Mind Your Business

By Business Bug

Lunch or snack? 

Would you prefer a press conference with lunch or with snacks? Media types had no choice in the matter last week as the board that attempts to attract investment had a long drawn out media briefing spreading out over three days. 

And we hear that the local media were thrown the crumbs on Monday and Wednesday while the foreign types feasted with the investing types on Tuesday.

Gas Poser

Usually, when more people enter a trade, the competition helps the consumer.But with more entrepreneurs taking to converting petrol vehicles to gas, the opposite seemed to have happened.

Established converting companies are complaining that they are being subjected to unfair competition - by those using sub-standard equipment that compromise on safety. Now, they are urging the government to impose some safety standards .

Three-company alliance produces tyre giant in Sri Lanka 

A three company alliance formed last week between Kelani Tyres, Associated Ceat (Pvt) Ltd and Ceat of India has created the country's largest tyre manufacturer. We have signed the shareholder agreement with Kelani Tyres," Associated CEAT (Pvt.) Ltd. (ACPL) Managing Director Abhik Mitra told the Sunday Times Business.

However, the validity and effectiveness of the agreement is subject to Kelani Tyres obtaining shareholders approval at an Extraordinary General Meeting, he added. 

On October 30, 1997, ACPL signed a strategic alliance with Kelani Tyres Ltd when the company was facing labour unrest induced closure.

The factory resumed production in December 1997 and sales in early January last year. 

Kelani Tyres subsequently announced details of its strategic alliance with ACPL which would incorporate a new company consisting of existing ACPL shareholders, who would hold proportionate shares in the new company..

Kelani Tyres (KTL) will separate their tyre manufacturing business, which will in turn be carried out by a newly incorporated company, KS, a subsidiary of KTL. 

A joint venture company is to be formed and all shares of ACPL and KS will be transferred to this joint venture company in the near future. The joint venture company in turn will issue shares in equal proportion to Associated Ceat Holding Limited and KTL.

Kelani Tyres produces light truck, truck radials, farm and agricultural tyres. The truck and light truck tyre market accounts for 65-75 per cent of the total local tyre market.

Being the sole domestic tyre manufacturer, the two companies' control 40 per cent of the local market. By the year 2000 the CEAT Kelani combination hopes to sell Rs 3000 mn worth of tyres here and abroad.

Price Waterhouse to recommend scripless system

By Mel Gunasekera

The prestigious Price Waterhouse (Australia) is studying systems to introduce scripless trading for government securities.

Requests for proposals for scripless trading and settlement have already been made for the World Bank funded study, Central Bank Deputy Governor, P Amerasinge said. 

The system comprises a central depository for deposits, scripless trading and settlement, a Real Time Gross Settlement system, and the automation of Central Bank's banking department activities. 

The Real Time Gross Settlement (RTGS) will not be confined to securities trading, but also extend to other inter bank operations.

There would be other categories like primary dealers, and non-banking institutions like EPF who will benefit from this system, he said addressing a recent Primary Dealers Association (PDA) meeting.

A scripless system would eliminate the physical issue of bills and instead the Central Bank's Public Debt department and the primary dealers will be linked on-line to a central depository system (CDS).

However, market practitioners were of the opinion that priority should be given to establish a CDS system first as RTGS is still new even to developed markets like the USA.

At present our market can only handle limited transactions because there is a huge volume of bills to be endorsed and physically delivered. Delivery by courier has an element of danger in moving thousands of bills through the city. "So a CDS should be the first priority," they said.

Secondary market activities are vital for liquidity in government securities.

Government securities are considered the most liquid assets. For instance the USA trades around US$ 4 trillion daily on the secondary market. However, figures for Sri Lanka's secondary market daily transactions are unknown as there is no central tracking device.

The PDA has hired a reputed law firm headed by a former young regulator to examine the legal structure for secondary trading. Things like market practices, code of conduct and details pertaining to master documents are being looked at.

Merged companies delist the smaller fry 

Ceylon Nutritional Foods Limited (CNF) has been delisted following the acquisition of the company by its majority shareholder Nestle Lanka Ltd, CSE Deputy General Manager Rohan Fernando said. 

Under CSE regulations, a company listed on the main board should have a minimum 25 per cent share capital in public hands, while listing on the secondary board requires a minimum 10 per cent public ownership.

When a company makes a mandatory acquisition, the CSE writes to the company to clear any objections to de-listing.

Since Nestle fully acquired CNF it was pointless that CNF remain quoted on the exchange, brokers said. 

On the same ticket, the CSE has also written to Forbes Ceylon asking them to consider a delisting, Mr. Fernando said. Since the majority shareholding of Forbes Ceylon was acquired by Vanik Incorporation there seems little point in having Forbes also listed on the exchange, brokers said. 

The CSE recently approved Aitken Spence Hotels Ltd application to delist. Aitken Spence Hotels Ltd is being de-listed as part of the Aitken Spence Group strategy to restructure the ownership of its hotels sector.

Theoretically it's a good time for companies to buy/takeover and merge, NDBS Stockbrokers analyst Chanaka Wickremasinghe said. In a situation when the market is down it's a good opportunity for owners to buy back the company and de-list". Some of the recent trends have been like Elastomeric, Richard Peiris Exports where the holding companies have increased their stakes in these companies by capitalising on the low share prices. 

Companies now feel there is little advantage of being quoted on the exchange, brokers said.

The main incentive of being a quoted company is the 30 per cent corporate tax rate , which is 5% less than the standard and the ability to raise capital on the market.The CSE recently introduced a rule that a company can list debt independent of equity provided the company has a bank guarantee and a rating from the to-be formed rating agency.

Companies are also increasingly shying away from a listing, as some of the closely held company owners detest the hassle of outside shareholders.

Others feel that the access to zero cost capital and the other advantages of being quoted was not worth the price of conforming to the stringent requirements imposed by the regulators.

There is also the cost involved in publishing expensive annual reports and sending interim financial statements to all shareholders.

Chamber demands more time 

By Vasana Wickremasena 

The Ceylon National Chamber of Industries (CNCI) is demanding an extension of the 60 day period given to determine the negative and preference lists of the Indo-Sri Lanka Free Trade Agreement (FTA).

The agreement signed last December 20 is expected to promote free trade between the two countries with a few exceptions. A negative list will rule out trade on selected items while a 100 per cent duty waiver is allowed on the preference list. 

The task of finalising the lists lies with CNCI President, Mr. Nimal Samarakkody who said that the 60 day period is insufficient to finalise the two lists.

"The Indians have done their homework before signing the FTA, and the sixty day period is enough for them. That is why they have put garments and apparels, alcohol and coconut on their negative list.

But, we have not studied the situation thoroughly. Therefore we need more time," he said.

Mr. Samarakkody said the CNCI, which has a membership of nearly 300 manufacturers will welcome the FTA if it facilitates the entry of low priced raw materials, machinery and spare parts.

However, he said they are concerned about ten issues arising from the FTA.

" The CNCI have by no means been assured that the products that need to be protected will be taken into account. Still, there is no clear criteria laid down for the selection of the Sri Lankan negative and preference lists," Mr. Samarakkody said.

" The Indian government has had a consistent policy of subsidising many areas of exports and the FTA does not appear to exclude these. This can be interpreted as a form of dumping of goods and whilst India has anti- dumping laws in place. Sri Lanka has no such barrier. 

India is also known to subsidise its small and medium industrial sectors in infrastructure costs such as electricity. Therefore, a level playing field does not exist at present and is unlikely to exist in the near future," Mr. Samarakkody said.

"Wherever zero duties have been imposed on Sri Lankan products as in the case of pharmaceuticals and textiles, closure of industries and large scale unemployment were the result. This is likely to be the case in many areas of industry that will be liberalised.

In the case of products not manufactured in Sri Lanka, no start up is likely to occur if duties are zero rated.

In addition to the normal customs duties, auxiliary duties are known to be charged by Indian customs. 

Also there are anti-state levies and there has been no agreement to eliminate these, he pointed out.

The removal of non tariff barriers is not stipulated in the agreement and we can only hope that these will be implemented in good faith," Mr. Samarakkody said.

"The term 'item' has not been defined in the FTA. Products are often divided under the Indian HS Code classification up to ten digits so that an item as understood by Sri Lanka would constitute a single product and could be subdivided by India as several products and so incorporated in their preference lists. This creates an illusion that India is granting more items for concession," Mr. Samarakkody said.

Euro makes reserve management complex and riskier

The birth of the euro as an international currency was a significant event in international monetary developments. Does it have significant implications for Sri Lanka?

A fundamental issue is whether the euro would boost European economies and result in their expansion of trade in the types of commodities we produce. At present intra-European trade is massive and their trade with the rest of the world minimal. Even in such a situation their imports could be significant for a small country like Sri Lanka. 

In fact, Sri Lankan exports to Europe constitute only about 4 per cent of our total exports. If this was to increase owing to the advantage of a single currency for European economic growth, there is a possibility of spillover effects to our benefit.

There are, however, other international monetary developments which could have a bearing on us. At present the US dollar is the major international currency and Sri Lanka, like most other countries, designates its trade in US dollars and maintains a large proportion of its foreign exchange reserves in US dollars. 

It is most likely that in the coming months, countries would shift from the dollar to the euro and the changing relative values of international currencies could have implications for our trade and exchange reserves.

For instance, if the value of the dollar falls in relation to the euro and our trade is denominated in euro while our reserves are in dollars, we would be losers. 

On the other hand, if our reserves are in dollars, which appreciate in value vis-a-vis the euro, while our trade is designated in euro we would gain. In short what this means is that the entry of the euro as a trading, and reserve currency, requires us to include the new currency into our international reserve management. 

A continuous monitoring of international currency movements and the shifting of reserves among currencies becomes important. There is therefore an added complexity to the management of our reserves owing to the emergence of the euro.

What we have said of trade applies with equal force to our international debt management. It is important that we do not get caught holding debt in a currency which appreciates, while our reserves are in a currency which depreciates. The international debt management must also be very carefully handled, especially as international currency values could be very volatile at times. 

The emergence of the euro naturally raises the question whether South Asia could have a similar common currency - A South Asian rupee. This seems logical in the context of SAPTA, SAFTA and the most recent bi-lateral trade liberalisation agreement between India and Sri Lanka. 

Yet, the fact is that Europe underwent a long period of preparation and dismantling of trade barriers and became an effective free trade area before the introduction of the euro. And even then there is some scepticism about its viability owing to the weaker economies like Portugal. 

The single currency adds a further dimension of intense competition and those countries which are unable to compete could suffer hardships. As significant is the fact that individual countries lose their capacity to control their own currencies and fiscal discipline is imposed by the market. 

There is a loss of sovereignty of each individual country over their currencies and government finances would be determined by the availability of resources to finance expenditure. 

Fiscal discipline will be imposed by the international market rather than political decisions. South Asia is in no position to accept such a regime at present. It may be inevitable in the future but still unforeseeable.

Further, the political dimension makes such a reality inconceivable at present. Even Britain - a member of the European Union - decided to opt out of the euro, owing to political reasons. She was not prepared to give away her sovereignty over the management of her own currency. In addition British pride dictated that she should retain the pound sterling as a domestic and international currency.

Sri Lanka, as a small international trading country, cannot ignore the birth of the euro. Our trade, our debt management and our reserves would be affected by the manner in which we take decisions in maintaining our reserves and designating our trade and debt. 

We require to be prudent in the management of our reserves. The task of our international monetary management has undoubtedly become more complex. We would suggest it has also become riskier. 

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