Financial Times

Has the government and the Board of Investment blundered over the Apollo fiasco?

By trying to block a takeover bid on the hospital company by controversial business tycoon Harry Jayawardene through the Sri Lanka Insurance, the BOI has created a precedent while triggering alarm bells in the stockmarket.

Our story on the previous page clearly sets out how the BOI’s action is flawed and the impact on Apollo shareholders, stockmarket and investment sentiment.

The Indian High Commissioner Nirupama Rao is reported to have persuaded the Sri Lankan government to block the Harry J-bid and that’s a diplomat’s right to protect his or her country’s investment. But should the government play ball or is it because the government is reluctant to tread on India’s toes due to the peace process, bilateral trade and current negotiations on CEPA (Comprehensive Economic Partnership Agreement)?

Without any proper study of the issues involved, the BOI threatens to withdraw all concessions if the ownership changes hands and if Apollo has to pull out.

Now why in the first place did the Apollo Hospital want public money and opt for only a 30 percent or thereabout stake? Why didn’t it invest over 50 percent if it had no intention of letting go ownership or management control? Any second or third grader knows that a listed company can be raided or taken over and while there are restrictions according to the rules, there is also the mandatory offer option which can lead to a buyout. And this is legitimate.

Apollo can’t grumble now – unless of course there was provision in the memorandum of articles or the share prospectus which clearly shows potential investors that ownership and shareholding was restricted or that government involvement was permitted.

The stockmarket is a well regulated trading ground for shares. The government – after all the talk of attracting investments to a well regulated market – cannot say: Hey we don’t like you; stay away from my company! Where does that put investor confidence if the government begins to intervene in the stockmarket particularly through BOI companies and start withdrawing concessions and tax breaks on frivolous grounds?

People invest in a stock based on the value of a company and what is contained in the annual report or other disclosures, and issues like the threatened withdrawal of concessions, taxes in the Apollo case will ruin confidence.

There are two fundamental issues in the Apollo case: One is whether the corporate raider SLI (Harry Jayawardene) resorted to unethical means to buy up stock and become the biggest shareholder; the second is whether the BOI has overstepped its own boundaries in wanting to withdraw concessions because the ownership of a company is at stake.

In the first instance, Harry J had followed a perfectly legal route to taking over the company. He upped his stake through sharemarket transactions, triggered the maximum limit and thereafter followed the rule: make a mandatory offer. The SEC says that SLI has followed the rules. If that is the case how can Apollo scream of foul play?

Of course monopolies and mergers are unhealthy but the SEC has specific rules to deal with these and the mandatory offer is one restriction. Shareholders can take or leave the offer. They are under no obligation to buy and can decide for themselves – not compelled to through another force. That’s established practice in many countries including India. I don’t think the Sri Lankan government would be permitted to interfere in the Mumbai stockmarket if a similar issue arose.

On the second issue, the BOI has also blundered or set a dangerous precedent. There has been no instance, a former BOI official said, where concessions and tax breaks have been withdrawn because the ownership of a BOI company has changed hands. This has apparently only happened when clauses in the agreement (nothing to do with ownership) between the BOI and the company have been violated.

If Apollo had a clause in the company articles or share prospectus that ownership is restricted then shareholders cannot complain. If not this is one of the biggest blunders this year.