21st June 1998
A wave of pessimism appears to be affecting the business com munity. This is no doubt due to the aftermath of the Asian economic crisis and the economic sanctions imposed on India and Pakistan.
The collapse of Colombo's stock market is perhaps the best indicator of this pessimism. Unfortunately if this pessimism continues it will be a self-fulfilling prophecy. The low expectations would lead to lesser investments, which in turn would reduce the momentum of economic growth and business activity.
It is therefore vitally important that we take the current global situation into account and act realistically making use of whatever opportunities there are for our own economic growth.
There is no doubt that l998 would be a year of slow global economic growth. Economic growth would be particularly low in Asia. Nevertheless the Sri Lankan economy has so far weathered the external shock reasonably well.
This has been mainly due to a lesser exposure to the global economy as well as certain aspects of our economic structure, which have enabled us to be affected only slightly.
Nevertheless there are signs of the adverse impact. In the first four months export growth was only about 5 per cent and this too was mainly due to a continuous robust export growth in tea.
In fact, agricultural export growth in the first four months was over 16 per cent higher than for the same period last year. This despite lower production.
The garments industry was the most resilient and registered a growth of 10 per cent. Since tea exports and garment exports account for nearly two-thirds of Sri Lanka's exports, the good performance of these two exports enabled a reasonable growth in our export income.
There are signs that the boom in tea prices may be at an end. This would affect our export incomes significantly. Rubber goods and other industrial exports suffered a setback.
Within export industries there is evidence of some export firms being able to expand their growth owing to their quality production and niche markets. This is a clear indication that Sri Lankan entrepreneurs must find strategies by which they could be more resilient even in the face of unfavourable global conditions.
We must exploit the fact that the international market still remains fairly free and competitive and the developed countries, in particular, are open for quality products at competitive prices.
The main problem facing our industries is that the devaluation in Asian countries producing similar products makes their products more price competitive.
Sri Lankan manufacturers must shift their production to those lines where they have a competitive edge, as well as enhance their productivity to cope with the disadvantages of the currency devaluation.
In this task it is important for managers to get the message across to their workers that they must play a vital role in improving productivity to remain competitive. Otherwise their own employment could be jeopardised.
While the government must review the emerging global economic situation and take appropriate actions which could help our industrialists, it is also important for our business community to retain a greater degree of resilience to the emerging economic conditions and take steps to improve their competitiveness.
A mood of pessimism must not be allowed to prevail as an expectation of a poor economic performance could itself be responsible for realising such an expectation of slow economic activity.
The construction industry cannot develop without government's commitment and long term active support. It is disappointing to note that the importance of the domestic construction industry has not been adequately reflected in state policies and the domestic contractors are left tostruggle for survival in an unhealthyenvironment to either sink or swim.
The importance of the Domestic Construction Industry as a contributor to the economic development of Sri Lanka is undisputed.
Countries in the region have developed their construction capabilities to a high degree to compete with the best in any part of the world.
In every case, assistance, incentives and guidance by the respective governments have contributed to their success.
The construction industry cannot develop without government's commitment and long term active support. It is disappointing to note that the importance of the domestic construction industry has not been adequately reflected in state policies and the domestic contractors are left to struggle for survival in an unhealthy environment to either sink or swim.
The situation is aggravated by ad hoc policies implemented from time to time to cater to short term political needs neglecting the required long term consistent policies to develop the industry.
The government with World Bank assistance, created the Institute for Construction Training and Development (ICTAD) and the National Construction Contractors Association of Sri Lanka (NCCASL) to develop the domestic construction industry.
The ICTAD fulfilled its functions with a high degree of acceptance during the period it functioned under the then Minister of Policy Planning and Implementation. ICTAD's performance during this period was outstanding and may be summarized as follows:
• Established ICTAD as the authority for the construction industry and
obtained recognition of state agencies.
Undertook a study for the Road Development Authority on a directive of the World Bank to develop a competent road and bridge sub sector domestic contracting community.
• Offered project management services to state agencies.
In 1992, ICTAD was shifted to the Ministry of Housing & Construction when the above progress ceased to be sustained and ICTAD's pace slowed down. Since 1994, ICTAD lost its recognition which was attributed to poor policy directives and the resignation of its trained and experienced staff.
It is sad that some of the achievements made by ICTAD have been nullified by the guidelines on tender procedures issued by the Minister of Finance and Planning in September 1996. These guidelines were revised in 1997 and further amended by Public Finance Circular No. 352(1) of February, 23rd 1998.
Some of the main issues of concern in the current circular are as follows:
Standards Bidding Documents - No importance is given to the standards bidding documents developed by ICTAD. According to this circular and ad-hoc document is permitted.
The following are the consequences in using such documents:
I. Documents may be defective involving disputes leading to delays and expense to government.
II. A variety of documents would necessitate the contracts and supervisory staff to study documents issued for each and every project and this situation will create confusion.
Mobilization advance - The guidelines state that this advance should not be given as a matter of course. This conflicts with international practice.
Registration of Contractors - ICTAD has developed an effective scheme for the grading and registration of contractors. The current circular requires registration to be done by State agencies for works up to Rs. 10 million, which system would undoubtedly cater to the "Chit" system. With the implementation of this system, contractors need not have the National Registration of ICTAD or membership in the NCCASL thus depriving themselves of the training and advisory services given by NCCASL to members.
The NCCASL has through its nine sub offices in the nine provinces including the North and East has established procedures at grass roots levels for the following activities:
• Seminars and Workshops
Escalation in cost of construction: The circular only permits escalation of cost for projects of over 12 months duration. This would prevent contractors from submitting realistic tenders for works of 12 months duration or less, with confidence.
Contractors will tender high to provide for escalation of cost.
The delays in payment: The delays in payments by State agencies is more the rule than the exception. These long delays have liquidated several contractors particularly small contractors who have not been able to service their bank loans.
The following are the principal factors hampering the development of the construction industry.
• Insufficient concern with planning in advance for the necessary construction,
resources and institutional capabilities within a framework of a consistent
place. This could be only satisfied by a separate ministry for construction.
In an article appearing in the "London Financial Times" Robert Chote quotes Alan Blinder, former vice chairman of the US Federal Reserve as saying "public accountability is a moral corollary of central bank independence. In a democratic society, the central bank's freedom to act implies an obligation to explain itself to the public." Chote says that Gordon Brown, the British Chancellor of the Exchequer, shares this view. Brown, says Chote, has long emphasised that an Independent Bank of England needs to be transparent and accountable.
According to Chote the main channel for transparency is the publication of minutes for each monetary policy committee (MPC) meeting. Such minutes include details of how each committee member voted and the minutes are published six weeks after the relevant meeting.
Chote says that, in contrast, the European Central Bank is not planning to publish the voting records from its policy meetings for at least 16 years. The ECB president Wim Duisenberg has said that minutes revealing split votes at the Bank of England had added uncertainty in financial markets.
Duisenberg has said further that publication of minutes soon after decisions have been taken at such meetings will make it difficult for individual participants in the discussion to change their minds and be convinced of the arguments of others. But, says Chote, in the UK the minutes have not prevented members from changing their views.As regards accountability, Chote says MPC's procedures will be scrutinised by the non-executives on the Bank's Court of Directors. They will check whether the MPC has collected the regional, sectoral and other information necessary for formulating monetary policy.
Chote observes that the Court membership has been broadened by the chancellor and that the 11 non-executives are joined by a trade unionist, a consumer lobbyist and bosses from manufacturing, financial services and a utility.
By Donna Smith
WASHINGTON, June 18 (Reuters) - The U.S. trade deficit swelled by 9.5 percent in April to $14.46 billion from $13.21 billion as the Asian economic crisis dragged exports down to their lowest level in more than a year.
The Commerce Department said on Thursday imports declined 0.9 percent in the month, but that was not enough to offset a 2.6 percent drop in exports in the month to $77.11 billion, down from $79.15 billion in March.
"It looks like the worst-case scenario for the U.S. trade gap in April eventuated," John Rothfield, International Economist at Nationsbanc-Crt. The April deficit, which reflects a change in the way some data were seasonally adjusted, was higher than the $13.4 billion deficit expected by economists and suggests that the robust U.S. economy may begin to slow.
"People are going to be knocking down their GDP (gross domestic product) forecasts," said Cary Leahey, Chief U.S. Economist at High Frequency Economics.
A $21.48 billion deficit in April for trade in goods was a record and exports were at their lowest level since February 1997 when they were $75.10 billion, the department said.
Fearing a political backlash, U.S. administration officials have repeatedly warned that the trade deficit will get worse as Asia's crisis depresses exports and boosts imports from countries that have devalued the currencies.
"We are receiving a flood tide of cheap Asian imports, and it is showing up," said Kevin Flanagan, Economist and First Vice President at Morgan Stanley Dean Witter.
The United States usually runs a deficit in goods trade, which is partly offset by a surplus in services.
The services surplus fell by 3.8 percent in April, the agency said.
Better or worse for tea
"For better or for worse" _ that's where Sri Lanka's tea markets appear to be heading in the next few months.
In recent weeks, the market has crashed for the expensive high grown types as the seasonal rush of poor quality crop stumps prices, sending it into a tailspin.
Last week was no better, with high grown teas selling at around 80 rupees per kg, far below the 140-150 rupees per kg fetched for these same types earlier this year.
Tea trade views are mixed as to the price levels and the future. Unilever's tea expert Michael de Zoysa believes prices virtually hit the roof earlier this year and were too high to be maintained. It seemed reasonable that it had to come down, he added.
'There is a glut of poor teas in the market and I see this trend continuing for at least a month," Zoysa, managing director of the multinational firm's tea division in Colombo, said.
He said that Iraq's absence as a direct tea buyer was also hurting sentiment in Colombo and it was hoped that Sri Lanka would send a ministerial delegation, as requested by Iraq, to discuss a resumption of direct tea purchases.
At present, teas are going to Iraq but through Jordan and the third party involvement is cutting into price levels that Colombo would have otherwise enjoyed if there were direct sales. Zoysa expects the auction average this year to be around or higher than the 1996 level of 104 rupees per kg.
Last year, the Colombo auction tea average was 117 rupees per kg but there are doubts as to whether this could be achieved this year. Central Bank Economic Research director R.H. Jayatissa also confirmed that tea price levels may not remain at the favourable rates seen in the first quarter of the year.
Plantation stock analysts said that next year would be a difficult year for prices and no more could one expect the high levels seen in recent months because traditionally the high prices are maintained over a two-year cycle and then they tend to fall.
What it would do to the balance sheet of now-thriving plantation companies is questionable. Plantation companies have shown high profitability owing to favourable prices in the past 18 months.
Brokers at Asia Siyaka Commodities said that a lot of teas among high growns sold at below cost last week. Many parcels were not sold after offered prices were below expectations. Mid growns followed a pattern similar to high growns while low growns were the only teas that made a positive showing.
They said that the poor quality teas were expected to taper off by end-June, allowing good quality types to enter the market and boost prices
The first listed company in Sri Lanka has fallen victin to the East Asian crisis and closed down operations.
Parquet (Ceylon) Ltd., closed down operations last week, citing its inability to attract orders due to the severe currency devaluation in South East Asian countries.
As a result, trading of Parquet shares were suspended for half an hour by the CSE on the request of the company.
The company produces timber wood flooring made from rubber wood, which is available in vast quantities in Indonesia, Thailand and Malaysia. Orders continued to flow, despite tumbling currencies and competitive prices in these countries.
Parquet had nearly concluded a contract to sell 50 per cent of its capacity over the next three years. But in March this year, the buyer has cancelled the order as he received an attractive price from a Malaysian supplier.
Meanwhile, Parquet's other buyers are also demanding a substantial price reduction, indicating that they have no alternative but to place orders with other suppliers from the region.
"We are looking at all avenues of cost reduction to enable us to re-start our operations," Parquet Chairman, Singha Weerasekera told The Sunday Times Business.
As a cost cutting measure, the company has sent proposals to its labour unions and the factory workforce with a view to increasing productivity. Despite lower productivity levels in the past, the company has continued to pay production incentives to their workers. A further financial injection is also required for Parquet to resume operations, Mr. Weerasekera said,. adding that it would take a while to put together an attractive production package to lure lost market share.
By Nimal Jayawardena.
An advisory Commission on Company Law appointed in terms of Section 422 of the Companies Act No. 17 of 1982, on a request made by the Minister of Trade has taken steps to recommend reforms to the present Companies Act.
The idea of the reforms is to ensure legislation to facilitate commercial activities in the present day economic environment. These reforms have been proposed with a view to have the following resulting effects;
* To minimize barriers for small businesses seeking the benefits of incorporation.
* To encourage efficient and innovative management of the companies by conferring on Directors a wide discretion in matters of business judgment at the same time having an effective control by shareholders and creditors against abuses of such management powers.
* Not to impose unnecessary limits on the ability for small business enterprises to structure those ventures.
* In the most appropriate way to make provision for the possibility of rehabilitating businesses facing temporary difficulties.
* And to provide simple, quick and fair procedures for realizing and distributing effects of defunct companies.
With these criteria in mind the Advisory Commission on Company Law having called for representations from the general public and professional organisations and having considered recommendations of a Sub-Committee appointed to identify the areas needed to be reformed, and also with the assistance of a foreign expert in the field of company law reforms, prepared a draft Companies Law which may replace the existing outdated legislation of 1982. This draft Law was formally handed over to the Hon. Minister of Internal and International Commerce and Food on November 24, 1997.
In this draft, certain new concepts also have been introduced. This article briefly describes some of the contemplated reforms.
Single Share Holder Companies -
The Present Act:
The minimum number of shareholders necessary to form a private limited liability company has been stated as two. (Section 2 of the Companies Act No. 17 of 1982).
It has been observed that family businesses are carried on in the form of private companies. There is one controlling shareholder and one or more other persons who would be made shareholders merely in order to comply with the statutory requirement. It has been observed that as far back as the last century this type of one man company did exist (See Salamon Vs. A.Salamon & Company Limited 1897 A.C. 22).
Even though there was general acceptance of the commercial reality of single shareholder companies, much opposition was experienced in introducing one shareholder companies into the local system. In the North American jurisdictions, legislation has provided for the existence of such companies. The main reason for which many objected to this suggestion was the delay experienced in appointing an executor or administrator for the estate of a deceased shareholder.
It was somehow acceptable after long deliberations to accept single shareholder companies when the single shareholder is a body corporate and to allow a natural person to incorporate a single shareholder company with a body corporate a designated nominee to succeed him as the shareholder until an executor or an administrator to his estate is appointed by court.
Special provisions for private companies
A large number of companies registered in Sri Lanka fall into the category of private companies. This fact would demonstrate the practical importance of private companies. In the present economic environment the need to provide a legal network in order to encourage the incorporation of such corporate bodies and effectively regulate those is clearly evidenced in the representations made to the Advisory Commission. The present Act despite certain minor relaxations of applicable legal procedures does not contain provisions which would serve as incentives to encourage the incorporation of private companies.
A look into the present position shows a great need for improvement to be made.
Private companies could be broadly divided into two main categories, namely, the properly structured companies and small family companies.
The latter could definitely be developed to the state of former by prudent investment and proper management. This would result in an increase in the investment in the domestic economy and a significant increase in employment generation.
Therefore in the new draft of the Companies Act it is suggested that:
* Lower and upper limits of membership is maintained at 1 and 50 respectively and continues to prohibit the public issue of shares. However, there is no prohibition to transfer the shares.
• A private company can dispense with the requirements to keep an interest register by unanimous resolution of shareholders.
•A private Company does not have to deliver copies of annual financial statements to the Registrar of Companies, unless, the Registrar on his own accord requires a private company to do so.
•These would enhance ability of a private company to take business risks and enable them to obtain equity participation from willing investors or distribute ownership more effectively than through a partnership or a non-corporate structure.
Provisions have also been made enabling the shareholders to take any of the following actions by way of Agreement in writing.
•Issue of shares
•Making of distributions
•Re-purchase or redemption of its share.
•Giving of financial assistance to purchase its own shares
•Enter any transaction which would confer benefits on a Director.
However, such liberties are given only if the Company can be kept solvent after the implementation of those.
Simplifying incorporation process by introducing one constituent document: Under the present system two comprehensive documents - namely, a Memorandum of Association and the Articles of Association - should be filed with the Registrar of Companies. Even though it is sufficient under the present system to file a Memorandum of Association and state that the Articles according to table A would be adopted, it may not reduce the volume of work that is involved in the course of incorporation.
A Memorandum of Association by itself is a lengthy document which consists of a detailed statement of objects of the company. Due to this nature of the document it has been the practice to obtain prior approval of the Registrar of Companies as to the acceptability of the contents of the constituent documents which more often than not caused unnecessary delays in the process of incorporation.
It was also observed that the object clause has become practically redundant. It was decided that unless a company wishes to narrow down the scope of operation by stating the objects, the constituent documents could merely state that the company can engage itself in any lawful commercial activity. With the introduction of this, a company could be incorporated with a simple application form which states basic details relating to the company if it adopts the Articles in the prescribed form which is contained in a part of the proposed Act.
Minority buy out rights
This is a totally new concept which is suggested to be introduced. The main aim is to increase the efficient use of investment capital. This has been done with a view to give majority shareholders a greater say in the business activities and direction of the company, and in the use of the company funds.
This task has to be achieved ensuring adequate protection to minority shareholders who do not share the same view with majority shareholders.
Any major change in the direction of the company or the alteration of the initial purpose for which the minority has invested has to be firstly approved by the shareholders.
This confers authority on the company in respect of the change desired by the majority of the shareholders. Thereafter the shareholders who voted against the resolution would get the right to be bought over at a fair price.
Under the suggested scheme the company can buy those shares and reduce the share capital by that amount or could initiate a process through which a third party could be arranged to purchase the shares. Similar schemes are found in the legislation of other jurisdictions as well (eg. Section 190 of the Canadian Business Corporations Act and Part XIIIA of the UK Companies Act of 1985) which have withstood the test of time and effectiveness of their implementation.
There is no doubt however, such a new concept should be worked out with adequate safeguards. Consideration should, in setting such safeguards be made with regard to both minority rights and interests as well as to the future well-being of the company. This is to be achieved in the following manner:-
A dissenting shareholder could within 10 days of passing of a relevant resolution set the buying out procedure in motion by serving notice on the company that he desires to be bought out at a fair price.
If a dissenting shareholder does not give notice within that period, it is presumed that although such shareholders were not in favour of the resolution they have opted to remain in the company.
If the buying out of shares of a dissenting shareholder is to have a damaging effect on the company (such as the purchase of shares resulting in the company becoming insolvent) the company could make arrangements for a third party to buy the shares or could obtain a suitable conditional Court Order exempting the company from the obligation to purchase its shares.
The price at which the shares of a dissenting shareholder to be bought should be a fair one both by that shareholder and the company. This is to be achieved by an effective system to check such a situation. A shareholder who is not satisfied by the price offered by the company can resort to arbitration or that matter could be referred to the Company Law Disputes Board (which is a concilliatory body intended to be established to expeditiously dispose off such disputes).
This provides a suitable mechanism to guide innovative investors in new avenue of business. This effectively provides a legal framework for diverting business directions into more profitable ventures which would be a boost to the slagging economy of today.
Financial assistance by a company to acquire its own shares.
Section 55 of the present Act (which is identical with Section 54 of the 1948 UK Act) prohibits granting of financial assistance by the company to purchase its own shares. The proviso to this section permits such grants where:
The company in its normal course of business lends money for such purposes;
The company is providing money under an existing scheme for employees to purchase fully paid shares.
The suggested scheme recognizes the universal principle to prohibit a Company giving financial assistance to acquire its shares, if the company fails to satisfy the solvency test after such grant.
However, the need to provide financial assistance is also seen in certain circumstances which are commercially beneficial to the company. The report of the Jenkins Company Law Committee (1962 British Command Paper No. 1749) suggested, whilst recommending to retain the principal restriction, that companies should be provided with certain practical alternatives which would enable them to give financial assistance in permissible circumstances.
This need is amply demonstrated in the cases of Brady V Brady (1989 AC 755) and the Charter House Investment Trust V. Tempest Diesels Ltd. (1987 BCLC 1), where two simple company reconstruction arrangements were attempted to be brought within the scope of the prohibition.
The possibility (or the probability) of bringing in commercially and rationally unobjectionable arrangements within the narrow meaning of prohibited granting of financial assistance is due to the ambiguity of the existing law on the one hand and the type of developments in the commercial field of today being not comprehended at the time of drafting the present legislation on the other.
In the present UK Act the provisions as suggested by the Jenkins Committee have been adopted in respect of private companies. The much more elaborate provisions in respect of public companies have resulted in certain wholly unobjectionable transactions being shot down as unlawful. (As described by Professor Gower in Principles of Modern Company Law 5th Edition at page 227).
Other jurisdictions such as Singapore, New Zealand have adopted schemes mainly based on the recommendations of the Jenkins Committee. They do not make any distinction between a private or a public company. So is the Canadian system.
The suggested reforms while recognizing the rule prohibiting the providing of financial assistance sets out the circumstances under which such financial assistance could be granted.
The reforms outline the procedure for treating a transaction as an exception to the rule and spell out the requirements which may prepare the ground conditions for the Board's decision to grant financial assistance for the acquisition of shares.
The responsibility cast on the Board of Directors would compel them to monitor the smooth operation of the system.
This would provide us with a legal regime which would be adequate to cover the gross violators of the system whilst permitting bonafide attempts to give a "kick start" to a company facing genuine problems.
Companies Disputes Board:
A new organ by the name of Companies Disputes Board is recommended to be established in the proposed draft. This Board shall be appointed by the Minister and should comprise persons with expertise in the law and practice. This Board, has the power to conduct mediations and arbitrations:
is expected to deal with all minor commercial disputes and effectively resolve them in a practical manner;
is expected to reduce the backlog of companies disputes pending before court:
could encourage mediation or arbitration wherever possible and discourage time consuming adjudicating procedures.
In addition to the new concepts discussed above it is also expected to abolish the separate type of companies known as Peoples Companies and for the Directors duties to be properly codified. The new concept of solvency test would run through the entire Act which would provide adequate protection to the company itself, to its creditors and its shareholders in all the vital circumstances.
There are mandatory requirements to disclose interests of directors and shareholders. A document known as the disclosure register would have to be maintained at the main place of business, Shareholders, creditors and certain other interested parties are entitled to peruse this register during a permitted time.
The main idea of introducing the new regime is to cope with the new developments in this field and to simplify the process of incorporation which would immensely benefit the commercial community. We are hopeful that the introduction of this new regime will provide the most suitable legal infrastructure in the commercial field for corporate structures to meet the pressures of an open economy and face the challenges of the next millennium.
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