3rd March 1996

'I gave no opinion to Vanik': Kadurugamuwa

Q. You gave an opinion for Vanik in the Puttalam Cement transaction. Now you are acting against Vanik. Is this position correct?

A: I never gave an opinion to Vanik. At the request of Ernst and Young which posed the question of whether Section 55 of the Companies Act had been violated in connection with the Rs. 900mn borrowed by Puttalam Cement Company Vanik made certain statements for me to base my opinion. I requested instructions in writing signed by a person with a first hand knowledge of these statements made by Vanik. Vanik never came back to me with a signed written statement and therefore no opinion was made by me.

Q. But in your letter to Vanik you have said that if a statement was made that Rs. 900mn was a debt and not part of the purchase price that it could be legal?

A: Yes, I said so. If that could be confirmed Section 55 may not have been violated. I have never said there was no violation of the Section.

Q. You are now retained by international investment funds in Hong Kong?

A: Yes. I was not advising Vanik at that stage. I have never acted for Puttalam Cement or the Tawakkals.

Q. You gave some information to Minister Kadirgamar?

A: Yes. That was on the instructions of my clients, the foreign investment funds, because they were very keen that the allegations of bribery should be brought to the notice of the government at its highest levels. I have personally known Minister Kadirgamar for more than 30 years. I acted according to the instructions of my clients, but I have never told the clients the person to whom I made the report. I only confirmed that information was given at the highest level.

Misunderstandings cleared but major questions remain
Arittha: parasites seeking personal benefits

Q: You have offered to resign in view of Minister Kadirgamar's letter to the President. We understand that on receipt of Mr. Kadirgamar's second letter to the President, you have reversed your decision to resign?

A: There was no question of reversing a decision to resign. What I expressed to the President was that Minister Kadirgamar seemed to imply that the Securities and Exchange Commission and myself in particular appeared to have acted improperly in respect of the Puttalam Cement issue. Now it is obvious on reading his letter that he was misled. I wrote to the President and told her that in view of the fact that there could be this implied allegation, I did not think it was fit for me to continue in this position till the matter was clarified. I told her I would resign if this matter was not clarified by Minister Kadirgamar. I received a letter from the President on February 27 in which she has informed me that Minister Kadirgamar has informed her that he has been misled and that he has gone onto say, "It follows clearly that the SEC and Mr. Wickramanayake had acted with propriety in giving the advice which they had tendered to PERC based on the 21st June Cabinet decision. I have no doubts whatsoever on that score".

Q: Has the President specifically said that Minister Kadirgamar has been misled?

A: What I understand from this letter is that he had been his letter is that he had been misinformed about the existence of this second Cabinet decision. So he had not known about the second Cabinet decision. Since the matter had been clarified to our satisfaction the issue ends there, as far as we are concerned.

Q: But Minister Kadirgamar even in his earlier letter had not made any reference to your honesty and integrity. Has he not merely made a comment on your interpretation of the Law?

A: No, I do not think so. If you see the original letter which has been written by Minister Kadirgamar it seems to give the implication that we had acted wrongly. He has called our conclusion an "astonishing conclusion, that Vanik's proposal that an illegal direction be given to 'cook the books is in order". I don't want anyone pulling out this letter five years down the road and saying that "Look the SEC and myself in particular have given an illegal direction to cook the books". We had no part whatsoever in that part of the transaction. I had made that very clear in the letter I wrote to the President. I had explained the whole transaction, how it happened and the role of the SEC in this transaction, which we have not released to anybody except the people in authority.

Q: Your six-page letter to Minister Kadirgamar could be termed as harsh, to say the least. What is your position on this matter?

A: I was reacting to what could be interpreted as an attack on my integrity, and naturally I was angry about it at the time. Now that the Minister has been gracious enough to say that the SEC and myself had not acted with any impropriety whatsoever, once he was aware of the second Cabinet decision, the matter ends there.

Q: What was your original position when Puttalam Cement asked for SEC approval to have its shares listed in the Colombo Stock Exchange?

A: Our position has been consistent right down the line. What happened was that there had been instances of leverage buyout being permitted by the previous government. There were two cases in particular, one was Kelani Tyres and the other Veytex. Our consistent position which in fact was confirmed by the Attorney General is that it is avoidable transaction and not a void transaction. The transactions can be voided by any party affected by it. In the case of Kelani Tyres and Veytex everybody knew about it and nobody objected to it. As far as we were concerned, we disclosed it and the transaction went through. In the case of Puttalam Cement when the application reached us, we asked the Treasury whether it had any objections. The Treasury which held the 10 percent employee shares objected. So we did not give a listing. We said we could disclose it and let it go, that was not a problem. If the Treasury wanted another solution, it had to resolve it and let us know so that we could disclose it to prospective shareholders. We did not give a listing because the Treasury objected to the transaction.

Q: Is there a violation of the Companies Act?

A: Yes, There is a violation.

Q: So can't the offenders be prosecuted?

A: There is provision under the Companies Act for prosecution to be brought in certain instances like this. But that power lies with the Registrar of Companies. To my recollection it was referred to the Registrar of Companies but nothing happened. If the prosecution was successful, the Directors would have been fined a nominal Rs. 1000/= each. But the question remained as to what would happen to the transaction itself. The thinking at the time was that it would not be void but could be made void. It could be possible to have it set aside if an affected party took the matter to courts.

Q: What happened after this second Cabinet decision?

A: After the second decision it came to PERC and PERC referred it to us. We said we can disclose and list. In January this year we got the listing application. We specifically asked the Treasury, whether it had resolved the matter, so that we could go ahead and grant a listing.

Q: What did the Treasury say?

A: We have not heard from it after that.

Q: You have not approved the listing as yet?

A: No. We have not approved the listing. We will not approve it until the original objections are withdrawn. Our position has been consistent from day one. As far as I am concerned, the Minister has clarified what he has said. He has acted honourably and clarified matters. Unfortunately there are all sorts of parasites who are trying to make use of this situation to further their own goals. That is an unfortunate situation.

How the drama unfolded

The Puttalam Cement Works of the Sri Lanka Cement Corporation is incorporated as a public company by the name of Puttalam Cement Company Ltd.

Puttalam Cement Company comes up for privatization under the UNP Government. Vanik Incorporation makes an offer for 90 per cent of the shares of the company on behalf of the Tawakkal Group of Pakistan.

* The bid of US $ 41.1mn (Rs.2,028mn) was more than double that of the second bidder, and the other bidders.

The Government's offer to privatize the Puttalam Cement Company was conditional that the successful bidder pays in full the moneys in foreign currency.

* The Tawakkal Group requested and obtained government approval to pay around half (Rs.900mn) the Rs.2,028mn in Sri Lanka rupees.

Puttalam Cement now under the Tawakkal Group decided to borrow Rs. 900 mn by the issue of debentures. The money was collected from among others; People's Bank, the Bank of Ceylon, National Savings Bank, National Development Bank, Development Finance Corporation of Ceylon. In short the Group raised Rs.900mn that was due to the government from the government institutions.

* The Tawakkal Group went to Hong Kong to raise funds to pay the moneys due in foreign currency. They raised the money from 22 investment funds, most of whom at the time were buying shares in the Sri Lankan share market.

* They invested the equivalent of Rs.750mn in 50 per cent of the shares of Puttalam Cement. Therefore the bulk of the balance sum (Rs. 1,128mn) due in foreign currency for Puttalam Cement was obtained in Hong Kong.

The Shareholders of Puttalam Cement were as follows:

Foreign investors 50,000,000 shares 50 per cent

Tawakkals 40,000,000 shares 40 per cent

Government 10,000,000 shares 10 per cent

* The investment funds entered into an agreement with the Tawakkal Group that they are investing in Puttalam Cement on the basis that the company offers it shares to the public of Sri Lanka by prospectus. If this was not done the Tawakkals had to buy the shares of the investment funds at an additional price.

* The Board of Directors of Puttalam Cement at this stage comprised;

A. Q. Tawakkal

F. A. Q. Tawakkal

S. I. Kapoorwala

D. J. Meegoda

L. S. K. B. Herath

After the new government came to office:

The company (Puttalam Cement) applied for permission to have its shares quoted in the Colombo Stock Exchange from the Securities and Exchange Commission (SEC).

* Aritta Wikramanayake refused permission on the grounds that it was a violation of Section 55 of the Companies Act which prohibits a company purchasing its own shares.

* Public issue is now stopped. Foreign investment funds in Hong Kong pressurised Puttalam Cement to go public.

* Representation was made to Special Advisor to the Finance Ministry, Nihal Amarasekera, and Treasury Secretary, A. S. Jayawardene to clear the deadlock.

Ernst & Young, a firm of chartered accountants is requested to study the accounts of Puttalam Cement in relation to the Rs.900mn transaction.

* Ernst & Young asks Vanik Corporate Services Ltd., Secretaries to Puttalam Cement to obtain a legal opinion from Mr. U. L. Kadurugamuwa, partner of the law firm, F. J. & G. de Saram regarding a possible violation of Section 55 of the Companies Act.

* Mr. Kadurgamuwa is instructed that the Rs.900mn was actually a debt that the Sri Lanka Cement Corporation (before privatization) owed the government and was not part of the purchase price of Rs.2,028mn and therefore the deal was not a violation of Section 55.

Mr. Kadurugamuwa writes to Vanik Corporate Services stating he had no means of verifying the accuracy of the instructions given to him but that if a statement is given signed by an appropriate official of the Ministry of Finance saying the Rs.900mn was a debt and was not a part of the purchase price he could confirm there was no violation of Section 55 committed by Puttalam Cement.

* No such statement was provided to confirm the Rs.900mn was in fact owed by the Sri Lanka Cement Corporation.

A Cabinet Memorandum is presented by the Minister of Finance, President Chandrika Bandaranaike Kumaratunga, stating that Mr. Kadurugamuwa has given an opinion that Section 55 has not been violated and to go ahead with the public share issue.

* At the same Cabinet meeting Trade Minister Kingsley Wickremeratne says there is some concern among the business community about the privatization of Puttalam Cement. President Kumaratunga requests Foreign Minister Lakshman Kadirgamar to give an opinion on the matter to the Cabinet.

* Minister Kadirgamar on seeing Mr. Kadurugamuwa's name being mentioned in the Cabinet papers, requests Mr. Kadurugamuwa to see him to discuss the matter.

Mr. Kadurugamuwa says he never gave on opinion as quoted in the Cabinet paper and in fact what he had said was that if a statement could be made by a responsible officer at the Ministry of Finance that the Rs. 900mn was a debt and not part of the purchase price of Rs. 2,028mn, it would not be a violation of the Companies Act.

* Minister Kadirgamar writes an opinion stating that the Tawakkal Group has violated Section 55 of the Companies Act and that they be asked to pay the Rs.900mn as part of the purchase price or cancel the transaction and call for fresh bids. (S.T... 1995).

Cabinet holds with Minister Kadirgamar and the decision is conveyed to the Chairman of Puttalam Cement.

* One of the members of the Tawakkal family attempts to talk to Minister Kadirgamar at the Changi International Airport, Singapore, but is brushed aside by security officials.

* The stalemate continues and fund managers from Hong Kong keep agitating for action in Sri Lanka. No implementation of the Cabinet decision is, however seen.

* Hong Kong fund managers threaten to pull out of the Colombo Stock Exchange and are not active in the Sri Lanka market. The stock market takes a noticeable dip.

* Foreign fund managers meet Treasury Secretary A. S. Jayawardene and complain. Mr. Jayawardene refers them to PERC Chairman Rajan Asirwathan.

* Mr. Asirwathan meets Ascanio Martinotti representing some of the Hong Kong investors.

* PERC retains Julius and Creasy, a leading law firm and R. Senathirjah, one of the partners, becomes a director of Puttalam Cement on behalf of the Hong Kong investors.

* A Sri Lanka company offers to buy the 50 per cent of the company owned by the Hong Kong investors.

Hong Kong investors aghast at the suggestion made and retain F. J. & G. de Saram as their lawyers.

* PERC invites Mr.Kadurugamuwa of F. J. & G. de Saram to discuss Puttalam Cement and urges him to take action to remove the Tawakkals from Puttalam Cement.

* F. J. & G. de Saram goes to court on grounds of mis-management and obtains an interim order from the District Judge, Colombo, to appoint a director, A. N. Subasinghe, to the Board.

F. J. & G. de Saram informs PERC that action has been initiated for the removal of the Tawakkals.

The Tawakkals in objections filed in Courts quotes a letter from Rajan Asirwathan that the Cabinet of ministers has accepted a Vanik proposal to list shares of Puttalam Cement in the Colombo Stock Exchange subject to two conditions.

(a) that it be cleared with the SEC

(b) all dues of Sri Lanka Cement Corporation be paid.

This is the first time the foreign investors came to know of the new Cabinet decision.

* In a telephone conversation between the Hong Kong investors and Tawakkals there is mention that Rs.30mn had been paid to get the Cabinet decision of (March 1995) reversed. The investors inform Mr. Kadurugamuwa about this conversation and urge him to take it up with the government.

Mr. Kadurugamuwa contacts Minister Kadirgamar to ascertain whether this information (i.e. that the Cabinet decision has been reversed) is correct.

Minister Kadirgamar telephones the Cabinet Secretary from Thailand and requests him to check whether the March 23 Cabinet decision has been reversed. He is informed that no such reversal had been made. On his return Minister Kadirgamar asks the Cabinet Secretary to make a second search. The Cabinet Secretary confirms that no such decision has been made.

Minister Kadirgamar writes to the President stating that he is deeply troubled about developments at Puttalam Cement that there is a tape recording indicating Rs.30mn had been paid as a bribe to get the Cabinet decision revoked and questioning the actions of Aritta Wikramanayake and Rajan Asirwathan.

* President Kumaratunga copies letter to Mr. Asirwathan and Mr. Wikramanayake

* A. N. Subasinghe, the Director appointed by court receives death threats.

Ascanio Martinotti, representative of the foreign fund managers is arrested by the CID, produced in court and subsequently released.

Tawkkals removed from the Board of Puttalam Cement at an Extraordinary General Meeting.

* SEC Director General Aritta Wikramanayake and PERC Chairman Rajan Asirwathan offer their resignations.

* President Kumaratunga copies letters of Mr. Asirwathan and Mr. Wikramanayake to Minister Kadirgamar.

Prior to his departure to Abu Dhabi Minister Kadirgamar sends a second letter clarifying his position after seeing for the first time a copy of the Cabinet decision reversing the March 23 Cabinet decision.

* President Kumaratunga sends extracts of Minister Kadirgamar's second letter to Mr. Wikramanayake who accepts the contents of the letter.