Financial Times

Code loophole in SEC Act

By Duruthu Edirimuni Chandrasekera

The recent Richard Pieris and Company Plc (RPC) announcements of transferring shares from one plantation subsidiary to the other has raised issues about a snag in the Securities and Exchange Commission (SEC) rules with regard to the Mandatory Code.

“The SEC rule for this code does not provide adequate regulations for such a transaction where the minority shareholders are disadvantages,” a stock analyst said. On Wednesday, RPC announced that RPC Management Services (Pvt) Ltd (RPCMS) transferred 17,015,100 shares (68.06 %) of stated capital of Kegalle Plantations Plc (KPP) to RPC Plantations Management Services (Pvt) Ltd (RPCPMS). Both RPCMS and RPCPMS are 100 % owned by RPC. Initially (before this transfer) RPCMS had both KPP and Maskeliya Plantations Plc (MPP) with 68.06 % in KPP and 63.67 % in MPP. Now RPCMS only has MPP.

A day before this announcement came, RPC issued a statement to the Colombo Stock Exchange saying that RPC have said that discussions/negotiations are underway for a possible divestment of the share of RPCMS of MPP. This came after speculative trading in Maskeliya and RPC stocks for two consecutive days.

"They are priming to sell MPP and the attractiveness in MPP is that it is held by a private firm (RPCMS) which is 100 % owned by RPC. MPP can be sold in two ways either selling RPCMS or directly selling MPP," a stock analyst explained. He said the issue in directly selling MPP is that the buyer, buying the 63.67 % in MPP will trigger the SEC mandatory offer (where when over 30 % of a listed firm is bought the buyer has to offer to buy shares at the same price he bought the shares to the minority shareholders).

"But by selling RPCMS, this can be avoided. This is the real attraction," he added. He noted the same happened when Taprobane Consortium took control of Browns Group and when AVIVA bought Eagle. "But this is a massive loophole in the SEC Act," he added, saying the minority interests are not looked after.

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