The Sunday TimesBusiness

5th January 1997




Mind Your Business

By Business Bug

Bull booster

The New Year has dawned and everyone is awaiting the return of the Bull to the Colombo stock market.

And, if whispers we hear are true, the state will release more funds to the market to try and boost trading.

These funds will come from a fund that has billions at its disposal and from a corporation that claims to be a leader in its industry.....

Sinhala channel

Some TV networks maybe having trouble with the powers that be but others are thinking of expanding.

One such network which now operates two channels is likely to launch a third.

This latest will cater mainly to a Sinhala-speaking audience and will be the ninth channel in the country.

No problem

Some industrialists are worried about the recent protests over privatisation and the prospect of mass scale labour unrest.

That is why a large established multinational commissioned a study to explore the feasibility of expansion.

The study is over, and the greenlight has been given. Provided correct incentives are offered, labour unrest is very unlikely, the study says.

Code to decide 40% of Commercial Bank

The bid for the 40 per cent stake in Commercial Bank held by the Standard Chartered Bank would be subjected to the Take-overs code of the Securities and Exchange Commission, The Sunday Times Business learns.

The newly appointed Director General of the SEC Kumar Paul said Central Bank Monetary Board Member S. Easperathasan had already been informed to consider the effects of the Take-overs Code when taking a decision on whether to permit the transfer of shares in the bank.

There are statutory limitations on the size of shares that can be held by a single shareholder in a Commercial Bank.

Both Hatton National Bank and the DFCC are interested in taking over the 40 per cent stake.

According to the Take-overs Code an offeror bidding for more than 29 per cent of a listed company has to make a general offer to all shareholders to take over their shares.

But in this event a further problem arises with the restriction preventing the offerors from taking additional shares as a single entity, analysts said.

Meanwhile the Commercial Bank has said that an acquisition by the DFCC would be more meaningful as the two institutions are operating in different fields.

"The Board of Directors of commercial Bank is of the view that an acquisition of 40 per cent of the equity of Commercial Bank by a competing commercial bank operating in Sri Lanka would neither be in the interest of the economy nor of Commercial Bank and its staff," the banks said in a statement.

The bank said a takeover followed by a merger with Hatton National may result in closure of branches making a large number of staff redundant, as well as providing less competition.

World of Sports benefits

One of the largest and most popular sportswear retailers, World of Sports, is now reaping the benefits of EDS value-added outsourcing services, a company release said.

World of Sports, the company that carries popular and well-known sporting and fashion apparel such as Nike, L.A. Gear, Prince and Adidas, recently outsourced its IT facilities management to EDS.

Having been a client of EDS for the past three years, the company has been using the FAMAS suite of application software which caters to the financial and distribution areas of the business. According to EDS Manager of World of Sports, Bernard Ee, if a particular outlet does not have the product the customer wants, the staff are able to initiate an item enquiry search within the system, made possible by the FAMAS 400 software. The search will include the availability of the product and the outlets it is available at.

After EDS took over the Outsourcing activities of World of Sports the Management has been able to concentrate on their core business and depend on EDS to provide them with timely, and accurate management information.

According to EDS, Outsourcing Services Manager, Singapore, Senaka Tiranagama, World of Sports is making full use of their computer investment as they are able to draw on the multitude of resources of EDS as and when required. World of Sports is using Information Technology as a strategic tool enabling them to form a competitive edge in the competitive business of sportswear.

Investment firms battles up

By Asantha Sirimanne

Fears are expressed that two investment companies which control substantial stakes in several blue chip companies may be de-listed before the end of this year to escape Stock Exchange rules governing such companies.

Ceylon Guardian Investment Trust, its subsidiary Rubber Investment Trust and Ceylon Investment Company hold large stakes in blue chip companies such as Hayleys 8.3 per cent, Richard Pieris 6.82 and Aitken Spence 2.88.

In addition they also own significant stakes in John Keells Ltd, Hatton National Bank, Acme Printing (nearly 20 per cent according to one source) and Packaging, Habarana Walk Inn as well as 154 other companies listed on the market.

The companies are believed to own shares valued at Rs 1.3 bn which was acquired at a cost of Rs 269 mn.

Last week four directors of the companies resigned in the wake of attempts by major shareholders of these investment companies led by Carson Cumberbatch to oust them. In early December Carsons and affiliates The Good Hope Company Ltd, The Indo Malay Estates Ltd, The Selinsing Co. Ltd, The Shalimar (Malay) Estate Company Ltd, (all listed Companies) and Ceylon Finance and securities controlled by the Selvanathan family sought to remove Mr. Ajith Jayaratne and Mr Singha Weerasekera to appoint Mr Israel Paularaj and Mr S. C. Fernando in their place.

The Carsons led group also obtained an enjoying order preventing the existing management from carrying out major changes within the company.

In December 1995, another director Mr. J. S. Mather hand been ousted.

At the AGM this week four directors including Mr J. K. Weeratunga and Chairman M. T. L. Fernando resigned in protest, on the principle that the management should be independent of ownership.

Up to now the three companies had been managed by their directors who were not substantial shareholders in the companies.

The Selvanathan controlled companies are said to hold 36 per cent of the ordinary shares and 32 per cent of the preference shares of Ceylon Guardian investment Trust being beneficiaries of 21 per cent of partly paid 'deferred' shares which carried enhanced voting rights. The company had 1,7 mn ordinary shares with 50 per cent of the voting rights and 686,000 deferred shares which carried the balance 50 per cent of the voting rights.

Generally accepted principles demand that the ownership of investment firms be separated from the management, with the funds being managed for the benefit of all shareholders and not for the special benefit of a few large shareholders.

One director of Ceylon Guardian said in his letter of resignation that he did not wish to be associated with the nominees of a major shareholder of the company who could act in their own interests prior to the actual date of implementation of the new listing rules of the CSE which prohibited such practices.

The new CSE rules required independent fund management firms to be appointed to manage portfolios of investment firms if one person or a group of person controls more than 25 per cent of an investment firm. The deadline for compliance is December 31st.

Analysts say with the Board now being controlled by its owners, the management should be handed over to an independent fund manager without further delay.

"Though the CSE may have allowed the existing status quo ( the management of the investment firms by non owner board) to continue till the deadline it should not allow a worsening of the situation after the introduction of the new rules," one analyst pointed out.

CSE Director General Dylan Moldrich however said they were not yet contemplating bringing forward the deadline, despite the new developments.

He said the appointment of directors was an internal matter and the deadline

The old board had already called for proposals form fund managers and were also planning to increase the capital to more than Rs 100 mn to meet the new capital requirements to stay on the main board of the CSE.

The of investment company and it s directors had not sought seats on the boards of investee companies in its 40 year history, sources said. The SEC rules governing unit trusts for example also prohibits such action.

However there are fears that with majority control being exercised by one party the investment company would attempt to force directors into investee companies after de-listing from the Colombo Stock Exchange, in addition to using such stakes to back hostile take-overs.

CSE officials said they would not be able to prevent a de-listing if a majority of shareholders wished it. In addition to the shareholdings of Carsons group companies, Ceylon Investment, Ceylon Guardian Investment have significant cross holdings in each other.

Sources say the interference in the affairs of listed companies is fundamentally opposed to the principles of investment ,management firms in general and these companies in particular. Even the name Guardian is said to indicated that they 'guarded' the investee companies concerned against predatory companies which sought control them. Sources also said the investment firms were given

However in a statement to shareholders of Ceylon Guardian, the Carsons group contended that the investment firms were established not to prevent predatory take-overs but to ensure that British-held plantations companies remained in British hands at a time when migrating Britishers were increasingly selling plantation company shares to locals for lack of British buyers. The investment companies were originally set up by British promoters.

The statement also said there was no basis to support the claim by the Board of Ceylon Guardian that the historical evolution of the company indicted that the management and the board of should remain independent and the owners of deferred shares should not be represented on the board or control management.

They further maintain that it was the desire of the promoters to allow the deferred shareholders to control the company.

However the statement added that that even if the structure of the company enabled Ceylon Guardian to act as predatory company which could be exploited by a company raider, the Carsons led group would not use the company for such purposes.

In another development, the investment firms also hold substantial stakes in the Malaysian plantations companies presently controlled by Carsons. The control of the three investment firms is believed to give the Selvanathan family leeway over 90 per cent of their equity from a present 70 per cent, according to one estimate. Some analysts believe that these companies may also be de-listed and the Malaysian companies whose legal title is in Sri Lanka at present would also pass onto a single private party.

The encouragement de-listing of companies analysts say would prevent expansion by denying them the benefits of widely held ownership. This trend, they say, is not conducive to growth and employment generation.

Magnet Sells batteries

Magnet Cells the sole importers and distributors of batteries in Sri Lanka, held their tenth anniversary last week, a company release said.

The company specialises in the Ni-Cd battery market and is able to offer replacement cells and battery packs for any brand of celluar or cordless phone, lap-top computer camcorder etc.

Magnet Cells are the sole importers and distributors of Dry Cells, Button Cells, Storage Batteries, Sealed Lead-Acid Rechargeable Batteries, Nickel Cadmium Batteries and Automotive Batteries.

The marketing and distribution arm of the company covers almost the entire island making certain that products will reach dealers to assure customers of a longer usage of products.

Amongst the sole agencies they hold are the Toshiba Battery Company of Japan, P.T. International Chemical Industries, Indonesia etc.

The company chairman and managing director, D.L. Seneviratne is an industrial engineer who has had his training abroad at the Yuasa Battery Company in Japan and Bosch Company of Germany. He has wide working experience in both dry and wet cell battery production in Sri Lanka with the companies manufacturing Yuasa, Exide, Lucas, Daganite and Laxapana batteries.

Indices on the rise

Retail and overseas investors purchasing selective stocks over the week have driven up the CSM ASPI index 2% from the December low of ASPI 590. Overseas investors were selectively buying into certain companies with bulk of the investments in JKH/HNB/NDB/DFCC/COMB ext....

Issues for 97

Opening-up investments by brokering firms on their own account would not be much of an impact unless the brokering firms behave as stockist of shares (Jobber/market maker) than just a one off trader which could erradicate the illiquidity in trading in shares prevalent in the present set-up of direct buyer/seller call-over.

This could be achieved by banks/pension funds brokering houses/insurance companies stocking up on shares and quoting competitive prices on the board as stockist with minor variations in prices which will automatically be adjusted by the information being available online to all investors. Therefore the present price ceiling of 5%,10% on increase/decrease of price won't be required. Investors would be able to check the prices before they buy/sell with both quotes being available with all stockist. This system of trading could have the added benefit to clients of competitive commission rates by brokering firms. Sri Lanka presently has the highest transaction cost (buy/sell) in the world-3.5%), which would reduce the present commission rates due to competitive price quotations between the stockist.

Pramuka moves to chase savings

Pramuka Savings and Development Bank Ltd, promoted by veteran banker Rohan Perera, is hoping to aggressively chase savings with new flexible banking products.

"We would like to create a situation where people feel that they ought to keep their money in savings deposits and not in non-interest bearing current accounts," Mr Perera said.

A major advantage savings institutions currently enjoy over commercial banks is that they are not required to keep a statutory reserve with the Central Bank. However commercial banks also have the benefit of interest free deposits from current accounts.

Savings banks are being set up in the wake of recent amendments to the Banking Act permitting specialised banks.

A major area of operations of the new bank would be rural banking.

"The bank would have agents in the villages who will promote micro level savings and lending," Mr Perera explained.

The bank is hoping to establish Pramuka Village Societies somewhat in the style of Grameen bank in Bangladesh. A top Pramuka team is to leave for Bangladesh to study the system in detail.

"But we would not follow the same system. We have already done a model of how we are going to handle it," he said.

The bank will recruit graduates from villages, who will act as village banking assistants.

"Because they are from the villages they will not feel out of place living in an area, without electricity or water service," he points out.

The banking assistants will be taught to process loans and to encourage the villager to save.

All recruits will be trained at the Pramuka Business School. The school will train outsiders as well.

Rural credit will be granted based on an evaluation of the family unit. The bank may target other family members than the head of the family such as the wife or adult children in giving loans, if the head of the family is found to have negatives attributes such as addiction to liquor. Village co-ordinators will also be able to give 'ath maru' loans of less than Rs 1000 for short periods running into one month.

The bank has identified three economic levels within the village society. "The lowest are the below subsistence persons who need state subsidies," he says. "Above that category are another group of people, who if given some assistance could generate employment and production and come up in life,"

At the top were more economically sound individuals who were able to save after meeting their own needs."We will be targeting the upper and middle level, but we will also try to help the lowest level," he said.

The bank hopes to set up a wide network of village level banking agency network with the approval of the Central Bank.

The bank will also target skilled workers such as carpenters, masons and plumbers. Though they earn relatively high wages they are not able to save due to lack of knowledge on savings. Another category would be those employed abroad who's families display a tendency to live lavishly rather than save.

The Pramuka Bank has commenced a private capital raising exercise this month and will be applying for an operating license from the Central Bank by February when an initial target of Rs 100 mn is reached. The bank however eventually aims at Rs 450 mn. Foreign injections from long term funds are expected to make up 40 per cent of equity. A British investment bank, Cowell and Partners who are technical collaborators of Pramuka, are in charge of foreign placement. Cowell and Partners will also have an equity stake in Pramuka.

The bank will have a limit of 10 per cent on the holdings of any single investor and 18 per cent when counting connected persons.

The Board of is chaired by Mr. Perera who is also president and chief executive. The bank's chief operating officer, H. A. Mendis, is also on the board. Other directors are Udaya Nanayakkara (Chairman Ceylon Carriers), C. W. P. Canege Ratne (Surgeon), J. A. D. Lanerolle (former chairman EDB and SLSI), Camillus Perera (publisher), L. W. Fernando (Attorney), Lasanga Jinadasa (managing partner Shetna Poultry Farm) and K. C. Nadarajah (corporate consultant).

A 10 per cent stake would be held by Pramuka Holdings Ltd, which is owned by top executives of the bank including Mr Perera. Pramuka Holdings will also control several affiliates which will be used to complement its operations.

One such is PRAENCO (Pramuka construction and engineering co.) which will build houses for the bank's housing loan clients.

Pramuka will also go into mortgage securitization with foreign technical collaboration.

The bank will have a range of personal credit facilities as well as for corporate clients. Mr Perera says it the lack of current account facilities would not be a major drawback when attracting corporate clients. "Corporates want to earn a return on their surplus funds and on a given date we would be able to transfer funds instantly as required," he said.

Pramuka holdings would also have a controlling interest in a Merchant Bank headed by Mr Dayantha Fernando, as well as a manpower company, Protecman (Pvt.) Ltd, which would provide security and related services.

Offshore banking for exporters

The Central Bank and Finance Ministry officials are expected to meet tomorrow to discuss the finer points of a budget proposal to extend off share borrowing to the entirety of the export sectors, The Sunday Times Business learns.

Bank interest rates which are reportedly the highest in the region have been a severe setback to the expansion of the export sector, which makes a leading contribution to the economy.

Responding to this genuine problem, Deputy Finance Minister G.L. Peiris proposed in his November 1996 budget that all exporters with foreign currency exposure be allowed to borrow abroad free of exchange controls.

Pelwatte:its sour side

By Asiff Hussein

"There was no need to go and dump the sugar complex right in the middle of the corridor," a leading development planner said, referring to the continuing battle between man and nature in the Pelwatte sugar plantation and its immediate environs.

He, together with a leading agriculturist has presented an alternative to the problems ensuing from the location of the Pelwatte sugar complex.

A. Denis N. Fernando, Fellow of the National Academy of Sciences and a surveyor, who counts over 35 years in the Mahaweli development project, said that the location of the sugar complex in Pelwatte, has created serious environmental problems including deprivation of water to forested regions, and threats to wildlife as well as economic drawbacks such as the non-profitability of large-scale sugar crop cultivation in the area.

Rather, Mr. Fernando advocates a number of easily implementable alternative measures to develop the sugar industry, while at the same time safeguarding the country's environment and wildlife.

The measures he advocates are mainly based on a map jointly compiled by himself and Rajah Wirasinha, a prominent agriculturist, in 1974, which delineated various regions of the country, showing potential areas for the cultivation of sugarcane under rainfed conditions.

As President of the engineering section of the Sri Lanka Association for the Advancement of Science, Mr. Fernando presented a paper entitled "An Integrated Approach to Development Planning in Sri Lanka" (1968) indicating ground water zones as well as updates of other maps on geology, rainfall, soils, bioclimates and natural vegetation, where he expressed the need for an integrated study of natural resources and its use for proper planned development.

In 1975, he produced an atlas entitled 'Resource maps of Sri Lanka', which included a sugarcane map showing potential areas for its cultivation co-compiled by himself and Rajah Wirasinha at the time an agricultural officer of the Uda Walawa scheme and an expert on sugar cultivation and processing.

The sugar cane included in the atlas map delineated regions into rainfed and irrigated areas where sugar cane could be cultivated. However, it excluded areas that were unstable for growing of sugarcane as well as those areas already cultivated with economic crops such as tea and rubber.

The possible areas in which sugarcane had potential for cultivation were sub-divided into areas where the crop could be cultivated under rainfed or irrigated conditions.

However, Mr. Fernando observes that due to differences in climatic conditions, the quality of sugar (ie. concentration) too varies.

In sugarcane grown in the wet zone or heavy rainfall areas, sugar concentration is less and is therefore suitable for the production of edible and industrial syrups for the manufacture of preservatives, jams, cordials and spirits, mainly Ethyl alcohol.

However, sugarcane grown in areas where the rainfall is sufficient, but the climate dry, provides us with quality sugarcane from which crystal sugar and jaggery could be obtained.

"The aim of this exercise was to prompt the cultivation of sugarcane in rainfed areas, so that irrigated areas could be reserved for the cultivation of rice."

Mr. Fernando said that consequent on the publication of the map, he and Mr. Wirasinha led a campaign to develop sugar cultivation under rainfed conditions which resulted in a number of areas such as Monaragala, Haldumulla-Beragala, Welimada and Walawe being successfully cultivated.

"However at the same time," alleges Mr. Fernando" multi-nationals were also interested in coming and taking over established sugarcane plantations set up by the Gal Oya Development Board (GODB) and its successor, the River Valleys Development Board (RVBD) which was concerned with the development of the Walawe basin and related projects.

"In 1986, with the establishment of the Pelwatte sugar complex, the then government placed more emphasis on large-scale sugar manufacture and neglected the smallholder. This resulted in the cost of manufacture steadily rising, with the government entering into an agreement with Bookers of UK which managed the plantation, to purchase the sugar at a price far higher than the prevailing world market rates.

"During the period Bookers were in operation, which was from 1986 till 1991, the government purchased sugar from the company well above the world market price.

"Whereas the world market price at the time was around 300 US Dollars (16,500 SL Rupees) per ton, the government was purchasing sugar from Pelwatte at the rate of 500 Dollars (27,500) per ton, ie. manfacturing costs plus an extra 10 percent."

"This was the first time that a large manufacturing company was given subsidies. All local prices were fixed to suit Pelwatte prices. Imported sugar was subjected to fiscal levies which made it equal to local prices as subsidized to Pelwatte," he alleged.

Mr. Fernando also alleged that due to the Pelwatte complex's utilization of water from the Menik-ganga, the water supply that would have normally gone to supply the rivers and waterholes of the Yala sanctuary fast depleted with serious repercussions to wildlife and the environment.

"The complex employed water not only for supplementary irrigation but also for processing."

"This was evident in the environment impact studies I conducted in 1992-93 with some students from the Institute of Surveying and Mapping where I served as a senior UNDP consultant," he said.

Mr. Fernando also opines that the Handapanagala herd which was recently driven from Pelwatte to Yala, would not stay put long.

"Preventing elephants from coming to Pelwatte is like preventing seasonal migratory birds from Siberia coming to Sri Lanka," he said.

"There was absolutely no need to go and dump the sugar complex right in the middle of the corridor."

"Rather", he says, "we could have well developed the area as a wildlife conservation site by setting up bungalows for tourists interested in elephant-sighting, thereby generating a considerable amount of foreign exchange," he observed.

According to Mr. Fernando, the 56 negative factors are indications that less stress should be placed on large-scale sugar cultivation and more emphasis laid on broad-based small-scale sugar manufacture involving small-time cultivators over vast, widely distributed tracts of land suitable for sugar cultivation as envisaged in his map.

The 'Sunday Times' also spoke to Mr. Wirasinha who returned to Sri Lanka recently after serving as a consultant irrigation agronomist for Upper and Lower Benue River-basins Development Authority of Nigeria.

Mr. Wirasinha who was noted for his role in opposing the entry of multinationals to the local sugar industry in the mid-1970's, said that such agricultural activities as sugarcane cultivation should not be allowed to be monopolized by multinationals but should rather be broad-based so that the depressed sections of the community could benefit.

According to Mr. Wirasinha, monoculture, resorted to by large-scale sugar manufacturers is not a viable exercise. Rather, he advocates multiple-cropping, where legumes such as soy beans, green gram and cowpea are planted on the ridges of the cultivated fields.

"Besides saving on valuable fertile land, the cultivation of such legumes would also enrich the soil by providing nitrogen," he noted.

"Multiple-cropping, however, is not suitable for large-scale cultivation, but is ideal for the small-holder," he said.

As for upgrading the local dairy industry at the same time, Mr. Wirasinha says that there is a possibility of bagasse (ie. fibre residue left after extraction) and tops (ie. tops of the sugarcane which is of no use to the industry) being used as feed for cattle, as his long experience in Nigeria has shown.

"This could well provide the major part of the fodder for our cattle, so that our dairy and beef industry could be sustained simultaneously," he added.

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