Financial Times

SC’s scathing attack on business ethics and unethical practices
Future of LMSL and JKH discussion in boardrooms, cocktail circuit
By Duruthu Edirimuni Chandrasekera

What next – is the question being asked in the corporate world in terms of John Keells Holdings’ (JKH) profitability following a ruling on a fundamental rights case by the Supreme Court on Monday ordering the company to return the land and infrastructure which it currently utilises for bunkering operations under Lanka Marine Services Ltd (LMSL).

The Supreme Court petition was filed by Presidential Advisor Vasudeva Nanayakkara in January this year as a private citizen against the highly controversial deal surrounding the LMSL privatisation. The case relates to the sale of the 90 percent stake of LMSL by the Ceylon Petroleum Corporation to JKH in August 2002 which was claimed to violate the fundamental rights of the petitioner. The petition names more than 30 respondents including Board of Investment (BOI) Chairman Dhammika Perera, former BOI Chairman Arjuna Mahendran, Commissioner General of the Inland Revenue A.A. Wijepala, John Keells Holdings Ltd and its current chairman Susantha Ratnayake, former Minister of Enterprise Development G.L. Peiris and the Attorney General. JKH has been ordered to return the land and infrastructure which it currently utilizes for bunkering operations under LMSL. The fair value of the land and infrastructure at the time of acquisition of LMSL (in August, 2002) is estimated to be Rs.727 million. However, the ruling has enabled JKH to retain the shares it currently owns in LMSL.

Taxes
Ms. Anita Muttukumaru, Research Analyst C.T. Smith Stockbrokers expectes the tax payment due, would be at the current concessionary rate of 15 percent paid by LMSL, which is applicable to companies bringing in foreign exchange income to the country. “The tax payment is estimated to be approximately Rs.620 million for the five year period ending December 2007. As JKH does not disclose LMSL' financial results, we have computed the tax payable on the assumption that LMSL has accounted for approximately 70 percent of JKH's transportation sector subsidiary profits in this period,” she said.

She said that if operations are to continue, the impact on profitability of LMSL will be the one-off tax payment as well as payments made to the Sri Lanka Ports Authority to continue bunkering operations.
“In the absence of any information pertaining to such additional payments, we have revised our forecast net profit for JKH down 11 percent to Rs.4.9 billion for the company’s March 2009 end financial, which is down three percent. This was done having only taken into consideration the impact of the estimated one-off tax payment. However, if LMSL is unable to continue its bunkering operations, we estimate JKH to report a net profit of Rs.4.4 billion for the current financial year, down 13 percent and Rs.5.7 billion for the following financial (2009) year, up by 13 percent,” she said.

Land and infrastructure
The initial purchase consideration paid by JKH when acquiring LMSL amounted to Rs .2 billion of which property, plant and equipment was approximately Rs.727 million. “Accordingly, the total net asset value of JKH would decline by approximately Rs. 727 million, thereby reducing JKH’s net asset per share value to Rs.68.8 from the current Rs. 69.5,” Danushka Samarasinghe, Manager Research at Asia Securities, said.
He said the tax liability as a result of JKH requiring to pay taxes with retrospective effect from December 2002 to December 2007 would be approximately Rs.360 million.

Continued bunkering operations
Mr. Samarasinghe said that subsequent to the return of the land and relevant infrastructure to the SLPA/CPC/ alternative government nominated body, it is evident that JKH will have to enter into a new agreement with the relevant entity to use the land in order to continue bunkering operations.
He said if a lease agreement works the impact on earnings would be limited to the retrospective tax payment amounting to Rs.360 million and any payments agreed upon with the SLPA/ alternative entity, for example lease rental payments.

However industry sources said other players with bunkering licenses would also want to lease the property and the Common User Facility, an issue noted in the judgement. “The Common User Facility Agreement is declared null and void and the Sri Lanka Ports Authority may enter into fresh agreements for the use of the facilities within the port on equal terms with all parties licensed to supply bunkers,” the court said.

Mr Samarasinghe said that JKH is unable to secure an agreement with the SLPA, the loss of earnings to JKH is estimated at approximately Rs. 930 million in 2009.

Will they live?
With all this is it not the end of the world for the company? “JKH’s cash position is more than Rs.10 billion worth. There will be an impact on the balance sheet, but it is not something that will put them down. So they will survive,” a stock market analyst said.

Accountability of directors
A corporate leader, who declined to be named, said the directors should not only be held accountable, but taken to criminal court and given strict punishment like in Singapore, Japan and China. “There needs to be strict indicators (regulations) given after this so that the business community (together) with high public officials do not rob peoples’ money,” he said.

He also said that just as much as the politicians are corrupt, so is the business community. “At most times, if the corporates don’t give the money, the politicians won’t be corrupt,” he said.

Governance
A top legal source said that now it seems that the private sector which had taken upon themselves to be stalwarts of corporate governance seem speechless. "The court has found that the two parties involved in the transaction are at fault. The next question is what does the private sector have to say about this. They always complain about corruption in the public sector now what?"

He reprimanded some sections in the private sector who were saying that JKH was not properly 'heard'. "They had the chance to go to courts. The law is clearly written and people cannot say the company did not have a chance to represent themselves in public," he added.

He was also critical about some businessmen saying that 'these things are not to be taken seriously'. "It is shocking to hear such things, especially after Sri Lanka has seen the biggest corporate shake up," he said. Commending Mr. Nihal Sri Amarasekera' bold stance to file a case against this transaction initially, he said, "We must take our hats off to him for initiating this."
Good judgement
He also said the judgement was a good one. "It is a simply written judgment and easy to understand."
He said some factions saying this will deter foreign investment is 'nonsense.' "All along the company changed the goal post to their advantage and such behaviour will deter investment not the judgement," he said. (The full judgement of the Supreme Court )

LMSL – earlier accused of anti competitive practices
LMSL is no stranger to scandal. In December 2003, The Sunday Times FT reported that the company was embroiled in a court battle with a rival bunker supplier called East-West Bunker Services, owned by businessman Nahil Wijesuriya. He accused LMSL of anti-competitive practices and of trying to retain a monopoly over marine fuel supplies in the Colombo port.

As reported, the dispute centered on a clause in the final privatization agreement LMSL signed with the government which was interpreted as effectively preventing other bunker suppliers in the Colombo port from using their own infrastructure to store and supply marine fuels to ships, thereby compelling them to use the common user facilities owned and operated by LMSL. East-West also protested about the insertion of a clause into the final agreement which East-West described as an alteration which prevented other players from supplying bunkers on their own.

LMSL is a marine fuels and lubricant supplier operating in Sri Lanka, offering expertise in bunkering and lubricants to meet al demands at port, at anchorage and at off port limits. According to the company's website, its product portfolio includes fuel oils, marine gas oils and intermediary grades of fuel oils which are supplied to vessels.

Jayasundera, JKH made false and unauthorised representation
The Supreme Court this week condemned the 2002 privatisation of Lanka Marine Services Ltd and asked LMSL to vacate the land, declared that all agreements with the Board of Investment are null and void and asked the Inland Revenue Commissioner General to recover all the taxes.

The court also ordered the cancellation of the Common User Facility agreement and said the Sri Lanka Ports Authority can enter into fresh agreements for the use of the facilities within the port on equal terms with all parties licensed to supply bunkers.

Excerpts of the judgement:
The Cabinet approved a careful strategy of liberalization addressing all concerns such as marine pollution and authorized PERC to recommend a process of granting 3 licenses to private sector operators to provide bunkers outside the Port of Colombo. LMSL was to continue for one year with a monopoly in the Port of Colombo and to be privatized in a situation where the trade is fully liberalized;

The PERC chaired by P.B. Jayasundera failed to take action to recommend a process for the granting of 3 licenses and instead devised and carried out without any authority of Cabinet a process of the sale of 90% shares of LMSL;

Jayasundera nominated three persons to be on the Technical Evaluation Committee (TEC) and the then Secretary Ministry of Finance appointed three persons. But Jayasundera failed to get a Cabinet Approved Tender Board (CATB) or a Negotiating Committee (CANC) constituted. Thereby, he avoided submitting this matter to the Cabinet and reserved for himself the final authority of deciding on all matters;

Impugned decisions
The documents clearly establish that all impugned decisions have been made entirely by Jayasundera at his discretion;That the PERC Act No. 1 of 1996 empowers the Commission which Jayasundera was Chairman only to advice and assist the Government in the matter of public enterprise reform and to act on any matter or transaction only if authorized by the Government;

That Jayasundera avoided getting a valuation of LMSL from the Chief Valuer and instead on his own without any authorization of Government secured a valuation from the DFCC Bank and took all action for the sale of shares of LMSL based entirely on that valuation;

JKH- false representation
That JKH had made a false representation of collaboration with Fuel and Marine Market (FAMM) for the purpose of securing the 70 marks to be shortlisted. This falsity is established by a contemporaneous application made by JKH to the Board of Investment (BOI) for investment relief in which no reference is made to any foreign collaborator;

That JKH had an assurance that it would succeed in securing a sale of shares in its favour even before the bid containing a misrepresentation referred above was accepted, since it made an application to the BOI well before the bidding process, on a false basis that the application is in respect of a new investment whereas the particulars in the application are referable to the business of LMSL. The tax relief granted to JKH was not permissible under the existing regulations and JKH got an amendment tailor-made for its purpose and secured the tax exemption. This resulted in LMSL which was a tax paying company when owned by the CPC becoming a tax free company when sold to JKH;

That Jayasundera made certain significant deviations from that stated at the Pre bid Conference that favoured JKH. In particular after the bid was accepted Jayasundera agreed to the inclusion of a clause in the CUF Agreement on the basis of which LMSL owned by JKH attempted to stave off competition in the supply of bunkers by others who subsequently obtained licenses from the Minister. The clause agreed to by Jayasundera was struck down by the Court of Appeal as being illegal;

Unauthorised
Jayasundera made an unauthorized and illegal representation that the land in extent 8 Acres 2 Roods 21.44 perches within the port of Colombo would be transferred to the purchaser of LMSL shares without any additional payment;

That Jayasundera pursued the unauthorized and illegal representation as to the land by causing a Notarial Agreement to be entered in terms of which the Government of Sri Lanka is obliged to ensure the transfer of the land without payment to LMSL and the expenditure connected with the transfer has to be met by the CPC;

That the Grant of the said land given by the President to LMSL 2 ½ years later is illegal since it is contrary to the provisions of the 13th Amendment to the Constitution and in any event it contains an incorrect statement that the grant as made in consideration of the payment of Rs.1,197,362,500/' by LMSL whereas no money whatsoever was paid by LMSL;

That Jayasundera rushed through the bidding process by giving misleading information to bidders and purported to conclude the transaction with an exchange of letter with Susantha Ratnayake on 12.7.2002 at the time when the Proposal of the Minister in charge of the subject had not even been circulated amongst the members of the Cabinet.

Jayasundera on his own fixed the sale for bidding at the Stock Exchange for 12.7.2002 and since JKH was the only bidder to have furnished the bid bond, he decided it was not necessary to go ahead with the bidding process and notified by letter bearing dated 12.7.2002 itself to S. Ratnayake that 'it proposed to conclude the transaction….and signing the Agreement by July 24th 2002'. Ratnayake by letter addressed to Jayasundera bearing the same date 12.7.2002 stated that JKH is willing to conclude the transaction as set out in Jayasundera's letter.

Exchanging letters across the table
When looking at the two letters bearing the same date one gets the impression that Jayasundera and Ratnayake sat across the table and exchanged them. Counsel for JKH submitted that they were exchanged by FAX. Jayasundera's FAX letter bears time 4.45 pm and Ratnayake's FAX the time 5.30. The documents have not been produced by JKH and I have noted the times based only on submissions. Whatever be the trevails of other bidders, the timing fitted well to Ratnayake's affairs since according to document P37 by letter dated 11.7.2002 the BOI informed JKH that the application for tax relief in this regard has been allowed. I have already under the heading 'E' dealt with the false and illegal manner in which JKH secured the tax relief.

LMSL profits now known

Stockbrokers and investors have often complained about the lack of transparency in the ‘numbers’ at LMSL which forms part of the JKH group accounts. “The group accounts didn’t reflect what profits accrued from LMSL though everyone knew it was a substantial amount,” one investor said.

However the court judgement said according to the “Annual Report profits of LMSL for the year 2005/2006 were: 2002/2003 – Rs 508 million, 2003/2004 – Rs 267 million, 2004/2005 – Rs 575 million, 2006/2007 - Rs 1.1 billion, making it a total of Rs 2.45 billion (for the 4-year period).”

Opposition and civil society not putting pressure on errant politicians and officials
By Bandula Sirimanna
The government will gain over Rs.100 billion as a direct result of the land mark judgment of the Supreme Court by reversing the privatization of Lanka Marine Services Limited holding Treasury Secretary Dr. P.B. Jayasundara responsible for irregularities in the privatization process, a parliamentarian said.
Speaking to The Sunday Times FT, former Chairman of the Committee on Public Enterprises (COPE) Wijeyadasa Rajapakse, MP said the land value of the LMSL site is over Rs. 2 billion and the default tax payable to the state by John Keells will be around another a couple of billions of rupees.

He said that the Supreme Court judgement has endorsed the findings of the commission which had named top level politicians and senior officials including Dr. P.B. Jayasundara. The imposition of a Rs. 500,000 as compensation is the highest ever ordered against a public official in Sri Lanka, he said. However he expressed his concern on future action against top ranking politicians and officials involved in the deal.

Mr Rajapakse blamed inactive opposition and civil society for not putting pressure on authorities to punish politicians, officials and their associates who have robbed public enterprises. He noted that the Supreme Court judgement would be a severe warning for such corrupt persons and there was a need now to pressure the Commission of Bribery and Corruption to investigate the findings of the Committee on Public Enterprises and the Public Accounts Committee.

Top to the page  |  E-mail  |  views[1]
 
Other Financial Times Articles
Cloud of uncertainty at JKH
George Steuarts MD declared bankrupt by a British High court
Controversial Wijepala heads state agency
GSP+ doubtful at this point-EU MP
Directors, shareholders clash at Hunters EGM
Susantha/PBJ – Acting in concert - Comment
Negombo – where no tourists are harassed
PET project to dispose of plastic bottles
CSE - Bad example of Corporate Governance - Right of Reply
Foreign Investment Deposit Accounts from ComBank
SC’s scathing attack on business ethics and unethical practices
50 % of SriLankan Airlines costs go on fuel
Sri Lankan hotelier wins accolades in the UK
Private sector support for English Language conference
DFCC Vardhana Bank growth up in 2007
Malaysian High Commissioner urges promotion of SMEs
Sri Lanka’s law against hostage taking used in a labour dispute
CCC says need to address inflation, COL urgently
SEC to pursue investigations to the 'end'

 

 
Reproduction of articles permitted when used without any alterations to contents and a link to the source page.
© Copyright 2008 | Wijeya Newspapers Ltd.Colombo, Sri Lanka. All Rights Reserved.