1. Another man with too many hats

Dev Manraj

• His substantive post is Financial Secretary
• He is a member (Chairman (?)) of the Investment Committee of the National Pensions Fund, which is considering the proposal to invest in the shares of the National Insurance Company Limited

• He is the Chairman of the Financial Services Commission which regulates the NIC

There is clearly an issue of conflict of interests. The problem can be resolved by the Prime Minister who is responsible, under section 4(2)(a) of the Financial Services Act 2007, for the appointment of the Chairperson of the Financial Services Commission.

2. Duties of directors

• The duties of directors are set out in sections 143 to 146 of the Companies Act 2001.
• Section 143(5)(a) states that the duties imposed by this section (S143 is entitled “Duty of directors to act in good faith and in best interests of company”) shall be owed to the company,  and not to the shareholders, debenture holders or creditors of the company.
• The directors of SICOM, SBM Holdings and, presumably, the National Pensions Fund (although the NPF is not regulated by the Companies Act) are bound to look at the best interests of the company in analysing the proposal to invest in the shares of the National Insurance Company Limited (“NIC”). A report values the NIC at Rs 5.6 billion.
• For comparison purposes, the value of Swan Life Limited based on its share price at 18 March 16 is Rs 2.5 billion – 45% of the value of the NIC!

3. SBM Holdings Ltd share price

The fall in the share price of SBM Holdings Ltd from Re 1.03 on 11 December 14 to Re 0.65 on  22 March 16 has wiped out Rs 9.8 billion from the company’s market capitalisation. The share prices were Re 0.93, Re 0.88 and Re 0.78 respectively when the results for the first, second and third quarters of 2015 were published.

The second quarter figures came with the bad news that the profit after tax for the 6 months to 30 June 2015 had fallen by Rs 751.6 million compared to the previous period as a result of a substantial increase in bad debts of Rs 1,084.7 million.

The third quarter figures were accompanied by a note from the directors that profit before bad debts and tax had increased by 11.73% for the 9 months to 30 September 15 compared to the previous period, if a one-off gain on the sale of equity investments of Rs 377 million was excluded from the previous period’s results.

As a share price looks to the future, the profit before bad debts and taxes is increasing and the bad debts arising from the receivership/administration of a major conglomerate have been recognised and absorbed, why has the share price continued to fall (from Re 0.78 on the day of the publication of the third quarter results to Re 0.65 on 22 March 16)?

• What is the market anticipating?

Will the directors address the doubts of investors now that the full year’s results have been published? Do they have a plan to improve the share price?

OBSERVER

4. SBM Holdings Ltd – 2014 profit after tax restated downwards by Rs 1.29 billion

The directors of SBM Holdings Ltd (“SBM”) in the presentation of the 2015 abridged financial statements state:

“Profit after tax for 2014 has been restated downwards by Rs 1.29 billion mainly to reflect part of the expenditures incurred during the year 2014 relating to inefficiencies in the implementation of the Group’s information technology project named ‘Flamingo’ and costs in respect of Business Transformation Initiatives which have been expensed as they did not meet the criteria to be treated as capital expenditure under IAS 38.”

So:

(I) the 2014 profit after tax of SBM was overstated by Rs 1.29 billion, or 40.9%

(II) investors have bought shares in SBM on the basis of an Earnings per share which is overstated by 40.9% 

And there has not been a mention of this issue in the March, June and September 15 abridged financial statements. 

How is it that the first time this issue comes to light is 15 months after the end of the 2014 financial year?

In a previous article about the fall in the share price of SBM from Re 1.03 on 11 December 14 to Re 0.65 on 22 March 16, we asked: “What is the market anticipating?”

Was this it?

The directors owe the shareholders of SBM, the investing public, its customers and stakeholders full and detailed explanations of this major overstatement of its 2014 profits.

Has the board failed in its duty to keep shareholders informed regarding material events affecting the company, especially if an event could have an effect on the share price? And where are the regulators? The Bank of Mauritius, Financial Services Commission, Financial Reporting Council and Stock Exchange of Mauritius should be asking pointed questions about this overstatement of profit and communicating with those whose interests they are tasked to protect.

OBSERVER

5. SBM Holdings Ltd – Compare like with like and tell it as it is

The directors of SBM Holdings Ltd in the abridged financial statements for the year ended 31 December 15 compared the profit before impairment and taxes of Rs 3.99 billion with the restated Rs 3.11 billion realised in 2014 – an increase of 28.2%.

When doing the same comparison in the abridged financial statements for the 9 months ended 30 September 15, the directors adjusted the 2014 results by Rs 377 million which was a one off gain on the sale of equity investments. It was a proper adjustment to make, even if it converted a decrease in profit of 2.08% into an increase of 11.73%.

But why did they not do the same adjustment for the full year when they had another one-off item which reduced the 2014 profit by Rs 1.29 billion?

Had they adjusted the 2014 results by the one-off expense of Rs 1.29 billion and the one-off gain of Rs 377 million, the comparable profits would have been Rs 3.99 billion for 2015 and Rs 4.02 billion for 2014 – a decrease of 0.9% instead of an increase of 28.2%.

Are the directors comparing like with like in the 2015 abridged financial statements?

And do they comply with the Code of Corporate Governance which states that the Annual Report should present a comprehensive and objective assessment of the activities so that all stakeholders obtain a full and fair view of the company’s performance?

OBSERVER

6. SBM Holdings Ltd – Provision for bad debts of Rs 1.94 billion

The directors of SBM Holdings Ltd (SBM) in the presentation of the 2015 abridged financial statements state that the fall in profit from the restated Rs 1.87 billion in 2014 to Rs 1.61 billion in 2015 is the result of a substantial increase in credit impairment charges of Rs 1.94 billion in 2015 compared to Rs 0.63 billion in 2014.

They go on to say that the substantial increase in credit impairment losses was due mainly to a major conglomerate in Segment A going into receivership/administration and two large accounts in Segment B that went impaired.

The credit impairment charges as per the 2015 quarterly abridged financial statements were:

Quarter to 31 March 15                     Rs 234.1 million

Quarter to 30 June 15                        Rs 850.5 million

Quarter to 30 September 15              Rs 176.2 million

Quarter to 31 December 15               Rs 676.0 million

The explanation accompanying the abridged financial statements for the 6 months to 30 June 15 was that  “the decrease in profit of Rs 751.6 million was mainly due to a substantial increase in impairment charges to Rs 1,084.6 million during the period compared to Rs 214.5 million in 2014”. This substantial increase was attributed “to an unforeseen impairment of one major conglomerate in the second quarter of 2015”.

Did the market expect the additional charge of Rs 676.0 million in the fourth quarter?

Is this another reason for the continued fall in the share price of SBM for Re 1.03 on 11 December 14 to Re 0.65 on 22 March 16?

Please also note that SBM increased its provision for credit impairment in 2014 by Rs 156.6 million (+33.1%) from Rs 473.7 million in the 2014 Annual Report to Rs 630.4 million as per the abridged financial statements for the year ended 31 December 2015.

There is no mention of this increase in the notes accompanying the 2015 abridged financial statements.

The directors should reassure the shareholders of SBM, the investing public, its customers and stakeholders that all bad debts have been fully provided for and that there are no surprises in store (or skeletons in the cupboard, if you prefer!).

OBSERVER

7. SBM Holdings Ltd – Restatement of prior year figures

The abridged financial statements for the year ended 31 December 15 states that the profit after tax for 2014 was restated downwards by Rs 1.29 billion mainly to reflect expenditures which had been capitalised in 2014 and which should have been expensed as they did not meet the criteria to be treated as capital expenditure under IAS 38.

But it was not only the 2014 profit which was restated. The profit for 2013 was restated downwards by Rs 356.0 million, mainly through an increase in other expenses of Rs 347.5 million.

Were there also expenditures in 2013 which had been capi- talised although they did not meet the criteria to be treated as capital expenditure under IAS 38?

● The items restated in the statement of profit or loss are:

Fees and commission income: 

Increase of Rs 14.4 million in 2014 and decrease of Rs 84.1 million in 2013

Other expenses: Increase of Rs 1,174.1 million in 2014 and Rs 347.5 million in 2013

Net impairment loss on financial assets: Increase of Rs 156.6 million in 2014 and decrease of Rs 88.0 mil- lion in 2013

The income tax expense was also restated to take into ac- count the above changes

The main item restated in the Statement of financial position is Other assets which was reduced from Rs 2.95 billion to Rs 1.25 billion in 2014 and from Rs 2.24 billion to Rs 1.51 billion in 2013.

The other items which have been restated by more than Rs 400 million include Loans and advances to nonbank customers, Other liabilities, Retained earnings and Other reserves

Even the Cash and cash equivalents amounts have been restated in 2014 and 2013.

The Group balance sheet had negative retained earnings of Rs 430 million and negative other reserves of Rs 5.0 billion at 31 December 15.

The directors should provide explanations for these restatements to the shareholders of SBM, the investing public, its customers and stakeholders. 

OBSERVER

8. SBM Holdings Ltd – Cost of information technology project named “Flamingo”

This information is not disclosed in the 2014 Annual Report and has not been published to our knowledge.

We would expect to find the information in Intangible assets, which are described as including acquired computer software and software under development. The amounts spent and shown as additions to intangible assets and progress payments for intangibles in the 3 years to 31 December 2014 were:

                          Additions          Progress payments on intangibles
                          Rs million         Rs million

2014                      4.5               1,042.9

2013                   20.3                 638.9

2012                  35.6                  34.4

The additions do not look like amounts spent on project Flamingo, but the Progress payments on intangibles look like they fit the bill.

Under Other assets there is an item described as Amount paid in advance which amounted to Rs 2,028.8 million at 31 December 2014 and Rs 975.0 million at 31 December 2013. The footnote describes Amount paid in advance as “payments relating to the IT project under progress”.

Adding the Progress payments on intangibles (Rs 1,042.9 million) and the Amount paid in advance (Rs 2,028.8 million), we have a total spent of Rs 3,071.7 million at 31 December 2014. It looks like project Flamingo has cost Rs 3,071.7 million at 31 December 2014.

And of this amount Rs 1,521.6 million (49.5%) has been written off because of the “inefficiencies in the implementation of the Group’s information technology project named “Flamingo” and costs in respect of Business Transformation Initiatives”. The word “inefficiencies’’ is an interesting word requiring fleshing out.

We will have to wait for the 2015 Annual Report to find out how much more was spent in 2015 on project Flamingo, unless the directors decide to shed light on this major item of expenditure before then. Let us hope they will.

OBSERVER

9. SBM Holdings Ltd – Was SBM the only bank hit by the BAI Group demise?

The table below gives a comparison of the charge for bad debts in the accounts of some of our local banks for the last 3 financial years:

Apart from SBM Holdings, the only 2 banks with big increases in their provisions for bad debts between 2014 and 2015 are AfrAsia and Barclays.

In the case of AfrAsia, Rs 112.6 M (67%) of the increase related to the category “Entities outside Mauritius” and Rs 49.7 M (29%) related to the category “Business”. Any lending by AfrAsia to BAI Group would be in the “Business” category.

We could not find any information on the increase of Rs 71.9 M in the Barclays bad debts from the bank’s website.

According to the nTan Corporate Advisory Pte Ltd report, Bramer Bank was owed Rs 2,486.0 M by Iframac and Rs 568.0 M by BAI Group companies at the date of the report.

It appears that SBM was, after Bramer Bank, the main banker of BAI Group.

The Risk Management Philosophy and Culture of SBM is described in its 2014 Annual Report as:

“SBM Group is committed towards embedding a risk culture in its organisation and embraces risk management as a core competency that allows it to optimise risk-taking through objectivity and transparency that will ensure effective and efficient risk processes and optimised returns within a chosen risk appetite.”

It takes 37 pages in the Annual Report to describe SBM’s Risk Management Framework. The policies and procedures are sound.

So, what went wrong? Will the directors enlighten us? And will they tell us what they have done to ensure the problem does not happen again?

OBSERVER

10. The Financial Services Commission

Section 5 of the Financial Services Act states that the objects of the Commission shall be:

(a)to ensure the orderly administration of the financial services and global business activities; 

(b)to ensure the sound conduct of business in the financial services sector and in the global business sector; 

(c)to elaborate policies which are directed to ensuring the fairness, efficiency and transpa- rency of financial and capital markets in Mauritius; 

(d)to study new avenues for development in the financial services sector, to respond to new challenges and to take full advantage of new opportunities for achieving economic sustainability and job creation; 

(e)to ensure, in collaboration with the Bank of Mauritius, the soundness and stability of the financial system in Mauritius; and 

(f)to work out objectives, policies and priorities for the development of the financial services sector and global business and to make recommendations to the Minister.

Section 3 (3) states that the Commission shall, in the pursuit of its objects, perform its functions independently

According to press reports, which have not been denied, Messrs Dev Manraj, Chairman of the FSC, Akilesh Deerpalsingh, Consultant in financial services with the FSC, Minister Roshi Bhadain and the Prime Minister met to discuss the purchase of the shares of the National Insurance Company Limited by SICOM, SBM Holdings Ltd and the National Pensions Fund.

In what capacity were Messrs Manraj and Deerpalsing acting on the day ? The objects of the FSC certainly do not include deciding on the investment policy of one of companies it regulates. 

OBSERVER

11. BAI: Nationalisation without compensation, by the back door?

The NPF is planning to pay the SCBG policy holders. But does it have the ability to do so, knowing that the companies whose undertakings have also been transferred to it also need to be paid?

In a liquidation, the assets are realised and are used to pay the creditors and shareholders in the following order:

1. Privileged creditors
2. Secured creditors
3. Other creditors
4. Shareholders

But is this what is happening in the BAI case?

The following has happened since the BAI Group went into administration in April 2015:

• the insurance business of BAI Co (Mtius) Ltd (“BA Insurance”), except for the Super Cash Back Gold (“SCBG”) policies, has been transferred to the National Insurance Company Ltd (“NIC”)
• the SCBG policies have been transferred to the National Property Fund Ltd (“NPF”)
• we do not know the values at which these transfers have been made, but: - the value of the insurance business must be close to the Rs 5.6 billion we are told the NIC is worth today - the NIC owes BA Insurance the amount of this transfer - the SCBG policies are loss-making and create a debt for BA Insurance towards the NPF
• the investments in BritAm Ltd and British American Exchange Co Ltd are still held by BA Insurance
• the banking business of Bramer Banking Corporation Ltd (“Bramer Bank”), except for toxic assets, the Hire Purchase portfolio of Iframac (“HP portfolio”) and liabilities towards the Rawat family and associates, have been transferred to MauBank Ltd (via the National Commercial Bank Ltd)
• the value of the banking business transferred has not been disclosed The chart (see opposite) shows the situation after these transfers. If we apply the normal liquidation rules:
• the sales proceeds of the assets of Courts are paid to Iframac Ltd
• the sales proceeds of the assets of Apollo Bramwell are paid to British American Hospitals Enterprise Ltd
• the payments on the HP portfolio are received by Bramer Bank
• the sales proceeds of the Kenyan company are paid to BritAm Ltd
• the sales proceeds of the Western Union agency are paid to British American Exchange Co Ltd
• the companies then settle their creditors in the order of preference of a normal liquidation and, if any funds are left, the shareholders receive what is left.

 But what is happening in the case of BAI?

1. The NPF does not have any asset, except for what the Government put in as capital when the company was set up and the amount due to it by BA Insurance
2. The NPF is paying or planning to pay the holders of SCBG policies from:

• funds raised or to be raised on the sale of assets belonging to companies such as Iframac Ltd, British American Hospitals Enterprise Ltd, BritAm Ltd, and British American Exchange Co Ltd
• funds to be transferred from Bramer Bank
• Funds to be raised from the sale of shares in the NIC. 

The SCBG policies are only entitled to participate in the assets of the life fund of BA Insurance.

The Insurance (Amendment) Act 2015 authorises a special administrator, after consultation with the FSC, to transfer, in whole or in part, the undertaking of an insurer and of any of its related companies to such insurer and any of its related companies as approved by the Minister.

The Insurance (Amendment) Act makes no mention of the compensation for this transfer, i.e. the value of the undertaking transferred must be recognised as a debt by the company receiving the undertaking towards the company whose undertaking has been transferred.

Unless the Government has brought in nationalisation without compensation by the back door!

And a nationalisation which not only means the shareholders are not compensated, but also all the creditors.

The Insolvency Act has not been changed to give the holders of SCBG policies a preference over the privileged, secured and other creditors of all the companies in the BAI Group.

The main secured creditor of the BAI Group is SBM Holdings, through its wholly owned subsidiary State Bank of Mauritius Ltd, a company listed on the Stock Exchange of Mauritius.

Surely the nationalisation without compensation is not what the Government had in mind. But this raises questions as to:

• the ability of the NPF to pay the companies whose undertakings have been transferred to it, in addition to paying the holders of the SCBG policies
• compliance with the priority of payments of costs and creditors in the Insolvency Act for each of the companies in the BAI Group
• whether the valuation of the NIC at Rs 5.6 billion takes into account an amount due to BAI Insurance for the insurance business transferred to the NIC
• how public funds will not be used when the nTan report estimates the recoverable values of the BAI Group assets at between Rs 7.0 billion and Rs 9.5 billion and the amounts payable to the holders of the SCBG policies and to the holders of the redeemable shares of BPF are Rs 19.2 billion and Rs 3.1 billion (Hansard of 08/09/2015 - before adjustments disqualifying certain customers like companies, foreigners etc… for unknown amounts). 

An American Secretary of Defence once talked of known knowns, known unknowns and unknown unknowns. We are in the third category here (unknown unknowns) and need answers. Who will provide them? The Prime Minister and Minister of Finance? The Minister for Good Governance? The Financial Services Commission? Or the Special Administrator?

PS The same normal liquidation rules apply to the refund of the redeemable shares of Bramer Property Fund Ltd (“BPF”). The holders of the redeemable shares of BPF are only entitled to look to the amounts realised on the sale of the assets of BPF for their refunds.

OBSERVER

12. Fair values

The investment in BAI Co (Mtius) Ltd was valued at Rs 7.9 billion at 31 December 13 (Rs 6.5 billion at 31 December 12) in the accounts of British American Investment Co (Mtius) Ltd for the year ended 31 December 13.

Confused as to who is who? Not surprising!

BAI Co (Mtius) Ltd is the insurance company, which issued a number of life assurance policies, including the infamous single premium Super Cash Back Gold policies.

British American Investment Co (Mtius) Ltd is the holding company of the Group. It held, amongst others, 100% of the insurance company and was for some time quoted on the official list of the Stock Exchange of Mauritius.

The National Insurance Company Limited is valued at Rs 5.6 billion for the purpose of selling its shares to SICOM, SBM Holdings Ltd and the National Property Fund.

The National Insurance Company Limited took over the business of the insurance company (BAI Co (Mtius) Ltd), except for the Super Cash Back Gold policies.

The valuations of BAI Co (Mtius) Ltd and of NIC are strongly influenced by estimates of new business that the companies are supposed to gain in the future – 66% in the case of the NIC according to press reports. 

OBSERVER

13. BAI – Who gives a damn about the “other creditors”?

The HOLDERS of the Super Cash Back Gold (SCBG) policies of BA Insurance and of the redeemable preference shares of Bramer Property Fund are organised, have their lawyers and spokespersons, have received their first repayments (up to Rs 500,000), have been promised the repayment of the balance by means of zero percent debentures and meet regularly the Minister for Good Governance.

But they are still unhappy, hold protest marches and some are even threatening to go on hunger strike.

They are the lucky ones!

Spare a thought for a group of creditors that nobody is talking about and nobody is looking after. The faceless “others”.

The audited accounts of six companies of the BAI Group (British American Investment Co (Mtius) Ltd, BAI Co (Mtius) Ltd, Iframac Ltd, British American Hospitals Enterprise Ltd, Bramer Property Fund Ltd, Bramer Asset Management Ltd) show that the amount owed to these creditors was Rs 1,338 million at 31 December 2013. 

This amount was certainly higher when the BAI Group went into administration in April 2015 and would be even higher if we had the information for all the companies in the Group.

A number of these creditors are surely Small and Medium Enterprises (SME).

Despite the Government’s goal to make the SME sector the backbone of the economy and the existence of a Minister for Business, Enterprise and Cooperatives, we are not aware that the SME who are owed money by the BAI Group for supplies and services have received any help. Maybe it is about time an explicit report be made public?

Anyway, their basic right to claim what is due to them has been taken away by the Insurance (Amendment) Act 2015 which prohibits winding up proceedings being instituted against the insurer or any of its related companies before the transfer of the undertaking to a Minister approved insurer or any of its related companies which the Special Administrator is authorised to do under the Act.

It does not look as if they have any legal recourse left to them.

They are the unlucky ones!

And you do not hear from them! Probably because they are busy working flat out trying to make up for the losses caused by the BAI Group going into administration and the preference given to the holders of SCBG policies and of the redeemable shares of BPF.

OBSERVER

14. Heritage City – Cumulative Redeemable Preference Shares - Equity or Debt?

In his reply to the Private Notice Question (PNQ) of the Leader of the Opposition, the Minister of Financial Services, Good Governance and Institutional Reforms stated: “On top of that, if we look at the Public Debt Management Act (“PDMA”), cumulative preference shares are classified as equity not as debt.”

While the Minister does not, for confidentiality purposes, disclose the terms of the issue of Cumulative Redeemable Preference Shares (“CRPS”), he states: “Now, with that money (rental income and the VEFA profits), those redeemable shares will be redeemed over time.”

Under International Financial Reporting Standards (“IFRS”):

•  A preference share that provides for redemption on a specific date or at the option of the holder contains a financial liability because the issuer has an obligation to transfer financial assets to the holder of the share
•  Faithful representation means that financial information represents the substance of an economic phenomenon rather than merely representing its legal form.

Heritage City Company Limited will have to prepare its accounts in accordance with IFRS. On the basis of the Minister’s answer that the redeemable shares will be redeemed over time, the CRPS will be accounted for as financial liabilities (debts) in these accounts, even if the PDMA classifies them as equity.

Sorry Mr Minister, the Cumulative Redeemable Preference Shares you describe in your answer to the PNQ are debt not equity.

OBSERVER

15. Heritage City – Cost of financing

The Minister of Financial Services, Good Governance and Institutional Reforms has not, for confidentiality purposes, disclosed the terms of the issue of Cumulative Redeemable Preference Shares (“CRPS”) (Rs 10.0 billion) and of the Bank loans (Rs 2.9 billion).

If we assume that the CRPS and Bank loans are received over 3 years in equal annual instalments and are repaid in 10 equal annual instalments from the end of year 6 and that the rate of dividends and interest is 6% p.a., the dividends and interest will amount to Rs 7.353 billion over the 15 years.

Heritage City will have to pay Rs 20.253 billion in capital, dividends and interest to the holders of the CRPS and bankers over the 15 years.

This represents an average of Rs 112,516,667 per month from day 1 – just to repay the financing!

What does this equate to, per square foot to be rented?

That’s right!  At this stage, we do not fully know how many square feet we are getting for our money …

16. New Mauritius Hotels – You know about the Rs 115 M. But do you know about the Rs 1.5 billion?

We all know about the Rs 115 million because the Board of Directors treated us to an Important Communiqué informing us of the fraud.

There was no communiqué to inform us of the Rs 1.5 billion written off in the accounts of the Company for the year ended 30 September 15.

When the abridged financial statements were published on 22 December 15 the following was included in the section explaining the results:

“The Board has therefore considered it prudent to impair part of its investment in Domaine Palm Marrakech in the Company’s financial statements (with no material impact on Group accounts) to allow for a potential downturn.”

But no amount is mentioned!

There is no mention of this impairment in the Chairman’s Address in the Annual Report.

The first mention in the Annual Report is on page 13 under the heading “Impairment of Goodwill”. The note is similar to the one in the abridged financial statements and still no amount is mentioned.

The first time we see the amount of Rs 1.5 billion is in the Statements of Profit or Loss on page 37.

It is shown as Impairment losses and is referenced to Note 15.

But you will not find the Rs 1.5 billion in the table of figures in Note 15. The explanation is in the middle of a page of text and reads:

“The Board has therefore considered it prudent to impair goodwill in Domaine Palm Marrakech at Group level, and part of its investment and inter company balance receivable from the Moroccan subsidiary at Company level to account for a potential downturn. The goodwill amount to (sic) Rs 5.8 M was fully impaired at Group level. The impairment of investment and inter company balance receivables amounted to Rs 740.7 M and Rs 759.3 M respectively (refer to notes 16 and 31) at Company level.”

The references to Notes 16 and 31 do not give us any additional information.

The result of this impairment of Rs 1.5 billion is that, at Company level, NMH made a loss of Rs 1,092.681 million for the year ended 30 September 15.

Although the information is available in the Annual Report, a user had to wait more than 4 months for it. It would have been good if the Board had been as transparent for a loss of Rs 1.5 billion as it was for one of Rs 115 million.

OBSERVER

17. Non-banking arm of SBM Holdings – Appointment of Chairman

One of the 8 Corporate Governance Principles in the Proposed Corporate Governance Code for Mauritius relates to the procedures for the appointment of Directors. It states:

“There should be a formal, rigorous and transparent process for the appointment, election, induction and re-election of directors. The search for board candidates should be conducted, and appointments made, on merit, against objective criteria (to include skills, knowledge, experience, and independence and with due regard for the benefits of diversity on the board, including gender). The board should ensure that a formal, rigorous and transparent procedure be in place for planning the succession of all key officeholders.”

The Proposed Code is not applicable yet, but the Director Selection, Training and Development chapter in the existing Code has similar requirements.

Can the directors of the non-banking arm of SBM Holdings confirm that the above principle has been followed in the appointment of its new Chairman?

18. New Mauritius Hotels – Why does it not disclose its Company figures in the abridged financial statements?

We are not aware of any other listed company that does not disclose its holding company figures with its group figures.

And in the case of NMH it is important, as the holding company is a major operating company in its own right with 68% of the Group’s property, plant and equipment, 72% of its intangible assets and 95% of its borrowings.

It is even more important when you know that the Directors felt it was necessary to include in  the notes to the accounts (Annual Report 2015, page 49) an explanation as to the ability of the Group and of the Company to continue as going concerns.

The note in respect of the Company reads:

“At September 30, 2015, the Company had net current liabilities of Rs 1,762,760 (2014: Rs 4,899,408).

The Directors consider that there is no going concern issue at Company level given the availability of undrawn bank facilities (refer to note 22) and certain elements such as guest deposits recorded in current liabilities will not result in cash outflows in the next year. The improvement in the working capital and reduction in cash flow constraints for the Group and the Company was due to a financial restructuring scheme in three parts drawn up in the current financial year. The first two parts consisted of issuance of preference shares and corporate bonds and the rescheduling of several loan repayments were re scheduled (sic). The third part which consists in taking strategic initiatives is in progress. Therefore, the financial statements continue to be prepared on the going concern basis.”

Apart from the disclosures given by the Directors, the following information is also relevant to users of the financial statements:

• The improvement in net current liabilities was also partly the result of an increase in the stock of land for sale of Rs 985,749 K, Rs 925,000 K of which was transferred from Property, plant and equipment
• The deficit of liquid assets (current assets less stocks) over current liabilities, although it decreased from Rs 6,400,765 K, is still very high at Rs 4,250,963 K
• The improvement in current liabilities from Rs 9,715,330 K to Rs 7,506,195 K was more than offset by an increase in non-current liabilities from Rs 10,989,448 K to Rs 14,026,549 K
• Total liabilities have increased from Rs 20,704,778 K to Rs 21,532,744 K
• The gearing (Liabilities/(Liabilities + Equity) has deteriorated from 64.7% to 68.4%

The shareholders and creditors of NMH, investors and stakeholders are entitled to receive all the relevant information so as to make their own assessment of how successful the financial restructuring scheme is at further improving the Company’s working capital and cash flow constraints.

For the above reasons, if not for regulatory purposes, NMH should disclose its Company figures as well as its Group figures in its abridged financial statements.

19. Non-banking arm of SBM Holdings – Appointment of Chairman: Reward or Poisoned chalice ?

Company law requires the directors to prepare financial statements for each financial year which present fairly the financial position, financial performance and cash flow of the company. In preparing those financial statements, the directors are required to:

• select suitable accounting policies and then apply them consistently;
• make judgments and estimates that are reasonable and prudent;
• state whether International Financial Reporting Standards have been followed, subject to any material departures disclosed and explained in the financial statements, and
• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business.

The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies Act 2001.

They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps to prevent and detect fraud and other irregularities.

The directors are also responsible for the system of internal control and risk management of the company.

And these are only the duties in respect of the financial statements.

In addition, there are other duties imposed by the Companies Act, other laws and by regulators.

The example of a Board Charter in the proposed Corporate Governance Code for Mauritius runs to 13 pages.

Well, reward or a poisoned chalice? You decide!

OBSERVER

Footnote: the penalties for directors not delivering on what they are responsible for are covered within sections 329 to 342A of the Companies Act and range from fines of between Rs 100,000 and Rs 1 million and prison sentences not exceeding between 2 and 5 years

20. Financial misreporting: Even the regulators were at it!

The Bank of Mauritius (BoM) in a communiqué dated 23 May 2016 states: “…corrective accounting steps have been undertaken in order to reflect the true picture of the Bank of Mauritius’ balance sheet. Provisions that ought to have been made in the financial years 2012/3 and 2013/4 were postponed. The financial statements for the two years were re-stated in June 2015 to correct for the under-provisions.”

The postponing of these provisions meant that the Employee Benefit Liabilities in the balance sheet of the BoM were understated by Rs 347.3 million (138%) at 30 June 2013 and Rs 245.0 million (89%) at 30 June 2014. Where are we if even the accounts of Regulators do not comply with International Financial Reporting Standards (IFRS)?

 Imagine the scene: BoM: Your accounts do not comply with IFRS Bank: Yours don’t either! Is this another case of “Do as I tell you, not as I do”?

OBSERVER

 P.S : By the way, who regulates the regulators? To whom are the Board and the executives answerable? Who is going to explain the non-compliance with IFRS in the 2012/3 and 2013/4 accounts of the Central Bank ? And to whom? Surely they do not operate in a vacuum ?

21. SBM Holdings – Are the fundamentals that good?

The Board of Directors in presenting the interim financial report for the quarter ended 31 March 2016 reported that the group’s profit before and after tax had increased for the first quarter of 2016 from Rs 712.7 million and Rs 538.9 million for the first quarter of 2015 to Rs 901.6 million and Rs 715.0 million respectively.

This indicated the strong fundamentals of the group, they added.

Well, do they?

If you remember our previous articles (you can refer to them on lexpress.mu), the 2015 results were affected by bad debts written off totaling Rs 1,936.8 million, while those of 2014 had been restated by a write off of Rs 1.29 billion of expenses on the Flamingo IT project and Business Transformation initiatives which had been capitalised previously. So, if we go back to 2013, a year not affected by substantial write offs and restatements, what do we see?

The profit before and after tax for the first quarter of 2013 amounted to Rs 894.1 million and Rs 715.2 million respectively.

The results for the first quarter of 2016 are very similar to those of the first quarter of 2013 – profit before tax is 0.8 % better while profit after tax is Rs 0.2 million less than in 2013.

On this basis, SBM Holdings results for the first quarter of 2016 are only as good as those of 2013. Strong fundamentals indeed!

If the Board insists on using the profit before and after tax of 2015 for comparison, you can already see the announcement of the results for the second quarter of 2016. Just to remind you, the second quarter of 2015 saw a write off of Rs 850.5 million of bad debts, which resulted in a sharp fall of the profit before and after tax to Rs 122.6 million and Rs 42.6 million respectively.

The equivalent figures for 2013 were Rs 961.8 million and Rs 780.4 million.

In a previous article we had talked of the importance of comparing like with like and of the directors’ duties to present a comprehensive and objective assessment of the activities so that all stakeholders obtain a full and fair view of the company’s performance.

Are the directors comparing like with like and telling it “as it is “?

OBSERVER

22. Disclosure of confidential information

The Minister for Financial Services, Good Governance and Institutional Reforms in a debate on a private radio station a few weeks ago disclosed the dividends paid by a management company in the Global Business sector to its shareholders.

The accounts of a management company are filed with the Financial Services Commission (“FSC”) and are not available to the public.

This begs a few questions:

• How did the Minister get this information?

• Was it from the FSC?

• If yes, was the FSC entitled to disclose this information to the Minister?

• By what right did the Minister disclose this confidential information on a private radio station?

• Are all financials of management companies to be henceforth made public as for the rest of the corporate sectors in Mauritius ?

OBSERVER

23. Negotiating the sale of Apollo Bramwell

According to press reports, which have not been denied, the Special Administrator of the BAI Group is no longer negotiating the sale of Apollo Bramwell. The Ministry of Finance is now carrying out the negotiations.

Section 110A (4) of the Insurance Act states that “in the discharge of his functions under this Act, a special administrator … shall have all the powers, duties and functions of an administrator under the Financial Services Act and Insolvency Act and of a conservator under this Act.”

This means the special administrator can manage the whole of the business entrusted to his administration. Why has the special administrator given up his power to negotiate the sale of Apollo Bramwell to the Ministry of Finance?

OBSERVER

24. Definition of Good Governance

The Minister for Financial Services, Good Governance and Institutional Reforms recently published the list of his achievements.

There was a major omission from that list: his definition of Good Governance!

OBSERVER

25. SBM Holdings – Reverse share split

Interesting information note from SBM Holdings on the proposed reverse share split.

It reminds us that the main reason for the original share split of 1 share of Re 1 into 100 shares of 1 cent was to enhance liquidity of the shares and make them more attractive to small shareholders.

It then explains that the proposed consolidation of 10 existing shares into 1 new share is to further enhance the marketability of its shares to a wider range of institutional and professional investors and other members of the investing public.

So the original share split was to enhance liquidity and make the shares more attractive to small shareholders, while the proposed reverse share split is to further enhance the marketability of the shares to institutional and professional investors and other members of the public.

Are you convinced?

How about this for an alternative reason?

The shares of SBM Holdings were quoted at around Re 0.65 recently. A 1 cent increase or decrease in the share price represents a 1.5% movement.

If the reverse share split had been in place, the share price would have been Rs 6.50 and a 1 cent movement in the share price would have represented 0.15%.

Is the apparent volatility of the share price the real reason for the reverse share split?

Or is the reverse share split the directors’ response to the hope we had expressed in a previous article of a plan to improve the share price which had fallen from Re 1.03 on 11 December 14 to Re 0.65 on 22 March 16?

OBSERVER