17th October 1999

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Guess what tops?

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Guess what tops?

Guess what topped the ratings on your idiot box? No cheers for the correct guess but yes its teledramas and news.

A Lanka Market Research Bureau (LMRB) random survey of people over eight years of age during the first six months of 1999 estimated 2.5 mn households in Sri Lanka own televisions.

A trend away from state channels was revealed. Rupavahini lost ground, with its market share of 50 per cent in 1998 declining to 33 per cent in mid 1999, while ITN has stuck stubbornly to its share of 21 per cent. However Swarnawahini's share rose dramatically in May-June 1999 when it telecast the World Cup cricket tournament. This resulted in a 54 per cent share for state channels in the first half of 1999, down from 70 per cent in 1998.

In urban areas Rupavahini and Sirasa have a share of 25 per cent each and Swarnavahini with its share of 22 per cent outdoes ITN which has a 16 per cent share.

Rupavahini has a 36 per cent share of rural viewership compared to ITN 24%, Sirasa 21% and Swarnavahini 16 %.

However as private channels transmissions become better Rupavahini's position could be eroded. More transmission towers, innovative programming and aggressive marketing has had a significant effect on viewing patterns in the island.

Most viewers are glued to their screens between 7.00 pm and 9.15 pm. Viewing peaks between 8.00 pm and 8.30 pm and between 8.45 pm and 9.15 pm. Viewership plummets after 9.15 pm, keeping 10 per cent of viewers busy. Children are catered to between 3.00pm and 6.00 pm and this slot has the attention of 11 per cent of viewers. From 8 am to 12 noon housewives dominate with a share of 7 per cent.

Lion's share of SLT may go out

By the Business Desk

The government plans to list the bulk of the eagerly awaited 10.5% of Sri Lanka Telecom (SLT) on an international exchange closer home and leave the crumbs (not more than 1% - 2%) for Colombo, a senior government official told The Sunday Times Business.

The government decided to go ahead with SLT's IPO last month after scrapping plans for a private placement of its 10.5% shares. SLT's much awaited IPO, was expected to boost the Colombo market with its first billion dollar company with adequate liquidity.

However, Public Enterprise Reform Commission (PERC) Chairman Dr. P B Jayasundara told The Sunday Times Business, the government plans to list one percent or even half a percent in Colombo 'the rest would be listed on a market which has relevance to Sri Lanka rather than New York or London'.

"There are 225 or so (listed) companies whose capitalisation is less than 10% of our GDP.

How can we list it, the market will crash. We also don't want to destabilise the market." Disappointed stockbrokers doubted if the stringent regulatory listing process could be completed soon enough to list on a foreign exchange next year.

If the government is looking at Hong Kong, Singapore or even Tokyo they have to go through a stringent due diligence and listing process which may take very long, one broker said.

Brokers also felt that the entire 10.5% of the SLT issue would not be too much for Colombo.

The government is expecting a ballpark figure of US$ 100 mn to US$ 150 mn from the sale.

If we divested 35% of the share for US$ 225 mn, we need roughly about US$ 65 mn for the 10.5% stake, he said.

"But we also built in a premium, it is now a better managed enterprise, the network is very much larger, and the investment much greater plus its value. So the benchmark was US$ 100 mn," Jayasundara explained.

Plans for a private placement was shelved after talks collapsed between the only qualified bidder, Singapore Technology Telemedia (a unit of Singapore Technologies Pte Ltd). "We started talks with them, but things didn't go well. We had a look at our economic performance which was doing okay, so basically there was no harm in postponing it," Jayasundara said.

PERC has already invited expressions of interest from investment banks to lead manage the SLT's issue. The banks will also be asked to submit binding financial bids.

The adviser/lead manager is expected to be identified at the end of this year, and the preparatory work is expected to take at least six months.

Jayasundara said a few road shows will be done before the transaction to explain about the economy, the privatisation process taken place so far, and proposed privatisation plans.

While the IPO is expected to spark interest from foreign funds, equity analyts felt 'the much sought after foreign fund managers' will go for the foreign listing.

SLT is managed by Japan's Nippon Telegraph & Telephone Corporation which paid US$ 225 mn for a 35% stake in 1997. The state holds 61.5%, while employees control 3.5%. SLT controls 66% of the domestic telecommunications market and has a monopoly over fixed wire lines and international telephone services until 2002.

In 1998, it had assets worth US$ 912 mn, turnover of US$ 265 mn and profit after tax of US$ 23 mn.

Two separate boards for debt

By Mel Gunasekera

The Colombo Stock Exchange (CSE) will have to have two separate boards to trade debt instruments, a main board and a secondary board.

CSE Director General, Hiran Mendis told The Sunday Times Business that they also will open the doors for new members who deal exclusively in debt instruments and commence secondary trading of treasury bills.

In bold moves to build up the bourse, the CSE will also introduce 'intermediary sponsors' to vet applications of companies seeking a listing on the exchange. Mendis said that investment grade debts will be limited to the main board while non investment grade debts (junk bonds) will be listed on the second board. "We are also thinking on the lines of limiting non investment bonds to qualified investors," he said addressing a workshop on the new debt listing rules.

The Sunday Times Business reported the setting up of a separate board for debt in its issue of September 26, but plans have changed and expanded since then, Mendis confirmed.

The exchange hopes to trade treasury bills next year to offer a 'one platform for investors to deal with debt and equity'.

We are in the process of drafting rules to permit members market making and we want to expand our membership for brokers who only want to trade debt, Mendis said.He added that the minimum capital requirement for debt brokers has not yet been decided but it will be in the range of Rs. 50 mn.

At present, the exchange has 15 equity brokers whose minimum capital requirement is Rs. 11 mn by December 31, 1999. The net capital will be further raised to Rs. 15 mn by December 31, 2000, he said. The exchange's trading system is also being modified to have a separate front end for debt instruments. Sponsors or intermediaries will be brought in to vet new applications.

The CSE is in the process of drafting the necessary regulations, which will be out by year-end.

"Sponsors have become a necessity due to the poor quality of application forms." There have been numerous complaints from companies seeking listing that the CSE takes weeks or sometimes months to approve pass their applications.

Mendis says some applications are so bad that the CSE at times plays the role of the editor correcting the grammar and verifying the sources of information! We are also looking at ways of reducing the cost of listing on the exchange.

Perhaps by reducing the number of prospectuses to be issued to brokers we can bring down some of the costs, he added.

New Tea Board levy upsets industry

By Shafraz Farook

The tea trade is concerned about the Sri Lanka Tea Board's recent levy on direct sales and forward contracts.

The tea board recently imposed a ratification fee of Rs. 1000 per grade for direct sales and forward contracts and Rs. 100 for a private sale valuation certificate.

The issue came up when a company wanted a small quantity of tea for direct sales ratified and as a result of the Rs. 1000 ratification fee the price per kilo was doubled.

The Tea Board told the Business Desk that the ratification fee was charged 'per grade' and not per sale. In other words companies could obtain ratification for the entire quantity of one grade, which the company hopes to sell directly and thereafter sell it in smaller quantities.

The earlier procedure as we understand is that the selling party quoted a prices and two independent brokers ratified that the price was reasonable and not below the market price. The Tea Board in turn ratified the quality of the tea free of charge. The only difference now is that the Tea Board charges a fee.

Tea Board officials added that it would mainly affect companies dealing with green and organic teas, which is mostly sold directly.

In addition to the ratification fees the Sri Lanka Tea Board also introduced ratification fees for permits to import tea and fees for issue of certificates and for the application forms prescribed under the scheme for import of tea for blending and export thereafter.

Producers said that they did not have a problem paying a fee to the board for their services, but since the new fees are charged in addition to the tea cess paid to the Customs the companies have to incur additional costs. They said a further increase would be a burden.

The board in a circular issued last month said it was charging the fees because services rendered by the Board without recovering even the cost had led to a heavy burden on the board's revenue. Hence the Board had decided to introduce fees and charges for the services provided by the board, at least to cover operational costs, the Board circular said.

However, market sources claim that the real reason for the levying of this new fee is that the Tea Board has lost revenue from the Cess.

Mania to build financial empires

The diversification of financial insti- tutions' activities is the order of the day. The rapidity with which financial institutions are moving into diverse activities makes one wonder whether there is a competition on for the most diversified financial empire.

There are arguments for and against this process, but the regulatory authority must keep a sharp eye on these developments lest they affect the financial viability of financial institutions and cause an erosion of confidence among the general public.

The argument made by financial institutions for diversifying into other lines of business is that there are synergic advantages of integrating financial services, and that diversification increases stability, enhances profitability and ensures long term growth.

They point out that the world has moved into the concept of universal banking, which means a diversified range of financial services.

So development banks are moving into commercial banking, leasing, insurance, investment banking, stock broking, venture capital et cetera. Commercial banks are also doing the same.

That too are in development lending, insurance, leasing et cetera et cetera. Commercial banks resent development banks moving into their traditional avenues of business, but see no problem in their undertaking development banking functions or expanding their leasing business. This process of diversification takes many forms.

The financial institution may undertake it directly, or set up a subsidiary or even buy up a venture which is already in such other financial service as they deem necessary. There are several issues we wish to raise for the consideration of the regulator of financial services—The Central Bank of Sri Lanka.

First of all, are these institutions serving the long run interests of the country by such diversification.

Are financial institutions losing their central focus in their pursuit of myriad business enterprises? For instance, is this diversification enabling investors in long term development projects to obtain funds with greater ease and better terms?

Are smaller enterprises, which are a very important component of our output able to obtain funds in an easier manner ? Then there is the consideration of the financial viability of the financial institutions themselves.

There are several important issues in this. One is whether there is enough business for all the institutions rushing into the various fields. Do have adequate expertise in the new activities to operate efficiently? In fact is there enough trained and experienced persons in the country to be scattered in so many places?

There is a possibility of too thin a spread of the available talent and a consequent inadequate density of trained personnel in each institution.

Diversification or universal banking, as much as financial mergers, may have added stability and enhanced competitiveness in as far as international big banks are concerned, but is their experience relevant to us at our stage of financial development, narrow domestic market and a rather volatile economy?

These are issues that must be gone into thoroughly and an appropriate blueprint for further financial development must be designed.

These are some of the important questions that props up when one sees the rapid expansion of financial activities of our commercial banks, development banks, merchant banks, investment banks, venture capital companies and other financial institutions.

In fact, the question has risen as to whether the rush to expand is due to an empire building mania rather than good financial and business sense.

We hope the Central Bank will examine these issues in depth and determine the best course of financial development for the country. The issue of prudential regulations and developmental need are very much tied up in the case of Sri Lanka's financial and economic development.

Truckers to get back their business again

By Shafraz Farook

After much ado, the Sri Lanka Ports Authority (SLPA) has agreed to hand over inter terminal container transport to truckers, who performed the task prior to the take over by P&0.

Parliament recently concluded that the SLPA would have to identify the percentage of the inter terminal transfers prior to the new arrangement by the SLPA and the P&O and hand the correct percentage back to truckers.

The agreement also stated that payments in relation to the transfers were to be made direct to the truckers by SLPA/SAGT and that certification of the number of transfers accomplished by the different truckers to be made by the Container Inter-terminal Trucking Office (CITO).

The row between the Association of Container Transporters (ACT) and the SLPA on the issue of inter terminal trucking began in August when inter terminal transportation was handed over to a single party as opposed to the previous system where many operators were involved.

However, in a bid to enhance the quality of services provided by the port and to stem the decline of the transshipment volumes, the SLPA and the South Asia Gateway Terminal (SAGT) agreed to take over and manage this responsibility. For this purpose, SLPA and SAGT set-up the CITO and thereby called for quotations from existing trucking operators, officials told the Business desk when the problem first began. Competitive bidding by the transporters saw the contract go to one of the parties who had quoted the price at almost half the previous price.

The SAGT came into the picture because Sri Lanka handed over part of the country's main Colombo port to a private consortium in a $240 million deal under a 30-year lease on a build, operate and transfer basis.

The group is carrying out a feasibility study for a new breakwater at the Colombo port and to build a new passenger terminal at the quay.

The new agreement will come into effect tomorrow.

Corporate bonds open to primary dealers

By Mel Gunasekera

Central Bank hopes to allow primary dealers to deal in corporate debt in the future, former Central Bank deputy governor S Easparathasan said.

The Central Bank came under much criticism when they limited primary dealers activities to only government debt. Explaining the rationale behind this, Easparathasan said that the Central Bank is highly concerned about the selling price of government debt. "Central Bank is wary about its own bonds being marred by malfeasance in relation to private bonds. But this will not be a permanent feature. Once the market is developed and the primary dealers prove their success, the bank will eventually allow them to deal in corporate debt," he said addressing a recent International Finance Corporation (IFC) debt symposium.

However, fellow panelist, NDB CEO, Ranjith Fernando commenting on the present status of primary dealers said that, he was not in favour of the restriction and thought the rationale was misguided.

After three days of deliberation, Sri Lankan participants drew up a set of proposals which will eventually form a comprehensive report on the future of the debt market.

Some of the recommendations included; removing risk reward structure anomalies by reducing treasury bill rates, expedite pension fund and insurance act reform, improve existing regulatory structure to encourage more players, allow commercial paper to be listed on the over the counter (OTC) market, promote selective inclusion of non-investment grade bonds in the investment portfolio of institutional investors, and rationalise regulation of trust deeds and trustees, redemption funds and bankruptcy and debt recovery laws.

The full report will be out by mid December, IFC officials said.

Interim reporting standard soon

By Dinali Goonawardena

A standard on interim financial reporting has been reviewed for adoption as a Sri Lanka accounting standard. "The due review process is complete and the standard is expected to be passed soon," Chairman, Accounting Standards Committee, Reyaz Mihular told The Sunday Times Business. Colombo Stock Exchange rules require quarterly interim and financial statements to be published two months after the end of each quarter. The standard is recommended for adoption in quarterly financial statements at management discretion and will be mandatorily applicable to half year interim financial statements. The standard dictates that interim financial statements must in, the minimum, contain a condensed, balance sheet, income statement, cash flow statement, showing changes in equity and selected explanatory notes.

Notes are required to explain significant events and changes in the financial position of the enterprise since the last annual reporting date. The information should be reported from the year end to date. Basic and diluted earnings per share should also be presented.

The interim financial statements must explain the seasonality of the operations of the enterprise and unusual transactions affecting its financial position. Material changes in liabilities, repurchase and repayment of debt and equity securities must be shown. Segmental results for business segments or geographic segments must also be detailed.

The effects on changes of the composition of the enterprise including business combinations, acquisitions and disposals of subsidiaries, long term investments and restructuring operations must be disclosed. In deciding whether to disclose an item for interim financial reporting its materiality should be considered in relation to the interim financial period to date.

The standard will be applicable for accounting periods beginning from January' 2000. However disclosure of cash flow statements and segmental information will be necessary after January 2001. A negative assurance audit, requiring the auditors to confirm that nothing has come to light which reveals the accounts do not present a true and fair view will also have to be included after January, 2001.


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