Sunday 13 December 2015

Carson’s prefer delisting to diluting Equity One stake

Equity One PLC, the property development company of Carson Cumberbatch PLC which recently took a decision to de-list from the Colombo Stock Exchange due to its dominant shareholder (Carson’s) not willing to shed part of its holdings to be compliant with the CSE’s minimum public float rule, has reported a stand-alone revenue of Rs. 51.2 million in the half year ended September 30, 2015, up 7.6% from a year earlier.

The shareholders of Equity One recently agreed to the delisting at an extraordinary general meeting with a third largest shareholder of the company, Mr. K.C Vignarajah, vigorously resisting the move.

However, with Carson owning 96.27% of the company, Vignarajah’s 0.3% (123,943 shares), was insufficient to stall the move. Mrs. S. Vignarajah with 25,199 shares (0.006%) is the 12th largest shareholder of the company.

Carsons Management Services (Pvt) Ltd, managers of Equity One, said in the company’s September financials that the Equity One board had announced its decision to de-list on November 2, subjected to shareholder and regulatory approval. The shareholder approval has now been obtained at a recent extraordinary general meeting.

The mangers said that the rationale for the de-listing followed the minimum public float regulations imposed by the SEC which require all companies listed on the main board of the CSE to either have a minimum public float of 25% in the hands of a minimum 750 public shareholders or a market capitalization of Rs. 5 billion of its public holding in the hands of a minimum 500 public shareholders holding 10% of its total ordinary voting shares by December 31, 2016.

"With a public float of only 3.72% as at September 30, 2015, Equity One is currently well below the stipulated minimum public float threshold," the managers said.

They further said that the directors of Equity One had made arrangements with Carson’s for the purchase of shares from minority shareholders who may wish to divest/sell their shares at an offer price of Rs. 77.50 per share which is at a 62% premium to the volume rated average share price between July 1 and October 28, 2015.

"The offer price is based on a premium on a net asset value recommended in the independent valuation report," the managers said.

The September financials said that the half year under review had in addition to higher revenue seen increase in finance income together with a deferred tax gain. This has facilitated a 48.5 % increase to the company’s net profit for the period under review against the first half of the previous financial year.

"The increase in the finance income was driven by higher dividend income received during the period," the managers said. "Accordingly net profit for the six months ended September 30, 2015 stood at Rs. 41.4 million."

At group level, Equity One registered 12.5% revenue growth from a year earlier mainly due to improved occupancy reported by its subsidiary, Equity Two, and overall rent revision of group properties.

Group occupancy for the six months under review stood at an average of 90% against the 88% in the first half of the previous financial year.

On the expenditure side there were increases in administrative and other operational expenses and deferred tax expenditure of Rs. 3.3 million and Rs. 1.5 million respectively over the comparative period a year earlier.

The increase in administrative expenses was attributed to brokerage fees incurred to acquire new tenants and an increase in professional fees.

At group level, the net profit on the back on increased revenue for the six months ended September 30, 2015 was Rs. 55.8 million, up 10.7% from a year earlier.

All shareholders of Equity One other than Carsons, individually owned less than 0.35% of the company’s equity. The estate of the late Mr. M Sri Mahadeva, is the second largest shareholder with 0.34%. 
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Carson’s dilute Pegasus holdings to remain listed on Diri Savi board

Carson Cumberbatch PLC, the dominant shareholder of Pegasaus Hotels of Ceylon PLC has diluted its holding in that company by slightly under a million shares to increase its public float to 10.01% enabling Pegasus to trade on the Diri Savi Board of the CSE in accordance with rules of the Stock Exchange.

Carsons Management Service (Pvt) Ltd has said in the June financials of this year that the CSE rules required listed companies traded on the main board of the Stock Exchange to have a minimum public float of 20% of the company in the hands of 750 public shareholders or a 10% public float amounting to Rs. 5 billion in the hands of 500 public shareholders by the end of this year.

Pegasus fell behind in both criteria and in having evaluated all possible options available, including discussion with the major shareholder with regard to being compliant with minimum public float rules, the Pegasus directors in consultation with Carson Cumberbatch decided to transfer the company to Diri Savi Board of the CSE as the threshold for listing there is 10% of the company in the hands of 200 public shareholders.

"Accordingly the major shareholder, Carson Cumberbatch PLC has diluted their holdings by 943,473 shares thus increasing the public float of the company to 10.01% from 6.9%," the managers said and the company has gone on Diri Sari board with the approval of the CSE.

Pegasus achieved an occupancy of 42 % in the first quarter of the current financial year against 39% a year earlier. Despite this slight improvement in occupancy, room revenue has fallen 3% year-on-year due to competitive room rates maintained, the June financials reported.

The first quarter had seen food and beverage revenue up 2% from a year earlier. The company’s first quarter revenue at Rs. 94.9 million was down a marginal 0.2% against the first quarter of the previous year.

Pegasus settled its total borrowings during the last financial year enabling zero finance cost in the first quarter having a positive impact on the earnings, the managers said.

The year-on-year drop in revenue had pushed down the net profit for the first quarter to Rs. 23.9 million from Rs. 25.1 million a year earlier, they reported.

Pegasus has opened a sea food restaurant at the hotel launched last August investing Rs. 34 million from operational cash flows.

Other than Carsons, all shareholders of Pegasus individually own less than 1% of the company.
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Sri Lanka’s controversial CB bond issue to come up under COPE scrutiny

Sri Lanka’s controversial Central Bank bond issue is likely to come up under the investigation of the Committee on Public Enterprises (COPE) again, official sources revealed.COPE headed by JVP MP Sunil Handunnetti has to take a decision on the re-opening of the probe into bond issue publish a report and take appropriate action against those who were responsible if there was any irregularity in the procedure, a senior government official said.

The failure to implement the recommendations of the COPE on state institutions is to be rectified by the new committee for the sake of good governance, he added.COPE head JVP MP Handunnetti told the Business Times that members of the committee has not taken a decision as yet to investigate the CB bond issue again.Members of COPE should make a request to re-start the probe into bond issue he said adding that the committee aims to eradicate bribery and corruption in state institutions over public funds under his chairmanship.

A special committee of COPE was appointed on 22 May compromising 13 members under the chairmanship of former Minister D .E.W. Gunasekera and they have prepared a 447 page report with recommendations in which the evidence given by 47 witnesses.Mr. Gunasekera has planned to table the interim report in parliament on July 7 but it has not happened due to the dissolution of parliament.Sri Lanka’s parliament has launched this inquiry into the controversial bond deal after the main opposition party said an initial investigation carried out by a committee appointed by 100 day government that cleared the central bank chief of any direct role was not independent.
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Public pressure mounts against the Divineguma Bank and NSB merger

By Bandula Sirimanna

Massive pressure from the public, government, opposition politicians and the subject minister is mounting against the proposed merger between the Divineguma Bank which has a deposit portfolio of around Rs. 59 billion and the National Savings Bank (NSB), the country’s premier savings bank. The Treasury has made the 2016 budget proposal to merge the two banks with majority savings deposits of the poor people of Sri Lanka as the Divineguma Bank has no capacity to manage a fund of this scale, a senior official said.

“It is essential to protect this fund given that the stakeholders are some of the most vulnerable in our society,” said Finance Minister Ravi Karunanayake in recommending the merger of the Divinaguma Bank with the National Savings Bank for the protection of the Rs. 59 billion fund ensuring professional management.Minister of Social Empowerment and Welfare S.B Dissanayake has stated that he is not in favour of transferring the Divineguma funds to (NSB) and that he will not sanction money for it.

He noted that he will never allow the transferring of samurdhi recipients’ money to NSB although its deposits are guaranteed by the Central Bank.

Minister Dissanayake said that the government should withdraw this budget proposal even after the committee stage budget debate, as he will bring this matter to the notice of Prime Minister Ranil Wickremasinghe. But the senior government official said that the Divineguma banking structure was a gamble using public money and the minister in charge was all powerful in managing the finances.

He pointed out that the minister in charge would recommend the registration and other matters of the Divineguma Bank and it would have to comply with the minister’s orders or directions.Divineguma Bank has doubled the loan amounts payable and now an individual could obtain up to a maximum of Rs.1 million. The bank will provide loans for group activities, marketing purposes, construction of stores, purchase of mobile sales outlet vehicles, community development programmes as well as for construction of houses. Loan facilities are now being provided through 1073 Divineguma Community Bank branches throughout the island to improve living standards of the rural masses.

This bank opens the door for the poor to obtain financial assistance without much resistance as it is very flexible in lending to samurdhi recipients, a top office bearer of Samurdhi Development Workers Union, said. Around 20,000 Divineguma workers will be affected if the government decides to go ahead with this budget proposal, he said adding that those workers will join hands with around 1.4 million samurdhi recipients in holding countrywide protest campaigns till the withdrawal of the budget proposal.The government should give an assurance that it will protect the job security of Divineguma workers serving in 1073 Divineguma Community Bank Branches countrywide.
He noted that they would not allow to amalgamate the funds in the Divineguma Fund with the NSB.
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Amalgamation of EPF and ETF: Points to ponder

By Sunil Wijesinha

The recently announced proposal to amalgamate the Employees’ Provident Fund ( EPF) and the Employees’ Trust Fund ( ETF )has stirred a hornet’s nest. It is a popular topic of discussion too, particularly among beneficiaries (members) of EPF and ETF. However it is appalling to find that most people who have an opinion on the topic are ignorant of some of the basic facts about the funds, and even worse have a completely wrong notion of the two funds. Having been a former Chairman of the ETF Board I though it is perhaps not out of place to share my knowledge with the general public, so that their arguments for or against the proposals could be based on a proper understanding of the two funds.

This is certainly not the first time such an amalgamation has been proposed, but all previous attempts just fizzled out. At the moment I do not have any strong views either for or against the proposal since I am not aware of the final proposal. However I believe that the proponents of the amalgamation have done their homework well and seem to be serious about it this time. First it is important to understand the two funds and their similarities, differences and objectives. It is useful to evaluate how the funds have performed in terms of the dividend and interest declared to the members of the funds. In evaluating the two funds it must be borne in mind that the EPF makes refunds only once in the lifetime of the member while the ETF may make refunds several times during the lifetime of a member.

The returns also do not quantify the value of the benefits provided by the ETF. Therefore the ETF return to members is slightly more than what is shown as dividend plus interest. ETF paid 10 per cent and EPF paid 10.5 per cent during the last two years. The lower figure of ETF is surprising since ETF returns were usually higher than EPF many years ago. One reason may be the high administration cost of ETF of around 5 per cent of income. This is a good argument for amalgamation. In the case of ETF this includes the costs of enforcement but whether the Labour Department’s enforcement cost is recovered from the EPF is not known.In both funds the 2012 portfolio indicates over 90 per cent in Government bonds, Treasury Bills and Rupee Loans. The investment in the stock market is only around 5 per cent. Therefore members need not fear about the security of their money

Even if the stock market crashes to zero the loss will be negligible. In good years the gains from the stock market will be very useful. In fact during the 1990s we claimed that 1 per cent of the ETF dividends to members that year came from the realised gains from the stock market. At that time there was no “mark to market” mechanism, but only a provision for diminution of value based on market price. Otherwise with unrealised gains the benefit would have been even greater. Although small, the investment in the stock market must be purely in the interest of the members and should not be used by Government to control companies. In fact, in the 1990s ETF had a policy of not taking up more than 10 per cent of the issued capital of any company and not using its proxies for voting for or against any resolutions that would not be in the interest of its members. The ETF Board of Directors, in the case of ETF, and the Monetary Board, in the case of EPF, are trustees of the funds; they don’t own the funds. I understand that at one time the investment policy was thrown out at ETF and even 100 per cent of the share capital was bought. I am glad to know that EPF and ETF both have investment policies now and have investment committees which take responsibility for their investment decisions.

In the early 1990s ETF was under immense pressure to invest in a low interest debenture significantly lower than the prevailing Treasury Bill yield rate. The Board refused, resulting in the Chairman (myself) being asked to resign and the Board being given a “telling off”. Later when the President realised that the Board acted in the best interest of the fund, I was re-instated. The architect of the ETF is considered to be Lalith Athulathmudali who realised that 3 per cent from the entire working population in the private and corporation sector would be significant and could create large organisations, particularly for infrastruture, which required large capital bases. Colombo Drydocks Ltd (now Colombo Dockyard) as well as Lanka Cement were beneficiaries then. At that time the market could not raise sufficient funds from the public for such large projects. Today the situation is different and the ETF’s role in contributing to capital is less significant. Another declared objective of ETF was “to promote employee participation in management through the acquisition of equity interest in enterprises”.

This caused a lot of anxiety in the private sector at that time and it was thought best to ignore this objective. The reason for inclusion of this objective was that employee participation at management and Board level was popular in some countries at the time. This concept is no longer in vogue. Therefore another objective of ETF is no longer relevant. Whatever the new mechanism is, it should have a strong Board with representation by unions and the Employers Federation of Ceylon. It should be able to resist unlawful directions from the Government. It should not be considered a captive source of funds. Once when I received a demand for funds from the Superintendent of Public Debt referring to ETF as a captive source, I asked him to define a Captive Source. He answered, perhaps in lighter vein, saying a captive source is one where the Chairman would not dare to resist a direction from the Government.

Many years later I came to understand that Government kept asking for funds at low interest and then asks the Board why the dividend is so low! Once the Minister in charge informed that under a particular section he could give the Board special directions about investments. We consulted appropriate legal opinion and informed the Minister that what is meant by that section is not special directions about investments. Many years later ETF was brought under the Ministry of Finance, and now under the Prime Minister.The purpose of this article is to enable those who express opinions on the proposed amalgamation to do so with greater information. It is a pity that the latest published Annual Reports of the funds are still only of 2012. Annual reports must be published in time and must also be submitted to the National Labour Advisory Council.
(The writer was Chairman of the Employees’ Trust Fund Board during 1989 to 1994, and was later appointed to the Board by the Finance Ministry. Subsequently he served two terms as the Employers’ Federation of Ceylon representative on the Board).
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Stock Brokers ‘jittery’ with high profile arrests

By Duruthu Edirimuni Chandrasekera

Now that the Financial Crimes Investigation Division has made sure some high profile offenders of the stock market are being prosecuted, other stock holders in the industry are getting jittery, according to sources. In particular the stockbrokers are worried, according to them. “Some of them are ‘clearly’ guilty of certain irregularities, especially of insider trading during the 2011-2013 period. There was no action taken against them, mainly because they were members or connected to the stock mafia,” a source told the Business Times.

This came in the wake of Nalaka Godahewa, the former Chairman of the Securities and Exchange Commission (SEC) and Dhammika Perera, former Deputy Director General SEC along with Premier Sports Ex-Director Ronnie Ibrahim were produced in Court this week and remanded till December 14 by Fort Magistrate Priyantha Liyanage on charges of misappropriating Rs.5 million of SEC funds.The SEC has started a fresh investigation against former Environmental Resources Investments PLC (ERI) Directors for alleged stock market manipulation, the source said, adding that SEC has also reopened cases against the directors of two other companies also on the same charges.

Probes of market manipulation and insider trading against 17 investors, brokers and institutions, including high-profile businessmen were nearing completion in August 2012 when some powerful investors complained to President Mahinda Rajapaksa regarding the then SEC Chairman Thilak Karunaratne saying he was enforcing rules that were too rigid and not market-friendly. Mr. Karunaratne who resigned during this time after a losing battle to strengthen the regulatory process, returned to the SEC with many saying that the investigations against past malpractices will be restarted. After his return, the complaints that SEC has got range from manipulation, insider dreading, pump and dump, stockbrokers and investment advisors misleading small shareholders, trading on accounts under third party names etc.
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