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 16th August 1998 |
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Mind your Businessby Business BugBank's new lady bossTop rungers of a bank with a heart are having heartaches these days with the news of the impending arrival of the lady boss. The management also felt that there could be some heartburn among top executives over the decision. So, they were summoned for a heart-to-heart chat and told that they would have nothing to fear, the lady knows the difference between ruling a government institution with absolute authority and the somewhat different set of rules in a private sector organisation... Review of GSTRequests for exemptions from the much maligned GST have been flooding the tax people, ever since the tax was introduced on April Fools Day. These range from the poultry trade, tourism sector and the automobile industry. The powers that be have finally realised that some of these requests are indeed genuine and that the GST could kill some of these trades. So, a committee to review the issue is likely to be appointed shortly, we hear...
Wireless loop operators slam SLTTelecom interconnection agreement under fireBy Mel GunasekeraTalks between the three telecom operators on the present interconnection agreement have come to a stalemate with the two wireless loop operators (WLL) accusing Sri Lanka Telecom (SLT) of blocking a level playingfield. They say that SLT is misusing its dominant status by making baseless allegations about WLL operators, in a bid to confuse the public and apply pressure on the government appointed regulator to agree to their demands. Sri Lanka Telecom Regulatory Commission (SLTRC) brought in the services of a mediation company McAphy and Tetrault to resolve the interconnection agreement between SLT and the WLL operators. However, the mediation team was unable to bring about a favourable solution for either party, as SLT was not in favour of the alternative solutions put forward by the WLL operators. SLT locked horns with WLL operators saying the present interconnection agreement favours the WLL operators. The present agreement permits the operators from whom the call originates, to keep all the revenue (sender keeps all) from domestic telephone calls. All International calls are routed through SLT's gateway. SLT receives 65 per cent of the revenue generated by the WLL operators on outgoing calls, whilst keeping all international incoming call revenues. The alternative recommendations put forward by the WLL operators were dismissed by SLT officials as they were not favourable to SLT, 'The Sunday Times' Business learns. Whilst agreeing to dispense with the 35 per cent discount on outgoing international calls, WLL operators had instead agreed to reimburse SLT with the cost of operating the international call switch, plus a percentage of their (WLL) profits on international calls. In return, the WLL operators had requested SLT to share the total revenue earned from international calls. It was suggested that SLT keep half the revenue, with the balance shared between the two operators. There is a mismatch between the incoming and outgoing international calls, which favours Sri Lanka. For each outgoing international call Sri Lanka gets 3 incoming calls. Overseas operators pay the difference to Sri Lanka. Since SLT controls the international gateway, SLT pockets the money. Nearly 70 per cent of SLT's total revenue is said to come from the lucrative incoming international calls, telecom industry statistics reveal. However, SLT says since they have the monopoly on international gateway till year 2002, all revenue generated through international outgoing calls should also go to SLT's coffers. "Ours is a business. We have had to build our network from scratch for which no government assistance has been given. We only want a fair deal from this for our company and what's best for our customers," Suntel Managing Director, Jan Campbell said at a recent media briefing. SLT also wanted to change the 'sender keeps all' agreement on domestic calls. It was suggested that the operators use a call measurement system, where the duration of all calls made to and from each operator are measured. Industry sources say, the implementation of such a system would require the operators to change the signalling system. This would also delay call connections. An additional administration cost is also involved, as the three operators have to meet each month and compare the data, before settling any payments. The method is also rather costly. WLL operators say they are willing to invest in additional equipment, if SLT agrees to it. But they say SLT wants to do the measurement themselves and then pass the data to the WLL operators. WLL operators are not in agreement, as they would like to maintain their own records and compare with SLT. SLT is unable to accept the basic rules of free competition, Mr. Campbell said. "They should appreciate the fact that all operators should compete on a level playingfield." Business Times learns, SLT is yet to get their billing structure in place. Whilst the WLL operators bill by the second, SLT bills by units. SLT's method may be favourable in the short run, but in the longer term the WLL method is better. Billing by the second is also the most accepted method worldwide. While the final report from the mediation team is yet to be released, WLL operators allege SLT had broken the 'gentleman's agreement' between all parties to refrain from commenting on the situation whilst negotiations were going on. Mr. Campbell said, "We have presented our proposals to the mediation team, and await a ruling from the regulator on this issue". When contacted, SLTRC Director General Prof. Rohan Samarajiva declined to comment on the present status of the issue. He said the talks have not failed but the mediation process is still going on.
More state borrowing-interest rates upEstimated defence expenditure of around Rs 44 bn is expected to overshoot this year, resulting in heavier government borrowing. The additional borrowing would come from Treasury Bond (TBonds) auction, as the government would maintain its outstanding Treasury Bills (TBills) statutory limit of Rs. 115 bn, a top research firm report states. The government intends to raise Rs. 27 bn through Treasury Bonds this year. However, there are indications that there will be additional borrowing of around Rs 8b to Rs 10b, a CT Smith report said. The increased level of borrowing has put upward pressure on interest rates across the board. TBill rates have moved up steadily over the year from 10.21per cent (end Dec 1997) to close at 12.77 per cent for the week ending July 31st 1998. Weighted Average Yields of TBonds have also shown sharp increases from marginally above 11 per cent at the beginning of the year to 13.34 per cent as at the end of July. The upward movement of interest rates will have an adverse impact on the growing debt market, as an upward shift in the yield curve will result in downward pressure on the debenture issues and force higher yields out of new issues. The most recent issues by two leading commercial banks, HNB and Commercial Bank, were priced to yield 14.2 per cent. Since the issue in mid June, the Weighted Average yield of TBonds was around 12.5 per cent has risen to 13.34 per cent. The National Savings Bank (NSB) which sets the benchmark ratio for deposit mobilisation, has pushed up its deposit rates. Rates on savings deposits have been pushed from 9.6 per cent to 10.5 per cent, and the fixed deposit rates to 11 per cent from 10 per cent a month ago. Commercial banks, which generally set rates according to the NSB, have also pushed their rates up. The PLR has moved to 16.4 per cent for the week from 15 per cent a week ago.
8000 tons more LPG with new Shell terminalPlans have been finalised and an agreement was signed with the government last week, for the 8000 tonne LPG terminal at Kerawalapitiya, Hendala, eight-km north of Colombo, a Shell executive said. LPG storage is currently limited to 2000 tons at the Orugodawatte facility built almost 10 years ago by the then Colombo Gas Company, the official said. To be built and owned by the Dutch based Shell Terminal Company Ltd. a wholly owned subsidiary of the Anglo Dutch based Shell Company, the terminal will have four storage spheres, each holding 2000 tons of LPG. State-of-the art safety measures, an automated filling line and a cylinder reconditioning plant will also be installed. The privatised Shell Company was to share the CPC jetty to discharge LPG from ships, an operation, which would have limited capacity and speed, because of the port development plans, it is understood. The new offshore mooring system and the pipeline to Kerawalapitiya provide more safe solutions to meet the long term demand, the official said. A 3.5km undersea pipeline attached to an offshore mooring system conventional buoy mooring (CBM) will feed the terminal facility. LPG ships will connect to the mooring system and the LPG will be discharged from ship to storage spheres via the pipeline, the official said. The direct link from pipeline to storage facility will eliminate the current system of unloading LPG ships into tankers/bowsers at the Colombo Port. Under this system a 2000-ton LPG load takes approximately 5 - 6 days to unload. Under the new system unloading will take 24 hours. The terminal to be fully operation by the end of 1999 will meet the future demand of LPG completely,the official said.
Takeovers and Mergers Code to get more teethThe Securities and Exchange Commission (SEC) is ready to amend the Takeovers and Mergers Code shortly to strengthen the existing regulatory framework. The rules would apply to all takeovers and mergers where the target company is a listed public company. A prominent feature in the new code is the change being made in the case of indirect takeovers. Here the new rules would make the offeror (person who acquires the controlling stake of the target company) to make a mandatory offer to the target company, Kithsiri Gunawardena Senior Manager Legal-SEC said. For instance, if the ownership of a listed company changes hands then the new owner of the company has to make a mandatory offer to the shareholders of the listed company. If the offer involves the sale of unlisted shares, the value of such shares would be based on a reasonable estimate of what the price would have been had it been listed. This is a vague statement, a point that the SEC has to look into to determine what the reasonable price is, legal experts said. Minority shareholders must take note that a mandatory offer does not compel them to sell their shares to the offeror. The offeror is merely carrying out a formality stated in the Act that he should make such an offer. "The offeror is not forcing minority shareholders to sell their shares," Mr. Gunawardena said. Another salient feature is the powers given to the SEC to waive the requirement of a mandatory offer. For instance, in an unsuccessful IPO, the underwriters would purchase the remaining shares. This does not mean that the underwriters have to make a mandatory offer. Such situations have occurred in the past, as the previous Act did not give freedom to the SEC to decide on such things, he said. The new rule would also help similar situations like placement (with the consent of the shareholders), rights issues etc. The code also requires the shareholders of a target company to seek the services of an independent advisor before consenting to sell their shares. Once an announcement is made, the mandatory offer to balance shareholders has to be sent off within 28 days. Once the document is received, the offeree has to send his recommendations to the shareholders within 14 days. Questions are being raised as to the exact definition of who an independent advisor is and whether the time period given is sufficient enough for the shareholders to decide. The SEC is also looking into the possibility of making the auditors accountable for their reports. Though a company commits a fraud, the auditor should be held responsible for the statements he prepares. The SEC is looking at the possibility of regulating the auditor at such events, SEC sources said. The new recommendations are part of the draft Act that will be given to industry and the public at large shortly. The SEC welcomes suggestions and constructive criticism from various parties. The SEC hopes to complete the task by end of this year. This is the first time changes are being made to the Takeover and Mergers code since it was implemented in 1995.
Crisis in the Share MarketOnce again the Colombo Share Market is in the dumps. The All Share Price Index dipped below the 600 mark and the Sensitive Index fell below 900. The collapse of Colombo's Share Market is entirely due to extraneous circumstances. The international investor community has lost confidence in emerging markets consequent to the East Asian debacle and the US economic sanctions on India and Pakistan have made investors move out of the South Asian region, including Sri Lanka. The outflow of foreign funds from the Colombo market is estimated at over Rupees One Billion. In both South Asia and South East Asia stocks are available at unbelievably low prices. It is very clear that the Sri Lankan market fell entirely due to circumstances beyond its control. The paradoxical situation is that while corporate performance continues to be good and returns on investments high, the prices of Colombo's blue chips and good companies have fallen dramatically. This phenomenon of corporate profits in Sri Lanka rising while share prices are falling indicates unambiguously the impact of global investors' decisions to pull out of South Asia irrespective of the performance of Sri Lanka's corporate sector. Unfortunately such investor decisions sooner or later impact on corporate profits themselves and in turn corporate profits would also dip and feed the downward spiralling of share prices. This demonstrates very clearly the stranglehold which international investors have in a narrow market whose demand is driven by external investors. Unfortunately in a foreign driven share market local investors follow the dictates and sentiments of the market rather than assess the fundamental values of share prices. Consequently domestic investors, too, shy away from the market when prices keep coming down. The downturn in share prices initiated by foreign investors pulling out of the market is sustained and indeed driven down further by local investors' lack of confidence in a bearish market. Particularly regrettable at the moment is that there are no signs of an upward movement as it may take quite some time for investors to re-invest in the Sri Lankan market. While prices are tumbling, investors are no doubt looking to the time when they could buy blue chip shares at ridiculously low prices. And this may happen. Such a market process is another way of the Nation's silverware being sold cheaply. Are there any remedies? The price levels of Sri Lanka's blue chip companies are such that it is time for the large corporate investors to buy these shares, not merely to steady the market, but also to reap profits later. They should not wait till an expected rock bottom. The market has fallen adequately to make such investments prudent in the long run. Large corporate entities, provident funds, unit trusts, insurance companies and banks should make these investments. By local corporate investors increasing their holdings the market could move upwards. Such large purchases would also ensure that the Sri Lankan Stock Exchange is less dependent on foreign investors in the future. By effecting a better balance between foreign investors and local investors the volatility of Colombo's Stock Market could be tamed and the Colombo Share Market less prone to the fancies of foreign investors.The time is opportune for corporate investors to make this contribution towards the capital market. We hope such an enlightened approach would redeem the flagging stock market soon.
Businesses missing budget incentivesBy ContrarianIn the 1997 budget there were a number of significant tax benefits to listed companies to stimulate the equity market. However with external shocks caused by the East Asian crisis and South Asian nuclear testing, the market has come down to valuation levels which are at the lowest for a number of years. It is a far cry from the hope of the early 1990s when government liberalization of controls on investments by foreigners in our equity markets made it one of the most open emerging markets in Asia to outsiders. The resultant foreign investment was responsible for the original early boom of our market. Today in the context of the losses elsewhere in Asia there appears to be little the government can do in terms of attracting foreign portfolio investment. This is despite the seemingly rock bottom values the market appears to be trading at along with a fairly good macro-economic picture. Though these current valuations are extremely cheap from a domestic investor's perspective from an outside fund manager's perspective, Sri Lankan equities as a long-term investment option are viewed in the context of relative values elsewhere in the world. Thus low historical value in terms of Colombo's past has less attraction when compared to rock bottom values available in other crisis hit Asian economies. Predictions of strong economic growth and robust growth in corporate profitability have to be seen in the context of similar predictions made to fund managers on the tiger economies. Stories of strong yields in the local markets have to be assessed against the potential exchange losses in a dollar-based returns calculation. However for the local investor such concerns are not directly relevant except in terms of the influence foreign activity has on the local bourse. Much of this failure to look at real value apparent in the market is the prevalence of a trader's mentality rather than an investor's mentality towards the equity market. Thus in it is most simple form the much abused price earnings ratio is rarely seen as what it actually represents, an earnings yield or a payback period of sorts. Essentially investing rather than trading requires a willingness to look at a share as what it really is not something to trade on but your share in the companies' real assets and an earnings stream. Thus a P/E ratio of four essentially represents an earnings yield of 25% the reciprocal of the P/E ratio. It implies the availability of an asset generating an income of 25% of your purchase price or a payback of four years (on an assumption earnings remain constant). Such valuations in the context of a healthy corporate earnings outlook and much lower returns of fixed income instruments with fixed returns in the region of 10% represent dramatic mis-pricing of equities. In finance language it appears a significant risk premium is being attached to equities or an assumption of negative earnings growth in the future. Or the alternative implied by such market pricing is a lack of confidence in the quality or accuracy of disclosed earnings. However if forecast's of our local brokerage houses are to be given any level of credibility there is no significant reason to accept any of the above reasons for this under valuation to prevail for the entire market. If so, there is a failure on the part of the investment community and corporates to have built up a long-term investor base which sees equity investment as a form of ownership of the corporate sector of the nation and thus view our assets for what they really are. What can be done ? Recently investment analysts and advisors have started assessing dividend yields in selection of investments. They often speak of it as a hedge against lack of capital gains. This is in a context where a significant number of corporates, especially small cap stocks offer after tax returns from dividends in excess of those offered by bank deposit rates. Dividend yields to our investor is the very real or cash part of the earning yield which we discussed previously and is to them is the actual direct benefit of ownership of corporates A case then could be made for a rise in dividend pay out ratios in order to boost dividend yields to levels implied by the earnings yields. New money for investment could be raised through right issues to the proportion that a cash outflow occurs due to the rise in dividends. This however seems to reveal a certain degree of subterfuge in that there would be no net effect in terms of real net change in cash between the company and the shareholders. This essentially is what is known as a case of the irrelevance of dividend pay out policy given that whatever the pay out ratio the company can replicate the actual net cash transfers between corporates and shareholders. However a dividend followed by rights would have the actual effect of opening the eyes of the investor community to the actual value represented in equities. In a move towards higher pay out ratios the tax incentives in the 1997 budget assume significance. The 1997 budget announced a full Advance Company Tax (ACT) imputation system on dividend payments and an allowance of investment relief for investment in new shares of listed companies. It also withdrew from the practice claiming ACT from companies on dividends paid to foreign shareholders (as they cannot claim an ACT refund). This eliminated the cash flow disadvantage companies with large foreign share holding had in declaring high dividends. This along with the other two incentives removed a shareholder group against high dividend pay out and even more created a strong incentive group of local individual shareholders who would be for higher dividend pay out finance through new issues of shares. Thus in finance theory in Sri Lanka we have what is called a very strong clientele for high pay out stocks. In simple terms the effect of full ACT imputations effectively eliminate the double taxation penalty for business run through a shareholder structure rather than a sole proprietorship or partnership structure. The shareholder being given a tax credit for taxes paid by the company does not face a situation of effectively paying taxes on dividends declared on profits which have already been taxed at the company level. Non taxpaying shareholders who file statements with Inland Revenue or Charities are in a situation where they receive a tax refund on the ACT credit they receive. Thus a corporate owned by such a class of shareholders could potentially return more than its pre tax profit to its shareholders in effect depriving the government revenue of this tax revenue. Yet such high payouts essentially deprive the company of the cash flows necessary to finance future growth. In this situation there is a need for rights issues to generate the necessary inflow of cash to the company. Due to the new investment relief on investments in new shares issued by listed companies there is an incentive to companies with high tax paying shareholders to finance the new higher level of dividend through rights issues. Thus the high dividend pay out financed with new equity is a tax efficient structure for both high and low taxpayers. It would reveal the actual values to equities and is a means of getting local investors back to the bourse as a solid long-term investment option, with inflation as tax hedge. In the current equity market with these virtual handouts by the government, investors could be earning dividend yields way in excess of the rates on their fixed deposits and the like, while having an option of re-investing the proceeds in a tax efficient manner. Local corporates have not taken these incentives. There appears to have been a rise in the level of dividends paid but this is partially a reflection of the increased profitability. There has not been any significant rise in rights issues by corporates to provide opportunities for investors to utilize the investment relief open to them. The expected reaction to the budget incentives should have been to assess if the tax authorities would accept dividend reinvestment plans as equivalent to paying dividends and then a rights issue. If accepted as such there should have been a dramatic increase in the corporates offering such options to their shareholders. Or else there should have been a very significant rise in payout ratios and new capital raising by corporates in response to these new incentives. We seem to keep asking the government for more and more incentives. At the same time it appears that very little actual utilization is made of some of these virtual giveaways.It is time we stopped blaming the government or the foreign investors and make full use of what has been placed in our hands and creating a strong long-term local investor base for our corporates.
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