Proposed reorganisation of NCB Group Limited by Raphael Gordon
Source: Financial Gleaner, November 17, 2000
THE voting on the N.C.B. Group Limited's (NCB Group) reorganisation showed an overwhelming majority supporting the scheme. I reproduce some information taken from the reorganisation document and make some comments.
The National Commercial Bank of Jamaica Limited's (NCB) Proforma Consolidated Balance Sheet at June 30, 2000, shows shareholders' equity of $7,980,540,000 and minority interests of $124,405,000 compared to $2,876,802,000 (including $1,000,000,000 preference share capital) and minority interests of $6,246,036,000 for NCB Group at the same date. This confirms the increase in net assets per ordinary share from $2.17 to $4.01.
The issued ordinary shares in NCB will be held as follows:
The present NCB Group structure allows FINSAC to effectively control the Board of Directors. Action taken by the new and future majority shareholders may not necessarily be in the best interest of the minority. As a minority shareholder, the above change will give the majority shareholders the facility to effect most changes which require more than a 75 per cent majority. However, action taken to improve NCB's earnings will benefit all shareholders. Provisions under the Companies Act and Jamaica Stock Exchange Regulations may offer some measure of protection to the minorities. If an investor is found for the 75 per cent plus 1 share, such investor will endeavour to create value and seek a reasonable return on the investment. Such objective will benefit all shareholders.
The Financial Sector Adjustment Company Limited (FINSAC) agrees that, dependent on financial performance and the maintenance of appropriate regulatory capital, it will support the proposal that the Bank will pay a dividend of not less than 15 per cent of the post-tax profits of the new banking group available for distribution in the year ending September 30, 2001. That dividend will be payable in two halves, the first on April 30, 2001, or 30 days after the date on which the Scheme comes into effect whichever is later, and the second six months after the first. In the case of FINSAC, such dividend will be payable in FINSAC bonds unless monetisation has taken place in full. In the case of non-FINSAC shareholders, dividends will be payable in cash.
The actual dividend distribution cannot be easily ascertained from the documents. However, 15 per cent of the profit after taxation must be transferred to the Banking Reserve Fund and the accumulated deficit as of June 30, 2000, must be eliminated. Future earnings will determine the dividend pay-out. On a price of $2.60 at September 4, 2000, the dividend yield for the year ending September 30, 2001, may be below 1 per cent. The dividend yield should be considered in conjunction with the prospect of future capital appreciation.
NCB Group auditors commented in their independent accountant's report as follows:
"Without qualifying our opinion, we draw attention to the following matters:
For the nine months ended June 30, 2000, $5.8 billion being 61 per cent of the group's income from loans and securities consisted of interest on FINSAC bonds. This interest was paid by issue of further FINSAC bonds except for $3.4 billion which was accrued and may be paid for in FINSAC bonds subsequent to period end.
At June 30, 2000, FINSAC bonds and promissory notes, including accrued interest, amounted to $43.6 billion and accounted for 57 per cent of income earning assets.
The liquidity of the group and its ability to fund its operations and achieve profitability are largely contingent on the collection of FINSAC interest, which the Government of Jamaica has undertaken to pay in cash to the extent required by the group at its request."
The proposed scheme may assist to remove the above uncertainty. Without FINSAC support, the Group may have a going concern and, possibly, future financing problems. The present scheme may assist in dealing with the problems and facilitate FINSAC's divestment.
If the share capital was split between preference and ordinary shares, the preference dividends paid at a reasonable interest rate on preference share capital would be allowed as a charge in arriving at taxable profit. Because of this, the net dividend cost would be 2/3 of the interest and the remainder of retained profits would fall to the ordinary shareholders, who can only get dividends after all the statutory and legal obligations are met.
Government's policy of reducing withholding tax on dividends declared by companies listed on the Jamaica Stock Exchange to 10 per cent on April 1, 2001, and 0 per cent on April 1, 2002, will be more beneficial with NCB as the quoted company. Such dividend would suffer no further tax in the hands of NCB shareholders. If NCB Group continues, such benefit may not be available for subsidiaries which upstream dividends to NCB Group. Where the concession is not available for distribution of subsidiaries to a quoted parent company, withholding tax of 331/3 per cent would be applicable and the net becomes Franked income in the hands of NCB Group. When this is distributed, shareholders will be receiving less in their hands. Where other means of upstreaming such income are used, General Consumption Tax implications have to be considered. As NCB will be the biggest income earner, the shareholders will benefit more from these tax concessions.
* Mr. Raphael Gordon is a partner of KPMG Peat Marwick, immediate past president of the Institute of Chartered Accountants of Jamaica, a member of the Public Accountancy Board and Jamaica's representative on the Association of Chartered Certified Accountants International Assembly.