Tag: NICIL

Posted on

Soul for sale: The Marriott saga Part 1

Introduction
The so-called Marriott Hotel, a scheme conceived by former President Bharrat Jagdeo − after one of his friends failed in his bid to buy the Guyana Pegasus – blessed by Mr Jagdeo’s successor President Ramotar, facilitated by Dr Ashni Singh, his Finance Minister and Chairman of National Industrial and Commercial Investments Limited (NICIL), executed by Mr Winston Brassington, NICIL’s CEO, and defended by political heavyweights like Drs Luncheon and Gopaul, puts in the shade the questionable transactions undertaken in the name of the people of Guyana since 1992. That is no small achievement.

Over the years Business Page has lamented the manner and extent to which the PPP/C Government, having criticised the PNC for its conduct of the privatisation programme, has been willing to sell the public assets of the country, often under very questionable circumstances and not infrequently, to questionable people. One criticism that I have not heard of the PNCR was any failure to account for the proceeds of those deals.

The actions of the PPP/C have been contrasting. Sometimes the transactions were so extraordinary as to arouse public attention, resigned scepticism and outright accusations. Think of those illegal concessions to Mr Jagdeo’s friend Dr Ramroop, transactions which prompted Mr Jagdeo to describe Mr Yesu Persaud as needing re-education. It turned out that the ones who were ignorant of the tax laws were Mr Jagdeo himself, Dr Singh and Mr Winston Brassington. On other occasions Guyanese came to learn of the transaction from abroad, as in the award of large swathes of our forest to Vaitarna of India and the diversion of more than $600 million. Even after the major disclosure in the Times of India, the Jagdeo/Singh duo never informed the nation that the money was used to plug a hole left in the wake of the Clico debacle in which Mr Jagdeo and Dr Ashni Singh were joined by another Singh − Gita − as lead characters. And from Jamaica we learnt that the Government of Guyana had committed this country to borrowing billions of dollars from the Chinese − most of which will never reach Guyana − to carry out works at the CJIA, works the country neither needs nor can afford. Just let us ask Delta.

Trading Guyana
Business Page from time to time has lamented that the Government was selling out the store and later, that it was selling out the store again. We warned that there is no such thing as a free chowmein, prompting a tirade of abuse directed at me by a senior government official, accusing me of lack of patriotism, and working against the development of Guyana. Only this week I was reminded of Samuel Johnson’s aphorism “patriotism is the last refuge of a scoundrel.”

The Marriott project has all the hallmarks of the several misdeeds inherent in the Queens Atlantic imbroglio, the transgressions of Vaitarna and the silence and non-accountability of the airport expansion transaction. So what makes the Marriott Hotel so special? It is that unlike the other transactions that merely sold out the store, the contract for the construction of the so-called Marriott Hotel involves selling out Guyana and its soul. And as you read on you will marvel at the brass, the contempt and the lawlessness demonstrated by the officers of a company called Atlantic Hotels Inc.

‘Egregious’ is a word Business Page has often used to describe what has passed for accountability in Guyana. I now need to find a term that surpasses egregious in scale and scope. To date the Marriott revelations have centred on the Chinese whose appetite for Third World resources causes it to act like the beads-for-precious stones policy of the Europeans in the early days of discovering foreign lands. And it is a skill they have honed with great success in Africa, first because of that continent’s resources and second, because they found that where there is weakness, incompetence and corruption by the government and silence among the people, a football stadium or a road can go a long way. Especially if the road leads to a mine or forests.

A scheme called Atlantic Hotel Inc.
The recent protests against the misnamed Marriott Hotel project – Marriott is not putting a blind cent in the investment – have paid little attention to the role of two individuals, Winston Brassington, the sole director of Atlantic Hotel Inc (AHI) and Ms Marcia Nadir-Sharma, the company’s corporate secretary and in-house attorney. It is their hands and signatures that adorn many of the Marriott documents in which Guyana has relinquished sovereignty to the Chinese. Everyone knows that Mr Brassington and Ms Nadir-Sharma could not do what they continue to do without the express authority of the two Presidents, Dr Ashni Singh and the Cabinet.

But the importance of the role of Mr Brassington and Ms Nadir-Sharma is that Mr Brassington is the sole director, Chairman and CEO of AHI while Ms Nadir-Sharma is its only other officer, information published in these columns on August 8, 2010.

Here are some facts about AHI that seem worthy of ventilation. AHI is a 100% subsidiary of NICIL, for years a corporate outlaw. AHI was incorporated on September 3, 2009 with a share capital of one million Guyana dollars (sic). From its incorporation to its latest filing on record three days ago, the only shares issued have been 10,000 shares at $100 each in the name of NICIL. By Resolution of 28th September 2010 the company increased its share capital from $1M (10,000 shares @ $100 each) to $3 billion (300,000 shares at $10,000 each) prompting questions about Ms Nadir-Sharma’s familiarity with section 5 of the Companies Act 1991.

It is Mr Brassington and not the Govern-ment which signed every agreement with the Chinese company, Shanghai Construction Company, through its Trinidad and Tobago subsidiary, for the construction of the hotel. To get a good sense of the documents we can look at a letter dated October 1, 2011, supposedly sent by Mr Brassington in his capacity as Chairman of AHI to Mr Michael Zhang, General Manager of SCG International (Trinidad and Tobago) Limited presenting ten documents to Mr Zhang for “initialing.” Included in the package is an undated Letter of Acceptance from Mr Brassington to SCG informing it that its earlier tender was considered and resulted in a Memorandum of Understanding (MOU) for a Design-Build Contract for the precise sum of US$50,918,112.89. I have not seen a copy of the final contract, but it is likely that any further changes would be in SCG’s favour and not that of AHI or the Government of Guyana.

The MOU
The Memorandum of Understanding, dated June 14, 2011 and signed by Messrs Brassington and Zhang, notes that SCG had submitted a tender of US$65 million based on an original design but that the amount was considerably above the $41 million budgeted cost for the construction. The MOU goes on to state that SCG − and apparently no one else − was allowed to submit an alternate design meeting Marriott international design standards.

The MOU reflects a situation in which SCG went for the kill, realising that it had all the cards and that its opponent was either weak, compromised by circumstances or grossly incompetent. It demanded, in exchange for a reduction of US$14 million in the contract price, the following amendments to the initial contract document:

1. The removal of any obligation on SCG to pay all taxes, duties and fees, and obtain all permits, licences and approvals … placing these on AHI. Moreover, SCG demanded that it receive full exemptions from all taxes. Mr Brassington agreed.

2. That it be allowed to import any personnel who are necessary for the execution of the project. Mr Brassington agreed. It turned out to be 100%!

3. That its obligation to repay an Advance Payment under clause 14. 2 of the agreement be removed. Mr Brassington agreed.

4. That the principal provisions regarding Claims, Disputes and Arbitrations be deleted in their entirety. Mr Brassington agreed.

The result is a complete sell-out of every principle that served Guyana’s interest, an agreement that was re-written by SCG for SCG. And Mr Brassington agreed.

Conclusion
SCG in a letter to Mr Brassington dated May 18, 2013 said that its revised bid price does not include the cost of the promenade/boardwalk, LEED certification cost, PAYE package, health charges, NIS contribution, work permits and visa fees required by law.

It is not clear why it was necessary to refer to PAYE as an exclusion, since PAYE is borne by the employee and further, effectively granting to SCG a waiver of all or any part of NIS, a cost which by law is shared between employer and employee.

The contract price seems to exclude both. In return, all SCG was required to do was assist AHI to secure funding for the project of US$7 million to US$30 million.

Just what else the directors of AHI have done, how they managed to do it and the further absurdity of the Marriott project will be the subject of the next Business Page.

Posted on

The tragedy of NICIL – Act 2

Introduction
Today I return to the article on NICIL (National Industrial & Commercial Investment Ltd) which I started two weeks ago but which I interrupted to conclude my 20th anniversary piece on the banking system. In what was referred to as Act 1, the directors were identified and financial summaries set out. It became apparent that the preparation of financial statements was a matter of political convenience and provided no information that could be considered useful to understand how and for whom NICIL operates. Events since January 6 have convinced me that the Institute of Chartered Accountants of Guyana has no serious interest in addressing the complaints against the Chairman of NICIL and his spouse and even worse that some members of the institute actually advise the executive of NICIL.

We recall that NICIL was incorporated as a company under the Companies Act Chapter 89:01 on July 18, 1990, but began functioning in 1991. NICIL enjoyed an incestuous relationship with what was called the Privatisation Unit of the Ministry of Finance which had been set up to carry out the Government’s privatisation programme. Moneys earned from the privatisations, including the shares in GBTI were paid into the Consolidated Fund.

But then someone had the bright idea that NICIL could function in capacities other than an incestuous relationship; it could actually raid the Consolidated Fund by the mechanism of vesting. So, convoluting and contaminating the relationship further, the same parties, the Ministry of Finance, Cabinet, the Privatisation Unit and the directors of NICIL, all of whom were appointed by Cabinet, signed in 2002 a Management Co-operation Agreement appointing the Privatization Unit, described as a semi-autonomous organ, as exclusive manager of NICIL. Under the agreement all privatization expenses would be funded by NIICIL, even though, let it be remembered, director Luncheon said NICIL was a private company. But demonstrating its unique brand of integrity, NICIL agreed that any privatization of NICIL’s assets would be in accordance with Privatization Policy Framework Paper (PPFP) of 1993.

What does NICIL do?
When NICIL was incorporated it had to include in its constituent documents the objects of the company and its financial statements disclose that “the primary objectives of the Company ‘NICIL’ is that of subscribing for, taking or otherwise acquiring and holding the Government shares, stocks, debentures or other securities of any company, co- operatives societies or body corporate.”

Now how NICIL moved into diverting sewerage, building roads in the hinterland on behalf of the Guyana Geology and Mines Commission, setting up a company to build a hotel and paying NCN to move its transmitting facilities, is not clear. But this was not the only perverse matter disclosed or not disclosed in successive annual reports of NICIL. Its financial statements disclose that properties vested or transferred by the Government to the company are brought into the books at a nominal value, in accordance with IAS 20 (para 23). A closer read of IAS 20 (para 23) tells us differently.

IAS 20
IAS 20 says that a government grant can take the form of a transfer of a non-monetary asset, such as land or other resources, for the use of the entity (my emphasis), and that it is usual to assess the fair value of the non-monetary asset and to account for both grant and asset at that fair value. Fair value is closer to market value and is clearly different from nominal value. The paragraph goes on to state that an alternative course that is sometimes followed is to record both asset and grant at a nominal amount, but this alternative treatment must surely be justified by circumstances. Since many of the properties are vested with a view to sales negotiated even before vesting, nominal value is clearly an inappropriate policy.

Some accountants might even argue that IAS 20 does not apply to NICIL because IAS 20 deals with government grants which it defines as “assistance by government in the form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the company.”

The transfer of these assets has nothing to do with the operating activities of NICIL which by its own admission is not an operating company but at its most honourable, serves to facilitate the disposal of state assets in an orderly manner.

The law
It seems to me that from a legal standpoint the so-called vesting takes place in a principal-agency relationship with NICIL acting as the agent of the Government whose assets they are. The perverse convolution is simply to use NICIL as the vehicle to circumvent Articles 216 and 217 of the Constitution which set out clear rules for accounting for government revenues and incurring government expenditure.

Let us assume that neither the CEO nor his deputy understand some of these technicalities or practices. But surely Ms Nadir-Sharma, who was expounding on the Companies Act 1991 and its application to NICIL only a few months ago, must be aware that the Act specifies the contents of the directors’ annual reports. These must include the following:

1. the affairs of the company, each of its subsidiaries and their principal activities;
2. changes in fixed assets of the company and each subsidiary;
3. a statement by the directors on their proposals as to the application of the profits of the company and of its subsidiaries.

To ensure that these matters are not excluded the Companies Act requires very specifically that where “the directors’ annual report does not contain a statement required by [the] section to be included in it or contains a statement which is false, deceptive, misleading or incomplete, the auditors of the company shall, so far as they are reasonably able to do so, include in their report on the accounts of the company … a statement or correction giving the information required by this section.”

There is a high probability that Mr Deodat Sharma, the Auditor General has no knowledge of this requirement and consequently is unable to fill in the information. Mr Sharma serves not as an independent auditor but chooses not to contract out NICIL’s audit. He does the same with NCN, another rogue company when it comes to compliance, good governance and accountability.

It is really painful that we tolerate such ineptitude from the government’s principal operating company. This brings to mind a question posed by a reader who enquired whether the annual reports tabled by various agencies of the state are subject to any review or scrutiny of the Public Accounts Committee. Sadly, the answer is that this has never happened and the practice is merely to place the document on public record; nothing more.

Some other comments
The paucity of information and disclosures frustrates any serious attempt at commentary on NICIL’s financial statements. Indeed, the paucity extends to disregard for entire accounting standards including IAS 10 Events after the Reporting Period. However the report for the year 2009 is interesting if only for one reason. In that year NICIL put some $166,241,000 in NCN about which nothing was ever said by the Minister of Finance who is NICIL’s Chairman and who in 2009 had allocated to NICIL in the National Estimates the sum of $54 million.

In other words, NICIL, whose Chairman is the Minister of Finance, gave to NCN three times as much as he gave to NCN as Minister of Finance. These advances coincide with the move of NCN’s transmission facilities to facilitate the construction of Pradoville 2, where Mr Jagdeo and some of his ministers have appropriated unto themselves valuable state property at below market value, or to use NICIL’s words, nominal value.

Surprisingly NICIL which from time to time holds billions of dollars in the bank discloses in its financial statements only modest sums for “Interest and other income.” It is public knowledge that NICIL also receives several millions of dollars annually in rental but without a note showing the separate amounts of interest, rentals, etc, it is difficult to determine whether all the income is properly accounted for.

Conclusion
The National Assembly has passed a motion for an investigation of NICIL. I believe that this investigation of NICIL’s operations would have to be very far reaching and include an examination of the assets of those who may have benefited. I have lost all faith in the Institute of Chartered Accountants of Guyana and it is public knowledge that certainly in respect of NICIL, the Audit Office is either inept or compromised. It is unfortunate that the Public Accounts Committee does not insist in reviewing the annual reports and financial statements of NICIL. Their rushed preparation, inept audit and simultaneous laying of NICIL’s reports for several years have nothing to do with good governance, respect for the law or accountability. It is meant to silence critics.

The real tragedy of NICIL is that it has simply got worse.

Posted on

The tragedy of NICIL – Act 1

Introduction
If NICIL – the National Industrial & Commercial Investments Limited – was a play, it would be one that challenges Othello and King Lear for the dubious distinction of saddest tragedy ever written. And this is how the dramatis personae would be introduced:

Chairman of the Board: Dr Ashni Singh has the distinction of reporting to himself; credit for the undermining of the last vestiges of confidence in public accounting; lead authority on the use and mostly abuse of the Consolidated Fund and its offspring the Contingencies Fund; and credit for the largest financial sector failure under his watch;

Director: Dr Roger Luncheon, who thinks running a government and country is an opportunity to display verbosity and jest; who has merrily led the country’s National Insurance Scheme to the brink of the cliff and then casually denies reality; and who cannot distinguish a government company from a private company;

Executive director: Winston Brassington, who has been the architect or centre of almost every concoction or government initiative in the past fifteen years – the Queens Atlantic Investment Inc and its illegal tax holidays (later accepting the assignment to teach a private sector icon about the country’s tax laws); railroading the most costly financial package in setting up the Berbice River Bridge Company Inc and inducing and bribing investors with generous tax incentives; and the longest transitioning from the public sector to the private sector in Guyana’s history;

Auditor General: the benign Deodat Sharma, who moves from the stream of auditing (or not auditing) government transactions to the ocean of auditing where statutes on taxation and governance rule; where familiarity with deferred taxation and ever-changing IFRSs challenge the most seasoned accountants; who audits some of the country’s largest (government) companies in accordance with the Companies Act 1991 which does not recognise him as qualified to do such audits;

Regulators: such as the Registrar of Companies who was frightened off from demanding annual returns from the company for close to twenty years; the Commissioner General of the Guyana Revenue Authority who has not been able, for more than twenty years to collect a penny of Corporation Tax from Dr Luncheon’s “private company” despite several billion dollars of profit before taxation; or Property Tax despite the company owning at various times some of the most valuable state assets; or Capital Gains Tax despite the company acquiring premium assets at nil value and disposing of them at market value (except in the case of some friendly sales); and the national accounting regulator who has sat on two complaints for the equivalent of one year, unable or unwilling, maybe because the financial interest of its members, to pronounce on alleged egregious breaches of ethical and accounting rules and the Companies Act.

Making hay of delay
Apparently the Institute, applying a logic best understood by them only, decided to treat with the two complaints sequentially. From follow-up enquiries on these complaints, there appears some equivocation or evasion on whether or not this approach was reversed following stalling tactics employed by counsel retained by Ms Gitanjali Singh to deal with the complaint against her on the fundamental question of conflict of interest. After all, more than Ms Singh’s conduct is at stake here and it was no surprise that she resorted to Senior Counsel.

Minor players whose names or faces are supposed to lend credibility to NICIL: These include former Chairman and Minister of Finance Mr Saisnarine Kowlessar who would hardly have suspected how the company would come to define and represent some of the very values he represents; Mr Geoff DaSilva, Head of Go-invest, Ms Sonya Roopnauth, Budget Director and Ms Marcia Nadir-Sharma, NICIL’s Company Secretary, ever ready to sign corporate documents and defend the most offensive of corporate practices.

Ms Nadir-Sharma we recall was on television in September 2012 on the NCN’s outstandingly ironic debate on corruption, vociferously denying that NICIL had been in violation of the Companies Act and then rushing just over one year later to sign off on the statutorily mandated directors’ report for nine years – 2002 to 2010 inclusive – bearing no date but only the month: November 2012. Consequently, what NICIL and its directors could not and did not do in years could suddenly be done in just two months, a demonstration of political expediency trumping the law and governance. It is probably more than idle speculation that NICIL might have been taking advantage of the craven slothfulness of the Institute of Chartered Accountants which has delayed any consideration of a number of issues on the financial statements of the company and the conflicts of interest between the company and the Audit Office.

The plot
More important to the players however is the plot to take an entity established by the PNC government of Desmond Hoyte to oversee the privatisation process and make it in an instrument of circumventing the Constitution and other laws of Guyana. More specifically, it ensures the ignoring of Article 216 of the Constitution that requires all government revenue to be placed in the Consolidated Fund and bypass Article 217 which requires parliamentary approval for all public expenditure. The plot is devilish in its simplicity: vest state assets in the company which it then sells and uses as its own money to do as it pleases, whether to develop Pradoville 2, divert sewerage or mismanage road contracts or build a hotel.

Sitting in the pit of the theatre of the absurd are the politicians, including the main opposition party APNU, demonstrating a failure to understand or appreciate the deviousness with which their concerns over NICIL and other financial issues have been circumvented, and announcing in late 2012 that the government had become “more accountable”; the professional class more concerned about their economic well-being or about being victimised for their courage rather than standing up and speaking out for the financial well-being and fiscal rectitude of the country; and the public bewildered and bemused that the kind of maladministration for which NICIL has become a poster child continues to this day.

Financial summaries
Against this background Business Page commences a review of the financial statements and directors’ reports of NICIL for the years 2002 to 2010, the last year for which annual reports have been tabled in the National Assembly by Dr Ashni Singh. To carry out this function Dr Singh seamlessly changed hats from being the Chairman of NICIL to that of Minister of Finance. Here is a summary of the financial statements of the company – not the consolidated accounts of the group – for the ten years 2001 to 2010 as disclosed by the audited financial statements.

Statement of financial position

2012.01.06_Table1

Statement of the Comprehensive Income

2012.01.06_Table2

Statement of Cash Flows

2012.01.06_Table3

However, before addressing and analysing these I will use next week’s column to conclude the twenty year review of the banking sector in Guyana which I started last month. I do apologise for the untidiness of not completing that review before beginning the examination of NICIL’s financials, but my own efforts at data collection and research were less efficient than I had anticipated.

Posted on

Hand-in-Hand Trust and the Brassingtons – Conclusion

Introduction
Today’s column completes a three-part article looking into the operations of this non-bank, deposit-taking financial institution as well as its murky relationship with the brother of a related party. Neither the company nor Mr Winston Brassington has responded to the claim by this column that by virtue of NICIL’s 10% shareholding in the Hand-in-Hand Trust (HIHT/the company) Winston and his brother Jonathan are guilty of using insider information in a substantial share transaction with the company.

It is instructive that all of this has surfaced even as we hear from the US that Rajat Gupta, who reached the pinnacle of corporate America was this week convicted of leaking inside information to his friend hedge-fund manager billionaire Raj Rajaratnam, who is himself serving an 11-year jail term for using insider information. Of course, as we say, this is Guyana where suspected corporate wrongdoings go uninvestigated, let alone prosecuted as we have seen in Globe Trust, Clico, NICIL and others.

In this concluding part I turn attention to the annual report and audited financial statements of the company Hand-in-Hand Trust Corporation Inc for the years 2007-2011. Here is a summary of the income statement extracted from the audited financial statements.

Over the five years the company’s after tax losses amount to $650 million of which $1,179 million arose from losses on investments, mainly in Stanford Investment Bank and to a lesser extent, Smith Barney, the US brokerage and investment banking house. In fact if a questionable gain on disposal to its parent of its only long-term asset is discounted, the losses incurred by the company over the period would be an astounding $900 million. Whoever decided on the Stanford investment has imposed on the company and by extension the insurance company with a huge loss overhang. Indeed had it not been for the very convenient sale and lease back of its office property, the company would have recorded a pre-tax loss of $158 million in 2011.

There are two reasons for considering the gain questionable: one accounting and the other law. The company entered into a sale and lease back agreement with its majority shareholder of its Middle Street premises. Ignoring relevant accounting standards, the company has failed to disclose the terms of that agreement and dismissed my own query to them for particulars of the transaction.

The balance of probability is that this transaction constitutes a finance lease and accordingly, the gain on disposal ought to have been deferred and recognised over the life of the lease. Recognising the $264 million gain therefore appears improper or aggressive revenue recognition and may have been entered into as a device to improve the company’s capital base for purposes of the FIA.

The legal reason is whether or not the company should have sought shareholders’ approval of the transaction under section 140 of the Companies Act which requires both a quantitative as well as a qualitative test for determining whether or not section 140 applies. With Hand-in-Hand Trust and its parent the Hand-in-Hand group sharing a common CEO – Keith Evelyn – the transaction without approval of the minority shareholders, is less than wholesome.

Other income comprises mainly fees charged for the seven pension plans with a combined balance of $14.9 billion at December 31, 2011, mortgage fees and management fees. On the expenditure side, the company has managed its expenditure well with a 21% increase between 2011 and 2007. There was a spike in the 2009 expenses because the financial statements were for an 18-month period, a change not mentioned in the directors’ 2009 report.

The company’s accounts show regular recoveries of doubtful debts and reversal of diminution in value of properties which have mitigated the other substantial losses incurred by the company.

Compensation
The practice among companies paying comparatively larger sums to its key management personnel is evident with HIHT which paid an average in excess of $1.2 million per month to this group, estimated at more than eight times the average of the rest of the staff. Perhaps more significantly is the 8% per annum interest rate which the company charges its staff.

The financial statements do not indicate the actual rate of interest charged on a director’s (sic) mortgage which at December 31 was a whopping $95.9 million compared with staff mortgages of $7.0 million. According to the notes, “[T]he rates of interest and charges have been similar to transactions involving third parties in the ordinary course of business.”

Balance sheet
The balance sheet too raises some concerns in addition to the treatment of the sale and lease back arrangement. One person very familiar with the measurement of capital adequacy has expressed some scepticism about the company’s computation of the Tier 1 capital adequacy which the accounts claim stood at 31% at December 31, 2011 and total tier 1 and tier 2 capital of 35% and the comparative 14% in 2010. What is certain is that a significant part of an increase would be attributable to the sale of the building which released hundreds of millions in capital reserves. A realised gain is obviously more valuable than one that is unrealised.

Nor do I think that the amount of $778.0 million shown as Term Deposits is properly described since a significant portion of this relates to recoveries in CLICO Trinidad, but which are in the form of bonds maturing several years hence. The related parties balance is a sum receivable from the company’s parent for the sale of the building.

Other risks in the balance sheet include some of the investments in which there has either been a judgment or the filing of legal action. These can result in some losses to the company. On the other hand, if the stock market in the US does improve then some of the Smith Barney losses will be reversed, creating a gain.

The company’s non-accrual loans to total loans has declined from 28.8% in 2007 to 5.2% in 2011, allowing the company to reduce its loan loss provision from 8.4% to 1.5%. That percentage is as good as most other financial business in the country. As Darren Sammy would say, that is a good thing to take into 2012. Deposits have declined from $7,206 million at June 2008 to $5,708 million at December 31, 2011, a decline in excess of 21%. The company also saw the number of pension schemes under management reduced by one during the period.

I must also comment again on the issuing of preference shares and their redemption within one month of the balance sheet date. As noted last week, there is some doubt whether the redemption met the statutory requirements.

Conclusion
In mortgages, the company competes with the New Building Society which enjoys tax exempt status, and the larger financial houses with a far greater income base over which to spread their expenditure. For its trust business to succeed, it will have to attract what are called high net worth individuals. In this regard, its main competitor is probably Trust Company Guyana Limited which has the benefit of being a member of the DDL group which includes two public companies, of which one is a successful bank.

There also seems to be a lot of room for improvement in ethical and governance conduct at the senior level. It was dismissive if not insincere in its response to my written questions while itself having been treated very kindly by the regulator which has not been known for strict insistence on accounting and reporting. Even as the company seeks to expand its income base by entering the lending business, it needs to consider its risk profile and to learn from its Stanford experiences from which it still has not recovered. And at a wider level, the company must be hoping that the high real estate prices can be sustained.

The company faces a challenging future.

Posted on

Hand-in-Hand Trust and the Brassingtons – Part 2

Introduction
Notwithstanding the caption of this article, the first part in last week’s Business Page dealt not with the Hand-in-Hand Trust Corporation Inc (HIHT/the company) but with Winston Brassington and his brother who Winston boasted had saved HIHT from the fate of Clico. I explained then that instead of using any speculative language with potentially adverse consequences to the company I would write the company for specific information and/or clarification on the company’s financial statements, the impact of its investment in Stanford Investment Bank, the directors’ efforts to rebuild the company’s capital base and its relationship with the Brassingtons.

Following receipt of my list of twenty-one questions, Mr Hewley Nelson, the company’s Managing Director and its finance officer visited me to give some explanations on the financial statements which are audited by Maurice Solomon & Co. Mr Nelson was as helpful as he could be, clarifying some of the disclosures in the financial statements and conceding that the notes to the financial statements could have been more explicit. I was told that persons “higher-up” would address me on the several other issues raised in my correspondence.

In the circumstances, I was optimistic about a factual and candid response from a company whose very survival depends on its own transparency and the public trust. Unfortunately the response communicated to me was disappointing. So be it. At the appropriate points in this column I will refer to the partial exchange which took place.

Jonathan Brassington
Let us start with the Brassingtons and the 2,250,000 shares issued to Jonathan Brassington in 2009. The general law and practice regarding the issue of new shares is to offer them first proportionately to existing shareholders so that the balance of control is unaffected by new issues. If this rule of pre-emptive right was followed, the offer of the shares would have had to be made to Hand-in-Hand Insurance group (90%) and NICIL (10%), leaving no place for Jonathan – or indeed anyone else – unless some shareholder(s) had passed up on the offer. To ascertain this, I asked the following questions:

Do the articles of Hand-in-Hand Trust Corporation Inc (Company) provide for pre-emptive rights on the issue of new shares?

How many shares were offered to the Hand-in-Hand group for the 2009 issue?

Was a prospectus or information package issued for the 2009 share issue? If yes, can I be provided with a copy?

How was the company informed that a Mr Jonathan Brassington might be interested in taking up shares in the company?

Was Mr Jonathan Brassington permitted to carry out a due diligence prior to his application and who carried this out on his behalf?

The company’s response – signed by someone who is certainly not among the higher-ups – that “All our shareholders were examined and approved by the Bank of Guyana” matches Dan Brown’s Da Vinci Code for mystery, complexity and improbability. I consider it perfectly proper to conclude that the company is willing to conceal the details of its transaction with the Brassingtons which many find improper and unlawful. That does so little to help strengthen the company’s reputation for integrity when under pressure. Or indeed for that matter of the Bank of Guyana which had not previously distinguished itself in its supervision of Globe Trust and Clico.

Hoops of circumvention
Readers and the public have a much better memory and sense of integrity than they are often credited with. They will recall how Mr Keith Evelyn, group CEO of the Hand-in-Hand Group including HIHT, took the country through a series of meandering hoops of circumvention after the news broke about the company’s investment in Stanford Investment Bank (SIB). Here is the sequence to which I add my comments.

On February 21, 2009, Mr Evelyn confirmed that the Trust Corporation had investments in Stanford International Bank (SIB) but said that “they are not substantial … and efforts are being taken to safeguard against possible losses.”

Four days later President Jagdeo publicly revealed that HIHT’s exposure to the Stanford group amounted to $827 million (US$4 million) and another to $297 million (US$1.5 million) invested on behalf of pension funds. As CEO of the group Mr Evelyn’s description of the investment as “not substantial” cannot be dismissed as ignorance on his part. Even the understandable motive to prevent any run on HIHT, a deposit taking financial institution, ought not to justify the misrepresentation contained in Mr Evelyn’s February 21 statement.

At that point the quantum and impact had been set straight, or partially so, by Mr Jagdeo – who himself understated the significance of the loss to HIHT by an inappropriate reference to its total assets and his description of the institution as having a “capital adequacy ratio of 26.9 per cent as at the end of January 2009.” But clearly not straight enough for Mr Evelyn who one week later announced that even in the possibility only of HIHT losing its investment in Stanford, it would remain a stable and safe institution. Yet, in the same statement about HIHT’s strength, Mr Evelyn announced that the Hand-in-Hand Group of Companies had submitted for the Bank of Guyana’s approval a plan to “restore HIHT’s capital adequacy.”

Neither Mr Jagdeo nor Mr Evelyn has ever explained why it was necessary to restore something that was never less than strong, that was above the industry average and above statutory requirement. Characteristically, Mr Evelyn announced that since approval might “take any time between two weeks to three months” the restoration plan could not be released to the public. It actually took the Brassingtons’ deal to bring some sunlight to the whole episode.

Poor standards
Then finally, two days later, unable to hold the fort weakened by damning information available to the world but only belatedly acknowledged by HIHT, Mr Evelyn announced in Stabroek Business that the investment in Stanford was “a loss and we’ll have to record it as a loss, that is what any prudent institution would do.” Had the institution recognised the need for such prudence and transparency earlier, maybe we would have been spared the loss of more than US$5 million.

The institution has clearly recovered from the imminent dangers it faced post-Stanford. But it seems not to have overcome the institutional and national culture of secrecy and evasion so pervasive in the corporate world. Here was a unique opportunity for the directors, including Chartered Accountant Paul Chan-a-Sue, Dr Ian McDonald, banker Alan Parris, Charles Quintin and Mr Timothy Jonas of de Caires, Fitzpatrick & Karran to let Mr Evelyn and his management team know that the HIHT was moving on to higher ground – ground on which is imposed on directors a statutory fiduciary duty to act honestly and in good faith with a view to the best interest of the company and a general duty of care to others, including in this case depositors. That specifically with respect to financial institutions, there is a fit and proper test that directors should meet. Mr Evelyn’s conduct appears to have fallen below those standards and the directors should have long since confronted this issue. Instead, they follow his lead refusing to give direct answers to questions on matters of public and depositors’ interest.

With the silence of the Bank of Guyana and non-interest by the Financial Intelligence Unit (the anti-money laundering agency) or the Registrar of Companies which has the power under section 506 of the Companies Act to apply to the court for an investigation order in respect of the shareholding in any company, the matter of the Brassingtons would appear to be closed to the public. In the case of the Bank of Guyana, the HIHT’s directors claim that the company’s shareholders “were examined and approved” by the central bank.

The lesson from the Brassingtons
We are unlikely ever to know whether HIHT’s parent company refused to take up the new shares in HIHT, whether a prospectus or issue memorandum was issued by HIHT for the 2009 share issue, whether Brassington, Evelyn or other directors approached Jonathan Brassington, and who carried out the due diligence on Jonathan’s behalf before he undertook his only public investment in Guyana. Their answer also puts a lid on the identity of the two pension funds which lost some $297 million of their funds under HIHT’s management. No doubt no one will ever be held responsible.

But before leaving the Brassingtons, just a brief comment on Winston’s claim that his brother rescued HIHT from a Clico-type collapse. The actual increase in the share capital was $500 million of which the Hand-in-Hand Group contributed $270 million, Jonathan Brassington $225 million and NICIL $5 million. This means that the HIHT group gave up a chance to take up $180 million of the new shares while NICIL gave up their right to take up $45 million – those shares were all taken up by Jonathan. Winston Brassington’s assertion that Jonathan saved HIHT can only be correct if no one else, including the HIHT group or NICIL was not prepared to take up any of those shares and if those shares were crucial to the restoration of the company’s capital base. That too we will never know, nor why the Bank of Guyana had not taken steps to suspend the licence of the company when the Stanford investment wiped out its capital base.

The number of shares available for take up by the shareholders, the amounts given up and the impact on capital is shown in the following table:

Another issue about shares
On August 24, 2011 the company had another share issue; this time in the form of 150 million preference shares approved by a resolution of the company to which are inscribed the signatures of Marcia Nadir-Sharma on behalf of NICIL and Winston Brassington on behalf of his brother. While these are only $1 shares, the proceeds did make the 2011 balance sheet look even stronger, adding another $150 million in stated capital.

While any concern about window-dressing could not be supported by available facts, the company’s failure to mention the redemption in a note to the 2011 financial statements as a post-balance sheet event, does not help the company. Indeed, that failure is compounded by another failure to make any reference to this 2011 share issue in the section Background on page 1 of the 2011 Annual Report which ends abruptly with the 2009 share issue.

The law requires that preference shares can only be redeemed out of a fresh issue of shares for the purpose of the redemption, or out of profits available for distribution. At December 31, 2011 the company had accumulated losses of $171M and there is no information that suggests that there was a fresh issue of shares to finance the redemption.

To be continued

Note: Ram & McRae acted as advisor to the Privatisation Unit on the privatisation of the GNCB Trust in 2002. The issues raised in this column all relate to events which took place at least seven years after that engagement came to an end, and are all matters in the public domain.