SEC plans crackdown on shell companies

By Thushantha Jayatilaka

Securities and Exchange Commission of Sri Lanka is planning a crackdown on the Non Performing Listed Companies (NPLC) in the Colombo bourse- which are popularly known as shell companies- in order to prevent various kinds of wrongdoings by these companies and those who invest in them.

With regard to this, the SEC plans to make amendments to Listing Rules relevant to NPLC and have sought public comments in doing that following presentation of a consultation paper.

According to a recent study done by the Corporate Affairs Division of the SEC, some companies continue to be listed even though they are incurring heavy losses for several years, thus depleting reserves of those companies.

Further the study has found out that certain companies have paid dividends which have ceased their business operations from their issued capital which is a violation of the Companies Act No. 17 of 1982.

Some companies remain listed in the bourse despite closing operations and significant assets have been sold off. Furthermore auditors of those companies have modified their reports on the company's ability to continue as an on going concern and have issued disclaimers of opinions on the financial statements of these companies.

The SEC study also revealed that NPLC's has been bought by certain parties for certain advantages, such as avoiding initial listing requirements to list in the main board by way of acquiring shares of an existing non performing listed company at a cheaper price thereby reducing the public float.

According to the SEC, the current regulatory framework for non performing companies does not allow for a mechanism to closely monitor and regulate non performing listed companies. However with the new Companies Act of 2007 a new provision was introduced to deal with companies with a serious loss of capital.

As per the Section 220 of the Companies Act No 07 of 2007, a director of a company shall call an extraordinary general meeting of shareholders if the company's net assets are less than half of its stated capital. The notice of that meeting shall include a report prepared by the board of directors to inform the nature and extent of the losses incurred by the company and steps are taken to prevent such losses in the future.

According to the consultation put forward by the SEC on this purpose, it maintains the necessity to integrate these pieces of legislation in the Companies Act to listing rules for NPLCs.

source - www.dailymirror.lk