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The Sunday TimesBusiness

9th March, 1997




Scouting for rating agency investors

By Asantha Sirimanne

The Central Bank is looking for equity partners for the first rating agency to be set up in Sri Lanka, a top Central Bank official said.

"We are in the process of identifying equity holders to start off the rating agency," Senior Deputy Governor S. Easparathasan said.

The Central Bank together with the Asian Development Bank has been the main promoters of the rating agency, which is essential for the future development of our capital markets.

The Asian Development Bank and the Central Bank itself, would take a part of the equity of the proposed rating agency, Mr. Easparathasan said.

Last year, the ADB commissioned a feasibility study on the setting up of a rating agency. The Canadian Bond Rating Services (CBRS) was selected to conduct the study. CBRS handed over its report to the authorities last year.

CBRS itself may be an equity partner in the agency.

"In addition to other local institutions, CBRS may possibly take up a stake," Mr. Easparathasan said.

The lack of a rating agency was felt last year when Vanik Incorporation launched the country's first unsecured debenture issue.

Rating agencies are well established even in India. In fact an Indian agency had also bid for the feasibility study last year.

Though Sri Lanka has a fairly well-developed equity market, debt markets are still in its infancy. The government and the Central Bank have in recent times been removing many of the obstructions that blocked the development of the debt market.

However in the last budget the fledgling industry suffered a severe blow with the raising of stamp duties on debt instruments, to the dismay of those who wanted to kick-start the debt market.

Another major obstacle was the present turnover tax regime which discouraged trading in these instruments. The turnover tax regime, also discouraged the issue of pass-through securities, though some issuers have developed ways of minimising the tax liability. With the introduction of GST however most of these problems are expected to be ironed out.

The Central Bank is now pushing to reduce turnover taxes on all government securities to encourage secondary trading in those instruments, especially the newly introduced treasury bond.

There was also an anomaly where bank primary dealers were required to pay only 2 per cent turnover tax while, others were required to pay 4 per cent.

A cabinet paper on this subject is to be presented shortly to create a level playing field for all primary dealers.

"Primary dealers simply cannot trade by absorbing all these because they play on very thin margins," Mr. Easparathasan explained. "You have to create a conducive environment for trading to take place."

Mr. Easparathasan said the Central Bank was attempting to create an environment conducive to active trading to take place.

"We are trying to educate the revenue authorities on the need to develop the secondary market."

If the rate was reduced, what is lost by the reduction would then be recouped from the hoped-for increase in trading volume, Mr. Easparathasan said.

Overseas investors interested in blue-chip parcels


by analyst

With the 'CSM' consolidating its position at ASPI 620 levels, it was evident that support at these levels has materialised. This is mainly due to overseas investors showing interest in certain blue-chip parcels.

The largest portfolio investment fund in the world considering investments in the South Asia region would in all probability pave the way for more investors to come to this region. It is hoped this fund would set up operations in Sri Lanka.

The power crisis showed its ugly head again this year with warnings of only 60-80- days before a total black-out. In the event of no rain in the catchment areas, it is anticipated that the 'CSM' share prices have already been discounted to reflect this event, if not the market may discount 2%-4% over the occurrence of this crisis.

Election fever is increasing day by day and this is evident with clashes between opposition and government supporters.

It is hoped that the elections would be conducted in a peaceful manner as the international community would be focusing their attention at this period than at any other period. Any resemblance of being a Beirut would be construed as a negative sign for investments in the 'CSM.''

War is a forgotten issue as long as no bomb explodes in Colombo, but economically the biggest wasteful outflow of funds is due to the war effort. The outlook for the war-front is a protracted long drawn-out war, which would ultimately cripple the country's economy, if drastic strategic changes in the war-front as not-undertaken.

Sectoral-wise, companies that would perform better than the market would mainly be in the banking sector:

Recommended: DFCC, NDB, HNB, COMB, SEYB

Companies trading in the manufacturing and export sector would also be a good source of investment:

Recommended: Ceylon Tobacco, Halleys, JKH

Speculative investors could concentrate on: Magpec/Bogala/MBSL/Vanik


By Business Bug

Automated facility

In the present day, with a new commercial bank being set up almost every week, automated teller machines are no longer a luxury in banking circles.

That maybe why a major state bank has decided to invest in them at long last.

But first, only the Bank's branches in major cities will have the facility with at least twenty ATMs being planned to be operational by end '98....

Tiring worker

Prospects look bleak for the tyre producer hit by worker unrest.

There have been attempts to solve the dispute, and an end to the strike is likely soon.

But that may just be the beginning of their woes, for market surveys have found that a fair slice of the local trade has already been lost due to the recent production stoppage....

Watch dog

Given all the intrigue about conflicts of interest in the commission that exchanges securities, some changes governing the rules of the commission are on the cards.

The considered opinion of most is that suitable people with no other business interests will be hard to find. But, such interests should be publicly declared and whenever possible, renunciated, authorities feel.

Or else, they would need another watch dog to watch over the watch dog, as it has happened now....

CTC Eagle strives for benchmark status

CTC Eagle Insurance company is aiming to set industry standards and become a benchmark company in the financial services sector.

CTC Eagle Insurance Managing Director Chandra Jayaratne said the company had comfortably exceeded all local provisioning, solvency and internal control requirements and were even above EEC standards which are the strictest in the world.

Regulation for the industry was still in its infancy.

"In the absence of an appropriate legislative and regulatory environment and with the Insurance Account not yet enacted, effective self-regulation assumes much greater importance than would otherwise be the case," Chairman Michael Fenn said.

"The board is encouraged by recent commitments made by members of the Insurance Association to make self-regulation more effective."

Janashakthi General Insurance Company had filed legal action against CTC Eagle claiming Rs 150 mn. CTC Eagle denies liability and has in turn claimed Rs 500 mn from Janashakthi General.

The company had posted profits of Rs 88.1 mn for the year ended December 31 1996 after making a provision of Rs 12.5 mn for taxation. Mr Jayaratna said the company had carry forward losses on long-term insurance business for several years to the future but the provisions were still made to even out the effect of tax from year to year.

"The company's financial position remained strong with assets well in excess of the reserves required," Finance Manager Marina Tharmaratnam said.

The company had a tax equalisation reserve of Rs. 58.7 mn, a provision for claims equalisation reserve of Rs. 37.6 mn and a provision for claims incurred but not reported of Rs 5.1 mn.

The subsidiary CTC Eagle Fund Management had reported a loss of Rs 4.3 mn, dragging group profits down to Rs. 83.4 mn.

General Insurance premium had increased by 6.4 per cent in 1996 to Rs 462 mn and life insurance by 18.4 per cent to Rs 742 mn.

"The life market was adversely affected by the economic downturn, and life insurance annualised new business premium was below expectation," Mrs. Tharmaratnam said.

Vanik meeting off

The extraordinary general meeting of Vanik Incorporation called to gain shareholder approval for the purchase of Forbes Ceylon had to be abandoned last Wednesday after minority shareholders brought a retraining order to prevent it.

The plaintiffs said Vanik's move to pay Rs. 2.5 billion for two companies in the Forbes Group, would be detrimental to the interest of shareholders.

Koolair starts generation again

By Shamindra Kulamannage

The Koolair private power plant which was shut down on February 28, is to restart generation of electricity, The Sunday Times learns.

The plant which is at Ethul Kotte was shut down following a court stay order after the residents at the area filed suit citing noise pollution.

Koolair, a 11.2 MW thermal plant, was commissioned at the height of last year's power crisis by Koolair, a 100% locally owned private company.

An official of the CEB told The Sunday Times that President Kumaratunga and the Chairman, CEB, Arjun Deraniyagala, had personally intervened to bring about a solution to the crisis as the power situation in the country is of grave concern.

The court ruling allowing Koolair to operate its plant is subject to the plant conforming to the minimal noise pollution levels, stipulated by the Central Environmental Authority (CEA).

The CEB official added that full CEA approval was necessary for plants over 25 MW. ''Since the plant in question is a 11.2 MW plant full CEA clearance was not required. Some of the other locational drawbacks of the plant were that it was situated close to the ceremonial drive to Parliament and that it was situated close to a bird sanctuary. These factors have however been of little importance as the country was on the verge of a repeat of the power crisis experienced last year.

The General Manager of Koolair, Mr. G. Seneviratne told The Sunday Times that the crisis was temporary, adding that ''The hasty setting up of the plant last year meant that noise pollution precautionary measures were not given due precedence. Thus initially the plant would have disturbed the residents, but we have now double walled the plant and are in the process of implementing other noise pollution measures.

The ruling which was delivered at the Colombo Magistrate's Court last Thursday, requires Koolair to comply with the noise pollution stipulations set out by the CEA.

According to the CEB official, the total contribution of the Koolair company towards the national grid is 19.4 MW of which 11.2 MW are being generated through the plant at Ethul Kotte while the rest is being generated at a plant at Malabe.

The Urban Development Authority had granted approval for the establishment of the plant in Ethul Kotte last year. The CEB official also stated that the matter was, ''An internal problem of the Koolair company but under the current circumstances of an impending power crisis, it has become a national issue, which reason he attributed to the high level intervention.

The official in conclusion denied allegations that the CEB had to incur losses due to the temporary shutting down of the Koolair plant and the CEB having to pay for electricity that was not being generated by the plant.

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