Singer issues Rs. 115 mn in pro notes

By Mel Gunasekera

Singer Sri Lanka last week issued Rs. 115 mn in promissory notes, of which Rs. 100 mn has been placed with Seylan Bank. Commercial Capital Ltd. (CCL), who structured and placed the issue will raise the balance money in the market, a senior CCL official said.

The unsecured one year pronote is freely negotiable with a benchmark of 12 month treasury bill plus a commission. Singer will utilise the funds for their expansion programmes particularly with the Mega Store concepts, Chairman Singer Sri Lanka, Hemaka Amarasuriya told The Sunday Times Business.

"It is also Singer's contribution to developing the corporate debt market," he said during the signing ceremony last week. Seylan Bank General Manger, Mrs. Rohini Nanayakkara said, Singer has a longstanding relationship with the bank, and has been using the branch network to deposit their daily collections.

"Seylan Bank has primarily been catering to the retail banking sector. Since I took over, I decided as a corporate objective to work with selected corporate businesses. Singer is a household name and it's a good opportunity for Seylan Bank," she said.

Commercial Capital (CCL) is a strategic alliance with Singer Sri Lanka and MB Financial Services (MBFSL). Following Central Bank's proposal to create dedicated primary dealers to stimulate the debt market, MBFSL recently launched its first dedicated primary dealer arm to trade TBills using Singer Mega Store in Kandy.

"We expect MBFSL and Singer to benefit from marketing synergies associated with the alliance," CEO/Managing Director CCL, Ajith Devasurendra said.

MBFSL would use Singer's islandwide branch network and the newly establish Singer Mega Stores to promote debt market activities in Sri Lanka, Mr. Devasurendra said.

Singer Mega Stores fashioned in the style of Western Department Stores, includes a multi-brand household appliances, cybercafe, an exhibition gallery, and a restaurant. The stores offer fortnightly discounts on various products.

The trend in the West, is for department stores to offer banking and personal finance activities to their clients. The Singer Mega Store is also catching on the trend by offering clients an opportunity to invest in fixed income securities.

While this helps expand the banking clients, the customers also get a better deal due to competition.

CCL Directors are Messers Hemaka Amarasuriya (Chairman), Ajith Devasurendra (CEO/MD), M T L Fernando (Director), Vijaya Malalsekera (Director), Gamini Abeysuriya (Director), Sumith Guruge (Director) and Nevile Peiris (Director).

People's Merchant to issue debentures

By Dinali Goonewardene

The People's Merchant Bank will issue Rs. 1.5 million, 4 year debentures of Rs 100 each, at 13.5% per annum, payable quarterly. People's Merchant Bank will manange the issue sponsored by C T Smith Brokers (Pvt) Ltd.

Proceeds from the issue are intended to increase the Bank's fund based activities. "The interest rate averages 14.2% and will provide the investor with a high return in comparison to prevailing low interest rate, in the gilt edged securities market," Senior Manager, Corporate Finance, Gamini Sarath said.

The capital is guaranteed by People's Bank, Hatton National Bank and DFCC. The debenture issue is ranked subordinate to creditors in the event of winding up.

The company maintains a debt ratio of 64%, which will dilute to 73% consequent to the issue of debentures. This is in keeping with industry norms. Shareholders of People's Merchant Bank include People's Bank 395, South Bridge Investments (Australia) 15%, Hatton National Bank 10% and DFCC 10%.

GST celebrates first anniversary

On the first anniver sary of the Goods and Services Tax (GST), officials said it was still too early to comment on its performance.

Comissioner General, Inland Revenue, O. M. Weerasuriya told The Sunday Times Business that collection in the first nine months of GST has been on target.

According to the Commissioner, total tax from internal sources (excluding import duties) for the first three-quarters of 1998 amounted to Rs. 80 billion, one billion more than estimated for 1998. GST revenue for the third quarter amounted to Rs. 11 billion.

TT revenue for 1997 amounted to Rs. 43.5 million while collections in the first quarter in 1998 were Rs. 13.5 million GST revenue in the eight months of 1998 amounted to Rs.31.million.

Inland Revenue officials said no immediate changes to the controversial GST were contemplated. The possibility of an increase from the 12.5% rate could be the only change envisaged this year, they added.

But with provincial council elections round the corner, there were no immediate measures to increase the tax band, on the dawn of its first anniversary, officials confirmed.

On April 1 1998, a new value added tax system replaced the Turnover Tax (TT), which generated the highest of all tax and non-tax revenue (28%) for the government of Sri Lanka (GOSL).

Although the most common tax collection system globally, the value added tax received mixed reactions from ratepayers, economists and analysts who had reservations and misgivings that the total revenue collected from this system would fall short of the old turnover tax system.

The main criticism of the system was that while it would eliminate the cascading effect of the old turnover tax system, enforcement was complicated and non-compliance would be rampant.

The landmark change, the GST, at 12.5% replaced the three bands of 8%, 12% and 18% TT, which amounted to 28% percent or Rs. 43,257 million of the total taxes collected in 1997.

1998 figures will not give a clear comparative picture, as the first three months of the year were not subject to GST and TT was in operation.

Targeted collection for 1999 is over 20% of all tax revenue, Inland Revenue officials said.

Mr. Weerasooriya said they had teething problems as with any new venture. One of the main problems he said was the refunding of differed tax. So far Rs. 7 billion has been refunded, but he said this was too high. He plans to strengthen the audit branch to tackle this problem.

A special monitoring system has also been set up for surveillance of non-compliance. As much as with every voluntary self-assessment system the GST has its share of non-compliance.

The Inland Revenue Department is mainly concerned with non-compliance of large taxpayers. GST is chargeable on registered organisations that make over Rs. 500,000 per quarter.

Field audits are carried out and penalties of Rs. 50,000 per return are imposed on those who fail to furnish tax returns. So far 450 cases of non-compliance have been recorded in April 1998 only, officials said.

There will be no changes in the exempt and zero rated items from GST, officials said. Meanwhile wholesale, retail trade, banking, finance, money broking and pawn broking areas are still under turnover taxes and will remain so this year also, they said.

Wholesale and retail traders are charged a 1% turnover tax collected by the provincial governments. Until the 13th amendment is sorted out and the government's devolution package is passed in parliament, this law cannot be changed, Inland Revenue officials said.

Turnover Tax on financial services is a dying tax globally, officials said. Because the financial sector's turnover is generally very high, even the current rate of 1% on TT could amount to half their profits. Internationally there are moves to scrap this tax and only charge income tax from the financial services sector, officials explained.

SLT sends shock waves in telecom

Sri Lanka Telecom (SLT) sent 'shock waves' through the telecom industry last Tuesday, by filing action against industry watchdog Telecommunication Regulatory Commission (TRC) and citing rival fixed line operators Suntel and Lanka Bell as respondents over the recent interconnection agreement.

The dominant carrier SLT alleges the interconnection agreement, specially the agreement related to international calls, favours its rivals.

The interconnection on international calls reduced Suntel and Lanka Bell's discount on out going calls to 20 per cent. SLT was requested to share its lucrative incoming call revenue by paying Rs. 9.50 for each unit.

Last November, the TRC unveiled the new interconnection agreement to replace the controversial sender-keeps-all agreement and lead to revenue sharing among the operators.

Revenue sharing on local calls can only be effective after the three operators establish a common telephone directory and directory services. No date was fixed as to when revenue sharing on local calls would become effective. Until then, the present sender-keeps-all agreement continues for local calls.

SLT has been against printing a common directory, as it would give unfair competitive advantage to its two rivals.

SLT's legal action comes after the TRC issued SLT with a notice last week for failing to comply with the new interconnection agreement.

The new ruling was made in a bid to end a bitter revenue row among the three fixed access telephone operators, which have substantial foreign investment.

Analysts say SLT's action undermined the regulator's task.

The deregulation process and the regulatory framework in Sri Lanka has been hailed at numerous international forums as a role model for the SAARC region. Analysts say SLT's decision makes a mockery of the regulatory framework and brings disrepute to the country.

Lanka Bell's CEO, Vijay Watson said that it was shocking news that a licensed operator should take such a drastic measure against a determination that underwent a detailed arbitration process.

The US$ 130 mn Lanka Bell venture, is mostly owned by Transmarco of Singapore.

Suntel's CEO, Jan Campbell said they were surprised by SLT's decision. "We were also disappointed with the TRC's determination, but abide by it as it's a rule of law." Suntel's major investors include Telia of Sweden.

The private operators have poured in millions of dollars into their local operations, are facing an uphill task of funding their expansion programmes. (MG)

Both operators say prospective lenders are sceptical due to the prevailing uncertainty in the telecom environment.

NTT of Japan has a 35% stake and the management contract to operate SLT. The government still retains the major ownership of SLT, while a further 10% is expected to be divested via an IPO.

SLT's tarriffs are also up for revision in April, with the TRC decision expected during the coming weeks. TRC Director General Prof. Rohan Samarajiva was unavailable for comment as he was indisposed.

Is there a future for our rubber ?

One of the important functions of government is to support sectors of the economy, which are adversely affected temporarily in the long run interest of the particular industry and the national economy.

Sometimes such intervention may not be entirely economic but have social considerations as well. The long term interest of the economy and society is a primary responsibility of the government.

Rubber production in the country is just one such area which the government must assist in the long run interest of the country.

The rubber industry was facing a number of problems arising out of the release of stockpiles by Thailand and China.

The declining price trend was accentuated by the South East Asian crisis. Since the South East Asian countries devalued their currencies significantly, local rubber producers have lost their markets, faced severe price declines and are being forced to cut down their production. The increasing use of local rubber in domestic industry, one of the favourable developments in recent years, has also been arrested owing to the poor performance of rubber manufacturers as well. There is every possibility that this trend may continue and seriously jeopardise our rubber production.

Even before this crisis, rubber production had not fared well. Several measures have accounted for a declining trend in rubber production.

The area under rubber had declined by about 25 percent in the last two decades, the rubber clones cultivated in the country have not been very productive, small-holders who account for about one-third of rubber cultivated area have not been responsive to the adoption of better clones and more scientific cultivation.

In fact most rubber producers are smallholders who tap rubber and process the latex as a part-time occupation. Scientific and systematic cultivation of rubber is limited.

This is very much in contrast to the developments in Malaysia where it is cultivated in a far more scientific manner.

The government has already taken a few steps to help rubber producers. These include the removal of the cess on raw rubber exports. The removal of this cess and creeping devaluation of the rupee has mitigated the problem as the price to the producers has not dropped by the full extent of the international dollar price decline.

However, in the rubber producing countries of South East Asia the large devaluation of their currencies has meant high prices to producers who have responded by increasing production.

This in turn brings down dollar prices - a common chain of events in primary agricultural commodities.

So our rubber producers have been at the receiving end of this international dip in prices.

The price decline was of such a magnitude that there were fears that our rubber manufacturing industries would import raw rubber.

In fact they did.

Fortunately the government stepped in and controlled natural rubber imports.

Consequently only a small fraction of rubber requirements were imported in 1998.

We are mindful of the fact that global trade arrangements limit a government's ability to intervene. We are also aware that many past efforts by countries to tame international commodity markets have failed.

Despite these experiences it would be disastrous for us to adopt a laissez-faire attitude towards our rubber producers.

There are several reasons why the government must intervene.

In the first instance it is not a development within the international rubber industry.

It is a spillover effect of a financial crisis.

Had the South East Asian countries responded in a different manner rather than reacted to the financial developments in a rash manner by massive devaluations, we would not have witnessed the depressed prices in the rubber market.

Secondly, this is likely to be a short or medium term development and we must not let our rubber industry suffer a permanent damage owing to it.

Third, we must recognise that it is a crisis brought about by factors beyond the control of the producers themselves.

Fourth, the revival of the rubber industry would ensure a greater degree of diversification in the economy and in our exports.

A time may come in the future when rubber prices are high and prices of our other primary commodities are depressed.

Then our vulnerability to international price movements would be much more.

We must guard against the instability arising out of the fluctuation of prices of a small number of exports.

Fifth, natural rubber has fed into manufacturers, which should be one of the industries which should grow.

At present about 40 per cent of natural rubber production is used by the local rubber manufacturing firms. Sri Lanka also has about 15 per cent of the world's solid tyre manufacturing capacity.

We should not lose our gains in rubber based manufacturing and value added rubber products.

We must view the natural rubber industry in relation to its forward linkages with manufacturers.

We must have a long-term view of the industry and fashion policies to serve the long term goals rather than abandon an industry which could provide the raw material for a cluster of rubber based manufacturers for which we may have a comparative and competitive advantage.

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