Monday, November 5, 2012

CSE in disarray

The country’s capital market is in disarray with investors stuck in a casino mentality with too much focus on making a quick buck, where related party transactions siphon off capital and assets of public listed companies to private companies, and the regulator now functioning under the whims of an influential few in the industry. The administrators of the Employees’ Provident Fund (EPF) too are failing to publish its annual report and disclose in detail investments in the stock exchange, thereby depriving nearly 14 million people who are members of the EPF timely information such as those available to those who invest in listed companies.

These startling details, not a secret for many, were highlighted once again at a round table discussion on ‘Capital Markets—Integrity and Development’ organised last week by the European Chamber of Commerce of Sri Lanka (ECCSL). There was no outright denial of these revelations by two commission members of the SEC who participated at the forum, with one of them saying people should not dwell too much on the negatives.

Independent Economic Advisor to the ECCSL Dr. Dilesh Jayanntha said the county’s capital market had the potential to create significant wealth in the long term and provided an interesting example.

Purchasing 1,000 shares at Rs. 10 each in a tea company he did not name that listed in 1980, Dr. Jayanntha said an investor would have earned Rs. 3.2 million in dividends alone to-date while the capital would have appreciated to significantly to Rs. 16 million. An ordinary savings account would have yielded only Rs. 30,000 while a high yield deposit would have brought in Rs. 60,000.

He said that investors, who were today more focused on making a quick buck and stuck in a casino mentality, should pick their counters more carefully. He also charged that listed companies through related party transactions were siphoning off capital and assets into privately held companies.

"We hope the SEC would conscientiously follow the good examples of the former chairpersons of the SEC, Ms. Indrani Sugathadasa and Thilak Karunaratne, and that the new chairman (Dr. Nalaka Godahewa) would continue what they had started," Dr. Jayanntha said.

UNP Economic Spokesman Dr. Harsha De Silva MP said an influential few were now regulating the regulator. "The failure of the regulator to create a level playing field because it is controlled by the industry it is supposed to regulate, or a group therein, is called government failure. This is not saying that the country is failed state. This is not a political statement. It is a technical term in economics to describe how the regulator loses its independence," he said.

"There is special interest group, called a mafia by the former SEC Chairman, regulating the regulator the way it wants. Those with vested interests have a lot to lose in a strong, independent regulatory environment," Dr. De Silva said.

He went on to say that recent directives issued by the SEC which reversed measures taken by previous boards, reshuffling SEC officials, top regulators being employed in companies in the industry after retirement without a cooling off period and letters sent to investors exonerating them from any wrongdoing were processes in regulatory capture.

"There two ways in which all this can be reversed. One, if there is actual failure which will then result in more regulation as was the case with Wall Street; or two, if consumers or investors become active enough and demand justice and fair play. Hopefully we would see the second because this would avoid catastrophe of the market actually failing," Dr. De Silva said.

JVP MP Sunil Handunnetti said investors had no forum to voice their concerns, demand justice and assert their rights.

"I am not merely concerned about the few thousands that invest in the stock exchange, but the millions of EPF members who are now investors in the stock exchange because of the EPF investments there. Investing EPF funds in the stock exchange can be justified. But who can be held accountable for the investment decisions made by the EPF (managed by the Central Bank)? Will the government guarantee the investments made? Will it bare the entire risk? Who will be held accountable for the loss making share transactions?" he asked.

"Every member of the EPF (more than 13 million according to the Central Bank 2011 Annual Report) has a right to know about the details of the share transactions carried out by the EPF in the stock exchange. There is more than one trillion rupees sitting in the EPF. This is not the government’s money. It is not the Central Bank’s money.

"I have asked the Parliamentary Research Department to dig out information about the EPF transactions but nothing came out of this. The 2010 annual report of the EPF was released only a few months ago this year. The annual report for 2011 has not seen the light of day. What will happen if a listed company fails to issue its financial reports on time? There will be many questions asked by investors. But when it comes to the EPF, members’ rights are being violated with impunity," Handunnetti said.

A listed firm failing to furnish its quarterly or annual financial reports is penalised by being transferred on to the default board of the stock exchange.

Handunnetti said the EPF took a Rs. 12 billion hit on stock market investments.

Chartered Accountants of Sri Lanka President Sujeewa Rajapaksa, an ex-officio of the SEC, said while solutions were being sought for certain issues people must not focus only on the negative aspects. He said the regulator was doing a lot of good work.

Rajapaksa said the SEC was in the process of developing new directives on related party transactions which seeks to hold the audit committees of listed companies accountable. He also said the SEC has a good governance code which would also be updated. He said listed companies should behave ‘properly’ with proper, timely and better disclosures.

Deputy Treasury Secretary Dr. B M S Batagoda, also a commission member of the SEC, spoke on government policy towards the capital market, which was reported last Friday (02-City Edition).

He said that the EPF annual report would be released soon and said criticism over EPF investments in the stock exchange were unfair as an investment committee oversaw these investments.

"There is a very small market cap and the government is worried about this. The private sector is not doing enough," Dr. Batagoda said.

He said listed firms were not proactive enough in increasing the public float, while companies outside the stock exchange were not proactive in seeking to list their shares.

"We are considering listing public entities and joint ventures with the private sector. Unit Trusts too have many opportunities for growth," he said.

Minority shareholder rights activist K. C. Vignarajah addressed the forum and said governance had to improve for a sustainable, thriving capital market.

In response to the accusations by some in the industry that the market is known as a ‘mafia’, a number of stockbrokers present expressed their views that this term is detrimental to the industry as a whole. "This term is not very appropriate", stated Eardley Kern, Head of Sales and Marketing at Lanka Securities (PVT) Limited, who has 22 years experience in the Colombo Stock Exchange. He added that the "market operates on fundamental perception and confidence… fundamentals haven’t changed, it’s improving. But the perceptions and the confidence have been deteriorated by people who have held positions at the highest office making incorrect statements."

source - www.island.lk

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