Financial Times

The Board of Investment’s (BOI’s) intervention last week in a legitimate stockmarket move where the Harry Jayawardene-led Sri Lanka Insurance (SLI) made a mandatory offer to buy shares in Apollo hospital has triggered a major controversy including the unhealthy practice of government interference in the market.

Questions have been raised over whether the BOI ‘jumped the gun’ in threatening to withdraw tax and other concessions to the Lanka Hospitals Corp, the owning company of Colombo’s Apollo hospital, and set off a precedent while creating uncertainty amongst investors.

The trouble started last month after SLI raised its stake in the company to over 36 %, higher than India-based Apollo’s 32 % which then was the biggest shareholder.

Subsequently the SLI made a mandatory offer – as prescribed by Securities and Exchange Commission (SEC) rules – for the remaining shareholding at Rs 28 each which then saw the BOI threatening to withdraw concessions given to the company. The stock opened on Monday at 32 rupees per share and closed at 32 on Friday with a total of 58,000 shares traded during the week.

The BOI said in a statement that any change in the ownership of this ‘infrastructural project’ that affects the fundamental characteristic of the project, will result in the BOI having to cancel its status granted to the project and ending the tax holiday; import duty concessions, etc.

The Sunday Times FT learns that Apollo’s senior executives appealed to Indian Commissioner Nirupama Rao to stop the takeover bid who had in turn sought the intervention of the government.

Nihal Fonseka, chairman of the Colombo Stock Exchange (CSE), said they were meeting this week to discuss the sequence of events relating to the Apollo situation and its impact on investors in the market.

Malik Cader, SEC’s Director of Public Relations and Market Development, said the SLI stake triggered the Takeovers and Mergers Code under which a mandatory offer has to be made. “We have to ensure that this is done and the company complied with this rule.”

Sureka Sellahewa, Director General, CSE said it was upto shareholders to accept the (mandatory) offer or not. “It is the individual shareholder’s decision. We cannot interfere and pressurize (shareholders),” she explained, adding that if BOI concessions are scrapped, it could be price sensitive. “This might affect the company’s performance and the company will have to inform the CSE, who in turn could inform the public,” she said.

A corporate lawyer said that irrespective of the parties concerned, it was ‘wrong’ of the government to intervene in the market because Apollo Hospital is a public quoted firm.

“The government’s position is unfair. It is up to the investors to sell their shares or not. The government ethically should not and legally cannot exert pressure on any party to sell their shares or not,” he said. Dharshana Senerath, a reader of the Sunday Times FT, in a letter (see Page 3) points out that “when a company lists its shares in the stock exchange, it is perfectly fair and legal for anyone to purchase those listed or quoted shares.”

“If a company needs to retain tight internal control it should not publicly list more than 51% of the company shares. There is no point-crying foul after publicly listing majority shares in the open market,” he said in a view shared by many investors, industry officials and former BOI officials the Sunday Times FT spoke to.

The corporate lawyer said it was unethical of India to interfere in the matter. “The High Commissioner of India had no business to interfere. She is giving a strong impression of arm twisting the Sri Lankan government,” he added.

Nagma Malik, Press & Information Secretary at the Indian High Commission confirmed that the High Commissioner had taken up the Apollo case with the government. “The board of directors is concerned about these developments which are potentially very harmful for future Indian investment in Sri Lanka. So as a representative of India in Sri Lanka, the High Commissioner has sought to safeguard Indian investment in Sri Lanka.”

N. Ratnarajah, Vice Chairman Apollo Hospitals (Pvt) Ltd said that when the Apollo Hospital project was initiated SLI along with the Bank of Ceylon were government entities. “We started the project in 2001 and SLI, which invested in the project was a government owned entity. We never thought this (SLI being privatised) will happen,” he said.

He said even when Apollo went public six months after it opened, SLIC was still government owned. “Apollo was a special project by the invitation of the government. The Indian investor might feel that the institutional investor has become the raider,” he said. On the BOI status being withdrawn from Apollo, he said that the initial agreement with the BOI stipulates Apollo Hospitals in the agreement. “When the new management takes over with the rest of the shareholders selling their respective stakes the Apollo name will not be used, because Apollo India would also have sold. As such the Apollo management along with the name will not be associated with the hospital. Therefore the BOI agreement is breached and the BOI can take away its concessions to Apollo,” Ratnaraja said.

But former BOI officials rejected that claim saying that a BOI contract is with an entity and not an individual. “There is no provision to reverse the concessions on issues of shareholding or ownership and the Apollo agreement doesn’t have any special provision which restricts ownership,” one former official said, adding that when there are changes in ownership, the BOI is either informed in advance or after as a matter of courtesy.

Another former official said there has been no precedent in the past where BOI concessions were withdrawn because ownership changed hands.

Investors and former officials said the company should have known before it went public that it could be the target of a raid and takeover, an accepted practice. “If they wanted to retain control, they should have had a 51% stake like in the case of Dialog where the parent company has an 87 % stake, effectively shutting off any take over bid,” one investor said adding however that if the company disclosed in its prospectus ownership restrictions then shareholders cannot complain because they bought the stock aware of the restrictions.