The Sunday TimesBusiness

12th January 1997




CES planning amendments to Takeovers Code

By Asantha Sirimanne

The Securities and Exchange Commission of Sri Lanka is planning to make changes to its Takeovers and Mergers Code, a top official said.

The local Code which is based on the British Takeovers Code was found to be somewhat rigid when dealing with complex financial deals.

A major problem lay in that the British version was in fact a voluntary code while in Sri Lanka it had legal effect as a rule gazette under the SEC Act, where it tended to be interpreted in the strict legal sense.

"Some flexibility has to be built into the Code if it is to operate in the spirit it was intended to," SEC's new Director General Kumar Paul told The Sunday Times Business.

A committee which includes Deputy Solicitor General S. Marsoof is presently examining the Code.

Last year when the holding company of Kotagala Plantations, an unlisted company, was acquired by Lankem it was ruled that the Code did not apply, despite Lankem being a listed company.

Recently the issue cropped up again when Vanik Incorporation attempted to buy into Forbes Ceylon.

Meanwhile there had also been complains from others that when adjustments were made to some provisions contained in the original British code it had drastically altered the original objectives of the provisions concerned.

Under the SEC Act the regulator is able to introduce rules swiftly by gazette notifications, without having to introduce a bill to Parliament which results in considerable delays.

Point of view

Unhealthy Move

The bid to acquire 40 per cent of the shares of the Commercial Bank by Hatton National Bank does not appear to be a healthy development and, if it succeeds, the acquisition does not augur well for Sri Lanka's banking sector.

The Finance and Banking Commission has pointed out that the State banks (and the foreign banks) have over time lost their market share in both assets and deposits and that the loss was taken up by the domestic private banks.

In 1990 the share of both assets and deposits of the State banks was 68 per cent down from 71 per cent in 1986 while those of the domestic private banks were 17 per cent up from 9 per cent in 1986. The share of the latter has continued to increase reaching 26 per cent in 1995, while the share of the State banks has dropped to 51 per cent.

The growth of the domestic private banking sector has recently been significantly characterised by the opening of two private banks in 1995, the Pan Asia Bank and the Union Bank of Colombo.

It is evident that this group of banks will compete with the State banks, especially in areas outside the main commercial centres. This is vital if banking facilities and services are to improve outside these centres.

In this context, it is important that more private banks be established, and even more important that their independence be preserved. To countenance "control" directly or indirectly of any one of these banks by another is inimical to the health and vitality of the domestic private banking sector. It would also not be in the interests of the consumer.

In fact, the Banking Act has prudently stipulated that the acquisition of a material interest in a licensed commercial bank by any person, partnership, company or corporation requires the approval of the Monetary Board and the Minister of Finance. Material interest is defined as the holding of over ten percent of the issued capital of a licensed commercial bank. Furthermore directions given by the Monetary Board under the Banking Act stipulate that a licensed commercial bank incorporated or established in Sri Lanka shall not allot or issue shares in the name of any company, incorporated body or an individual in excess of 15 per cent of its issued share capital. (This is applicable to shares issued after the Banking Act came into operation.)

But the directives provide that the Monetary Board may approve such "excess" shareholding if the acquisition of the shares in question is in the national interest. These are all salutary provisions and are intended to prevent an individual or body of persons from having a controlling interest in a licensed commercial bank.

If the Standard Chartered Bank wants to dispose of its shares in the Commercial Bank, it should do so bearing in mind the provisions of the Banking Act. A historical accident which endowed one bank with 40 per cent of the shares of another is no justification for perpetuating the position. It would set a bad precedent if an exception is made on whatever grounds. In developing countries the special treatment becomes standard procedure and makes well conceived legislation ineffectual.

Takeovers Code needs flexibility, says SEC Chief

The newly appointed Director General of the Securities and Exchange Commission, Kumar Paul hopes to focus on the role of facilitator of market development while continuing SEC's traditional role of regulator.

Mr. Paul, who was seconded to the SEC from the Attorney General's Department, has been SEC's legal manager since December.

Excerpts from the interview:

Q: There have been some questions raised regarding effectiveness of the Takeovers Code, as it is based on the British Code, which actually was a Code with no legal effect. Are you going to make any changes?

A: Yes we are contemplating changes. Most of it was taken from the British Code, and as you say it is a roluntary code, whereas in our case we had no choice but to make it a statutory rule of the Commission. The British Code gives a certain amount of flexibility which our code, by virtue of it being a statutory code, does not. Some flexibility has to be built into it if it is to operate in the spirit in which it was enacted.

The code is not there to dissuade or prohibit takeovers and mergers. It is there to facilitate them. It lays down a procedure which should be followed, in such a transaction and which endeavours to ensure that all shareholders are equally treated, and given an opportunity to decide whether they want to remain with the present management or move out.

When you bring in new legislation you keep learning. New things come up. If they are of a substantial nature and indicates that there are problems which need to be addressed, we definitely would bring in amendments. At present, there is a committee which is looking into it. Deputy Solicitor General Saleem Marsoof is in it.

Q: There are some amendments coming to the SEC Act itself. At what state are they now?

A: The SEC amendments have been approved in principle by the Cabinet and are with the legal draftsman.

Q: What are the specific areas the amendments deal with?

A: The amendments we suggested were in several sectors. One is that we hope to bring out registration of market intermediaries. These include rating agencies, margin providers, fund managers and underwriters who are not covered by the Act.

We are not considering licensing them. But we would like them to be regulated with us so that we could be satisfied that they have the basic qualifications and the infrastructure to function and that they follow certain uniformity or principles.

We do not have credit rating agencies, which are going to be essential if we are to have a healthy debt securities market.

We have also asked for increased powers of investigation and inquiry. At present, our powers of investigation are limited. Bodies such as the Fair Trading Commission have wider powers of investigation and inquiry. With the activities of the market increasing we believe that it is necessary for us to have new powers.

There is a restriction in the SEC Act preventing stockbrokers from operating as dealers. As the market grows, these restrictions have to go out. We have asked that the consideration be given to removing the restrictions, with the future in mind.

At the moment when a company applies to be listed in the Colombo Stock Exchange, all listing applications are sent to the SEC, by the CSE because of the arrangement we have with the CSE. There is nothing in the law at present requiring the SEC to give approval for a listing application even though it is the practice.

Some amendments have been suggested where we will have more control of the listing process where we will also be able to specify certain requirements that have to be followed by companies seeking a listing.

Q: When you come to the debt market, in the US for example, you find that all debt issues, whether by listed or unlisted entities are registered with the SEC. Are there plans to bring unlisted debt under the SEC?

A: Not at the moment.

Q: The SEC was investigating some insider dealing cases. What is the progress on these? I believe there were questionable transactions relating to Dankotuwa Procelain?

A: We have filed action against four officers of Dankotuwa Procelain.

Q: An issue that has come to light recently is that commission members have sat in on meetings in conflict situations without declaring their interest. Are you in a position to take action against a commissioner or commissioners?

A: Yes, if a commissioner has broken any SEC law, that is the SEC Act or any other rules of the commission. The secretariat is in a position to act. There is no question about that. If they have contravened provisions of the act, they are in a similar position as any other breacher of the law.

Q: Has the SEC investigated any of its commissioners?

A: Investigations are confidential until we come to some conclusion on whether there is a prima facie case or not. Even if we had reached a conclusion, I would not like to make a comment on that. Investigations are initiated sometimes on anonymous tip offs. I think it is not fair by the people involved to comment on these matters. Until you are prepared to file a case these matters should be kept confidential. The Commission might also lay itself open for defamation.

Q: Are you contemplating any changes to the operation of the SEC?

A: It is a bit too premature to answer that question. At present we have one of the most technologically advanced market infrastructures in place. I would like to see the current infrastructure utilized to the maximum. That is one objective I would like to work towards. We would like to encourage new listing and new products.

Q: What is your message to the market now that you have taken the role of the regulator?

A: Thanks to people who were here before me, Mr. Wickremanayake who put the SEC on the map it is established on the regulator. I think the message Mr. Wickremanayake also tried to propagate was the SEC is not only a regulator but it is also the facilitator to assist the market grow. I would like to continue both roles.

Foreign loans for non -BOI exporters

By Shamindra Kulamannage

Exporters will get a well deserved boost with the liberalisation of exchange controls for the non-BOI sector enabling them to borrow abroad free of exchange controls, an official said.

The Central Bank's Economic Research Director R.A. Jayatissa told a news conference, BOI registered companies enjoyed the privilege of borrowing abroad and it was necessary that even one non-BOI companies be provided with the facility to maintain their international competitiveness.

The facility would be available to exporters with adequate foreign currency exposure. Foreign currency loans to exporters would be extended either from the Foreign Currency Banking Units (FCBU) or the domestic banking units of commercial banks. The Central Bank anticipated an additional US dollar 100 million lending through the FCBU's after the implementation of the scheme. Commercial banks would have to ensure the loans were not utilized for non-export purposes.

The servicing at these loans would have to be made out of export proceeds. This meant conversion of rupee funds to foreign currency to effect the settlement of these loans would not be permitted, Mr. Jayatissa said.

Mr. Jayatissa said there would be no restriction in the duration of such loans for the purpose for which such loans are to be used. This meant these loans would be available for both working capital as well as fixed capital. He was hopeful that as a result of the new scheme, interest rates of rupee loans would come down.

Dr. A.G. Karunasena, Additional Director, Economic Research told 'The Sunday Times' that commercial banks obtain foreign currency through exporters who wish to convert their export proceeds to rupees and through foreign currency deposits and through borrowing off-shore. In this context the London Inter-Bank Offered Rate (LIBOR) hovers around 5%-6%; thus it could be expected that the interest rate for the foreign currency loans would be around 8%-9% compared to the rupee interest rate of around 17%-19%, said Dr. Karunasena.

Low interest

foreign currency loans for non-BOI firms

CSM to see influx of foreign funds

Market focus by Analyst

It was apparent that the initial momentum in the Colombo Stock Market's ASPI index was not sustainable, as retail investors began to cash-in on the gains made during the previous weeks.

Foreign investors were mainly concentrating on shares of Grains, HNB, Commercial Bank, and certain other companies, with an average daily percentage investment in the region of 25%-35%.

The New York/London markets are overheated due to abnormal returns during 1996 (26% increase in Wall Street in 1996).

Analysts believe that these markets would decline in 1997, due to contributing factors of US interest rate hikes, cyclical trends, very high p/e levels etc.

These trends in the west would be beneficial for emerging markets such as Sri Lanka, the Philippines, India etc., as demand for mutual and regional funds investment in emerging markets increases.

This trend is apparent in the Philippines as a large inflow of foreign mutual funds has begun to invest in the Philippine stock market, from end of December 1996. This trend, is hoped, would also be witnessed in the CSM in the short-term by analysing the international investment trends.

The take-over bid for Commercial Bank has heated up with three contenders: HNB, DFCC and ETF. HNB seems to be the main-contender and has shown keen interest in acquiring 40% stake of Commercial Bank from the present majority shareholders, Standard Chartered Bank (40% stake) offered price being Rs. 103.00. As the stake is above 15%, the Monetary Board has to give a ruling on the proposed take-over in addition to compliance of Take-overs and Mergers Code.

Commercial Bank management has ruled the offer as a hostile-take-over and recommended the shareholders not to dispose of their shares. Reasons being branch closures/redundancies etc.

DFCC, the second contender is the choice of the management, but no known definite offer has been made.

ETF is interested, but investing a large portion of funds in one company carries a high risk, analysts say.

It is expected that the CSM would increase 20%-30% for 1997, with more overseas funds investing in the 'CSE'. Export-oriented manufacturing sector and banking sector should lead the way in increase in price levels with plantation sector not far behind.

Foreign funds to swell CSM in 1997

Promoting investment is everybody's business

The BOI, which is the principal agency for channelling foreign investment to the country, has come under fire in the wake of low foreign investment flows in recent years. Meanwhile, there has also been reports of arbitrary duty waivers to a flagship project. In this interview with The Sunday Times Business, BOI Chief Thilan Wijesinghe details BOI's activities during 1996 and his views on recent disclosures

Q : What has been the major thrust of BOI strategy so far?

A : When I took over the BOI I realized that there has been a decline in the number of projects approved in the manufacturing sector. Our first priority has been to improve the supply side factors affecting investment. That is the availability of infrastructure, how quickly approval is granted for manufacturing facilities and to address the shortage of industrial land within easy access of Colombo.

We set up the separate unit within the BOI called the Bureau for Infrastructure Investment to focus on infrastructure. Currently BII is also looking at water supply and rail electrification.

Delays were encountered in acquiring land and obtaining infrastructure connections. So we initiated the creation of a special inter ministerial committee to speed up the process. Issues that still could not be resolved were referred to an inter ministerial committee on investment promotion created on a recommendation of the BOI chaired by the President.

Q : What is the success rate of this process?

A : Of the 60 odd issues that have been brought to the inter ministerial committee only about 10 per cent remain unresolved. . The only way we can shorten the time period for implementation from the present average of about 10 months to about 4 months is to have up to date and modern industrial parks in easily accessible areas with adequate infrastructure.

We have created a special task force which had been approved by the Cabinet to fast track the development of industrial parks and townships.

Q: The performance of BOI has been traditionally measured in terms of employment created at investment approved or agreements signed. How has the BOI fared under you in this regard?

A: I think there is a third element to measuring performance, that is the number of projects that physically got off the ground.

When I took over the BOI in September 1995 Sri Lanka went through the second year of decline in foreign direct investment (FDI). In 1995 the foreign direct investment without the Shell transaction was 80 per cent below that of 1994.

In numerical terms projects that started commercial operation declined from 90 in 1995 to about 60-65 in 1996. We had a turnaround in the FDI inflows in 1996 because despite the number of projects declining investment committed rose 4.5 times because of a few big ticket investments.

Up to June 1996 ,FDI figures were around US $ 50-55 mn. I expect the entire year to have FDI figure of about US $ 120 mn compared to a level of about US $ 25 mn in 1995.

Q : What sectors have these investment taken place ?

A : A large textile mill commenced commercial operations last year, a ceramic operation and a local wireless local loop project to name a few.

Q : But how can you count telecom projects when they were not promoted by BOI but proposals were invited by the Telecommunications Ministry ?

A: The BOI participated in the evaluation committee and in detailed discussions regarding the implementation agreements and BOI agreements which were relatively complex documents to negotiate. After awarding licenses the first investment was committed within a period of about seven months, which is a very quick implementation period considering the fact that it is a flagship project of more than five billion rupees each in investment size involving the raising finance in international markets.

I don't for a moment want to take credit as to who promotes a particular project. But the mere fact of a government bureaucrat meeting with a prospective investor does not necessarily result in investments.

That is why I maintain that promoting investment is everybody's business starting from the President who is in fact the head of the BOI in her status as the Minister of Finance, to the Cabinet of Ministers, to the ministries right down to local government authorities and existing investors in the private sector.

Investments reacts to country fundamentals and incentives. Provided we have a very competitive incentive structure and the country fundamentals are relatively stable 85 per cent of the investment promotion had been done. The rest becomes facilitation.

We go along with the President on state visits to promote investment. In fact this is a conscious strategy followed by other countries as well. For example Lee Kuan Yew right through the 60 and 70's headhunted certain investors and personally visited companies. Mahathir Mohammed of Malaysia very recently personally visited Bill Gates of Microsoft to persuade him to invest in an advanced technology industrial park.

We play the roles of promotion facilitation and retention. Let us not look at the promotional aspect and say the other two functions are not important. If the facilitation aspect and the retention aspect is not looked after, however much anyone promotes projects they would come to nought because those projects would not get implemented and stay in the country and expand.

Q : Why are huge salaries paid to short term employees, in the BII for example when you already have experienced people within the BOI?

A : I discovered that during the 3.5 years period where BII's predecessor the Secretariat for Infrastructure Development and Investment had not concluded even one project. The USAID had cancelled technical assistance to SIDI and made it a condition to renew funding that SIDI be given statutory powers and that SIDI be staffed with professionals drawn from the private sector. We felt that most appropriate structure to have statutory powers was to bring it under the aegis of BOI law. The primary skills needed for structuring BOO/BOT that were not available at the BOI was financial analysis skills and legal skills so we recruited financial and legal professionals into the BII.

The BII was instrumental in setting up formal guidelines for investment in BOO/BOT projects and handling unsolicited proposals.

We managed to financially close the KHD US $ 62 mn power project which was first solicited by CEB almost four years ago and had not moved forward. It is an achievement considering the fact that this investment alone is more than double the amount total FDI achieved in 1995.

We have made considerable progress in several other power projects. The BOI was also involved in the implementation of a scheme for self generation of large scale industrial users with the corporation of the CEB which has resulted in creating about 60 MW of reserve capacity. We have made progress in concluding the Colombo Port development program. BII played the role of facilitating the activities of the special power committee that was set up to combat the power crises. The emergency procurement of power generation plants was fast tracked through this power committee and most of the financial and legal skills in structuring these projects was provided by BII.

Q : Are proposals for the Trinco power project being called again?

A : We were contacted in the project in relation to awarding an LOI but we had not been contacted again.

Q : So things are at a standstill?

A : I would not know. The Cabinet appointed Tender Board would know the correct position.

Q : How would you assess the prospects for 1997 ?

A : The prospects for 1997 should be considerably better than for 1996. Firstly we have in terms of agreements signed in 1996 the figure stands at about Rs 38 bn. Approvals are many times that. The initial indication of a commitment to investment is the signing of the agreement. This involves going through the process of incorporating a company, obtaining the land if necessary appoint directors. We have 18 projects in excess of 500 mn rupees, which are due to reach commercial operation. We are also targeting the construction of Colombo Port within the second half of 1997.

Q : What is your target for 1997?

A : We have hoping to achieve a FDI of US $ 300 mn (Rs 15 bn) for 1997 which we feel is an achievable target looking at investment projects in the pipeline, which will be around three times the figure expected to have been achieved in 1996(US $ 110-120 mn)

Q: What is the comparable achievement rates of South East Asian countries?

A: South East Asian countries do not have the concept of a multi stage application process where there is an approval and then there is agreement followed by implementation. Indonesia achieves about 35 per cent implementation when compared with approvals. In Vietnam where the legislative framework and policy guidelines are confusing the implantation ratio can be as low as 15 per cent. Historically Sri Lanka has achieved a rate of anywhere between 30 to 35 per cent. Implementation ratio dropped significantly in 1995 to around 20 per cent but in 1997 because there have been a large amount of investments approved the ratio would be lower. The approval levels are extremely large because of some oil refinery approvals.

Not counting the refineries, we have projects of Rs 175 bn approved and 38 bn which have signed agreements. I hope to achieve an implementation ratio of projects approved of 10 per cent and projects contracted of 30 per cent which would translate to an FDI figure of US $ 300 mn.

I should say that only 12 per cent of this is in manufacturing. I expect manufacturing investments to pick up once we can send the signal that we have put behind us the infrastructure bottlenecks and the industrial parks we are developing are in a state where companies can move in rapidly.

Q : You have also pursued a strategy of targeting companies and visiting them. What results has this brought?

A : We have had relatively successful results. We adopted a similar strategy during Presidential visits. In Korea we targeted large scale Korean corporations such as Samsung, Lucky Goldstar, Hanjung and Hyundai. Even the presentations we made to these companies were tailor made for their own business plans.

In addition to that the BOI, including myself, visited several countries to personally make presentations to investors. For example I visited Motorola. We have been intimated that Sri Lanka is now on their list of three countries for locating the next semiconductor plant. Earlier Motorola has a list of about five countries. During subsequent evaluations three countries have been eliminated and Sri Lanka added. Six weeks ago Motorola sent a one man delegation to look into prospects in Sri Lanka.

The reason we want to attract large companies is that very often their suppliers and competitors follow suit. In Penang for example one of the first investors in 1983 was Motorola. That plant was to have come to Sri Lanka but was shifted due to the ethnic conflict in July 1983. Today the plant has 30,000 employees and a whole host of suppliers and competitors have also moved in its wake.

Q : Why was the BOI Board re-structured recently?

A : That was undertaken by the President primarily because it was felt that a senior official of the Treasury should be appointed to the BOI Board. A lot of fiscal issues and these relating to incentives are relevant to the Treasury and it has helped us better formulate strategy by having Dr. Jayasundera on the Board.

Q: Why was duty concessions approved for the Oberoi lobby when it was not a BOI project and there are questions whether it deserves flagship status at all?

A : When the Crescat development was approved it was agreed that a part of the land owned by Asian Hotels (Oberoi) would be transferred to Crescat. Part of the conditions of this transfer was that the entrance to the Oberoi lobby would be closed because the land adjacent to the old lobby was to be used for recreational facilities which would be part of the Crescat development.

Four of the five purposes for which the new lobby is built is to provide entrances to Crescat facilties. That is parking, apartment, office and shopping facilities.

Furthermore for the purpose of using the lobby, Asian Hotels is paying a rent to Crescat.

Therefore it can be very clearly established that the new lobby is primarily is for the use of Crescat. However they were compelled to provide access to the Oberoi Hotel because the entrance to the old lobby had been closed.

It is aslo correct that Oberoi is not a BOI approved company but Oberoi obtained duty exemption for the period of 1994 and 1995 for the purpose of completing refurbishment programme under a special incentive scheme implemented by the Ministry of Finance. The Oberoi imported equipment costing Rs 695 mn for refurbishment, free of duty. The Oberoi could not complete the programme by 31st December and it was concluded in May 1996. During that period they paid full duty of Rs 58 mn on all plant and equipment.

When Oberoi itself had duty concessions and had also paid duty when the period expired it had no reason to come through Crescat.

On whether Crescat qualifies for flagship status, it is correct that to date only US $ 25 mn had been committed to Crescat in capital equipments and the cut off for flagship status is US 50mn.

But we have documentary evidence that Crescat has signed construction contracts of 42 mn dollars, and would be paying out US $ 1.5 mn a month.

The value of land belonging to Crescat is US $ 6 mn. It has leased land from Asian Hotels valued at US $ 10 mn. Historically when the BOI gave flagship status, including the twin towers building, the value of land was factored in. Even today Crescat can be considered a flagship project with the land. But we have also given them an extension to complete their second apartment block and office Tower till 2000 because today there is a glut of office and apartment space. In the interest of facilitating a flagship project of which are only nine, I acted within the full authority granted to me. Extensions has been granted to other projects, for example the JAIC tower.

Q : Didn't fact that David Creighton Watt has sat on the same board as you prove an incentive?

A : No it didn't. For the simple reason that I had at all times declared any interest that I had. I had resigned from private sector positions. David Watt happened to be chairman of Asia Capital by virtue of his shareholding. He is a passive shareholder of Asian Hotels. The Major shareholder is in fact Tan Sri Azmi, one of Sri Lanka's largest foreign investors who has personally committed more than US $ 40 mn to the country.

Q : The newspaper public relation campaign which used publicity funds allocated to BOI has now run for some time. Do you think it has had a positive impact on the investment climate?

A : It was not initiated by me and I did not conduct an assessment of its results.

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