Category: Business and Economic Commentary

July 12, 2024

Court woes for Banks DIH Limited

Court setback

Banks DIH Limited and its newly minted holding company Banks DIH Holdings Inc. (BDIHHI) had a setback of some significance in the courts in an action brought against the Guyana Securities Council. (See Stabroek News of Wednesday 9 July). Dissatisfied with the failure by the Securities Council to give speedy blessing to their efforts to restructure Banks business, the two companies, through a strong legal team, approached the court for judicial review. It was over the Council’s delay in endorsing a plan which would see the iconic company ceasing to be a public company and now to be owned by a newly created holding company. That plan involves shareholders in the long-established company exchanging their shares for the uncertainty of a newly minted, ill-defined holding company.

The decision by the court must have come as a total surprise to the companies which enjoyed a rather easy ride, obtaining a stage one approval without even notifying, let alone engaging, the Council. It was even easier at the level of the shareholders who offered overwhelming support for a scantily defined and hardly understood and communicated plan. A booklet circulated to shareholders selling the idea offered information that was at best unclear and imprecise, and worse, inadequate and troubling. As I think about it now, that document was as important as a prospectus but was subject to none of the stringent conditions of a prospectus.

The essence of the assurance to shareholders was that the move was part of a broader strategy to streamline the company’s corporate structure and meet evolving financial regulations. To achieve this objective, the directors of Banks DIH Limited would make the company into a private company, shielding its tons of retained earnings from shareholders. To do this, the directors needed the approval of the Securities Council to deregister the much-loved company. And that is when the problem started.

Ruling on favour of the regulator

The GSC’s position it seems was “not so fast”, asking the company for more information. It seems that this displeased the directors who approached the courts, arguing that the GSC’s actions were unreasonable, an abuse of power, and contrary to law. The court ruled that the Securities Council was indeed subject to judicial review, a process which involves an examination of the legality of the decision-making process, but not the merits of the decision itself.  Except for that small mercy, the court rejected the arguments of the companies and refused to grant the several orders sought. Accordingly, the court found that the GSC’s request for additional documentary evidence was both lawful and necessary, and found no evidence that the GSC failed to consider the applications or acted in bad faith.

The companies are now required to provide the Council with the information it needs within seven days after which the Council has a further fourteen days to decide on the application. I have deep concerns about the adventurous move by the directors and hope that the company will reconsider its decision. This is a poorly conceived plan and there is no doubt that quite a few shareholders are hoping that the directors are courageous enough to walk away from this extravagant idea.

Running out of ideas

Readers will recall that the very Council which the directors have vigorously challenged in court, was recently requested by the same directors to investigate the poor performance of the company’s shares on the Stock Exchange. Maybe the price fall is less about manipulation or small shareholders and more about matters which cause more than a little concern among shareholders. Maybe there is a link between the share price and the serious questions about the composition of the company’s board of directors – many of whom are not independent of the Chairman -, the routing of transactions with Europe via Florida at great cost to the company, the expensive, inflated share buyback in 2016, and the appearance that the company has run out of ideas.

With respect to the great plan, it would be useful for the directors to share their understanding and impact of the following provisions of the Companies Act dealing with dividends and retained earnings. .  

52 (5) “Where a particular company becomes the subsidiary of another company, any dividend paid to the other company out of profits of the particular company, acquired before it became a subsidiary of the other company, shall be treated as capital, and not as profits of the other company.”

53 “Where a company acquires all or enough of the shares of another company to control all of the other company’s activities, the pre-acquisition profits of the acquired company shall be treated as capital of the acquiring company.”   

Conclusion

Banks DIH Limited, once respected for its civility and decent conversation, seems no longer interested in open and respectful exchanges. Indeed, the decision by the Court included what it referred to as a postscript in which the tone of the exchanges, particularly by the company, was harshly criticised. But hubris is no substitute for good corporate practices. Banks as a company needs some serious reflection and retreats (pun intended). It needs a more enlightened and informed approach to management in the third decade of the twenty-first century. The structure has served the company well. If it ain’t broke, don’t fix it. Business is far more about business than it is about structures.

This project will have far more unintended consequences than the directors can imagine. This is no time for such risks.

June 22, 2024

Banks DIH’s call for a suspension in trading in its shares

Introduction

Banks DIH Limited, a blue-chip company on the domestic scene, has asked the Securities Council of Guyana to suspend the trading of its shares on the Guyana Stock Exchange. While I am not aware of any precedent for such a request in Guyana, the request is often justified where there are concerns about unfair trading or market manipulation. In a circular to its thousands of members, the company’s Board of Directors expressed concern that there is a continuing pattern of an unusual reduction in the price of BDIH shares involving very small trading. It notes that for the period 2019 to 2023, revenue increased by 48.8 % and profit after taxation increased by 79.7 % but yet the Company’s share price declined from $300 per share in March 2022 and to $115 per share in May 2024. The Circular added that “such a comparison of the price of shares going down at the same time that profits are going up defies any logical explanation” and raises fundamental questions as to the integrity of the Stock Market. Even more strongly, the Circular added that “[A]ny reasonable person would consider that the Stock Market in Guyana cannot be taken seriously!”, with an exclamation mark.

An accusation of market manipulation is a serious one indeed, particularly coming from one of the country’s best-known public companies. What is worse is that the company appears to have formed its conclusions, even before calling on the Security Council to undertake an investigation of the reasons for the price movement and to “rectify the present state of affairs.” To put the small shareholders at some ease, the fall does not affect them and others who do not intend to sell their shares, but only traders, brokers, pension schemes and similar entities which are forced to recognise the loss in value.

There is another side to the question of the share price of the company which this columnist has raised before. The significant increase in the share price over the period 2019 to 2023 was correspondingly much greater than its increases in profits, as reflected in the Table below, previously published by me as a letter to the Editor. (S/N 02 -02- 2024). Seeing their results as much as a public relations issue as a statement on their performance, companies take credit when their share prices increase but seek to avoid responsibility when they fall.

Source: Annual Reports of Banks DIH and GASCI website

The company should also address the historical, low dividend yield arising from the ownership of its shares and to offer an explanation and justification for the company’s policy of hoarding cash at the expense of shareholders. A small holding in the company is hardly worth the transaction cost for the modest dividends paid to its multitude of small shareholders, in three separate tranches. At the time of writing, I have on my desk three Banks DIH share certificates, one for 135 shares, one for 90 shares and the other for 910 shares, all issued by the company which the owner is offering for sale. Shareholders obviously have a right to sell their shares and if the company wants to stop small trades, then it needs to amend its by-laws and/or carry-out a large scale buy back of such small holdings.

Share price performance also reflects other variables. For example, the directors recently persuaded its shareholders to support the adventurous idea of converting itself into a holding company while making this iconic company into a private company. To borrow from the Circular, that step “defies any logical explanation,” but despite grave questions being raised, there is no indication that this move will not take place.

Observers are aware too that this company has been lukewarm at best on an effective Code of Corporate Governance and not only holds to a single person being the Chairman and the CEO, no succession plan and a majority of directors who are employees of the company and the Group. No wonder then that in relation to the ordering of goods from Europe through a company in Miami, the directors have opened themselves to charges of a breach of fiduciary duty to protect the best interest of the company. While one cannot be sure where this gross breach is on a scale with the accusation which the company is making against anonymous persons, to ignore such concerns only compounds the absence of responsible and proper governance in the company. For the company to be taken seriously, it must be willing to urgently review the governance and procurement practices of the entire group and to discontinue wasteful practices.

One final thought. While the company calls for the suspension of trading in its shares, it advises shareholders that their shares can be transferred at the Banks DIH Shares Registry, which would seem to be an avenue of share trading which is no more transparent than the issue being complained about.

Conclusion

It is true that the company has increased turnover and profits substantially over the years but its inconsequential revenue from exports shows the absence of any serious strategies and policies over those very years, or for the future. Investors in Guyana long for investment opportunities and look to the existing as well as new companies to offer fresh ideas and possibilities. Hopefully, the company will cooperate fully with any investigations by the Securities Council and the Stock Exchange. It must be prepared to share information on share activities by its own Share Registry and to actively support the efforts of the Securities Council to put in place a modern Code of Corporate Governance and Social Responsibility.

March 22, 2024

Time for a fairer Compulsory Acquisition law

Introduction

As Guyana continues on its extensive infrastructural works to cope with a fast-growing economy, one area of law – compulsory acquisition of land – has been sidestepped and ignored, almost exclusively to the detriment of property owners. While the holding of property is a constitutionally protected right under the Guyana the Constitution, this country, in common with countries around the world, allows the Government, under strict conditions, to acquire private property. Under US jurisprudence, the concept is called “eminent domain.”  

The insertion of the term “public purposes” in the name of our law may be designed to take the sting out of the appropriating citizens’ property, while seeming to promote national development and patriotism. In practice, the law invites and paves the way for a very imbalanced relationship between the Government and the citizen with the Government using the coercive force of the law against the timidity of all but the well-heeled in society. In fact, many people whose lands are acquired are sufficiently intimidated by an army of officials and their entourage on being told what they will be paid, they just say yes. This then allows the Government to boast that it has consulted, praising those who are intimidated as patriotic and those who want adequate compensation as anti-progress and anti-development.

Yet, the very essence of how the Act maintains some of the more obnoxious features from ancient times is not only disturbing but would be considered unacceptable and appalling in any open democratic society. For example, the principle of market value which assumes a willing seller is a non-starter since the property owner is at least reluctant, while the so-called buyer is using statutory powers to get a deal. The owner hardly ever wants to sell, while the Government obtains title whether there is agreement or not. All for a sum that the “seller” will soon spend and go broke.

Guyana

The fact is that the Guyana Act is woefully deficient, having come down from more than one hundred years ago, with minimal amendments – some of it for the worse.Ironically, the only amendment for this century was railroaded to facilitate the gas-to-shore project. And let us not believe that this is a West Demerara problem. Land on the East Bank of Demerara is also at risk of being compulsorily acquired under the same project. Because our law firm represents two persons whose land is being taken away under this project and because one of the persons has taken legal action, I am unwilling to say anything much at this stage. What I can say is that it is ironic that a government that boasts about its working-class credentials is prepared to cheat many of its own supporters.

India

About ten years ago, India recognised the weaknesses in their similar legislation and passed a most progressive act – the Land Acquisition, Rehabilitation and Settlement Act. As a model, that Act is hard to beat and if the Guyana Government or the Opposition was truly alert, the Indian Act would be so useful as a model. Containing an extensive preamble as well as a statement of objects and reasons, the Act is designed to ensure a participative, informed and transparent process for land acquisition and appears to be a people-first enactment. Even as India anticipates industrialisation and the development of essential infrastructural facilities, the Act is intended to operate with the least disturbance to the owners of the land and affected families while providing just and fair compensation to affected families. In fact, the preamble regards those persons as partners in development, no worse off after the acquisition than they were before.

To start with, “public purpose” is comprehensively defined, so that government’s scope for  intervention in acquisition is limited to defence and certain development projects only. The nonsense of running highways through residential communities as the Government is doing in Prashad Nagar just outside of Georgetown is hardly likely to be permitted under the India legislation.

Elaborate protection

The Act requires that the consent of at least 80% of the project affected families be obtained through a prior inform process while the urgency clause permitted under the Act is limited to projects for national defence, security purposes and rehabilitation and resettlement needs in the event of emergencies or national calamities only. The Act also provides a comprehensive compensation package for owners and affected persons, including a solatium and a scientific method for the calculation of the value of the property.

An important feature of the Act is the requirement for a Social Impact Assessment Study, its public hearing and appraisal by an Expert Group of independent persons. In a nod to the rural and agricultural communities, that value is augmented by a factor of two in rural areas. The Administrative machinery too is quite formidable with consultations and defined roles for the Panchayats, Municipalities and Districts involving the Collector, Administrator, Presiding Officer, Judges and of course the Courts. Despite or because of all these features, India has some of the most interesting cases on the subject that would be most helpful in any review of the law.

The problem for the people is that the Government seems happy with a loose, ancient and unfair framework that works against the people.

March 8, 2024

A Table of a Chart and a Graph

Introduction

Today I will deliberately use the Chinese aphorism that “a picture is worth a thousand words” with great effect. So, with two pictures, we start with two thousand words which takes me over my word limit. Some weeks ago, the Government announced that two historic cricket grounds and green spaces in Georgetown are being handed over to its Middle Eastern friends from Qatar and their exclusive clientele for the paltry sum of $2 Bn, or less than US$10 Mn! Forget for a moment that the President and Vice President seem incapable of distinguishing between the State and the Government, or that selling in the absence of a robust valuation was their alleged ground for wanting to jail former Finance Minister Winston Jordan.

As dessert, VP Jagdeo, who is no stranger to tax holidays, indicated that the Qataris will have a 10-year tax holiday! We recall that about fifteen years ago, Jagdeo publicly insulted the late Yesu Persaud for being ignorant of the tax laws when the icon asked for equality and equity of tax concessions. Yet, any ignorance was on the part of Mr. Jagdeo who had extended concessions to his friend Dr. Bobby Ramroop, which the law did not allow. Mr Jagdeo showed no embarrassment or contrition over his error but rushed to change the law to accommodate Dr. Ramroop.

The wealthy poor

Let us look at the two charts. The first is by energy consultants Rystad Energy (which is duly acknowledged) showing that Guyana now has the highest per capita petroleum of any country in the world. And by far. Even if we estimate the population to be 800,000, it means that each Guyanese has a claim to 16,250 barrels of oil, the value of which at roughly US$80 per barrel, means that every man, woman and child is worth about US#1.3 Mn! For the moment, let us forget that Exxon and the Government are concealing several additional billions of barrels from Guyanese. Of course, these are gross values from which expenses have to be deducted, as they are for every other country on the chart. By any measure, however, that is a lot of money.

Sadly, these numbers seem to mean nothing to this Administration or to suggest to them that there ought to be a better revenue sharing between Guyana and the oil companies. Nor does It stir them that Guyanese are still queuing for freeness, teachers have to strike for better pay, and the working struggle to make ends meet even as the oil companies take a disproportionate share of the patrimony of the people and their officials live a life that would make the British Raj envious.

Tax to GDP ratio

Now for the second graph. It shows the tax collected by the central Government relative to the gross domestic product of the country. By this measure, Guyana has the lowest tax to GDP ratio across the entire Commonwealth Caribbean countries. It further tells us is that Guyana collects even less tax as a proportion of GDP than the near-tax free countries of the Caribbean. Guyana’s ratio is about a quarter of Dominica’s, a third of Grenada’s, and about half of Antigua and Barbuda’s, its nearest comparator.

Source: International Monetary Fund Website. All percentages are stated for 2022 except for Guyana which is stated for 2023.

It is difficult to accept that Guyana’s economic managers can believe that oil revenues displace the need for taxation and that we can go handing out tax concessions to any friend or flatterer. That is the President’s chosen role in the economy. He gave away huge tax concessions to the CPL cricket extravaganza – outside of the law – and continues to do so whenever he brings regional artistes to entertain the masses.  

But the VP will not be outshone. He has taken it upon himself not only to give away state land without any consideration of its implications for the national interest but also tax holidays to persons who have neither applied for nor are entitled to them. The Income Tax (In Aid of Industry) Act is clear – it must be for “new economic activity of a developmental and risk-bearing nature”. It seems that neither the Vice-President nor the President has any respect for the laws or resources of the country, or the intelligence of its people. 

Guyana recently entered into a Double Taxation Treaty with the United Arab Emirates that is all one-sided. That has not even made the news. But now, completely outside of a treaty, the Qataris enjoy exceptionally cheap land, irreplaceable resources, no taxes and the red carpet. This cannot be rational, responsible or reasonable. It is more like recklessness and drunkenness with power. Or is it the resource curse?

March 2, 2024

Time for Guyana to have a code of Corporate Governance

Introduction

For decades, the captains of Guyana industry – almost all men – have resisted the introduction  of a binding code of corporate governance. It has not been for want of effort. There have been numerous efforts at the establishment of a code of corporate governance including one by the Securities Council and another by the Private Sector Commission. Neither of these came to fruition and there is now a total void with companies limited to more narrow codes issued for particular sector, or to practices likely to get past a general body of unenlightened shareholders.

In a column I did several years ago, I wrote that the international quest for a modern corporate governance code began in the UK in 1991. Then Pime Minister John Major appointed a committee headed by Sir Adrian Cadbury following a number of high-profile corporate failures which were attributed to poor governance, poor accounting and inadequate disclosures. The most significant corporate failures were the Maxwell Communications Corporation scandal in 1991 which surfaced after chairman Robert Maxwell died in the most unusual circumstances, revealing that he had fraudulently misappropriated hundreds of millions of British pounds belonging to the group’s pension schemes. Then there was the failure of the Bank of Credit and Commerce International which collapsed after an investigation revealed that it had been engaged in fraud and money laundering.

As its formal name implies – the Report of the Committee on the Financial Aspects of Corporate Governance published in December 1992 – the Cadbury Report really had a fairly narrow focus. Its principal recommendations emphasised improving corporate governance and accountability in public companies in the United Kingdom. There was more to follow. South Africa in 1994 saw the King Report on corporate governance, now recognised internationally as perhaps the leading code of corporate governance of any country of the world. Germany published its code in 2002 with Japan following some years later. A code for the US followed the debacle of Enron and WorldCom failures and took the legislative route with the passing of the Sarbanes-Oxley Act (2002).

Particularly in the UK and South Africa, there were iterations and additions in subsequent years with the UK now having a full corporate governance code embodying several other reports while in South Africa, the King Report is now in its fourth iteration.

Guyana’s Experiences

A Business Page I authored years ago had reported that the Council of the Private Sector Commission (PSC) of Guyana on 7 April  2011 had accepted a Code on Corporate Governance which could have some transformational effect on the way Guyana companies are managed. Like the draft Code published by the Securities Council, the PSC’s code did not get far, effectively killed by officers of the PSC itself. As I wrote then, the then Chairman of the PSC was Mr Ramesh Dookhoo, an executive of Banks DIH while Mr Chintamani (DEMTOCO) had been a member of the executive of the PSC. They could not persuade their own companies to adopt the PSC’s Code, with Chintamani pouring scorn on the idea of a mandatory code.

So here we are, decades later with no Code and a PSC that has become no more than ceremonial and largely inactive. What the absence of a code does is allow for poor governance with directors handpicked by an all-powerful chairman who reports to himself and a compliant set of directors. Directors’ turnover is minimal, and it is striking that since their formation, both Banks DIH Limited and Demerara Distillers Limited have been firmly controlled for decades under hereditary fiat by four men – Peter D’Aguiar and Clifford Reis at Banks DIH Limited and Yesu Persaud and Komal Samaroo at DDL. Independent directors are almost invisible and ineffective, serving at the will of the Chairman while the executive directors are not subject to election or re-election. The shareholders with any real voice and influence are the Institutional investors but these operate as cartels, even at the cost of their own interest.

Guyana’s Failures

Guyana too, has had more than its fair share of failures with Globe Trust and CLICO as standouts, but Guyana Refrigerators, Stockfeeds and many state-owned companies have also suffered. Yet, no meaningful action has been taken to strengthen corporate governance and to prevent a recurrence. These are not simply issues for the seven days’ news cycle. Companies will fail because of the type of industry they are in, because of technological advances and because of particular unique circumstances. But good corporate practices, careful planning and open communication do help in anticipating and preventing failures.

Boards have made too many costly blunders because of directors’ failures such as DDL investing in facilities in a dry state in India and Banks DIH making some costly strategic and tactical blunders, all with total immunity. This should not continue. There is a complete disconnect between a country determined to take its place among the richest in the world, tolerating corporate government practices that are backward, ineffective and which stifle growth and development.

Conclusion

A code not only sets the minimum standards of governance in companies but also requires them to report on how they apply relevant corporate governance principles, and also to be responsible enough to give an explanation to the shareholders of the reason(s) if they deviate from the code – the ‘comply or explain’ principle. The code also calls on companies to provide information on their corporate governance policies and principles at the request of shareholders for further evaluation, the very things DEMTOCO said they would only provide if the law so required it.

None of the senior members of the government have any corporate experience and would seem ill equipped to appreciate how the absence of a corporate governance code retards the development of the country. Yet, it is a great opportunity for the Minister of Business to convene a meeting of the Private Sector Commission and the securities council asking them to set up a  committee with the express purpose of formulating a code of corporate governance. Let the Private Sector explain why it is not supportive of such a code.