Buyback of government shares in JV companies

The Ministry of Finance has introduced regulations governing the sale of government shares held in joint venture companies in the tourism sector. These regulations are made in pursuance of the Tenth Amendment to the Tourism Act which repealed and replaced the earlier provisions on the subject introduced by the Eighth Amendment to the Tourism Act.

What are these companies?

As of today, there are some 45 joint venture companies holding resort leases in the Maldives tourism sector. This is a fairly significant amount compared to the total of 271 tourism properties in the country: 156 operating properties and 115 under development.

Section 5 of the Tourism Act is the central provision for lease of tourist resorts. Until recently, the section contained two main parts: the first part was the general rule and the second part was the exception to the general rule.

The general rule is that islands by way of tourism leases must be granted to the best bidder in a public bidding process. The exception to the rule is that islands may be awarded for tourism development outside the bid process if the government acting on its own or in partnership with another is the investor.

This exception to the rule has been (over)used to arrange leases for investors outside the bid process. Quite evidently, it has been used at least 45 times.

The government has employed the loophole (in the exception to the rule) on a host of occasions to organize a tourism lease via a joint venture set up. The key ones are outlined here:

CSR Scheme

The government introduced a CSR scheme whereby an investor willing to assist the government with the establishment of essential infrastructure on an inhabited island at its own cost and expense (with no burden on government finances) is rewarded with an island for resort development.

The investor would then collaborate with the government to set up a joint venture company to hold the tourism lease.

Conversion Scheme

The government introduced a policy to allow conversion of picnic islands into full-fledged tourist resorts. A picnic island is a local reference to uninhabited islands held on lease by individuals for day trips, excursions and picnic purposes. Some of these islands were collaborating with resorts to sell exclusive Robinson Crusoe type experiences to resort guests by arranging trips to these islands.

Picnic islands which wanted to migrate were reclassified as tourism islands and converted into resort leases granted to joint venture companies created by picnic island lessees in partnership with the government.

Compensation Scheme

In circumstances where the government is faced with payment of compensation to a person wronged by government action, the government preferred to enter into a settlement agreement by granting an island for resort development to a company created by the “payee” in association with the government.

A joint venture agreement is created, the joint venture company is formed and a tourism lease is given to that company.

Boundary Scheme

If an island was within the boundary of an existing resort, the boundary regulations were used in stretched creativity, to allow the owner of that resort to seek the second island in the vicinity of that resort via a joint venture set up under a separate tourism lease.

These are some of the key avenues through which tourism properties have come to be vested in joint venture companies in whom an insignificant percentage of shares is held by the government.

Nominal government involvement

In almost every company created in this format, there is nominal government involvement and action.

Typically, the government would hold 10% of the shares although at times it may be slightly less or more. The capital due in respect of government shares would be contributed by the investor, and the government would not get involved in the management direction or control of the company.

The government would get a fixed dividend when it is declared, and would obtain an indemnity against any financial liability or debt obligation.

All in all, none of these joint venture companies was truly meant to be a partnership between an investor and the government where both partners contributed capital and resources to create a common venture with a view to making a profit.

It the most ordinary sense of the word, the government would merely lend its name to bring the property within the exception in section 5 of the Tourism Act (as explained before).

Correcting an error

In an effort to cure this unfortunate dent in the regulatory regime, the government introduced a provision (when it proposed the Eighth Amendment to the Tourism Act) by which a legal basis was provided to sanction the joint venture partner(s) to buyback government held shares in joint venture companies. The Ministry of Finance was empowered to create rules to govern the process.

With the introduction of the Eighth Amendment, some joint venture companies acted early and wisely to obtain government held shares and bring the company within the exclusive control of the investor both in fact and in law.

With the change of government in 2018, a presidential commission was created to investigate corruption and recover stolen assets. This commission had directed the Ministry of Finance to halt the share buyback process carried out at the time under the Eighth Amendment.

This freeze continued until the Tourism Act was amended in December 2020.

By virtue of the Tenth Amendment to the Tourism Act, the government altered the previous buyback provision in the law and replaced it with a new process and a statutory formula. That is to say that the purchase price formula is now specified in the law itself and the process is left to be regulated by the Ministry of Finance via regulations.

The new framework

With the rule change that occurred with the introduction of the Tenth Amendment, the ability to buy back government shares in joint venture companies was allowed to continue but the formula for the purchase price was altered. The new rule also created more administrative and regulatory requirements than before.

Under the new rule, the key part is the formula for the purchase price. It multiplies land area with the dollar figure five and multiply it again with the percentage of shares held by the government.

In case, the land area of the island is 1000 meters and the percentage of shares held by the government in the JV company is 10, the formula would work like this:

Multiply the dollar figure 5 with the total land area and multiply again with percentage of shares. So it comes out like this: USD 5 x 1000 meters of land x 10 percent of shares in the company = USD 50,000.00 purchase price.

This example is provided in the regulations itself.

Under the new regulations published pursuant to the Tenth Amendment, the Minister of Finance would be required to sign a sale of shares agreement and the Privatization Board is asked to carry out the process of transfer.

The new rules allow for the payment of the sale price in one payment or distributed into installments payable inside 18 months.

The formalities associated with the transfer of shares (like those required by the Companies Act) would need to be completed within 15 days from full payment of the sale price.

Also, there is a catch – the regulations apply only if the shares are transferred to the remaining shareholder(s) in the joint venture company. The regulations do not apply if the share is transferred to a third party.

A functional translation

Here is a functional translation of the regulations published by the Ministry of Finance.

If you would like to read the original regulations, you can find that here.