| Threat of
withdrawing incentives to Apollo Hospitals
An investment analyst
Incentives granted to Apollo Hospitals
Ltd (AHL) fall into two categories: a. Incentives Conferred
under the BOI Law
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| Apollo Hospitals |
This would entail an agreement between
the BOI and AHL covering investment incentives contained
in the relevant regulation covered by Section 17 of
the BOI Law. These incentives would be applicable to
ANY investor satisfying the eligibility criteria. Such
incentives would include concessions on income tax,
customs duty and exemptions from Exchange Control. The
primary qualifying criteria in the case of AHL would
be the minimum investment (i.e. total project cost)
required under the ‘Large Scale Project”
category.
b. Concessions Granted by the
Cabinet of Ministers in Alienating State Lands
The BOI agreement by definition cannot include concessions
pertaining to the alienation of state lands. AHL was
entitled to concessions on the land lease by virtue
of a land alienation policy approved by Cabinet on 22nd
September 1997 (vide cabinet paper titled “Proposals
to Streamline Land Alienation Procedures and Provide
Relief to Large Scale BOI approved Projects”).
The concessions on land granted to AHL were a consequence
of the above cabinet decision and conferred through
a separate cabinet paper submitted on 9th February 1998.
It should be noted that many investors were granted
incentives under “Large Scale Projects”
category described under (a) above. These would include
(to name a few):
* South Asia Gateway Terminals (SAGT)
* Dialog Telecom
* Ace Power
* Asia Power
* Lanka Bell
* Suntel
* YKK
* Textured Jersey
Special concessions on land alienation
as contained in the above mentioned cabinet memo were
granted only to a few projects with each project approved
by the cabinet on a case by case basis on the recommendation
of the former President. It should be noted that the
thinking underpinning the above policy was as follows:-
a. Several large scale private investment
projects were not implemented due to the prohibitive
valuations placed on lands by the Government Chief Valuer.
b. The war situation in the country
was deterring investment and it was envisaged that a
concession on land would be granted to a few “priority”
projects that satisfied certain criteria. It was implicitly
understood that the total number of projects that would
be eligible for such concessions would be limited to
around 8.
c. Stimulating the construction sector,
housing sector and increasing availability of private
hospital beds.
Accordingly, the following projects
were granted concessions on land in keeping with the
conditions outlined in the cabinet memorandum. (Only
implemented projects are listed.)
*Apollo Hospitals Ltd
*Asiri Hospitals Ltd (expansion)
*Millennium Information Technology
Ltd (IT Park at Malabe)
*Millennium Housing (1800 houses in
Athurugiriya) granted to Ceylinco/NDB Consortium. This
particular land had been tendered twice before at the
Chief Valuers' valuation with no takers.
*Nivasie Housing at Ekala (ICC/NDB
consortium for 2600 houses)
*Asia Pacific Gold Course (promoted
by Mr. Ronnie Peiris at Battaramulla)
With respect to the threat by the
BOI to cancel incentives granted to AHL, the following
should be noted:
* Agreements are typically cancelled
in the event of a violation of a specific clause in
the agreement or failure to implement the project according
to the approval granted.
* Incentives are conferred to companies
incorporated under the Companies Act of Sri Lanka and
do not filter through to the shareholders of the company.
Accordingly, the BOI incentives are not granted in a
manner that links the company to a specific group of
shareholders. In law, the BOI cannot grant fiscal or
other incentives or assurances to shareholders of a
company entering into a BOI agreement.
* During the life of the BOI agreement,
shareholders are free to add new shareholders, sell
shares etc., as permitted under the Companies Act, JV
Agreements, Articles of the Company or CSE rules. The
BOI, however, requires that material changes in shareholding
be informed in writing only for the purpose of maintaining
statistics for monitoring movement of foreign direct
investment, categorizing shareholders by country of
origin and ensuring foreign ownership limits are maintained
where applicable.
It is implicitly understood that upon
the listing of a BOI company, this requirement cannot
be complied with other than in a situation where the
‘anchor’ investor chooses to dispose its
shares.
* There have been many instances where
BOI companies have changed hands, where the BOI has
been kept informed of the change in shareholding; (some
obviously would not report such changes and there is
nothing the BOI can do about it)
* In keeping with the above analysis,
the granting of concessions on land is a matter for
decision by the cabinet. There is no known case where
the BOI or cabinet have prospectively withdrawn incentives
granted under the BOI law or under any other statute
on grounds of changes in shareholding.
* The only company that has qualified
for both BOI incentives and the above mentioned concession
on land and changed ownership has been Asia Pacific
Golf Course.
Mr Ronnie Peiris and other investors
sold this company to Mr. Sumal Perera at a capital gain
and all incentives granted to this company (including
the concession on land) have remained in tact. With
the construction of Waters Edge, the company should
have satisfied the criteria stipulated in the BOI agreement.
Therefore, AHL was not alone in being
eligible for the above incentives.
Moreover, AHL would have a valid lease
agreement with the UDA outlining concessional terms
of lease. This can only be changed by virtue of a cabinet
decision. However, the argument that the concession
on land should be withdrawn on account of Apollo exiting
cannot be justified in view of the company having satisfied
the investment criteria and there being a precedent
as in the case of Asia Pacific golf Course. This apart,
such arbitrary withdrawal of incentives can be legally
challenged.
BOI stance: Then and Now
Aug. 13 - BOI warns: Divest Apollo
and lose benefits
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| Insurance Corporation made a mandatory offer
to purchase the shares owned by the Lanka
Hospitals Corporation Ltd |
The Board of Investment warned
last week that it would be compelled to end tax
holiday status and other benefits to the ApolloHospital
if the ownership changes at this premier institution
in Colombo.
In a statement the BOI said
Lanka Hospital Corporation (Apollo Hospital) had
entered into the agreement in October 1999 for
the establishment of a multi-speciality hospital
with a 350-bed capacity. Furthermore, in their
project proposal they also committed that Indian
Hospital Corporation limited will manage the hospital
professionally with specialist medical and paramedical
manpower.
“The land upon which the
hospital was built, was released to the company
on concessionary terms, based on a cabinet decision
identifying the hospital as a “Special Development
Project” to operate an ultra modern hospital
at Narahenpita with injection of foreign technology
and capital. The Cabinet also took notice of the
fact that Apollo Hospital India will hold substantial
equity of the Company, and will manage it,”
it said.
For these reasons the BOI said
any change in the ownership of this large infrastructural
project that has resulted in considerable improvement
in the country’s medical service, affecting
the fundamental characteristic of the project,
will result in the BOI having to cancel the BOI
status granted to the project.
This will mean that the company
will have to -- forego the tax holiday granted;
pay import duties on all goods imported and pay
the current market price for the land, which was
granted for the establishment of a “Speciality
Development Project.”
The BOI said it was making this
statement to safeguard investor confidence in
Sri Lanka.
Oct. 8 – BOI doesn’t
withdraw concessions
Extracts of the BOI letter to
the CSE and Harry Jayawardene issued last week
deciding to continue with the concessions:
The Chairman of Sri Lanka Insurance
Corporation which made a mandatory offer to purchase
the shares owned by the Lanka Hospitals Corporation
Ltd (Apollo Hospitals - Colombo) has sought concurrence
of the BOl to continue with the purchase of the
shares and to maintain the BOI status and facilities
granted to LHCL.
As per the agreement signed
with the BOl certain minimum criteria has been
laid down regarding the investment and also to
maintain a minimum number of 350 beds. We have
noted that although the investment criteria has
been met, the number of beds at present is only
150.
The Chairman of Sri Lanka Insurance
Corporation (SLIC) has by letter dated October
2, 2008 indicated to us that he will be immediately
commissioning approximately 110 beds with a further
additional 40 rooms to be undertaken later.
They have also confirmed to
us that they will maintain the hospital as a ‘Special
Class Category Hospital which we assume would
be a ‘Multi Speciality Hospital as per the
terms and conditions of the BOl agruoment. We
have also noted that additional funds would be
brought into the project which has drawn our attention
to the need to facilitate continuation of the
project. The land for the project has been approved
on concessionary terms in favour of LHCL as per
a special Cabinet approval. This project was also
identified as a special development project. The
BOI has also declared this land as a Licensed
Zone of the BOI under Section 22A of the BOI Law
No. 4 of 1978. Furthermore, the BOI has invested
funds for the development of the infrastructure
at the hospital site Since specific mention has
been made to ‘Apollo Hospital’ in
the Cabinet approval it will be necessary for
the BOI to obtain a fresh Cabinet approval to
continue with the lease of the land which was
provided to LHCL (Apollo Hospital), prior to confirming
the continuation of the lease of land on the same
terms and conditions that were earlier approved
by the Cabinet of Ministers. The BOI has noted
the statement made by Chairman, SLIC in the said
letter of 2 October 2006 that the owners of Apollo
Hospital India had decided to voluntarily accept
the offer made by SLIC contrary to the position
of duress made known to the BOI by the former
owners.
Taking all these matters into
consideration and the compliance letter submitted
by the Chairman of Sri Lanka Insurance Corporation
seeking our approval to continue with the purchase
of shares and agreeing to maintain the terms stIpulated
in the BOI Agreement, we wish to confirm that
the terms of the 801 Agreement would be continued
provided that all terms and conditions as provided
for in the Agreement are complied within a period
of 6 months from the date of transfer of the shares
under this particular transaction.
However, the continuation of
the lease terms for the land would require the
approval of the Cabinet of Ministers and the BOI
will take the initiative to submit details to
the Cabinet of Ministers for necessary approval.
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The “Pus Wedilla”
over Apollo
The following – based on
The Sunday Times FT’s consistent coverage
on the issue – is a sequence of events over
the Apollo Hospitals take over and the BOI involvement.
We repeatedly said that the Apollo takeover was
legitimate and there was no provision for the
BOI to withdraw concessions to a company that
had been listed in the stockmarket:
July 23 – Harry
J gets major stake in Apollo
*Harry Jayawardene, after a failed attempt to
control Asiri Hospitals, last week eyes Apollo
Hospital – upping his stake to 36.07 percent
from 20 percent earlier in the Indian-managed
entity and triggering the Takeovers and Mergers
Code.
The stake was bought through
Sri Lanka Insurance (SLC) On Thursday, SLC life
and general funds paid Rs. 700 million for the
16 % stake from Dr. T. Senthilverl, a director
in the company. Jayawardena is now the single
largest shareholder of the company after Apollo
Hospitals Enterprises with 32 % and Property Development
Ltd, the holding company of the Bank of Ceylon
tower, with 13.62 %.
Aug. 13 – BOI
threatens to withdraw concessions
* The Board of Investment’s (BOI’s)
intervention last week in a legitimate stockmarket
move where the Sri Lanka Insurance (SLI) made
a mandatory offer to buy shares in Apollo hospital
has triggered a major controversy including the
unhealthy practice of government interference
in the market.
Questions have been raised over
whether the BOI ‘jumped the gun’ in
threatening to withdraw tax and other concessions
to the Lanka Hospitals Corp and set off a precedent
while creating uncertainty amongst investors.
* The SLI makes mandatory offer
– as prescribed by Securities and Exchange
Commission (SEC) rules – for the remaining
shareholding at Rs 28 each.
The Sunday Times FT learns that
Apollo appealed to Indian Commissioner Nirupama
Rao to stop the takeover bid who had in turn sought
the intervention of the government.
Malik Cader, SEC’s Director
of Public Relations and Market Development, said
the SLI stake triggered the Takeovers and Mergers
Code under which a mandatory offer has to be made.
“We have to ensure that this is done and
the company complied with this rule.”
A corporate lawyer said that
irrespective of the parties concerned, it was
‘wrong’ of the government to intervene
in the market because Apollo Hospital is a public
quoted firm.
Nagma Malik, Press & Information
Secretary at the Indian High Commission said the
High Commissioner had taken up the Apollo case
with the government. “The board of directors
is concerned about these developments which are
potentially very harmful for future Indian investment
in Sri Lanka. So as a representative of India
in Sri Lanka, the High Commissioner has sought
to safeguard Indian investment in Sri Lanka.”
Former BOI officials say that
a BOI contract is with an entity and not an individual.
“There is no provision to reverse the concessions
on issues of shareholding or ownership and the
Apollo agreement doesn’t have any special
provision which restricts ownership,” one
former official said, adding that when there are
changes in ownership, the BOI is either informed
in advance or after as a matter of courtesy.
Investors and former officials
said the company should have known before it went
public that it could be the target of a raid and
takeover, an accepted practice. “If they
wanted to retain control, they should have had
a 51% stake like in the case of Dialog where the
parent company has an 87 % stake, effectively
shutting off any take over bid,” one investor
said adding however that if the company disclosed
in its prospectus ownership restrictions then
shareholders cannot complain because they bought
the stock aware of the restrictions.
Aug. 27 – CSE asks
Apollo
* The Colombo Stock Exchange writes to Lanka Hospitals
Ltd seeking clarification whether the incentive
package offered by the Board of Investment was
granted to a ‘particular set of investors’
or to the company itself.
Sept. 10 – Apollo
responds to CSE
* Lanka Hospitals has written to the Colombo Stock
Exchange saying that recent speculation on Apollo
Hospitals and newspaper articles about the Board
of Investment withdrawing its concessions have
had no affect on the share price as far as the
company is concerned.
Apollo also says its board of
directors agree with the report by BDO Burah Hathy
(an audit firm appointed by Apollo to advise the
company’s board of directors on Harry Jayawardena’s
offer) which said, “in our view the price
per share of of Rs 28 offered to shareholders
… is at a premium and is an attractive offer.”
* An LHCL company official said
that Apollo will definitely not work with Jayawardena
if he manages to secure control of the hospital.
“There is a greater chance of Apollo pulling
out if Jayawardena takes control,” he said.
Sept. 17 – Harry
J takes control
*Harry Jayawardena once again proved that no government,
president, regulator or individual stands in his
way when he took over Apollo Hospital last Thursday
making another victim bite the dust. Apollo by
selling its shares to the Jayawardena-led Sri
Lanka Insurance Corporation (SLIC) raised a few
eyebrows because it gave up without a fight after
resisting the offer with help from two governments
– Sri Lanka and India.This move also got
stock market tongues wagging with allegations
that the billionaire businessman did an ‘under
the table’ deal buying the shares at Rs.32
each, instead of the mandatory offer's proposed
Rs.28.
Indian High Commission spokesperson
Nagma Mallick:
“If an Indian investor feels that a worthwhile
offer has been made and he accepts it, then it
is fine. The High Commissioner has no personal
views on this matter.”
Oct. 1-- Indian doctors
want to stay
* Indian expatriate doctors at Apollo Hospitals
prefer to remain in Sri Lanka because of generous
salary packages and because patients ‘like’
them, a hospital source said. “The new owners
cannot make sudden changes because the patients
are used to the Indian doctors and they themselves
do not want them to leave,” a member of
the Apollo management said.
Oct 8 – BOI eats
its words
* The Board of Investment says the concessions
offered to Lanka Hospitals Corporation Limited
(LHCL), the holding company of Apollo Hospitals,
will remain under the new ownership, reversing
an earlier threat to withdraw it.
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