Watawala Plantations Ltd, a listed company, has been in the news recently for the wrong reasons; allegations by independent minority shareholders (IMS) that the directors of the company are taking arbitrary decisions without consultation and consent. These shareholders has raised serious concerns that the company is being stripped off its lucrative divisions like marketing for example and transferring these to other units, eventually reducing the value of the assets of the company, its share value and future prospects. K. C. Vignarajah, an IMS at Watawala Plantations and a well-known proponent of governance, transparency and good management of listed companies and providing value to all its shareholders - not only the controlling interests (CI) -, has written to the commissioners of the Securities & Exchange Commission (SEC) including the chairman, Thilak Karunaratne and acting Director-General Harendra Dissa Bandara urging the SEC to intervene in the matter.
Here are excerpts of his letter: Watawala Plantation PLC (WATA) was 'peoplised" when the Government leased out 23 well located estates with great potential for developing existing and new Tea, Rubber, Palm oil crops & brands.
The development of new luxury scenic boutique hotels, many restaurants, tourist shops, retail outlets along the exotic, long main road frontages of some of the best plantations in Sri Lanka in all elevations drew the attention of ordinary investors. Hydropower generation from the many waterfalls, 'bottle water' plants, timber resources were also normal expectations!
At the WATA's recent EGM the concerns of IMS' expressed included:
1. The directors' statement regarding WATA spinning off Watawala Marketing Ltd (WML) to concentrate on the 'core business' (the recent buzz word) as against the mantra of consolidation while enhancing efficiency and total company value. Spinning off vital assets and operations were considered deceptive and fallacious by the IMS. The core business of the company has to be integrated to achieve best quality and productivity while getting best prices for the products, branding being such products which functioned well as a division of WATA.
2. A history of continuous and systematic siphoning off/spin-off of tremendous values/assets of the company to unfairly enrich the CI and its related parties, at the expense and loss to IMS.
3. Non-disclosure, even suppression, of important material information in a timely manner. In this instance, even the name of the "Independent" Advisor/Valuer of WML appointed by the CI was not given, when a shareholder requested this information. The valuation report was also refused to the shareholders in direct violation of good corporate governance and provisions of the SEC Act.
The WATA MD pointed out that it was not specified in law for it to be given. It elicited a prompt response that when he obtained a marriage license, all acts that he needs to do are not specified.
4. A wholly owned subsidiary was less detrimental to IMS of WATA even if the CI could hide the full facts of profitability/full potential, by extra fees, commissions, perks, travel/entertainment & other expenses. The annual report has extolled the virtues of the products of WATA. "Fresh from our plantation" etc .... which was foremost among other points of the good Brand value.
5. Board of directors
5.l. The Chairman and Board of Directors of all PLCs are first and foremost trustees of all the shareholders, and in the larger context to the good image of the country's Stock Exchange, its efficacy and reliability!! The SEC must be very firm with all those who will reduce or destroy investor confidence; the trusteeship for the IMS is all the more sacred.
5.2. Managing/Executive Directors, perform managerial functions. Policy review and monitoring functions of the board are given the benefits of balance and checks by electing truly independent Directors, Auditors, Advisors and maybe even company secretaries whose recording of minutes are crucial in many cases. They cannot really be independent if the management appoints them (a famous English Judge once opined that, "it would be like the thieves appointing the Judge and also fixing their remuneration"!).
In some jurisdictions in China, CI and related parties cannot vote in the election of Independent Directors, Auditors, etc. For example Microsoft has announced that the CI and management will refrain from voting in elections for the Independent positions who should be elected by IMS.
6. WATA violated important principles:
6.l. Continuous lack of accurate and timely information of the valuable assets/projects and prospects, which are of intrinsic importance to make informed decisions by shareholders/investors.
6.2. Shareholders of WATA participating in the capital, trusting the directors and managers to manage and develop the entire tangible and intangible assets of WATA for their benefit.
6.3. Conflicts of interest/siphoning off profits/benefits to the parent company, or diverting assets to entities where controlling interest and/or related parties benefit are neither ethical nor moral. It is not legal either.
6.4. Insider dealing - WATA PLC creates WML out of the most profitable division on the basis of insider information available to directors/managers: market/profit forecast, huge hidden values of the brands). They transferred WML to the parent company EMS. The IMS and the Golden Shareholder (GS-state Treasury) have vehemently protested. A churlish reply was sent by WATA to SEC's letter seeking information/clarification.
7. Wrongful sale of WML - the excellent profit making division of WATA PLC, to EMS must be reversed.
8. The Directors' excuse that WATA required urgent funding, and that there was no lending institution which was prepared to give loans to WATA, was a shocking revelation of the extremely poor cash flow and asset management by EMS; Or was it extremely well pre-planned to enable EMS to 'wrongfully purchase the cash cow' of WATA? What happened to the normal one year, three years and five year corporate plans?
IMS have helplessly watched the best potential of the assets of Watawala Plantations PLC being siphoned off to related parties; subsidiaries of parent company (EMS) and or the ultimate parent Sunshine Holding (SH) PLC; TATA Global beverages joint venture.
The ironic part is that EMS has offered to buy the most profitable arm for a paltry sum of Rs 741 million, whereas reasonable valuation was stated at the EGM by an analyst to be Rs 2.5 billion at the very least and probably Rs 3 billion.
All these companies and their directors have been accumulating huge management, directors' fees and profits every year from WATA. They have also spun off the more profitable companies and assets from WATA to themselves and related parties.
The IMS appealed to the Chairman and MD, and later at the EGM, the IMS and the GS cautioned the entire board not to proceed with the resolution using their (CI & related party) majority. However, they proceeded with the transfer of 100% of WML to EMS. The IMS expected the Board of EMS to consult the TATA main board and accept their very reasonable and legitimate request. There has been no response to date.
The SEC and the Treasury should investigate the activities of WATA PLC and Sunshine Holdings over the past five years, including transfers of assets; valuations and patterns of share trading. It will be a salutary deterrent to many other companies who have embarked or are embarking on the same wrongful path.
The IMS representing over 18,000 are a group of average decent citizens investing their savings in productive ventures to earn good returns on their investments while promoting growth and economic wellbeing of the country.
It must be noted that all of the above representatives voted against the resolution at the EGM.
A lack of stern action by the SEC, and anyone of the parties above would encourage insider traders/manipulators and other wrongdoers to bring the Colombo Stock Exchange (CSE) into disrepute. Genuine investors will not only be dissuaded from coming into the CSE but the existing investors will also seek to exit the CSE.