De-listing and the minority

Reckitt Benckiser (Lanka) Ltd., previously Reckitt and Colman of Ceylon Ltd., has informed shareholders that it plans to de-list from the Colombo Stock Exchange (CSE), buying out the 16% minority shareholders at Rs. 38 per share. This will cost the British multinational 1.1 million pounds sterling, according to an announcement made at corporate headquarters. Possibly no inward remittance will be necessary for funding the buyout, if the parent company had held its rupee dividends from the Sri Lanka operation here for a sufficiently long time.

In our business and finance pages today, we run a report focused on a letter that a concerned Sri Lankan shareholder had written to the Securities and Exchange Commission (SEC) about what he regards to be the unrealistic price that the mostly Lankan minority has been offered. SEC Director-General Dayanath Jayasuriya explained that the Commission cannot go into the matters that have been raised until the company seeks regulatory permission to proceed with the de-listing. The law requires that such permission is obtained and provides shareholders the opportunity of making their own representations. They will also be able to do that when the company itself summons an extraordinary general meeting to consider a resolution to de-list.

The SEC, which plays a watchdog role on the operations of the stock market, will, no doubt, carefully consider the arguments presented by the complainant-shareholder at the appropriate time. Jayasuriya has already cleared the air about one matter - that a serious conflict of interest will arise in any adjudication by the SEC as one of the Commission’s own members, Mr. G. C. B. Wijeyesinghe, is also a director of Reckitt Benckiser Lanka. The Director-General explained that the SEC Act itself deals with such problems by requiring its members who may have an interest in any matter the Commission is taking up to declare such interest and not participate in any discussion or decision on the subject. This requirement has been scrupulously followed in the past and will be in the future, he said.

In a small country like Sri Lanka, it is almost impossible to get reputable businessmen who understand the mechanics of the market to sit on a body like the SEC if they are prohibited from membership of the Commission on the grounds of being directors of quoted companies over which they have a watchdog remit. No wonder then that the incumbent chairman of the SEC, Mr. Michael Mack, one time chairman of Aitken Spence, continues to sit on the boards of several quoted companies. So did his predecessor, Ken Balendra. It is necessary that people of their calibre who are familiar with the nuts and bolts of business operations make their expertise available to ensure that a body like the SEC functions effectively. That is why the law has enabled such persons to be members of the Commission while ensuring that conflict of interest pressures do not apply.

With that matter out of the way, it is useful to consider the substance of the representations that have, perhaps prematurely, been already made. The complainant is a chartered accountant who once ran the share department for John Keells. Although the market at that time was not even a shadow of what it is today, he is familiar with the subject he is dealing with and knowledgeable, both from an accounting perspective as well as long practical experience in market operations. He is not merely a shareholder who is looking for a better price for his shares, no doubt a dominant concern of the whole minority. The major arguments he has presented is that Reckitts have last re-valued its land and buildings in 1964. While the book value of the buildings may have well been depreciated to zero by now, the difference in the land value between then and now will be chalk and cheese.

There is also another very pertinent factor raised in the case that has been made. Why has no value been accorded to brand value of the fast-selling product portfolio the company has built-up over the years? The company’s brands are household words in this country. Who does not know Mortein, Dettol, Harpic, Lysol or Disprin? Mr. K. Ariyaratnam, who has written to the SEC may not be altogether correct when he says that the company’s market-leading brands have been developed in Sri Lanka utilizing funds that would otherwise have been available for distribution as dividends. Many of the above brands are part of Reckitt’s global portfolio and we do not think they have all been developed here although they have been intensively promoted in this country, no doubt at considerable cost.

The most important of Ariyaratnam’s arguments is his contention that if the SEC "does not act meaningfully in this case,’’ other multinationals who are quoted on the CSE might follow a similar course of action. There are quite a few of these like Singer, Glaxo, Shaw Wallace, Ceylon Tobacco, Bata and Nestle to cite a few. We’ve already seen Coco Cola de-list, but at a time that the company was deep in the doldrums with huge accumulated losses and no dividends in sight for many years down the road. In that case, the minority may have been happy to take a Rs. 30 plus price that was offered and let Coke do its own thing.

The SEC should also look at how some local companies who have de-listed have approached the issue. Walkers Tours, for example, paid the minority way above the net asset value per share and the then prevailing market price. Reckitt’s, it must be said, have named a price considerably higher than its net assets value per share which was Rs. 23 in 2001. But that is on a 1963 valuation of its Ratmalana land where the factory and offices are located. Also, should multinationals making substantial profits here be allowed to shed the small percentage of locals with an equity stake in their business by using their financial and corporate muscle? Wider implications of the issues that arise must be carefully weighed.

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