Plumbing ownership of foreign funds

Last week’s tumble on the Colombo Stock Exchange - the All Share Price Index was down 25.7 points and the Milanka, tracking the liquid blue chips plunged 63.5 points - indicates the truth of what many analysts have been saying: the recent bull run was partly the result of what the market calls "strategic buying.’’ The better description is corporate takeover attempts, friendly or hostile as the case may be.

The upward momentum on Colombo’s little bourse began last October when threats of defections made the continuance of the previous People’s Alliance administration a matter of doubt. The election of the UNP-led United National Front government, widely perceived as more business friendly than its predecessor, tended to propel the bull run assuring fat profits for the steely-nerved who picked up fundamentally strong blue chips like John Keells Holdings and the National Development Bank at bargain basement prices during the pre-October slump. They didn’t have to wait long to reap their profits with the share prices of such companies tripling or even going higher.

More recently, raids on some companies gave the market some upward momentum. But if events last week are a reliable signal, the bears have returned to the bourse. That, however, is not the focus of this comment. What we are more concerned about in the present climate of takeover attempts (Richard Pieris and Asia Capital are two recent examples) is whether the Securities and Exchange Commission (SEC) can effectively discover the beneficial ownership of foreign funds investing in the Colombo market. Such ownership is very material in the context of the SEC’s own Takeovers and Mergers Code. This requires any individual or entity, or parties acting in concert, to make a mandatory offer to all shareholders of the highest price they have paid within the previous twelve months for the shares of any quoted company of which they have acquired over 30 percent.

Corporate raiders who do not wish to make such an offer that would generally cost them dearly, can always resort to staying below the 30% threshold but getting some foreign fund to act on their behalf to get the balance shares needed for control. All such a fund need do thereafter is to give the raider’s nominee their proxies to vote as he wishes at meetings of the company. The law as it stands correctly permits extraordinary general meetings (EGM) to be summoned by individuals or groups commanding the allegiance of 20% of the issued capital of a quoted company. It is open to such meetings to make wide-ranging changes in the management of a company including sacking incumbent directors and appointing new members to its board. If they are not impatient, the raiders can await the next annual general meeting (AGM) of the company and then make their moves.

There is no dispute that the majority owners of any company should have the right to call the shots, subject of course to the minority not being oppressed. The law provides for this. The mandatory offer requirement in the SEC law is part of this machinery to ensure that all shareholders are treated fairly and it is necessary that the regulator has the muscle to find out for himself whether the Takeovers and Mergers Code had been triggered in any instance. While foreign funds investing here must be approved by the finance ministry and be duly registered, do they also have to declare their beneficial ownership? If this is not the case already, it is necessary that the required changes are made either legislatively or administratively so that the watchdog SEC can more effectively perform its role.

Another factor relating to the stock exchange that should attract the attention of the concerned authorities is the delisting of quoted companies. A company gets its shares quoted for various reasons. Among the more important of these is the opportunity to tap the capital market and avail itself of what is called "zero cost capital.’’ Such capital costs the company nothing as the investor anticipating dividend returns and capital appreciation buy the shares with an expectation for the future with no guarantees offered or expected. Multinationals sometimes get themselves quoted in the countries where they operate to minimise or mitigate political risks. Having local shareholders make them less vulnerable. Governments may require these corporate giants to offer a slice of their pie to nationals of the country so that part of the profits they earn remains in that country. Making them get a stock exchange quotation is the best way of enforcing that.

Sometimes such multinationals for reasons of their own wish to de-list. Coca Cola was one such, after the company had hit a bad patch and suffered tremendous losses. Most minority shareholders would have been happy to exit in such a situation at a price consonant with the net assets of the company. Reckit Benckiser is now in the process of de-listing. This company, unlike Coke when it de-listed, has been very profitable and had rewarded its shareholders with attractive dividends and scrip issues of bonus shares. While the company may be fair to the minority in exiting the bourse, government should have an interest in ensuring that locals too have the opportunity of sharing in profits that multinationals earn in this country. This aspect deserves its consideration.

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