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Oakbay’s gravity-defying share price is convenient for the IDC and Gupta

Monday, 11 April 2016   (0 Comments)
Posted by: Author: Stuart Theobald
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Author: Stuart Theobald (BDlive)

The near simultaneous dropping of the Gupta family’s Oakbay company by auditor KPMG, exchange sponsor Sasfin, and bankers FNB and Absa is remarkable. It can be justified, I suppose, by the fear of reputational risk and the heavy burden on banks not to be linked to politically exposed persons or a hint of corruption. Or, it could be a co-ordinated attack on the company by corporate SA as an act of corporate social responsibility.

Oakbay appears to be fighting for its life. The company listed on the JSE as Oakbay Resources and Energy in November 2014, and has a market capitalisation of R19.2bn.

You may have expected the share price to have been pummelled, but that has not happened. On Friday, there were only 11 trades in the stock, worth R68,000 in total. Someone is buying and conveniently keeping the share price up. It is hard to see value in the stock — in its interim results to end-August 2015, it had a book value of R5bn and a R34m bottom-line loss.

The death-defying share price is particularly convenient for the Industrial Development Corporation (IDC), which converted R256m of debt to equity when Oakbay listed, giving it a few percent. At the current price, the IDC has made a paper profit on what was a very helpful bit of value creation for the company. Should the share price drop, it will look like value destruction for taxpayers.

Only 2% of the company’s shares appear to be free floating, with 80% held by Oakbay Investments, of which Atul Gupta seems to be the main beneficiary, with an effective interest of 68% of the listed entity. That’s a paper asset value of R13bn. I wonder if this value has been pledged as collateral for his other business interests, which would provide another good reason the share price needs to remain high.

I’m sure the ever-vigilant JSE will be watching trades in the share to ensure that there is no price manipulation going on. If buyers were there to support the price, rather than because they see value in it, they would be breaking the law.

WITH the leak of the Panama Papers that has revealed some astounding criminal money laundering, tax havens are in for renewed opprobrium.

The stories that have flowed from the papers run the gamut from bank robbers laundering and hiding their loot through, to politicians hiding investments that conflict with their official roles. The disclosures are undoubtedly going to drive far better transparency rules that will be better for everyone.

But let’s for a moment pause and ask the question: is there anything good about tax havens? And if so, is there a baby we should find before emptying this particular bath?

Pretty much every South African fund manager runs its offshore funds from a tax haven, with the Isle of Man, Bermuda and Jersey among the popular choices. Most of our big companies also have subsidiaries or holding companies in such low-tax jurisdictions.

In the case of South African entities, the primary benefit of doing this is to escape exchange control. Without the ability to set up in such offshore locations, South Africans simply wouldn’t be able to run offshore funds or companies, because the bureaucracy of exchange control makes it impossibly inefficient to do so from SA.

South Africans don’t get to avoid tax through this activity. Ultimately, any money made anywhere in the world is taxed when it accrues to South African citizens. That is the nature of the residence-based tax system that applies here.

While the rules are changing, Cape Town’s fund management industry would not be able to run funds denominated in dollars (or any other currency) if they could not do so offshore. South African corporates would not be able to conduct cross-border businesses efficiently, including buying and selling subsidiary companies.

The fact that companies choose low-tax domiciles for such activity ensures they don’t pay more tax than they encounter when they repatriate the profits to SA. But it also means the profits are bigger, so there is more for SA to tax. If the companies used a high-tax domicile, then double-taxation agreements would allow them to offset the tax paid there against what would be due in SA.

So tax havens are, in this respect, good for SA. They allow for useful economic activity and actually increase the tax receipts that can be claimed by SA.

Of course, the Treasury could just sort out the archaic exchange control laws that make this the case, and it has been promising for some time that it will do so.

When that happens, the case for tax havens will be weaker.

But there is still a case for South African companies to operate their global business from a tax haven. A haven serves to protect value from being taxed by alternative high-tax jurisdictions, which means more of the profits are available for SA to tax when they come home.

None of this is a justification for secrecy. When tax havens are used, it should be with full transparency. If the Panama Papers prove nothing else, it is that your secrets can never be certain to remain secret.

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