The Sunday TimesBusiness

3rd November 1996




Debt Markets awaiting budget boost

By Asantha Sirimanne

The local debt market is hoping that next week's budget will unveil reforms that would give life to a hitherto dorment market.

Last year's budget saw the lifting of the transfer fee on debentures, leading to the country's first listing of straight debentures by Vanik Incorporation.

However a one per cent stamp fee remains payable on issue as does the withholding tax on interest paid to debenture holders.

The markets are awaiting a lifting of the one per cent stamp fee in this year's budget.

"The lifting of the withholding tax and capital gains tax on debentures would also help the market take off," one analyst said.

Several large institutions are hoping to list debentures in the market once the stamp duty is lifted, market sources said.

Though Rs. 150 mn worth of Vanik debentures were listed on the Colombo Stock Exchange, there has not been any active trading on the stock.

Analysts say the investment culture in the country is very much geared towards holding securities till maturity, preventing active trading in debt securities.

Meanwhile, analysts say, the BTT and defence levy charged on interest income from trading on treasury bills should also be removed at least among primary dealers as is already the case in the interbank money market.

"Though the government is interested in developing an active secondary market for treasury bills, this type of levy acts as a damper because dealers operate on very thin margins," one treasury bill dealer said.

Meanwhile other analysts say that if obstacles standing in the way of securitizing mortgages were removed, long term finance could be raised for housing at attractive rates.

Mortgage securitization involves the transfer of mortgages to a dedicated investment vehicle or trust, and the issue of securities against the mortgages.

Each time mortgages are transferred to such a vehicle however a stamp fee has to be paid. If the stamp fee was removed it would boost the securitization of mortgages, analysts say.

The State Mortgage and Investment Bank, which is in the process of being privatized has a large portfolio of mortgages and is lacking longterm funding sources.

If the government is willing to make changes to existing procedures, the securitization of mortgages could not only increase the availability of funds for housing purposes but could also bring down the interest rates of such loans, analysts say.

The charging of turnover taxes in interest income is a major impediment to securitization at present as turnover tax has to be paid each time interest is passed through the investment vehicle that issues securities. The introduction of GST however would eliminate this obstacle.

Moderate gains at CSM

Market Focus By Analyst

With the market fluctuating widely, throughout this week, punctuated by a corrective mood following recent gains, it is expected that the ASPI should stabilize around 600-610 levels.

Foreign funds were seen to be liquidating their holdings with very high net-outflows recorded throughout the week.

Turnover recorded daily was moderate with the majority of the turnover recorded coming from a maximum of 2-10 transactions (70% of the turnover value). This shows that even though turnover is respectable compared to previous months’ levels still the buying pressure has not come in quantity and variety to classify it as a continuous bullish trend.

Plantation sector: Due to the high prices prevalent in the world-market for primary commodities, this sector has shown strong gains for the third quarter. Success factors for these companies are rising earnings, significant management overhaul due to privatization - as well as traditional criteria such as stock price, compared with a company’s underlying value. Certain stocks in this sector traded at P/E 2-4 whereas Market is at P/E 10.

Plantation sector shares to focus on:

Bogawantalawa, Kelani Valley, Tea Smallholders and Agalawatta.

The plantations sector has regained its position as a major player in the “CSM” after the privatization of some plantations. This may be largely due to retail investors from the high-net worth category being in the plantation sector. Therefore price fluctuations and speculative returns are more likely to occur in this sector.

The market definitely has recovered slightly as a whole. Investor confidence was given a boost by way of market recording nearly 10% appreciation from the beginning of September. If persistent gains are made in the primary commodities it could be a catalyst for some funds to find their way to the “CSM” which could sustain the market to reach ASPI 650-6801 levels (6-9 months). As foreign funds shun the bourse to get back to a strong market like in 94, would at least take 2-4 years, some analysts feel.

Local textile market troubled

By Rajika Jayatilake

Tossed around on rough seas for quite a while, the local textile industry is now in a state of near collapse.

Business tycoon A.Y.S. Gnanam, Chairman of the Synthetic Textile Mills and Textile Manufacturers Association voiced his opinion on the situation with the forthcoming budget in view.

Mr. Gnanam pointed a dismal picture of the prevailing trend in the domestic textile industry. According to him 40 powerlooms have already closed down. These include well-known names like Kundanmals, Union Textiles, and Sooriya Textiles. Even Nagindas and Cyntex are in severe trouble, he said. Last year Cyntex had suffered a Rs. 30 million loss. Pugoda, Veytex inspite of being equipped with state-of-the-art modern machinery, are unable to sell their textiles profitably and are being forced to sell their machinery. Now India is buying textile machinery from Sri Lanka, he said. "The government says the textile industry has old machinery but that is not true."

Mr. Gnanam puts the blame for the present situation in the industry on smuggled textiles and the prevailing textile policy. "I won't blame the present government only. It is a policy that has been going on for a long time."

"With smuggled textiles flooding the local market and with garment exporters allowed to release 10% of their product to the local market, domestic textile manufacturers are under severe pressure to compete. You can't make much money under these circumstances. The profit is only about 5-6%", Mr. Gnanam said. What makes matters worse is textile manufacturers have to borrow funds at 20% interest.

The present fear in the textile sector is the impending General Sales Tax (GST) which is to be effective with the budget. If a 17% GST is slapped on the local textile industry, it will kill the industry, Mr. Gnanam says.

He says the government needs to maintain a textile subsidy for a few years and offer domestic textile manufacturers a lower interest rate to make investment in the sector attractive. Also smuggling imported textiles into the country needs to be curbed if the local industry is to survive.

Otherwise, Sri Lanka's textile industry could well be a thing of the past, according to Mr. Gnanam.

Violations of the SEC regulations

By: Charitha P. de Silva
Chairman, Securities and Exchange Commission of Sri Lanka

I am writing this article because I have come to realise that many businessmen are not aware of the regulations of the SEC and violate them without any idea how serious the consequences could be.

In this article I shall touch on the most frequent violations that have taken place in the past. The most serious is 'Insider dealing'. Insider dealing has been clearly defined in the regulations and is considered an offence so serious that it can be punished with a jail sentence of up to five years and/or a fine of up to Rs. 10 million. The gravity of the offence can be judged by the fact that amending legislation which is in the pipe-line will increase these penalities.

Insider dealing has been exhaustively described and defined in the regulations and I do not propose going into any detail regarding them. Suffice it to say that a person is guilty of insider dealing if, as a result of his connection with a company, he becomes aware of price-sensitive information that is not known to the public, and makes use of it for his profit. The essence of the offence is that he makes a profit (or mitigates a loss) at the expense of an innocent member of the public who does not have his inside information.

A common type of insider dealing is where a director or employee of a company, being aware that a bonus issue is planned in the near future, buys shares in his company knowing that the share price will move up when the Bonus issue is announced. Similarly shares may be sold (or bought) by the insider on the basis of his knowledge of a change in the company's fortunes, which knowledge is not known to the public. The knowledge must be 'price-sensitive' which means that had the public been aware of it the price of the shares would have moved in a predictable direction. While the venality of these examples is fairly obvious, it is often not realised that it is an equal offence if the Insider were to tip another and induce him to purchase or sell shares in his company. The 'tippee' may be a nominee, relation or friend. Such cases are harder to prove but the SEC is determined to investigate and pursue any violation that comes to its notice either by its own surveillance or on the basis of information received. The reason for this determination is not a thirst for blood but the need to protect investors. This is one of the key objectives of the SEC and is clearly set out in the Act under which it was established.

Another frequent violation is failure to comply with the continuing listing requirements of the SEC. One requirement is that a quoted company is expected to immediately disclose to the Stock Exchange any information, regarding the company or any of its subsidiaries, that is either price-sensitive, or may create a false market in the company's shares. This requirement is not fully appreciated by many directors and chairmen of companies. They do not realise that the onus is on them to inform the Stock Exchange of any development that could affect the price of their shares were it to become common knowledge.

I rather suspect that there are many who would consider it their duty to the company to conceal such information. They little realise that their action, in concealing material price-sensitive information, can earn them a jail sentence and/or a substantial fine.

Many of the cases that the SEC has investigated are based on tip-offs. The SEC will investigate any tip-off (anonymous or otherwise) as long as it is specific. We do not take the view (taken sometimes by government officials and company managers who prefer an easy life) that unsigned letters should be consigned to the waste-paper basket. They are very often the best source of information of violations of the regulations.

Unfortunately, sending such information on the fax network is a foolish way of informing the authorities because it alerts the offender and gives him a chance to try to cover his tracks. My advice to the would-be informant is to write a letter to the Chairman or the Director General of the SEC. He can be sure that if the allegations are well founded they will be investigated and action will be taken against the offender. There are many punishments that the SEC can impose depending on the nature of the offence. Prosecutions will be launched if the evidence is such that the Attorney General confirms that there is a case.

I have written this article because I would like to deter businessmen from committing offences under the Act in future. By alerting them to the risks they run through being unaware of the regulations and violating them, I believe I shall save them a lot of pain and the SEC a lot of trouble. The Commission consists of a body of very eminent men, chosen for their individual expertise and reputations, and their main concern is to ensure the integrity of the share market thereby protecting the interests of investors. As nobody is above the law, the SEC would not hesitate to take action where it is necessary. Eventually this is the guarantee to both local and foreign investors that our share market is a safe place to invest in.

Budget 97; seminar

The next seminar in the lecture series of the Society for International Development (SID) Sri Lanka Chapter on the Budget '97, will be held on November 8 at the Institute of Engineers (Sri Lanka), Wijerama Mawatha.

The seminar is organised in collaboration with the Federation of Chambers of Commerce and Industry of Sri Lanka (FCCISL).

Speakers will be Rajan Asirwatham, Chairman, Bank of Ceylon and Public Enterprise Reform Commission, Professor A.D.V. de S. Indraratne, Emeritus, Professor of Economics of the University of Colombo, Patrick Amarasinghe, President, FCCISL and R.M.B.Senanayake, General Manager, T.A. Securities Ltd.

Mind Your Business

by Business Bug

Paws in privatisation?

Government and business circles are buzzing with the news that the Tigers were attempting to buy a state venture being privatised.

Now, more safeguards have been called for to protect security interests.

This is likely to result in a permanent committee that would scrutinise all links of possible investors, to exclude Tiger proxies....

Jerks over perks

The story that heads were about to roll among those commissioning enterprising public reforms surprised many, because it appeared in one of the ''official'' newspapers.

Some said it was because of the Shell deal which gave the consumers a raw deal. Others said it was because the boss was suspected of leaking secrets to the media.

But such fears are unfounded, we hear. The gentleman who recently spurned a big pay hike will bat on, with the "blessings" of all....

Hold your dollars

And, what secrets does the budget hold?

All we can say is that most stock brokers have advised their overseas clients against dumping their dollars in the Colombo stock market until November six.

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