Sri Lanka investors warned to be more vigilant of ESOPs

COLOMBO (EconomyNext) - Sri Lankan investors should be more vigilant about Employee Stock Ownership Plans (ESOP) given by listed firms as some might be too narrow in scope, a forum for minority shareholders was told.

Naomal Goonewardena, a Partner at Nithya Partners, a law firm, said that in recent years the
regulatory environment for listed firms has improved with better protection for minority interests.

But minority shareholders themselves should exercise greater vigilance over the companies they invest in, he told a forum for retail investors on minority shareholder rights held by the Colombo Stock Exchange in association with the Institute of Chartered Accountants of Sri Lanka and The Chartered Financial Analysts Society of Sri Lanka.

The issue of shares can significantly dilute certain minority shareholders if the majority has unfettered discretion in their issue, Goonewardena said.

But the new company law has introduced the right of pre-emption, an important safeguard which ensures that if new shares are issued, shareholders are entitled to be offered to buy them, which he described as "the first step in protecting shareholder rights in general."

But he also warned in the case of some Employee Stock Ownership Plans there could be abuse.

"I'm amazed a lot more ESOPs are not challenged by minority shareholders, given their narrow scope," Goonewardena said. "Sometimes just 10 people in the organisation get the benefit."

This can result in the organisation itself not performing well "but I never see shareholders objecting," he said.

ESOPs are matters minority shareholders should be more "proactive on", he added.

ESOPs in public firms are meant to motivate employees by giving them a stake in the company, to perform better so that the company does better.

They are usually tied to performance indicators such as meeting or exceeding profit targets and returns on capital.

ESOPs also provide tax benefits to the sponsoring company or selling shareholder and participants but can also dilute the stock of existing owners.

Sri Lanka Kalpitiya Beach ordered to call EMG, explain use of IPO funds

COLOMBO (EconomyNext) - Sri Lanka's capital markets regulator has ordered Kalpitiya Beach Resort to call an extraordinary general meeting of shareholders to explain what it will do with 283.5 million rupees raised from the public to build a hotel.

The Securities and Exchange Commission said in a statement it took the decision at its commission meeting of March 10 given the "inordinate delay" in Kalpitiya Beach Resort building a hotel in Kalpitiya out of funds raised at a Initial Public Offer.

The SEC said it noted with "grave concern" that Kalpitiya Beach Resorts, in which Dilith Jayaweera and Varuni Amunugama are executive directors, has not built the resort within the stipulated time frame as stated in the IPO.

Disclosures made by the firm and reasons given for the delay "no longer justifies prolonging construction further," the SEC said.

The SEC ordered the Kalpitiya Beach Resorts board to call for an EGM by May 10 to tell shareholders of the "true financial position" of the company and to pass a resolution on an alternative course of action with regards to the money raised from the public.

It also ordered the firm to produce a report from the company auditor with supporting documents so shareholders can make an "informed decision" and vote on the resolution.

The Securities and Exchange Commission said the company had raised 283.5 million rupees in the IPO in November 2011 to part finance building Citrus Kalpitiya, a resort hotel.

Construction was to have been started by December 2011 and completed within 24-30 months with commercial operations of the hotel scheduled to start in early 2015.

Sri Lanka 'super gains' tax to be applied to groups, individual firms

COLOMBO (EconomyNext) - Sri Lanka's 'super gains tax', a 25 percent additional income tax will apply to individual entities and consolidated accounts of groups of companies, according to proposed to tax laws approved by the cabinet of ministers.

The tax will apply to any person or company who has a taxable income of more than 2.0 billion rupees in taxable income based on audited financial statements in the tax year starting April 2013.

It will also apply to groups of companies, where aggregate before income tax profits of the holding company and all subsidiaries exceeds 2.0 billion rupees or where the profits of each subsidiary and the holding company in that group of companies exceeds the threshold.

Subsidiary companies are companies where a holding company either directly or indirectly has more than 50 percent of the voting shares.

The tax shall be charged on every subsidiary and the holding company of a group of companies.

Board of Investment companies approved under section 17 of its law will have to pay the levy under taxable income coming after the expiration of exemptions and in the case of other companies, the residual assessable tax.

No specific mention has been made of foreign subsidiaries.

The tax has to be paid in three equal instalments by the 15th of May, July and September 2015.

The 'super gains tax' was one of the new taxes proposed in a revised budget in January 29, where salaries of state workers were raised by over 40 percent.

The controversial tax has come under fire for undermining rule of law and predictability by being applied retrospectively and for creating a precedent for the elected ruling class to tax unarmed citizens in ad hoc ways in the future to fulfil election promises.

However in financing the spending needs of the elected ruling class, analysts say taxes are better than printing money, which depreciates the rupee and generates inflation.

Income taxes only destroys a specific amount of investible capital generated by a citizen during a specified period, and directs them to consumption spending of rulers.

But currency depreciation destroys all past savings that can be invested to generate jobs and value, including the savings of weak and old citizen who can no longer work as well as current and future real value of salaries of wage earners.

Sri Lankan shares edge up in thin trade; rates direction awaited

(Reuters) - Sri Lankan shares ended slightly firmer on Friday, led by large caps, but volumes remained thin as investors awaited cues on interest rates, stockbrokers said

The main stock index ended 0.11 percent, or 7.88 points, up at 7,054.58, further moving away from its lowest close since Feb. 2 hit on Wednesday. It had lost 3.74 percent in the last 13 sessions through Wednesday.

Analysts expect the index to gain on hope that interest rates might gradually come down after yields in t-bills fell between 31 basis points and 44 at a weekly auction on Wednesday. The yields spiked between 112 basis points and 124 in the two previous weekly auctions.

"There was no reaction for the declining interest rates. Investors are still not confident enough and they are not selling or buying, but looking for direction," said Dimantha Mathew, research manager at First Capital Equities (Pvt) Ltd.

The day's turnover stood at 370.4 million rupees ($2.79 million), well below this year's daily average of 1.24 billion rupees.

Foreign investors were net buyers of 63.1 million rupees worth of shares, extending the year-to-date foreign inflow to 3.36 billion rupees.

The central bank on Wednesday said the low interest rate environment is expected to continue benefiting from lower inflation while keeping the policy rates steady.

Shares in Ceylon Tobacco Co Plc rose 3.83 percent, while Commercial Leasing and Finance Co Plc gained 4.88 percent.

Infrastructure firm Access Engineering fell 10 percent a day after Sri Lanka's new government cancelled an $85 million airport runway project awarded by the previous government. 

($1 = 132.9000 Sri Lankan rupees) 

(Reporting by Ranga Sirilal and Shihar Aneez; Editing by Anand Basu)

Thilak renews calls for investor association to protect minority shareholder rights

By Channa Fernandopulle

Securities and Exchange Commission (SEC) Chairman Thilak Karunaratne restated his call for the formation of legally-empowered investor association that emulates examples in Malaysia and Thailand.

Speaking during the first in a series of seminars organised by the Colombo Stock Exchange (CSE) aimed at educating minority shareholders on their rights, Karunaratne noted that minority shareholders face numerous problems in today’s market, the most challenging being the prohibitively expensive cost of litigation.

“We get a lot of complaints from minority shareholders but there is very little that we can do however if you follow the examples of other jurisdictions, they have formed investor associations to look after the interests of investors, particularly minority shareholders.

“Lawyers would say that they have the right to take their case to Court and fight it out there but that is one of the costliest exercises in this country therefore even when minority shareholder rights are violated and they have a legitimate complain, they are still reluctant to go to Court and that is why the formation of such an association has become so important,” Karunaratne explained.

He went on to cite the examples of Malaysia and Thailand which formed strong investor associations through the joint efforts and funding of capital market stakeholders and their regulator.

“When the Malaysian capital market was deregulated they used the money realised there and worked with the regulator to form an investor association to look after the interests of all investors, particularly minority shareholders.

“These associations are quite powerful and can even go to Court on their own if a shareholder makes a complaint. If they feel the complaint has merit then they will take up the case at their own expense and fight it on behalf of the shareholder and this is what is needed here,” he stated.

Karunaratne further stated that he had previously attempted to create such an association in Sri Lanka during his previous tenure as SEC Chairman prior to his controversial removal last in August 2012 but which failed due to interference from powerful majority investors.

“During my previous tenure in office as the Chairman of the SEC we started doing this, in fact we drew up a constitution also held discussions with the CSE at that time but somehow after my departure it did not happen. Thereafter, the Sunday Times Business section also initiated something on similar lines and I gave all my support and even handed over a draft constitution for the association also, but there again it was sabotaged by the majority investors.

“They got into the association, they prevented it from being formed and I must say that very clearly: they did not allow it to be formed. Now again we’re trying to form this investor association and this time hopefully we’ll succeed and that will help to look after the rights of minority shareholders,” he asserted.
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Kabir Hashim outlines 6 focus areas to develop capital market

By Charumini de Silva
Minister of Investment Promotion, Highways and Higher Education Kabir Hashim this week outlined six areas the capital market must focus on for future development and asserted that Sri Lanka needs a strategised plan to attract Foreign Direct Investments (FDIs).

“There is a clear need to restructure our investment policies, while having consistent policies to win the trust of investors,” he told the inauguration of the 3rd Capital Market Conference 2015 under the title ‘Consolidation, Innovation and Initiative’ organised by the UTO EduConsult.

The Minister’s six areas of focus were increase listing of companies, market awareness and education, attracting foreign investors, developing new products, corporate debt market and developing unit trust market. Despite admitting that it was challenging, Hashim stressed that it was nevertheless possible.

He went on to say that despite the change in political leadership, the country should have a ‘national policy’ to attract FDIs, which would support capital growth of the economy.

“Attracting FDIs is not easy. We need to have the right balance of investments and confidence to compete in a global market. Thus, it is crucial to have consistent policies to ensure adequate foreign capital flowing into the country,” Minister Hashim added.

He highlighted that the lack of market liquidity had been a negative factor in attracting foreign investors to the capital market.

“Between March 2012 and March 2015, only nine additional companies have listed on the Colombo Stock Exchange (CSE). Many of these companies are Colombo-centric and it is important that we reach out for private companies outside Colombo to encourage listing in the CSE, while looking at attracting State-Owned Enterprises (SOEs) to get listed, which would enhance capital, transparency and good governance,” he noted.

The Minister emphasised that inclusive development was paramount for Sri Lanka and added that although the Government encouraged FDIs with special concessions, they would support and protect local enterprises.
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Plantations in crisis; estates suffer Rs. 2.85 b losses in 2014

* Producers gravely concerned of loss of Rs. 35 on rubber and Rs. 30 on tea per kg sold last year

Plagued by plummeting tea prices, a rubber market at an all-time low and high production costs, 19 Regional Plantation Companies (RPCs) collectively made a staggering loss of nearly Rs. 2,850 million on rubber and tea in 2014.

By end of 2014, on average RPCs were making a loss of approximately Rs. 30 on each kilogramme of tea sold, with average cost of production at Rs. 455 with Net Sales Average at just Rs. 425. In the case of rubber, the other main crop cultivated by most RPCs, the loss on each kilogramme was even higher at Rs. 35, with average cost of production at Rs. 327 but Net Sales Average at only Rs. 292.

The situation is now aggravated leading to further accumulation of losses with the average tea prices declining sharply at the Colombo Tea Auction within the first two months of 2015. Prices have slumped below corresponding levels in 2014, despite the increased cost of production since then.

The auction average at the Colombo Tea Auction for February 2015 was only Rs. 418 – a Rs. 64 reduction from Rs. 482 in February 2014 and even below Rs. 423 which prevailed in February 2013. Some RPC estates are now thus incurring a loss in the excess of Rs. 50 per kilogramme of tea sold.

“Due to external factors, the market for tea is very challenging at present and most worryingly, the situation appears to be a trend rather than a phase of a cycle,” Roshan Rajadurai, Chairman of the Planters’ Association of Ceylon – which represents the Regional Plantation Companies (RPCs) said.

“Tea is available the world over at Tea Producing Auction Centres at around $ 2 a kilogramme and therefore tea traders tend to buy cheaper teas from these origins because of the cash flow and liquidity problems they themselves face. Our tea prices are in the range of $ 3 and above. In this scenario, the immediate survival and by extension the sustenance of the over one million population resident in our estates are facing a great danger, as we are finding it extremely difficult to manage our day-to-day operations and commitments.”

“All must support productivity improvements, without which the industry’s downhill spiral is irreversible and as we have always maintained, the future sustenance and the survival of the industry to a great degree is in the hands of the workers themselves. They can easily increase the daily output and support cost reduction so that we can be competitive in the world markets, as our costs are the highest in the world on account of our labour productivity being the lowest in the world,” he reiterated, pointing out that according to the estimates of the RPCs, a one rupee increase in labour wages will automatically increase the cost of production of tea by 52 cents per kilogramme.

“Therefore there is no choice left but for all the stakeholders to work in unison to save the industry and the people involved, realising the current external pressures and challenges.”

With the demand hitting a historic low, buyers are now purchasing lower quality tea at lower prices, thereby creating additional woes for the RPCs. Large quantities of teas remain unsold at the weekly Colombo Tea Auctions and the RPCs are forced to increase the borrowings in order to pay the wages and other commitments to the workers and to keep the cash flow intact due to delays in receiving incomes for shipments, Rajadurai further noted.

“Being mandated to provide 25 days of work to our workers, our cost of production is significantly above the price (NSA) that we are receiving at the moment for rubber,” Lankem Tea and Rubber Plantations CEO Ranjit Peries said. “Based on forecasts, prices will not increase within this year.”

“The depressed auction prices of tea, due to external factors, are creating much concerns for all stakeholders,” a top official of one of Sri Lanka’s foremost tea exporting companies said. “Considering the gravity of the situation, tea traders have even appealed to the Government for relief.”

Overall slump in tea prices is due to many reasons, the main being the current catastrophic situations in key markets of Russia, Middle East and Ukraine that account for over 70% of exports of Ceylon Tea. The downturn in the Middle East following drastic reduction in oil prices, a raging military conflict in Ukraine and economic sanctions in Russia as well as the recent depreciation of its currency, have created an almost impossible to recover situation for Ceylon Tea. With the global rubber market in a slump and prices not expected to recover soon, a double whammy situation has emerged.

Rubber losses too have spiralled and some RPCs are now on average incurring a loss of around Rs. 70 per kilogramme of rubber sold. Lesser demand from China, a major buyer of natural rubber from Sri Lanka, due to economic slowdown and reduction in price of synthetic rubber, a substitute, following fall in petroleum prices are among the key factors making an adverse impact on local rubber prices.

The issues in export markets add to the longstanding concerns regarding high costs of production, particularly in tea, for which Sri Lanka has the highest production costs in the world, while other factors including weather are also not conducive at the moment – hectares of tea fields were damaged due to frost recently. In this scenario, the need for greater productivity to reduce labour costs and thus total cost of production appears to be the consensus among the RPCs.

In tea, the unit labour cost alone in Sri Lanka (which is approximately 67% to 70% of the total) is higher than the entire unit cost of production of some of its competitors. 

Substantially lower labour productivity, even after making allowance for lower land productivity, continues to pose a major issue. At approximately 18kg, the daily plucking average of a Sri Lankan worker is less than half of that of a South Indian plucker (38kg) and is slightly more than a third of that of a Kenyan plucker (48kg).

The RPCs thus urge all stakeholders to support improvements in productivity, to ensure the survival of the plantation sector and its approximately 200,000 direct employees and many more dependants.

Cabinet nod for Rs. 350 per kilo price for rubber

 A Cabinet decision was taken to pay Rs. 350 per kilogram of natural raw rubber produced by the rubber small holders in the country with effect from 15 March. 

Cabinet Spokesman Rajitha Senaratne announced this at yesterday’s Cabinet briefing. 

“The Cabinet of Ministers approved a proposal made by Minister of Plantation Industries Lakshman Kiriella to implement the proposed scheme of paying Rs.350 per kilogram of natural raw rubber produced by rubber small holders which is mentioned in the 100-day program. Therefore,this will be in effect from 15 March,” Senaratne added.
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