The investments in the stock market by the Employees Provident Fund have come in for severe criticism. There are allegations that interested parties have palmed off to the EPF, their shares bought at peak prices during the bull market which ended a few months ago. There is particular criticism directed at the EPF’s purchase of Baihira Farms shares which went above Rs.300 but is now down to Rs.150 or so. The share was unnecessarily pushed up by brokers on the back of the EPF purchases.
Since our market is small and lacks liquidity, any big orders cannot be executed without a steep increase in price. This point has to be noted by those who engage in trading. Since, the EPF orders are farmed out to several broker firms, the trading is effectively done by the brokers. There are also negotiated sales for large quantities where an offeror wants to dispose of his shares in one lot for otherwise the price would drop steeply with every large lot size sale. Any large buyer has to be particularly careful since normally there could be a premium payable for a large quantity in a rising market or a large discount in a falling market. The EPF Investment Manager has to be conscious of the state of the market and not pay too much. There has been criticism also about the purchase of Galadari Hotel and Laugfs Gas shares by the EPF. There are allegations that a higher price was paid than necessary to acquire the shares in these two companies with the intention of rewarding their controlling shareholder sellers.
There is criticism of a different sort about the purchase of shares in the listed banks like Commercial Bank or Hatton National Bank. The criticism is that the EPF investments, which are carried out by the Central Bank, also supervises the commercial banks and therefore has access to unpublished price sensitive information and if they trade on the basis of such information they would be guilty of insider trading, a criminal offence in law. It is correct that the Department of Bank Supervision of the Central Bank carries out checks and inspections which provide them with unpublished information about the particular banks.
But, the shares of the banks are the most attractive shares in the market, providing both safety and good returns. To shut their shares altogether from the EPF portfolio would be to deprive the subscribers to the EPF of valuable shares which could provide extra returns. Should the workers, who contribute to the EPF, be deprived of such opportunity for high returns? The answer to the problem of access to unpublished price sensitive information could be resolved by building a Chinese wall to separate the Investment Management arm of the EPF from the Department of Bank Supervision.
Another criticism is that the EPF by acquiring a large stake in a bank can interfere in the appointments and management of the banks. This unfortunately is a possibility which is not at all desirable. Large global investment funds are passive investors and they do not seek to change persons on the board of Directors or interfere in the management of the company. They leave that to those who are more competent to do so. The EPF should follow this same policy of being a passive investor. The State Corporations already suffer from the curse of outside interference in the management by politicians and the appointment of political favourites and bureaucrats who lack knowledge and experience in the particular field of business of the State Corporations. These men have driven these corporations to bankruptcy and destroyed the taxpayers capital invested in them.
There are some critics who oppose what they say is the attempt of the EPF to prop up the stock market. They would prefer to see the stock market collapse altogether. But, a stock market collapse generally has adverse consequences on other sectors of the economy. It could lead to financial losses for many people who had bought shares in an earlier period at higher prices. There could also be what economists call systemic failure if a broker firm were to fold up unable to settle the trades carried out by it. It would undermine the other broker firms to whom they owe money. We remember the financial crisis in USA in 2008/2009 when the housing mortgage market collapsed. Many Investment banks were in trouble and Lehman Brothers collapsed. The US government allowed it to fail but when it realised that other banks were similarly exposed, the authorities stepped in to bail them out.
Recently, we saw the Greek government becoming insolvent and seeking a bail out from the European Union. Then it was realised that several European banks and even some US banks were exposed to Greek debt too. The European Bank intervened to provide low interest loans to these banks, which these banks promptly invested in Euro bonds at higher rates of interest. Governments do not risk systemic failure when financial markets face a crisis.
Our stock market is facing a crisis due to the bursting of a bubble which emerged after the end of the war. The high share prices could not be sustained and a bursting of the bubble was inevitable. But when this took place many investors deserted the stock market. The EPF has come to the rescue of the stock market and its limited intervention has already restored the confidence of the retail investors and encouraged other Funds and other large investors to come in without waiting for the market to bottom out on its own. Most people would not fault the EPF for doing so.
source - www.nation.lk
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