Demystifying the Complexity of Related Party Transactions

A seminar was organised by BDO Partners, Chartered Accountants, based on the title ‘Demystifying the Complexity of Related Party Transactions,’ and a panel discussion was held to allow the participants to raise their questions to the panellists with regard to RPT.

The panellist consisted of eminent persons who are well conversant in relation to RPT such as Dr. Harsha Cabral, President’s Counsel and Chairman of Tokyo Cement PLC; Gamini Wijesinghe, Director General of Sri Lanka Accounting and Auditing Standards Monitoring Board (SLAASMB) and former Senior Commissioner of Department of Inland Revenue; Renuka Wijayawardhana, Chief Operating Officer of the Colombo Stock Exchange (CSE); Tishan Subasinghe, Partner Technical and Human Capital – BDO Partners; and Priyana Gunesekera, Head of Listings and Corporate Affairs of the CSE. The panel discussion was moderated by Daily FT Editor Nisthar Cassim.

A practical viewpoint

Dr. Cabral expressed his opinion with regard to the Companies Act and the Code of Best Practices on Related Party Transactions (RPT) from a practical viewpoint. He pointed out that mechanisms like the interests register have been in place for a very long time to deal with RPT. He emphasised that the directors’ duties in relation to RPT must be read together with the general obligations of directors given in section 184, 186, 187, 188 and 189 of the Companies Act, where they must act in the best interests of the company. It was also mentioned that it is not only a company law requirement but an ethical obligation that the directors do not place themselves in situations where there can be a conflict of interests.

Dr. Cabral was of the opinion that the Companies Act is applicable to all companies in Sri Lanka, and as such the law provides a broad outline on the duties of directors for each of these companies. The fact that they are entitled to vote on transactions in which they have any interest cannot be taken in isolation as this vote has to be exercised in line with his broader duties and responsibilities and in the best interests of the company.

When appointed as a director of a listed company, it was mentioned by Dr. Cabral that the regulators impose a higher standard of care on the directors in order to protect the investor interests. The introduction of the Code of Best Practices on RPT and even the Code of Best Practices on Corporate Governance are examples of where the Securities and Exchange Commission (SEC) has placed more stringent requirements and put in place a regulatory framework on listed companies to ensure greater transparency and accountability of its affairs.

Difficulties in capturing RPT 

As a member the Board of Directors of several listed companies Dr. Cabral also discussed the role of the RPT Review Committee which has to be set us under the Code of Best Practices on RPT. This committee is charged with the responsibility to review all RPT of the company.

He explained the difficulties in capturing RPT as one director may also be a director of another company with which the company has business dealings but such transactions may escape the notice of the director inadvertently. Dr. Cabral suggested that companies will have to invest on software which is capable of connecting the directors’ interests in transactions by entering the NIC number of the director to such computer system. There is however, a doubt as to whether such system can also be programmed to capture RPT with parties outside the country as well.

There was a request from the audience to the representatives from the CSE to consider the possibility of making such a software freely available to the public in order to ensure ease of compliance with the new regulatory requirements.

Disclosure-based listing regime

Renuke Wijayawardhane informed that a disclosure-based listing regime has been adopted by the CSE in order to ensure that adequate information is disclosed by the listed companies, starting from the point of listing, so that the investors can make an informed decision about the company’s shares.

The CSE had introduced rules on related party transactions since 2010 which is in effect as of now. There are certain disclosures required by way of immediate disclosures as well as in the annual reports. However it was subsequently felt that the present rules were not broad enough and certain rules did not provide clarity too. For e.g., at times it was difficult for companies to define what a related party transaction was. A frequent question was having common directors would constitute a RPT.

Sometimes related party relationships and transactions may be difficult to identify and report by the company. Sometimes it may have been noted that the company’s related parties may operate via an extensive and complex network of relationships due to the convoluted shareholding structures of the company which makes it difficult to unravel the RPT.
Wijayawardhane accepted that there was some confusion regarding what is a ‘recurrent’ RPT and several companies wanted to know if they needed to disclose each recurrent transaction separately or whether to disclose the cumulative amounts. The CSE subsequently issued a clarification that companies can in fact group ‘recurrent’ transactions in the ordinary course of business and disclose an estimated amount. However, the ‘non-recurrent’ transactions will have to be disclosed as and when they take place.

At times the CSE has noted that the disclosures did not specify the terms of the transaction; whether it in the ordinary course of business, concessionary rates would apply etc. Also, the rationale for the transaction was also not given, although required in the rules.

However, with the introduction of the new rules, which would be mandatory from next year, most of these confusions would arise. The new rules would ensure that there a transparent process established by the listed companies to review the related party transactions with adequate checks and balances together with certain enhanced disclosure.

Wijayawardhane expressed that certain parties may wonder as to why the CSE requires so much information but it was explained that once a company gets listed the company acquires a responsible role as the public will be investing in that company and if discrepancies in information are not avoided the public will be reluctant to invest in the company or may start discounting the true value of the company and the company’s cost of capital will increase.

It was inquired as to what steps are taken by the CSE in the event of noticing any lacuna in the regulations and Wijayawardhane informed that CSE will duly inform the SEC and the SEC will take remedial action and also in the event of any irregular activities by parties, the SEC will be informed with regard to same by the CSE and the SEC will take necessary legal action against such parties.

Transfer pricing regulation

Wijesinghe, speaking through experience whilst being the Director General of SLAASMB and former Senior Commissioner of Department of Inland Revenue, addressing the attendees informed that there is no applicable threshold for transfer pricing regulation under Section 104 of the Inland Revenue Act.  The threshold of Rs. 50 million and 100 million for domestic transaction and international transaction respectively are applicable only for the purpose of keep and maintain of relevant information which is required under regulation 5 of Transfer Pricing Gazette No. 1823/5 dated 12 August 2013.
It was also informed that RPT are liable to test under arm’s length price. But if both related parties are local, then if either party is not enjoying tax holiday, concession rate or loss incurred for the purpose of tax the section 104 is not applicable. This condition is not applicable if one party is in different jurisdiction.

The rate of interest to be charged for the related party was also mentioned as a controversial area in RPT. The general idea of the arm’s length pricing is the price which is charged by independent party in uncontrolled condition, in other words, the open market price for the same or similar product or services under similar condition. It was also mentioned that as far as interests are concerned, identification of similar conditions are difficult. Therefore cost of capital plus relevant profit margin may be the reasonable rate to be charged and the relevant interest rate to be adjusted considering the risk factors of the borrower.

Wijesinghe informed that transfer pricing is applicable for any transaction or group of transactions of class of transactions. He further explained that transfer pricing regime now have been established in Sri Lanka, therefore such to be complied with in relation to RPT.

It was further explained that Section 104 defines what arm’s length price means: “a price which is applied in uncontrolled conditions in a transaction between persons, other than associated undertakings”.  This section is implied that the price on transactions which is take place between related parties to be treated always as non-arm’s length. Therefore if there are any transactions between related parties they have to ready to prove that there prices are arm’s length.

Accounting and auditing standards

SLAASMB is the only authorised regulator for issuing and monitoring of accounting and auditing standards in Sri Lanka, and the SLAASMB Board has given authority to The Institute of Chartered Accountants of Sri Lanka to issue relevant accounting and auditing standards. While regulating the process of issuing standards, the board annually review around 1,500 annual reports and 100 cases of audit to satisfy the application of the relevant standards.

Sri Lanka Accounting Standards (LKAS) 24 is the standard expressing the disclosure of RPT. The Board has noted that 163 entities including 54 SMEs have failed to provide information relating to the nature of the related party relationships as well as information about transactions with related parties. Wijesinghe further stated that any persons who fails to comply with provisions shall be liable to a fine.

Priyana Gunesekera informed that currently there are two sets of rules applicable for RPT namely the rules that came into effect in September 2010 and the rules that came into effect from 1 January 2014 which are currently on a voluntary basis and would become mandatory with effect from 1 January 2016.

It was also informed that based on the sample of annual reports reviewed by CSE none of those listed companies have adopted the new rules and continue to make disclosures based on the rules introduced in September 2010 which are currently mandatory.

During the review process by CSE, it has been noted that when complying with the 2010 RPT Rules, the listed companies have issues in tracking down related parties and having them in a system in a retrievable manner, and even though market announcements are made by certain companies the announcements do not contain the required disclosures, e.g. the rationale, the terms whether in the ordinary course of business or on special terms at concessionary rates, etc.

It was mentioned that the requirement under the applicable rules is to make an initial announcement on an estimated basis of recurrent RPT initially and thereafter make an announcement when the actual aggregate exceeds 5% of the estimate.
The new rules that are currently adoptable on a voluntary basis do not require immediate disclosure of recurrent transactions and whether non-recurrent RPT is to be disclosed per transaction or on a cumulative basis. The requirement is for each transaction to be disclosed if it exceeds the threshold and thereafter all material transactions, prior to the concerned parties being informed by a third party.

CSE also have identified certain RPT from the annual reports which have not been duly disclosed as per rules and non-disclosure of RPT separately for each related party.

Challenges under the new rules

Gunesekera explained that some of the challenges to be faced under the new rules for example are prior to the board approving the RPT to obtain shareholder approval when required in a well-planned manner when entering into RPT and, the RPT Review Committee having to review the transaction prior to or before completion of a transaction since transactions entered into for which approval will be obtained before completion of a transaction may pose issues if not accepted and having to track down related parties of the entity prior to six months of a transaction, which can be a very challenging task.

It was also mentioned that when a company does not inform the CSE regarding a RPT that requires immediate disclosure, the CSE could be made aware via a complaint or a media release. The other method would be at the time of reviewing the annual report of the company, where the CSE would identify certain RPT based on annual report information, which however may very well happen within five to eight months after the year end.

In such instances the CSE would include the observation in the observations letter and compel the company to comply with the rules and require the company to make an immediate disclosure. In a worst case scenario the CSE may take certain action in line with those provided in the listing rules.

The panel was raised with the question as to what would the role of the auditor be with regard to the rules and how effective would they be in complying with the rules.

Subasinghe informed that an auditor must ensure that the RPT is duly completed whilst complying with the rules. However it is the duty of the management of the company to ensure and follow the proper process of identifying the RPT and to identify such.

It was further informed that the management may use specific software to capture such or an independent audit committee to ensure that the rules are fulfilled but the management to ensure that the right people are selected to the committee.

Furthermore, the Sri Lanka Auditing Standards (SLAuS) 250 ‘Consideration of Laws and Regulations in an Audit of Financial Statements’. The auditor has to ensure compliance with any laws or regulations which would have a material impact on financial statements. This includes any laws and regulations on Related Party Transactions. And also as per the SLAuS 550 ‘Related Parties,’ the auditor has to ensure proper audit procedures been carried out in covering Related Party Transaction.

Furthermore, the auditor has to ensure compliance with LKAS 24, the according standard on ‘Related Party Disclosures,’ which has mainly focused on making adequate disclosures on Related Party Transactions.

When asked what steps have been taken by the Department of Inland Revenue regarding the new rules, the invitees from the Department of Inland Revenue informed that the department is ready to follow the new rules and the department intends to organise workshops to train the department officials in order to be prepared to handle transfer pricing issues.

Role of directors

It was suggested to the panel that the directors are not aware of the rules with regard to RPT, and Dr. Cabral informed that as per the Companies Act there are no specific requirements to be a director but it is the duty of the shareholders of the company to appoint those who are suitable to be in the board especially independent director as they are required to bring in a wealth of knowledge, and proper training to be provided to the directors to carry out their duties.

Dr. Cabral further added that the Golden Key Credit Company would not have collapsed if proper disclosures too place and directors were provided with training and followed their duties accordingly.

When inquired from the Department of Inland Revenue whether irregular RPT are detected, Wijesinghe informed that they have detected and losses of revenue to the Government has been reduced because of the detections. The department has also taken steps to gazette information regarding transfer pricing and the requirement of disclosure has been emphasised.

Published in DailyFT, Sri Lanka on June 03, 2015 (http://www.ft.lk/article/428265/Demystifying-the-complexity-of-related-party-transactions). Words by Radhi de Silva.

A hero on his native soil, so was thought: The Sepala Ekanayake Story

Headlines were made locally and internationally when Sepala Ekanayake a Sri Lankan national hijacked the Alitalia flight AZ 1790 Boeing 747 with 340 passengers on June 29, 1982. This case was sensationalised mainly because this was the first time a Sri Lankan national was engaged in a hijacking of a passenger airline and at that time it was not an offense under the Sri Lankan legal system to commit such an offence.

Facts

Ekanayake having being born in Matara, married an Italian national in 1977 with whom he had a son whilst residing in Modena, Italy. However, Ekanayake lost his Italian visa some time after his son’s birth and was denied a renewal of his visa by the Italian authorities and the authorities suggested that Ekanayake return to Sri Lanka and apply for visa with the Italian Embassy in Colombo which would probably take him six years to receive the visa.

Being infuriated with the situation he concocted a plan to hijack an Italian aircraft and put forth his demands straight to the Italian government.

On June 30, 1982 Ekanayake travelled to the New Delhi airport with some of his friends and awaited the arrival of the Alitalia flight AZ 1790 which was travelling from Rome to Tokyo. Ekanayake having boarded the flight waited until the plane reached a level of 35,000 feet and then issued his demands to the pilot in a letter, which were as follows:

1. to have Ekanayake’s son brought to him;
2. 2. to be given US$ 300,000/- for him to distribute among his collaborators;
3. 3. for the plane to land at the Bangkok Airport, leave the doors closed, issue the demands to the Italian authorities and communicate only through radio; and
4. 4.That all the passengers be allowed to disembark at the without security checks. And if his orders were not followed Ekanayake would blow up the plane with the “most sophisticated bombs manufactured in Italy”.

The chief pilot George Amarosa immediately dropped to 25,000 feet and headed to Bangkok. In a few hours Ekanayake’s wife and son along with the ransom were on the way to Bangkok. In 30 hours the transaction was completed and Ekanayake released the passengers of the plane. But Ekanayake was confronted with the new problem of not knowing where to go with his wife and son and his newly gained wealth in order to start a new life.

Matters of Jurisdiction

The plane belonged to Alitalia of the Italian government and the offence took place in Thailand. Therefore, the prime responsibility to deal with the hijack situation rested with the Thai authorities and should have been dealt by the Thai authorities thereafter. But the Sri Lanka Ambassador and the Sri Lanka foreign office played an active role in the negotiation process and the freeing of the hostages, merely because Sepala Ekanayake was a Sri Lankan.

Due to the miscommunications that took place between the authorities and based on the assurance provided by the Sri Lankan ambassador in Bangkok Manel Abeysekera, Ekanayake was given the opportunity to travel back to Sri Lanka without any fear, which Ekanayake reluctantly did. However, the Italian government demanded that Ekanayake be handed over to them.

A Hero’s Arrival in Sri Lanka

On the assurance given by the Sri Lankan ambassador, Sepala Ekanayake arrived in Sri Lanka with his wife and child to a virtual hero’s welcome in the early hours of 2nd July, 1982. Ekanayake and his family having been cleared by the Immigration desk, while the Customs having cleared their baggage and money including the US$ 300,000/- “ransom money”, they were driven straight into the Hotel Ceylon Inter- Continental where they had been checked in to Room No. 730.

Diplomatic Controversy

The Sri Lankan Government was in a dilemma since the public opinion in Sri Lanka opposed the handing over of Ekanayake to the Italian authorities since some in Sri Lanka even deemed Ekanayake a hero; whilst on the other hand the Sri Lanka government was being condemned for harboring an international criminal and for the violation of the International Air Traffic Agreement (IATA) which Sri Lanka was a signatory however due to the sovereignty of the Sri Lankan constitution, a local statute was required to be passed by the legislature to make the provisions in the IATA enforceable in Sri Lanka.

Daya Gamage having being a political specialist at the American Embassy during this time states that it is very likely that the US authorities would have adopted a hard line and threatened to declare Sri Lanka a country in the category of Libya if Ekanayake was not prosecuted for the offences committed. At that time Libya was already declared an ‘international pariah’ with a tag of ‘exporter of state terrorism’ due to the Libyan government’s leniency towards a number of hijackings by Libyan nationals.

Issues at Law

Sepala Ekanayake was allowed to come into Sri Lanka by the Sri Lankan authorities as a free man after having hijacked a passenger plane, whilst holding the crew and passengers hostage and having extorted a ransom of US$ 300,000/-.

With pressures building from many directions, the officials needed a way to arrest Ekanayake but except for newspaper reports the police had no grounds to make an arrest since, no aggrieved party had made a complaint to the police regarding the hijack; and that Ekanayake had not committed a cognizable offence in Sri Lanka and also most importantly no anti hijacking laws were formulated in Sri Lanka at that time.

Crisis Averted

Therefore as an initial step to take action against Ekanayake, “some” complaint was required from an aggrieved party that will prima facie show that an offence has been committed, in order for the police to bear responsibility and order his arrest.

On 3rd July,1982 Franco Micieli de Biase the Italian Ambassador handed over a complaint requesting the Sri Lanka Police Authorities to take necessary action against  Sepala Ekanayake for the hijacking of an Italian passenger airline and for the return of US$300,000 to the Italian Government.

After the police accepted the aforesaid letter from the Ambassador, Chief Inspector George Nicholas recorded his statement and thereby the Sri Lanka Government authorities were able to take action under the law in respect of this complaint.

It must be noted that Ekanayake had to be arrested in a lawful manner and the police had to do so with all possible precautions. Had the police been pressurized to rush to arrest without the complaint of the Italian Ambassador the defense could have argued that the arrest was illegal.

Eventually the arrest of Ekanayake took place on the 3rd July at 5.00 p.m. in Galle barely 36 hours after he stepped on Sri Lanka soil. The wheels of the law were set in motion whilst defusing the international tension that was building up.

With the handing over of Ekanayake to the Criminal Investigations Department (CID) at 8.45 p.m. on 3rd July, 1982 the task of the Colombo Police ended. Later on the CID carried out a successful investigation and Ekanayake was indicted and convicted under the anti- hijacking laws which were passed under Offences Against Aircraft Act No. 24 of 1982 (“the Act”), which was only assented by the speaker of the Parliament of Sri Lanka on July 26, 1982.

The Act gave effect to certain conventions[1] which Sri Lanka had become a party, and to also to deal with matters connected therewith which was enacted with retroactive effect.

Subject to the newly passed statute, Ekanayake was charged[2] on June 29, 1982 having unlawfully forcing or threatening the pilot of the said aircraft that if his demands were not met he would explode the said aircraft with all on board with the use of explosives; and thereby Ekanayake having taken control of the aircraft which was in flight between New Delhi and Bangkok.

Furthermore, Ekanayake was also charged under section 394 of the Penal Code for having dishonestly kept US$299,700 knowing same to be stolen property between July 1 and July 3, 1982 in Colombo which was within the same jurisdiction as the offense set out as the aforesaid charge.

Judicial Power Enforced

The case against Ekanayake commenced on May 30, 1983 in the Colombo High Court with case No.1203/83, before the Honorable High Court Judge J.J.F.A. Dias, Upawansa Yapa (then deputy Solicitor General) and V.J.W. Wijayatilaka (State Counsel) appeared for the state, whilst Attorneys-at-Law Ranbanda Seneviratna with Dammika Yapa, Mahinda Rajapaksa and Mahinda Jayawardana, appeared on behalf of Ekanayake and Attorneys-at-Law C. Titawela, S. L. Stanislans and Haradsa watched the interest of Alitalia.

At the end of the trial, the High Court found Ekanayake guilty on the charges of hijacking and retention of stolen property and sentenced Ekanayake to simple imprisonment of life on the first charge and three years rigorous imprisonment on the second charge.

Ekanayake appealed against his conviction to the Court of Appeal with case No.132/84, who was represented by Dr. Colvin R. De Silva. The appeal court bench consisted of Justice Abeywardana, (President) Justice Jayalath and Justice Ramanathan, who interfered with the sentence imposed by the trial judge and held that sentence of simple imprisonment could not run concurrently with a sentence of rigorous imprisonment and altered the sentence on the first court to one of five years rigorous imprisonment to run concurrently with the sentence on the second count, which was reduced to two years.

Ekanayake appealed to the Supreme Court who was again represented by Dr. Colvin R. De Silva and the appeal was heard before Justice R.S. Wanasundara, Justice L.H. de Alwis and Justice O.S.M. Seneviratna.

During the appeal made before the Supreme Court with case No.68/86, the defense challenged the jurisdiction of the Sri Lankan High Court to try the case under section 17 of the Act for crimes committed by a Sri Lankan on an Italian plane in Bangkok, also a plea of misjoinder and whether a charge of retention can be leveled against the extortionist himself were also raised.

The Supreme Court, after hearing the appeal, delivered judgment on January 18, 1988[3], dismissing the appeal, affirming the conviction and sentences on Ekanayake.

Justice de Alwis who delivered the judgment of the Supreme Court with other two judges agreed with the relevant section dealing with the offence of hijacking according to the judgment comparing section 17 of the Act along with section 19 of the Act based on the following:

1) section 19(3)(d) of the Act vests jurisdiction in respect of the acts of the Defendant referred to in section 17(1)(a) to (e) in relation to a foreign aircraft. The words ‘in relation to’ include acts committed on board the aircraft also. The words in relation to, as used in section 19(2)(d) mean ”in respect of” although in other parts s o the words used are “on board or in relation to”. This interpretation must be given in order to give the words a rational sense which is consonant with the Hague Convention[4].

2) section 9(1) (f) of the Judicature Act No. 2 of 1978 confers jurisdiction on the High Court to try Sri Lankans for offences committed outside Sri Lanka or on board or in relation, to any ship or aircraft of whatever category. Moreover section 39 of the Judicature Act bars objection to jurisdiction by an accused person who has already pleaded and taken part in the trial.

3) Where theft (or extortion) has been committed in a foreign country it is possible to charge the thief or (the extortionist) himself in the Sri Lankan courts with dishonest retention of the property so stolen or extorted.

4) The acts for which the accused was charged under the Act and retention of stolen property were connected so as to form the same transaction based on the main test of “continuity of action”.

Conclusion

Ekanayake’s case is a case that certainly goes down in Sri Lankan history because of the potential international mayhem caused, all because of one man’s wish to be reconciled with his family.

This case had the possibility of threatening the diplomatic relations between Sri Lanka and the international community and most importantly creating a legal crisis, however all were fortunately averted due to the quick assertive acts of the executive, the legislature giving validity to international conventions through domestic statutes also the Judiciary taking up the responsibility of giving way to the will of legislature by enforcing statutes that have retrospective effect. However, it must be noted that the proceedings of the case have most certainly created debate amongst jurists regarding the manner in which the 1982 act was enacted and how a man who thought was innocent on his native soil was made a criminal.

[1] Convention on offences and certain other acts committed on board aircrafts, signed at Tokyo on September 14, 1963, Convention for the suppression of unlawful seizure of aircraft, signed at the Hague on December 16, 1970, and Convention for the suppression of unlawful acts against the safety of civil aviation, signed at Montreal on September 23, 1971

[2] under 1982 Act, s 17(1) read with s 19(1) and 19 (3)(d)

[3] Ekanayake v. Attorney-General(1988 SLR1 46)

[4] Art 1, 2 and 4

Sources of reference:

Case Report, Ekanayake v. Attorney-General [1988 SLR1 46]

Newspaper publications on The Island, The Nation, etc.

Publications by the Retd. Senior Deputy Inspector General of Police  regarding the event.

 

**This article was published in the Fifth Volume of the Junior Bar Law Journal in 2014 

Carolina: its past, its presents and its black tea

View of the Seven Virgin Hills from the Agarawatta Division Courtesy of Bhagya Senaratne

The hill country terrain has always been an escape from the tropics for the local and foreign visitors alike. When passing through the mountain ranges, the travellers are able to view picturesque clusters of green spread throughout the hills, which makes up the high end, up country, tea plantations of Sri Lanka. This picturesque view has always been a breathtaking sight to any visitor, who enjoys the splendours of the hill country.

With the temperature dropping to an average low, and with road-bends which are sure to make some travellers slightly giddy, makes up half the experience while on the Avissawella/Hatton/Nuwara Eliya Highway (A7 road). But with the clearing of the foliage when passing through Ginigathhena, the clusters of green start to appear, and with a sight such as that makes the long bending journey certainly worthwhile.

Tea plantation was introduced by the British during the existence of their colonial rule of Ceylon. A visitor being able to visit one of the tea factories built during that rule and reminisce the colonial era is of course an opportunity which definitely should not be missed.

Apart from the scenic view on the A7 road, the perceptive traveller will come across the historical Carolina Tea Factory operated by the management of Carolina Estate which is owned by Watawala Plantations PLC. This is one of the first tea factories to be seen located at Watawala while on the said A7, and which is located passing the Diyagala Junction. And interesting enough the management of Carolina Estate allows visitors to visit this historical land mark and the management is more than happy to share the history of this age-old factory and the estate.

Carolina Tea Company of Ceylon Limited incorporated in 1892 was one of the pioneer tea companies in the country, set up primarily to plant tea. It consisted of a group of plantations situated in Lower Dickoya, which were Agarawatte, Carolina, Kandawella, Mount Jean, Wigton, Udeapola Group, Trafalgar, Goarfell and St.Margaret Estates. The Management of this group that was originally with Leechman and Company changed to Mackwoods Estates and Agencies Limited at a later date. According to the Times of Ceylon Green Book of 1939, this group had over 1,000 hectares in tea.

The Carolina tea factory was one of the original ‘central factories’ constructed closer to the shores of the Mahaweli river that flows by the estate. John Walker, who was the founder of the present Colombo firms, Walker Sons and Company and Walker and Greig, had by then acquired much prominence as a designer of plantation machinery. Therefore the task of planning and equipping the Carolina Factory was entrusted on him.

This factory was built in 1932 and it was indeed an improvement compared to some of the other factories at that time, by having mud free floors and cadjan roofs. The building was constructed with wood, which was assembled firmly on stone pillars. It had three floors going up to the height of 42 feet from the ground to the ridge. The novelty was that very often than not, the green leaf arrived by train. The factory had sufficient capacity to accommodate all the leaf not only from the group, but from many other adjoining plantations who were satisfied with a return of 9 cents (about 2p) per pound. Currently, with modifications being done to the factory and the machinery over the years, the factory can boast of its high accommodation capacity of 22,000 kilo grams of green leaves even today, and manufactures black tea subject to the Cut Tear Curl (CTC) manufacturing process.

At the time the plantations were nationalised, Carolina group had in all 1023 hectares with 579 hectares in tea, however other subsidiary crops such as cinnamon and vanilla had been planted on this property by then. Currently the Carolina Estate consists of Agarawatte, Carolina, Kadawala, Trafalgar and Binoya Divisions consisting of 892.42 hectares and 216.25 hectares are of tea while the other extents consist of cinnamon, vanilla and areca nut.

Amongst the lush cultivations exists the scenic mountain ranges coupled with pine forests and ever flowing waterfalls which are at times hidden behind the mist yet emerge at times to amaze the un-expecting traveller with the beauty of Carolina.

With the change in times and the demand for upcountry black tea ever so increasing it has been quite difficult for the plantation sector to keep up in this industry especially with the difficulty in hiring labour to work in the fields, whilst ensuring that the demands for the supply of high quality, upcountry black tea are met. Matters get even difficult as explained by Mr. Prasanna Premachandra, the Manager of Carolina Estate when individuals encroach on these estate lands ignoring proper legal procedures and thereby claiming rights over these lands which have been leased out by the government to plantation companies such as Watawala Plantations PLC.

With plenty of tasks and obstacles at hand it is quite commendable to see that the management of Carolina Estate is able to ensure that the manufacture of black tea runs smoothly and the standards of upcountry black tea are met.

The Estate takes pride in its all time records for PF1, BPS and BP1 tea grades and also has won many awards, and has obtained numerous certifications and some of which being HACCP and ISO 22000 certification. The Carolina Estate has also partnered with Ethical Tea Partnership which is a non-profit membership organisation that works with tea producers and tea companies to improve the sustainability of the tea industry.

Visitors are welcome to reminisce the past of the Carolina Estate, explore the scenic presents that Carolina has to offer and of course enjoy that excellent cup of black tea while at the Carolina factory by contacting Watawala Plantations PLC on 011-4702400.

This article was published on DailyMirror Life and http://www.life.lk