GHL, RBTT: alliance or no ?

On September 5, 2003, Guardian Holdings Limited (GHL) chairman Nazir Ahamad, advised shareholders of two material changes to the affairs of the company. The announcement revealed GHL’s solution to the impact of IAS 39 and 28 on the company’s  investments in RBTT.  The effect of the standards “has been to understate materially the group’s operating results and the carrying value of this strategic investment.”  This issue is one that was  “actively engaging the attention of your Board of Directors, “  since adoption of the standards in 2002. The way forward proved simple and is allowable within the “terms of the  Strategic Alliance Agreement (SAA) between the GHL and RBTT Groups.”

1) GHL “has decided to sell 24.0 million ordinary stock units comprising 7% of issued  capital of RBTT and thereby reduce the Group’s interest to approximately 14%. This sale is expected to realise TT$514 million which will be satisfied in cash.” The shares will be sold to RBTT.
2) RBTT will exchange its “20% shareholding in GHL sub-holding companies - Guardian Insurance Limited (GIL) and Guardian General Limited (GGL) for 29.9 M new ordinary shares of no par value in GHL. The new shares to be issued will represent 15.7% of the increased share capital of GHL”
Our interest lies in the impact on the future earnings and reported statements of these two companies if GHL shareholders approve the transactions at the special meeting carded for October 14,2003.
For GHL the benefit of reducing its RBTT shareholding from 20% to 14% will be that IAS 28 would no longer be applicable to the treatment of this investment in its Balance Sheet.
 
GHL will no longer be “obliged to treat with this strategic investment as an associated company and therefore to report its value at cost adjusted by the proportionate share of after tax undistributed profits.”  (IAS 28 is applicable when an investor is deemed to have significant influence (20% or more shareholding) over an investee company.) The company will no longer suffer “losses” as it did at the 2003 mid year report where the “Group’s investment in RBTT (FH) has a market value of 1.5 billion but it is reflected in the Group’s balance sheet at 806 million in accordance with the requirements of IAS 28.”  (It is important to note that this is a book and not an actual loss since no actual trading was done.)

The companies have declared their intention.  It is now up to the external auditors and the T&T Stock Exchange to agree that the “substance” of the transactions is as reflected in the legal forms.  Their job is to determine if GHL has not maintained “significant influence” in RBTT and vice versa at the end of the accounting day.   Under IAS 28, the existence of significant influence by an investor, with less than 20% of shareholding  is evidenced in one or more of the following ways:
* Representation on the board of directors or equivalent governing body of the investee;
* Participation in policy making processes;
* Material transactions between the investor and the investee;
* Interchange of managerial personnel;
* Provision of essential technical information.
It is difficult to see just how GHL and RBTT will circumvent these limitations if they intend to pursue the objectives of a Strategic Alliance.  The term alliance suggests that there should be synchronisation of vision, technology sharing, policy decision making and a host of other activities that walk a thin line around the significant influence definition.
The GHL RBTT alliance and the strategic manipulation of IAS 28 and 39 serves as a good test case for the credibility of the external audit function in Trinidad and Tobago and the power and effectiveness of the Stock Exchanges in both Jamaica and Trinidad and Tobago. 
 These are the only two external parties who can determine if the Standards are being correctly interpreted and applied.

Maxine Attong is a financial and management consultant email :enhanceink@hotmail.com