The Sunday TimesBusiness

17th November 1996




Lankan shoes at Dubai show

Four Sri Lankan leather goods manufacturers, participated at the recent Leather Show '96 exhibition.

The companies Bettans Lanka Shoe Co., Ltd., Ceylon Leather Products Ltd., Sarath Leather Products Ltd., and Sterling Shoes (Pvt) Ltd., had initial orders amounting to US $4 million for leather footwear and bags.

According to exhibition authorities, the fair attracted a large number of visitors and the attendance was an improvement on last year's figures.

The delegation was led by Rasa Weerasingham, Project Co-ordinator of the National Chamber of Exporters of Sri Lanka (NCE). The participation was organised by the National Chamber of Exporters of Sri Lanka with the assistance of the Sri Lankan German Private Sector Program and the Export Development Board.

Sri Lankan German Private Sector Program is implemented under the Ministry of Industrial Development of Germany with GTZ assistance and its primary objective is to promote the private sector organisation in selected industrial sectors and to strengthen the chambers and trade associations engaged in this field.

D.W. Jinadasa, Sri Lanka's Consul in Dubai co-ordinated activities and facilitated the stall arrangements and promotions.

The Sri Lankan pavilion was ceremonially opened by A.M. Samsudeen, our Ambassador in Abudhabi and was accompanied by the Chief Guest Sheik Asher Maktum, Director of Information Dubai and Mr. Jinadasa.

Privatisation a problem

The former Finance Minister who initiated privatisation in the '70s was fond of saying that privatisation was not a panacea for all problems. In the light of past experience we can add that privtisation is problematic. The problems arise out of unsatisfactory processes of privatisation, lack of transparency and consequent accusations of low pricing of assets, the use of privatised assets for unintended purposes, the poor performance of privatised ventures and the lack of proper regulatory safeguards to ensure that consumers are not exploited by a privatised monopoly.

The process of privatisation has indeed been vociferously criticised by many segments. There is an overall impression that many privatisation exercises have been done without a proper valuation or that the method of pricing has given an advantage to the purchasing party. The most recent case is that of Kotagala Plantations where the formula used to price the 51 per cent of shares was the lowest purchase price of the 10 per cent shares offered to the public. The prevailing economic conditions and the depressed stock market resulted in hardly any public purchases and consequently the par value of the share was applicable to the 51 per cent sale of shares.

In the first instance it does not appear reasonable that the lowest price should have been fixed. A more reasonable formula would have been the Weighted Average Price of the 10 per cent share sale to the public. Of course even this formula would not have made any significant difference to the pricing owing to the overall conditions prevailing at the time of the offer The fundamental mistake appears to be that there has been an excessive faith in market forces. Instead of valuing the shares at a minimum price reflecting the net asset value of those shares, the price was wholly dependent on market forces. This is a clear instance of not understanding actual conditions but relying on theory and ideology. No doubt international experts who advised the sale must have proffered such advice. We should be far more circumspect in accepting such advice as they often lack an understanding of our particular conditions.

The other unsatisfactory feature of privatisation has been the poor performance of some of the privatised ventures. This has given a poor image to privatisation in the country. Besides this, some of the privatisation exercises have not been adequately thoughtful of possible consequences to essential services. The privatisation of transport is an outstanding example of how a service deteriorated through privatisation.

The poor performance of some of the privatised ventures has made the government react by threatening to take over some of the privatised ventures which are operating inefficiently. But this is indeed counter productive. By having a piece of legislation which gives wide discretion to a government to re possess privatised ventures, the entire exercise of future privatisation may be jeopardised. These fears have been somewhat allayed by subsequent amendments to the bill moved at Committee Stage. The application of the law would be confined to six months; it would apply only to transactions that took place prior to the establishment of PERC and the powers under the bill would be exercised only in a situation where there is an omission or lapse on the part of the Board of Management of the enterprise.

A government serious in continuing the process of privatisation should improve the pre privatisation technicalities and ensure that proper pricing and consumer safeguards and regulatory mechanisms are in place rather than make up the defects in these aspects by re possessing the privatised ventures.

A third source of discontent with privatisation has arisen recently, where the sale of monopoly has not adequately protected consumer interests. The price hikes of gas have brought into some disrepute the privatisation exercise. This experience also raised the need to be particularly careful in privatising monopolies which provide public utility services.

At a time when the problems in privatisation are getting full publicity, we must not forget that there are many examples of successful privatisations. The privatisation of the plantations itself, despite its manifold problems, has been a successful one in terms of increasing the efficiency of the plantations and increasing their output. Other examples of successful privatisation includes the National Development Bank (NDB), the Merchant Bank of Sri Lanka, the Distilleries Corporation and several industries.

There is little doubt that the process of privatisation must go ahead. Many important and large privatisations are likely to occur. The important lessons to be learnt from the past experience is that there should be an objective and proper valuation of the assets of such enterprises which are to be privatised. The government must ensure that the mechanisms will enable a proper price to be paid for these.

Many of the problems that have arisen may be resolved by ensuring a proper pricing. In the case of vital infrastructural state monopolies, there must be extra care taken to ensure that the proper regulatory mechanisms are in place to ensure that the services are provided adequately and at reasonable prices.

If privatisation leads to escalating prices to consumers then public support for privatisation may not be forthcoming and public resistance could be an important factor in slowing down future privatisation. The government must recognise that private parties are motivated by high profits not social concern. It is the government's responsibility to ensure that the interests of the consumers and the nation are also protected.

Budget blow for debt securities market

The doubling of stamp duty in the budget has dealt a crippling blow to the fledgling debt securities markets, with short term debt instruments suffering the most.

The introduction of Commercial Paper in particular opened up an a cheap source of funds to corporates in a country where bank interest rates are extremely high.

However the new stamp duties gazetted last week has pushed the annual stamp duty cost of three month paper to the equivalent of 400 basis points of interest.

"Each time an Rs 100mn CP issue is rolled over Rs 100,000 has to be paid as stamp duty," explained one securities expert.

This would result in a borrower paying Rs 400,000 in stamp duties for four roll-overs, adding 400 basis points to his annual interest cost.

Loans given on mortgages would also be subjected to a 0.02 per cent stamp duty, adding a further burden on industrialists. An Rs 100 mn loan would attract stamp duties of Rs 200,000.

Longer term bonds (not coming under the definition of promissory notes) would also be required to pay the 0.02 per cent stamp duty. Negative effects on longer term debts would be lesser as the stamp duty would be spread over the duration of the debt.

"The government has failed to grasp the importance of developing the debt side of our capital markets," one analyst lamented. "We already have a fairly developed equity market, and there is a crying need to develop the debts, but incentives have only been given to equities."

"Industrialists already have to pay defence levy and turnover taxes on interest, these measures would hurt capital investment on the long run," he added.

With stamp duties on mortgages and loan agreements also going up legal experts say there would be an increased tendency not to legalise such transactions.

Bottomline by P.M.N.Bandara

By P.M.N. Bandara

Improved performance

Forbes Ceylon Limited circulated its first full year report on accounts among the shareholders of the Company. The report covers the financial year ended 31st March, 1996.

According to the report the Company's group turnover amounted to Rs. 866.5m. Profit before taxation was Rs. 47.1m. Profit after taxation was Rs. 13.5 m. which shows 24.5% drop even compared to the post- tax profit earned for the 6 months ended 31st March, 1995. Profit attributable to Forbes Ceylon Limited was Rs. 30.5m. Shareholders' funds Rs. 2,378.6m. This shows an increase of 6% over the balance at the beginning of the financial year. In view of the conditions prevailing in the market, this is a satisfactory increase according to Chairman, Ronald Langley.

"All the company's businesses have operated throughout the year in a difficult and deteriorating business environment that shows little signs of improving. On every front, political, economic and most unfortunate of all, the war, events have been negative. Foreign investors perception of investment conditions in Sri Lanka have worsened", he further added explaining the status of the environment the company operated in during the year under review.

The Company had disposed of loss making and poorly performing operations. The market value of Rs. 10/= ordinary share as at 31st March, was Rs. 4.25 which shows significant diminution of market value during the year.

Turnover increase

Ceylon Oxygen Ltd., for the 9 months ended 31st March, 1996 recorded a turnover of Rs. 386.9m. This is an increase of 14.3% over the corresponding period in the previous year.

According to the provisional accounts profit before taxation increased by 7.2% from Rs. 51.1m. to Rs. 54.8m. Profit after taxation increased by 7.5% from Rs. 33.1m. to Rs. 35.6m. Shareholders' funds amounted to Rs. 345.2 as at 30th September, 1996. This is an increase of 18.5% over the balance at the beginning of the year.

Better '96

Bogala Graphite Ltd., reported 1.6 times increase of turnover for the quarter ended 30th June, 1996, compared to the corresponding period in the previous year.

Company's turnover for the quarter was Rs. 39.2m. Profit before taxation was Rs. 10.7m. compared to a loss of Rs. 21.5m. in the previous period.

Profit after taxation and written off goodwill was Rs. 9.6m. compared to the loss of Rs. 22.6m. in the previous year. This shows satisfactory performance during the period under review.

Income drops

CF Venture Fund Limited reported 26% drop of income from Rs. 14.9m. to Rs. 11.0m. for the six months ended 30th September, 1996 compared to the corresponding period in the previous year.

Operating profit before taxation dropped by 36% from Rs. 10.8m. to Rs. 6.9m. Profit after taxation was Rs. 3.0m. and it shows 40% drop over the previous year. However shareholders' funds as at 30th September 1996 reflected 3% marginal increase compared to the figure of Rs. 211.9m. at the beginning of the period.

Dramatic take-over battle rocks CSE

By Asantha Sirimanne

The Colombo Stock Exchange set the stage for a dramatic a take-over battle last week with Asia Capital making an offer for 90 per cent of equity in Vanik Incorporation.

Vanik termed the offer "an unsolicited, unwelcome and hostile bid".

'I do not see why it should be viewed as a hostile bid, a merger would in principle be complementary for the two businesses,' Asia Capital Chief Executive Ian Hardy said. With Vanik looking for capital and Asia having cash parked in treasury bills a merger may help both companies.

The Asia offer is a sequel to an earlier move by Vanik to acquire control of cash rich Forbes Ceylon by purchasing two unlisted subsidiaries of Global Equity Corporation (formerly The Ondaatje Corporation) which holds a substantial stake in Forbes. The purchase may take the form of a reverse take- over with at least part of the funds being raised selling lease securities into Forbes. These proceeds will be used to pay back Global Equity Corporation. However Vanik has refused to confirm this.

Asia, a minority shareholder of Forbes is also interested in acquiring the company. Forbes which has blanket approval to invest the equivalent of 40 per cent of its issued capital abroad is regarded as a plum to any potential buyer with international ambitions.

Asia believes that Vanik is under capitalized and needs equity to expand, in addition to needing strong management input.

But Vanik Chief Justin Meegoda dismissed the claim saying his company had even been recognized as one to the ten best managed companies in Sri Lanka by Asiamoney magazine.

A merger between Vanik and Asia, initiated by a third party shareholder had fallen through in May this year.

This week's Asia Capital offered Rs 10 in cash and a newly issued share of Asia Capital for every share of Vanik Incorporation. Vanik has an issued capital of Rs 448 mn, net assets of Rs 1bn and gross assets of around Rs 3.7 bn. But with over Rs 2.5 bn in debt, it is highly leveraged when compared with Asia which has Rs 1.2 bn in net assets and around Rs 1.3 bn in gross assets indicating marginal borrowing.

Vanik maintains that it is not undercapitalized, and with borrowings of 2.5 times the net assets, there is still room to raise new debt as financial institutions are sometimes leveraged up to ten times the net assets.

Analysts however doubt that a merger would actually take place at the current price offered.

In the event a 51 per cent stake is purchased at Rs 10, around Rs 225 mn would flow out of Asia Capital. With Vanik shares trading at around Rs 20 at present and Asia at Rs 10, Asia would have to offer a premium with at least Rs 20 in cash to persuade the larger Vanik shareholders to part with their holdings at a time when most shares are believed to be underpriced, analysts say. If the offer is raised to Rs 20 in cash, Asia would need Rs 480 to pay up 50 per cent of Vanik Shareholders, taking up most of its liquid assets.

This would leave Asia with very little funds to pump into Vanik.

It is also believed that Asia may not consider Vanik shares to offer value over Rs 20.

After a merger the addition of at least Rs 400 mn is likely to increase borrowing capabilities of the new company. Mr Hardy points out that the new entity would also have the backing of major international shareholders of Asia Capital.

In another development Vanik says shareholders controlling over 60 per cent of Vanik, including Commonwealth Development Corporation (CDC) and ADB subsidiary Asian Investment and Finance Corporation (AFIC) have indicated that they would stay with the present management, whatever the offer price.

Mr Hardy told The Sunday Times Business that the offer was "in part" aimed at frustrating Vanik's efforts to acquire control of Forbes, but pointed out that a merger talks had been on the cards even earlier, indicating their interest working together.

Mr Meegoda said the available evidence suggested that the Asia offer was aimed at scuttling the Forbes deal.

Asia believes that if Vanik sells lease securities into Forbes and draws capital out even at a high rate of interest it may be against the interest of Forbes shareholders, as the creditworthiness of the lease securities could be uncertain. Established leasing companies are also believed to be fearing competition from Vanik in the post take-over scenario.

A larger issue is also at stake regarding the applicability of the Mergers and Acquisitions Code to the sales of unlisted companies which control listed companies.

At the time the unlisted holding company of Kotagala Plantations was sold it is believed that the Attorney General had advised that the code was not applicable. Minority shareholders say that in the event Vanik acquires control of Forbes an offer should be made to other shareholders of Forbes as well, as required by the Code. At least one shareholder is believed to have made representations to the Attorney General to review the interpretation.

Budget recognises role of private sector - GL

Bartercard Lanka, Sri Lanka's first cashless trade exchange commenced commerical operations last week with the ceremonial opening of the company's office at Nawam Mawatha, Colombo.

Bartercard Lanka, which has purchased a master license to operate a trade exchange in Sri Lanka from Batercard International of Australia, is a BOI approved venture a press release said. The exchange's first 50 members represent diverse sectors such as printing, hotels, freight forwarding, interior decor, office equipment, computers, paging services, perfumes and cosmetics, advertising, flooring, floor maintenance products, jewellery, catering, photography, motor engineering and air conditioning.

Three leading companies in the financial sector have taken a stake in Bartercard Lanka, whose objective is to enrol corporates, small and medium companies, and individual business into a computerised trade exchange that will enable them to exchange goods and services instead of paying cash for their requirements.

The exchange assists companies increase turnover, conserve cash and thereby increase their cash profits. It promotes extra business for members, who trade with their own goods and services for their business or personal requirements.

The Golden Key Credit Card Company, a member of the Ceylinco Group, the People's Venture Investment Company, a People's Bank subsidiary and Equity Investments Lanka (Equill) an associate of the Commercial Bank of Ceylon are major shareholders in the venture.

The exchange acts as a clearing house by monitoring the transactions of its members and maintains a credit and debit system using a unit called trade rupees, which is the equivalent of the currency unit of the country. Members are issued a Barter Card, which functions as a transaction card.

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