16th June 1996

Kotagala capers:actors speak out

Another PERC privatisation exercise has run into stormy weather no sooner the Thawakkal episode subsided. This time it is the privatisation of Kotagala Plantations.

PERC has again come under the spotlight for its handling of the issue, especially the way Lankem Ceylon has ended having control of Kotagala Plantations, the first regional plantation company to be privatised.

Originally George Steuarts Management Services (Pvt.) Ltd. (GSMSL) was offered the option of purchasing a 51 percent stake in Kotagala Plantations by PERC. They took up the option but immediately thereafter George Steuarts, the parent company, sold off the entirety of its share holding in its subsidiary GSMSL to a Malaysian investor, Naganathan Aiyadurai at a profit reported to be around Rs. 90 million.

The Malaysian company is reported to have resold GSMSL to Lankem Ceylon, again at a profit of some Rs. 100 million. So now Lankem Ceylon owns 51 percent of Kotagala Plantations, but the Malaysian company is finding it difficult to obtain government approval to take out part of the funds from the sale.

A partner of the law firm, Julius & Creasy was asked by the Chairman of PERC, Rajan Asirwatham, to probe the original sale by George Steuarts, but this partner is found to be a director of Lankem Ceylon that eventually purchased the GSMSL.

The Secretaries & Registrars Ltd., a subsidiary of Forde, Rhodes & Thomton, a firm of chartered accountants, of which Mr. Asirwatham is chairman, is reported to have approved the sale of GSMSL to the Malaysians. Bank of Ceylon, of which Mr. Asirwatham is chairman, has partly financed the Lankem Ceylon purchase. Another PERC commissioner happened to be a director of Lankem Ceylon.

The Sunday Times speaks this week to Dr. Romesh Bandaranaike, the ex-director of the Plantations Management Monitoring Division, who has remained silent on the issue up to now.

We also spoke to George Steuarts Chairman Scott Direckze and PERC Chief Rajan Asirwatham on this raging controversy.

Profit we made was to cover losses, says george Steuarts chief Direckze

Q: Mr. Direckze can you explain why GSMSL was offered shares of Kotagala Plantations at only Rs. 10 per share?

A: The price was determined by a mechanism where 20 per cent of the shares were offered on the Colombo Stock Exchange for companies that were profitably managed. You will notice that Kotagala shares are now traded around Rs 22. We are told that Lankem had paid about Rs 40. When the shares were offered to us at the price that the market was prepared to pay was Rs 10. The price was determined by a mechanism devised by the government.

Q: Why was it necessary to bring in a Malaysian investor. Why didn't you buy the estate yourself when you were offered the option of buying the shares?

A: The lowest possible cost of acquisition would have been Rs 222 mn., that is if the price was Rs 10 per share. If we had borrowed it, it would have resulted in an annual cash outflow of Rs 50 mn plus lease rent. We had no way of raising Rs. 222mn at the time. On July 28, 1995 we got a letter saying we had the option of purchasing a 51 per cent stake in Kotagala Plantations. We were asked to deposit Rs 5mn before the end of one week if we were interested in exercising the option. We went to the M erchant Bank and asked them to find a collaborator.

As you know its chairman is also the chairman of PERC and we felt quite safe in dealing within. The bank had also helped us before. At the time we did not know whether we had to pay Rs 222mn or Rs 600mn because the strike price had not yet been determined by the market. It was an open ended commitment. During this time we had a call from Asoka Gopallawa, son of a former Governor General, who was the first General Manager of the JEDB. I was also one of the directors of the JEDB. When he said there were so me foreign investors who were interested in Kotagala I said fine, but that we had handed it over to Merchant Bank to structure the deal and to meet them. We had to do this within a short time. The Merchant Bank then drafted the agreement and we consulted our lawyers and we were assured that it was legal. We were later approached by John Keells group but by the time it was too late.

The foreign investors were allotted 40 per cent of shares for funds injected into George Steuarts. Then a 60 per cent share holding held by Geroge Steuarts Group and a few others were transferred.

We would have much preferred the government to keep the plantations with the government and to let successful managers who had proved their worth to continue to manage them. George Steuarts is the company which has the oldest history of plantations management in the country and perhaps the whole world.

Q: isn't it illegal to transfer 100 per cent share holding in a company to foreigners?

A: According to the gazette notification of June 29, 1992 foreigners could hold up to 40 per cent shares or a higher percentage if approved by the Greater Colombo Economic Commission (now BOI) in companies engaged in growing and primary processing of tea rubber coconut and some other areas. According to the gazette we were entitled to sell 100 per cent in GSMSL because it was simply a management company and not tea growing company.

Q: But when GSMSL purchased the 51 per cent stake in Kotagala in addition to managing it, GSMSL ends up owning plantations as well. Then GSMSL is no longer purely in the business of managing plantations?

A: As far as we were concerned at the time of transfer, GSMSL was a management company. It was Kotagala plantations that was in the business of processing and growing tea. In fact we had an inquiry from Julius and Creasy for details because they were asked to conduct an investigation, shortly after Channa Gunasinghe complained. Our lawyers asked for the legal relevance of the question in the context of Section 11 of the Exchange Control Act and the Government Gazette Extraordinary No 721/4 dated J une 29, 1994. Even the prospectus of Kotagala said only 49 per cent can be held by foreign residents in Kotagala Plantations. GSMSL was a locally incorporated resident company so there was no restriction against GSMSL holding 51 per cent in a plantation. We signed the transfer forms and sent it to the new buyers and they promised to notify us of the names of the new shareholder. At the time there were also local representatives who we were given to understand will be holding some of these shares.

Q: Why did you sign these blank transfers? Was it your responsibility or the secretaries' responsibility to get the signatures of the transferees?

A: I am not sure what the current CDS regulations are. But earlier the broker used to forward a blank transfer which you signed and returned. The transferee signs it later. In this case they gave us an undertaking to inform us of the shareholders.

Q: Have they informed you of the transferees?

A: No. Not yet.

Q: At the moment do you have any dealings with the GSMSL? Are you on the board?

A: We have no dealings. I am on the board but I am about to resign.

Q: Why didn't you resign earlier?

A: Because I wanted to see that these people kept their agreement. GSMSL owes the previous shareholders, management fees in respect of the profit earned by Kotagala during the final year. At the time of the transfer the accounts of Kotagala were not finalised. GSMSL other shareholders signed an agreement to this effect.

Q: Are you going to legally enforce this agreement?

A: We haven't yet. We are waiting to see if the new shareholders would abide by it. When we heard that NDB and Bank of Ceylon were going to finance the purchase of Kotagala by a third party we informed them that the management fee was due to us.

Q: It is said that you made a profit of Rs 100 mn on this sale. Is this true?

A: Its less than that. The original arrangement was for George Stuarts to continue to manage the estates for three years. Later on when it turned out that the price was only Rs 10 per share they changed their minds. Based on the final years' performance we would have then lost potential management fees of around Rs 25 mn. to Rs 35mn a year. If they wanted to terminate the agreement then the arrangement was that we would be compensated up front. The profit you referred to was the premium to cover t he income we would have lost. Basically that was our thinking and we rounded it off to around Rs 90mn in the end.

Q: What happened to these funds?

A: We had long-standing liabilities which we were able to settle with these funds. When the government nationalised plantations we lost 90 per cent of our business and we had a very difficult time after this. We received no compensation at the time. Recently we also suffered due to the Central Bank bomb. We were not insured against terrorist acts. We were also not covered against consequential loss.