sindh Oil Company Limited (SOC)
relating to refining of crude oil and supplying of refined petroleum products. It was
subsequently converted into a Public Limited Company in June, 1971 and is listed on the
three Stock Exchanges of the country. The Company is also registered with Central
Depository Company of Pakistan Limited (CDC).

Original paid-up capital of the Company was Rs 95 million which was subscribed by the
holding company i.e. SOC, Government of Pakistan, investment companies and general
public. The present Paid-up capital of the Company is Rs. 887.55 million.

SRL is the pioneer of crude oil refining in the country with its operations dating back to
1935. Backed by a rich experience of more than 75 years of successful operations, SRL’s
plants have been gradually upgraded/ replaced with state-of-the-art hardware to remain
competitive and meet new challenges and requirements. Sindh Refinery Limited sister’s
company named “Sindh Petroleum” has more than 150 filling stations in Pakistan.

There were subsequent discoveries of oil at Badeen (1968). Reservoir studies during the
period 1970-78 further indicated high potential for crude oil production of around 20,000
bpd. In 1981, the capacity of Refinery was increased by the addition of two distillation
units of 30,000 and 10,000 bpd capacity, respectively. Due to their vintage, the old units
for lube/wax production, as well as Edeleanu, were closed down in 1986. In 1999, Sindh
commenced JP-1 pipeline dispatches. Another expansion and upgradation project was
completed in 1999 with the installation of a Heavy Crude Unit of 20,000 bpd. Sindh
current nameplate capacity stands at 60,000 bpd and it possesses the capability to process
lightest to heaviest (10-65 API) crudes.

Products of Sindh Refinery Limited:

The Sindh Refinery Limited produces the full range of petroleum products:

1- Liquefied Petroleum Gas (LPG)

2- Petroleum Solvent

3- Naphtha

4- Premium Motor Gasoline (PMG)

5- Mineral Turpentine

6- JP-1

7- JP-8

8- Kerosene Oil

9- High Speed Diesel

10- Light Diesel Oil

11- Jute Batching Oil

12- Furnace Fuel Oil

Board structure:

The board has seven members: one executive director, three are alternate
directors remaining three are the non executive directors who all considered independent
directors. Mr. Asif Sheikh is deputy chairman his present age is 68 Years. Asif Sheikh
owns 40 percent individual shares in Sindh Petroleum Limited and he is also CEO of
Sindh Petroleum Limited. From last ten years only one new director has been elected, all
of the other directors are re-elected in annual general meetings of the company. The
company also consists of Nomination committee, which proposed the same name with
proper justified reasons and shareholders re-elect them without making any change.

Board Proceedings:

Mostly Mr. Asif Sheikh chairs the company meetings. He takes keen interest in all
matters discussed in the meeting gives his opinion on these issues and also ask from other
members to give a solution for the discussion matter. Other than the SPL limited matter
he remains cool and calm and made his decision as per recommendations and consent of
other board members, but when issue of product supplies to oil marketing companies
discussed in the board he tackled the situation efficiently and by and large able to
convinces the other board members in the direction of his personal interest point of views
after having a long friendly environment discussion. Most of the members of the board
do not negate his decisions because of the reason that they know he is a good friend of
chairman of the company. Similarly when other issues related SPL are discussed in the
board he always used to give favor to SPL because he owns much individual shares in
this company. In the presence of chairman of the company in the meeting such type of
issues are not highlighted and discussion has been diverted on other certain issues like
pricing formula of the Government for oil pricing is not good, international crude prices
are rising frequently and plants are not efficient and propose him to replace these plants

Financial Performance of the Sindh Refinery Limited

The company net profit before tax from refinery operations was Rs 78.929 million only
and after including other income, mainly from bank deposits, the total net profit after tax
amounted to Rs 406.016 million from its refinery operations. Although the international
prices for both crude oil and products declined sharply during the year, the decrease in
products prices was higher than the crude prices due to which the refiner’s margin was
lower than last year. As advised earlier, the refiners margin was further depressed due to
changes made in the pricing formula for calculating the prices of PMG and HSD prices in
August 2008, The profitability was further eroded by huge exchange losses of Rs 1,464
million during the year pertaining to crude oil purchases. In the recent due to changes in
tax law, the benefit of admissibility of certain export related expenses shall no longer be
available as a result of which the company tax liability was higher than that calculated on
accounting profit which also had an adverse impact on company profit after tax.
With the declining gross refiner margin (GRM) and supplying of product in the bulk to
its sister company without taking care of the after effects, the profits from refinery
operations for the year 2008-09 decreased to Rs 406.016 million as compared to Rs
2,007.570 million in 2007-08. After accounting for non-refinery income of Rs 610.742
million the net profit after tax for the year ended June 30, 2009 was Rs 1,016.758 million
with an EPS of Rs 11.92(June 30, 2008:Rs 72.08). Non-refinery income in last year was
higher due to recognition of capital gain of Rs 3,762.775 million on sale/repurchase of
shares of different enlisted stock exchange companies which contributed Rs 44.12 to last
year diluted EPS. In the year 2009 Board of Directors have decided not to recommend
any dividend due to build –up the proposed projects relating to Naphtha Isomerization,
Preflash unit and Diesel Hydrodesulphurization units that shall require huge capital
outlay. The issued, subscribed and paid up capital of the company as at June 30,2009 was
Rs 852.930 million. The total number of Company shareholders as at June 30, 2009 was
5,544 as against 3,844 on June 2008.

Summarized Financials
Sindh Refinery Limited
30 June (Rupees in Million)

2009 2008 2007 2006

Sales (Net of
Govt. Levies) 76,546. 91,910.70 59,108.53 55,828.14
nt from/(to) 714.05 1,743.60 355.39 234.24

Turnover 77,260. 93,654.30 59,463.92 56,062.37


Cost of Sales 75,342. 89,646.37 58,597.69 55,490.68


Gross profit 1,918.4 4,007.93 866.24 571.69


Profit before 1,683.3 7,027.43 1,205.53 658.55

tax 7

EPS 11.92 86.49 13.17 6.68

Paid-up 852.93 710.78 568.62 454.90

Conflict of Interest:

It is rare that chairman of the company Shah Abdul Kareem chaired the Annual General
meeting or Board of directors meeting of the company. As already mentioned in the
introduction phase of the case that alternate director Mr. Salman represents the chairman
in his absence but meeting is chaired by Asif Sheikh. Asif Sheikh has long association
with SRL, he also remains CEO of the refinery and he is performing duties of Deputy
Chairman as well as chairman duty in his absence. He owns 40 percent individual shares
in SPL which is sister company of SRL.SRL supplies its fifteen products to its sister
company SPL along with five other oil marketing companies. The prices of the all
petroleum products are finalized by oil & gas regulatory authority (OGRA) from 2005
onward and this price change is based upon fluctuation of crude oil prices in international
market. Previously these prices were changed after every fourteen days by OGRA in
current scenario prices are changed on end of each month. From the data of last two years
it has been analyzed that there was upward trend of all petroleum products.SPL has its
own pricing department which remains busy in forecasting the next coming rate of
petroleum products.

The conflict of interest starts when the pricing department of SPL gives its report to
management committee about the expected change of prices in the petroleum products.
When there is expected upward trend in the prices SPL used to purchase all available
products from the SRL before the change of price and the deputy chairman enforce to
give them maximum available product to SPL and curtail the supply to other oil
marketing companies, contrary to this when there is downward trend in the prices SPL
refused to buy product from SRL and refinery has to store this product till announcement
of new rates. So in both cases SRL has to bear huge losses because of high percentage of
change in prices of petroleum products. On the other hand SPL enjoys bulk of profits
after announcements of new rates in both the cases. This is one of the big reason
expanding too much of SPL. Nobody in the board is in a position to disclose or stop this
practice due to Mr. Asif good relations with chairman of the company. In directors report
other non related issues are highlighted for the reason of accumulated loss or less profit
during a certain time period. Even deputy general manager finance tried to uses his power
and stopped the supplies of SPL one time but what he suffered after doing this is

One other aspect in this scenario is of non refund of loan which SRL had given to SPL at
time of launching of the company. The age of SPL is more than 12 years and instead of
huge profits in last five years they didn’t payback the original amount taken by them as a
loan from SRL.SPL instead of very little volume as compared to SRL give almost double
packages to its employees and even given them bonuses equal to salary of twelve months.
On the other hand SRL has facing losses from last five years and going through very
crucial stage instead of very strong company in the past. SRL has shortage of resources
for making payment of crude oil to the foreign based oil companies and one important
thing necessary to mention here is, SRL made payment of crude in US dollars on the
other hand they sell their petroleum products in rupee and due to non payments by SPL
payments delayed and it has been analyzed that most of the time due to upward trend of
dollar prices SRL has to bear million of Rupees as loss. Like the product supplies issue
this issue is also hidden from chairman of the company and Mr. Asif Sheikh didn’t wants
highlight it due to his personnel 40 percent shares in SPL.

Along with above mentioned operational issues Mr. Asif Sheikh also interferes in the
recruitment and other related issues e.g; if any manager is doing excellent job in SRL he
appoint him or her to SPL due to his personnel interest and transfer an average or below
average manager to SRL. It is also necessary for human resource department to appoint
an employee with sign of Mr. Asif Sheikh. Along with this maximum recruitment made
by him on the basis of his personnel relations or referred by him. It is almost impossible
task for acting CEO to appoint management level employee by only his own consent.


The conflict of interest of one person has great impact on Sindh refinery Ltd. The
result of his conflicts financially leads to decline in annual profits, annual growth,
upgrading of new projects and declining company share value in the market. Along with
financial impact there are also some others impacts like employees turnover rate in SRL
is much higher as compared to SPL, employees love to job in SPL because of excellent
salary packages offered by SPL instead of sister company of SRL owning same policies
and much less in volume and age. The long lasting relation of Asif sheikh with SRL and
chairman of the company diluted the independency and transparency of the board.

This whole scenario reveals that image of the SRL is highly affected by personal interest
of only one person, due to this the negative impact goes on all stakeholders and as well
the financial market and it is dangerous in the long run for image and sustainability of
Sindh oil refinery.