One of our other public companies – Caribbean Container Inc. (CCI) – seems to have an even more serious problem with its share price than Banks DIH Limited does. Between the Stock Exchange (GASCI) trading session 1007 on 20 February 2023 and trading session 1057 on 5 February 2024, the price of CCI’s shares has skyrocketed from $40 to $200. There is nothing in the fundamentals of that company (see Table below) that could conceivably justify anything close to this 400% increase in the share price over a 1-year period. In fact, if we go back one year earlier to 27 June 2022 when the price was $15, the increase is a staggering 1,233%!
The only noteworthy development in the Company is the leasing of part of its property which will generate a steady flow of income in the immediate future.
Source of Information: Annual Reports and GASCI Website
The principal shareholders in the company are Demerara Holdings Inc., whose ultimate beneficial owner is the estate of its former Managing Director, which owns 85.92% of CCI’s shares, and Secure International Inc., a Beharry Group company which owns 5.16%. The Securities Industry Act requires disclosure of 5% or more.
The number of shares traded between February last year and this month to date, was 66,400 and between 27 June 2022, that number was 90,200. For completeness, the average number of shares traded over eighteen sessions was 3,688 shares. This represents just 0.059 % of the 150,916,595 shares in issue. It ought not to be that transactions involving 0.059% of shares in issue can move the share price by 1,233%! While this is an extreme case, such distortions are not unique to CCI as the trading records of DDL and Banks DIH show.
I am not suggesting any insider dealing or other improper conduct on the part of any person, including CCI’s management. But rather that something is wrong with the working of our Stock Exchange, its shareholdings, market participants and shareholder and investor education. There is a lot of blame to go around, including misleading information in annual reports and peddled by chairpersons of public companies.
Part of the solution lies in meaningful reform but efforts to get successive governments to pay attention to both GASCI and the Securities Exchange have produced little or no fruit. I am hopeful that the recent comments published in the Stabroek News on Banks DIH Inc. and now this extreme disclosure will stir the powers that be into some meaningful action.
An immediate course of action would be for the Stock Exchange to immediately suspend trading of shares in this company, and to make inquiries and appropriate recommendations. We cannot at the same time boast of a world class economy and have an imperfectly functioning Stock Exchange.
Banks DIH Limited, one of Guyana’s oldest and most prominent public companies held its 68th. Annual General Meeting on 27 January 2024. Executive Chairman Clifford Reis presented the report of the Directors for the year ended 30 September 2023. Banks, as it is popularly known, is actually a group of companies comprising the food and beverage giant and Citizens Bank Limited in which it has a 51% interest. More recently, the company incorporated a 100%-owned Banks Automotive and Services Inc. which reported a profit of $9.2 Mn. in 2023. The group as a whole reported a profit before tax of $14,509 Million which was an increase of 8.3% over 2022.
Key shareholders in the company include Demerara Life Group of Companies (11.4%), Trust Company (Guyana) Limited (8.7%), Banks Holdings (Barbados) Limited (5.9%) and the Hand-in-Hand Group of Companies (5.5%). Banks has eleven directors, the majority of whom – including two women – are non-independent executive directors reporting to a CEO who is also the Chairman of the board. Banks DIH and DDL have been known to resist any attempt at separating these roles, considered a feature of good corporate governance under most international Codes of Corporate Governance.
From all accounts, the AGM was proceeding sedately until, according to a report in the online news outlet, a shareholder indicated that he planned to invest more in the company but questioned why “the Company’s share price was not moving in tandem with all the positive things that were happening.” That question appears to have triggered quite an emotive response from Chairman Reis who expressed strong dissatisfaction about the Guyana Stock Exchange itself, the role of brokers, the size of trades and the influence of small trades on the price of traded shares. Mr. Reis even suggested that brokers have sold five shares in violation of the Company’s By-Laws.
Mr. Reis would not make such a public statement if he did not have actual knowledge of those transactions and he has every right to be upset that the most recent trade price – no matter how small – becomes the new price. He knows too that in Business Page columns I wrote over several years (these are available at chrisram.net), I advocated for a reform of that practice. His Company was silent on the call because it also came with a call for a Corporate Governance Code which both Banks and DDL have stoutly resisted. Where I do believe Mr. Reis went overboard in his expansive response to the shareholder was in describing as “amazing,” 80,000 shares being sold between twenty-five persons, an apparent heresy in Reis’ view because a number of the sellers did so “without any hard financial evidence”. Mr. Reis would be doing us all a favour in providing any reference to the By-Laws of any public company in Guyana or to the Companies Act of Guyana of such a requirement.
That was not the only problem I have with Mr. Reis’ response. He practically boasted about the Company’s ability “to develop the company with all this capital works without borrowing and selling shares.” The fact that the company can do this is a direct result of the company’s dividend policy in which the directors pay shareholders a negligible share of the annual profit available for distribution.
Banks DIH Limited Group Performance Summary September 2019 – September 2023
Source: Annual Reports of Banks DIH and GASCI website
What is worse is that as the Table below shows, there is such an eerie consistency around 20% as to suggest that that is no accident – but a policy which directors are either unable or afraid to question. Moreover, that ratio is in fact the lowest among major public companies in Guyana, although again, only slightly less than DDL. It is amazing that Mr. Reis would overlook such an important determinant in the price of his company’s shares.
As a consequence of this policy, the Company fails in another significant indicator, i.e., the dividend yield, which shows how much a company pays out in dividends each year relative to its stock price. He might take some comfort that by this measure, Banks actually outperforms DDL and Demerara Bank but lags far behind Demtoco, GBTI and Republic Bank. Ironically, had the share price been higher, the dividend yield would actually be even lower.
There is no intrinsic virtue in the Company financing out of retained earnings all its investment requirements. One of the things one learns in an MBA Finance programme is that equity, including retained earnings, is generally more expensive than debt. One has to believe that equity is cheap to believe that financing all investments out of equity and distributable reserves is something to be proud of. What a low payout ratio assumes is that the company will more profitably re-invest the profit than shareholders would, despite dividends being tax-free. Sadly, that misplaced confidence, or arrogance, is not limited to Banks DIH.
Mr. Reis laments the company’s share price movement which has swung by 2.6 % in 2020, 50% in 2021, 58.3% in 2022 and negative 7.8% in 2023. There was nothing in the fundamentals of the Company to justify the significant increases in 2021 and 2022, two years in which share prices across the board rose by 46% and 70% respectively. Mr. Reis did not question those increases but now raises doubts about the 2023 change of negative 7.8%, ignoring the negative 23.2% change in the market as a whole.
Some years ago, the directors decided that dividends would be paid in three tranches, two interims of around $0.40 per share and a final dividend of about $1.20 per share. Whatever may have been the intention, that decision makes poor sense. An interim dividend of $0.40 per share to someone who holds 5,000 shares amounts to $2,000 but carries a significant transaction cost both to the company and the shareholder. For a shareholder resident abroad, not only will the net remittance after withholding tax substantially erode the dividend, but some banks have a floor on the amount they will transfer on any single transaction. Such shareholders also bear the risk of a creeping exchange devaluation. In these circumstances, I fail to see any financial or economic reason even a medium-sized non-resident shareholder would want to hold on to their shares in this company.
It should not be so amazing that persons with small numbers of shares sell their shares – they become like stranded assets, but the CEO thinks there is something amiss!
Mr. Reis made a big play about the Company’s expansion programme and its acquisition of forty acres of land and a new bottling plant for US$71 Mn. The truth is that the Company has in fact been replacing fixed assets as line 8 of the Table shows. On that score, the profit before tax (PBT) has increased at a faster rate than average total assets for a number of years, but one must remember that PBT is based on current values while a major part of total assets is usually stated at historical cost. What is particularly troubling however, is the wide disparity between the 17.3% increase in total assets and the comparatively modest increase of 8.3% in profit before tax in 2023.
On page 15 of the 2023 Annual Report, the Directors – not the Chairman – discussed a new holding company which will subsume and change the public status of the existing company as it has been since 1955, making it a subsidiary with only one shareholder. Under this arrangement, shareholders in the existing company will exchange their shares for shares in the new holding company. According to the Directors, this step would allow the Group to enter into new activities arising from the present rapid development in Guyana and is “taken pursuant to the advice of a reputable accountable firm BDO.” I am not convinced about the wisdom and benefit of this decision, but rather consider it adventurous and poorly conceived. The existing structure has not prevented the Group from investing in a new company costing hundreds of millions of dollars and can similarly undertake several others.
The misguided, incorrect and flawed response by the Chairman makes , absolutely necessary. a reconsideration of the decision to have a new holding company with all its ramifications. If anything, my view is that the shares of Banks DIH are currently overvalued but that the problems are not insoluble. Get governance right, address the fundamentals, have regard to the interest of the shareholders and not only the company, practise some informed corporate democracy and execute judiciously, and Banks can once again be the pacesetter.
I agree that we need to address the issues of GASCI and the Securities Council to make them function more efficiently. Public companies can help in this process if they cooperate with GASCI and the Securities Council rather than treating these bodies as enemies to be confronted. And at all costs, we must never return to the days when senior officers of public companies engaged in self-dealing, insider trading and price manipulation.
The Minister of Finance has kept his Budget Speech promise to come back to the National Assembly to a) raise the debt ceiling b) to revise upward the NRF withdrawal rule and c) saving an increasing share of the inflows into the Fund. Earlier yesterday, via the Fiscal Enactments (Amendment) Bill 2024 – a format which is typically utilised for amendments to tax legislation – the Minister delivered more than even his most optimistic supporter would have expected.
As the Table below shows, the Minister has increased the borrowing ceiling for Public (Domestic) Loans by 100% from G$750,000 Mn. to G$1,500,000 Mn. and the borrowing ceiling for External Loans by 66.7% from G$900,000 Mn. to G$1,500,000 Mn.
Debt Ceiling – Guyana Millions of Dollars
Years
Pre 2021
2021
2022
2023
2024
% increase 2020/ 2024
Domestic
150
500
500
750
1,500
900
External
400
650
650
900
1,500
275
It means that since the PPP/C came to power in August 2020 they have increased the domestic debt ceiling by 900% and the external debt ceiling by 275%. By any measure, even for the fastest growing economy in the world, these are staggering increases, with obvious consequences. The domestic debt reported in the Budget Speech at December 2023 was $569,913 Mn. which means that he can borrow as much as $931,000 Mn. more on the domestic market. The 2024 Budget showed that the Government proposes to borrow in 2024 some $189,522 Mn. (net) from the domestic market and $206,394 Mn from external sources.
The Minister is giving himself a massive borrowing space both from local and external sources. It would be interesting to see the private sector responds to this proposal which can crowd out local borrowings and possibly carry up the cost of capital.
The NRF
Contrary to the statement in the Budget Speech, the proposal by the Minister to increase the automatic withdrawals from the NRF will significantly reduce what is left for intergenerational savings and for expenditure stability in periods of downturn. To give one simple example, after US$2,000 Mn. of earnings from profit share and royalty, only US$50 million would be saved under the new arrangement, compared with US$750 million under the replaced formula. Let us take it further but expressed another way, savings of US$1,710 million would have been saved from earnings of US$3,000 Mn. under the existing system. Under the new proposal it would require earnings of US$6,000 Mn.!
The Minister has delivered on his promise to increase the borrowing ceilings and NRF withdrawals. Understandably, he has not been able to achieve the trick of withdrawing more and saving more at the same time.
Ram & McRae expressed concern in its Budget Focus that it is dangerous for any Government to treat the NRF like some ordinary piece of legislation. Sadly, that fear has been realised.
Mr. Anil Nandlall S.C. Attorney General and principal legal adviser to the Government has written rather disparagingly about comments I made in my last Friday‘s Stabroek News oil and gas column. Without naming me or addressing any of the extensive data, sources and arguments I used in arriving at my findings, he claims that my assertions were “grounded in a shocking misunderstanding and misinterpretation of the intendment policy and express provisions of the Natural Resource Fund Act 2021, as well as a misconception of certain elementary principles of law”. In his opinion, they were so serious “that to leave such legal fallacies untraversed on the public record would be a grave omission.”
Unwittingly acknowledging the ubiquity and the connection between actions of the Government and private and political corruption, Anil thought it necessary to point out that I made no accusation about corruption. I apologise for disappointing him. More substantially, Mr. Nandlall seems to misunderstand the differences in the nature and functions between a Natural Resources Fund and a Consolidated Fund because “[the funds] will eventually be deposited into the Consolidated Fund”. At best, that is misleadingly simplistic.
The NRF is a sovereign wealth fund established under separate legislation to garner, manage, invest and use the proceeds from the exploitation of non-renewable resources for current and future generations. Its structure, objectives and management are vastly different from those of the Consolidated Fund. A properly managed NRF aims to use only the income generated from the investment of the funds in the NRF. On the other hand, the Consolidated Fund is effectively the operating fund for the day-to-day financial operations by ministries, departments and other budget agencies of the government. It is managed by public servants in a very decentralised framework.
Mr. Nandlall is not alone in confusing the two funds. That same conflation was made in a 22 June 2022 article in the Stabroek News quoting the Commissioner General of the Guyana Revenue Authority. One hopes that this misconception is not the reason for the confusion whether moneys were paid to the GRA for it to issue receipts and tax certificates to Hess and Exxon to claim credit in the USA for tax “paid” in Guyana.
Anil’s volunteering that section 15 (1) and (2) of the NRF Act authorises petroleum revenues to be paid directly into the Fund is not relevant to anything in my column. The point the column made is that the NRF Act does not provide for the withdrawal of money from the Fund to pay the taxes for the oil companies, an omission I described as a disconnect, and for which I made a recommendation. Instead of acknowledging the omission and committing to fixing it, Anil cites the supremacy provision of section 45 of the flawed Act and that the “draughtsman’s mind was alive” to what taxes are to be paid directly to GRA – another irrelevant non sequitur.
More seriously, Anil asserts that the provisions in the Agreement on taxation have “obviously been overtaken by the Natural Resource Fund Act”. He has achieved by default – and unilaterally to boot – provisions which the Government has claimed are sacred and beyond renegotiation.
Anil also displays surprising carelessness when he claims as “a very rudimentary principle of law that if a contract conflicts with a Statute, the Statute shall prevail.” I need to remind him of the Rudisa v Guyana case [2014] CCJ (OJ) in which he was lead Counsel for Guyana. The judges lost no time in rejecting his argument that a failure by Guyana to honour its Treaty obligation was somehow excusable because of good faith efforts by the then PPP/C Government.
Ruling against Guyana, the CCJ unanimously re-affirmed the legal principle “pacta sunt servanda” (“agreements must be respected). Just in case Anil thinks that the reason for the CCJ’s decision was that the matter arose solely out of the Revised Treaty of Chaguaramas, it is in fact a long-standing principle laid down in Trendex Corporation v Central Bank of Nigeria [1977] 1 QB 529 that sovereign immunity, including lawmaking, does not generally apply to commercial cases.
Anil’s argument that the NRF Act applies to the 2016 Agreement, and by implication with retroactive effect, is not without considerable difficulties. But even if those hurdles are crossed, it is unlikely that this extends to making the stability clause(Article 32) in the Agreement inoperable. That clause, while not forbidding any changes in the law, provides, inter alia, that “the Government shall promptly take any and all affirmative actions to restore the loss or impaired economic benefit to Contractor, so that the Contractor receives the same economic benefit under the Agreement that it would have received prior to the change … “
Prior to Nandlall’s statement, there was nothing in the public domain to suggest that the new legislation affects the 2016 Agreement in any manner, let alone requiring resolution. For example, the most recent audited annual financial statements of Hess and Exxon continue to reflect no change in their entitlement, or their understanding of the tax provisions. Mr. Nandlall’s reactive interpretation will certainly excite them.
Meanwhile, Mr. Nandlall can help Guyanese in providing answers to the following questions.
Does his statement on his Facebook page represent his and the Government’s official position, or was it personal and unofficial?
Did he or the subject Minister, at any time since the passage of the NRF in 2021, have any discussion with Exxon, Hess and CNOOC on his interpretation of the implications and consequences for the Agreement?
Were his interpretation and its consequences accepted by the oil companies?
Was there a resolution in accordance with Article 32 (3) and how was that resolution formalised?
Since he does not agree with my interpretation of Article 15 (4) (b) of the Agreement regarding Government’s obligation to pay the tax out of its share of profit oil, can he say what the correct interpretation is?
By virtue of section 45 of the NRF Act to which he accords supremacy status, is Guyana now relieved of the obligation to pay the taxes of the oil companies?
Would he be kind enough to provide a schedule, with particulars, of the Certificates of Taxes issued by the Guyana Revenue Authority under Article 15 of the Agreement?
What was the source of the money used to pay such taxes for the oil companies?
If no Certificates of Taxes were issued, were there any other receipts, acknowledgments, documents or confirmation from the GRA to the oil companies of taxes paid on their behalf?
Given Anil’s assertion that the Agreement is overtaken by legislative changes, does he consider that further changes are within the exclusive powers of the Government, without restoration of benefits?
I share with Guyanese three very fundamental concerns about the 2016 Agreement.
The use of the Government’s share of oil profits to pay the taxes on behalf of the oil companies.
The stability clause which effectively deprives Guyana of legislative sovereignty until 2057 – give or take a couple of years.
The Government’s insistence on the sanctity and inviolability of the 2016 Agreement, making it beyond renegotiation.
Mr. Nandlall’s response to the column suggests that he has found a magic formula to overcome those concerns. If his statement represents the Government’s position, it is the best news for the country at the beginning of a new year. It also portends that Guyana can settle other concerns about the environment, insurance, level of royalty and allocation of profits in the Agreement without adverse implications.
Finally, it would certainly be preferrable for the conversation I am having with Anil to take place more widely, including in the National Assembly. Currently, that is wishful thinking. But I do believe that Anil is committed to constructive dialogue and that he too recognises the benefit of our exchange.
I therefore welcome his response and look forward to his answers to my questions and confirmation of my conclusions.
