Governance in the markets

by FS

(March 14, Colombo, Sri Lanka Guardian) The Securities & Exchange Commission (SEC) on Thursday announced new distribution rules for IPOs directing that at least 40% of the subscribed issue should be delegated to small retails investors.

This follows a furore, reported extensively in the Business Times, over IPOs being over-subscribed largely based on bank guarantees often used by big investors and institutions.

Brokers and small investors have complained that the use of bank guarantees – without hard cash – gave a false impression that IPOs were drawing billions of rupees and getting over-subscribed several times over when it effect, it was the small investors and their hard cash that mattered. As a result of the bank guarantee issue, small retailers were often not allocated the small amount of shares they had requested while the big investor, without hard cash, enjoyed a larger allocation or smaller lot without committing the same amount of cash pledged by small investors.

In the post-war growth of the economy, the SEC has many issues to worry about in the field of governance, transparency and whether the companies are sticking to the rules and the Companies Act. Thus it needs to get its act right.

The fact that the SEC is slowing down is taking senior officials or companies to task, for reasons only known to the regulator, was highlighted by a question by a reporter at a recent media briefing asking whether companies or directors would be penalised for offences. “If you want we can even jail them,” was SEC Chairperson Indrani Sugathadasa’s response!

Last week, whistle blower and former chairman of Hotel Developers Lanka Ltd (HDL) Nihal Sri Ameresekere wrote to the SEC urging it to take action against the company that owns the Colombo Hilton hotel for non-issue of its annual accounts for the past 21 years. He said the directors should be liable for the accumulated losses and not doing anything about it, which is a violation under the Companies Act and subject to penalties. The same applies under SEC regulations.

Of particular concern in the governance arena – particularly at a time when the stock market is booming -- is the role of auditors and independent directors, an issue that has confronted board rooms and shareholder meetings with veteran investor K. Vignarajah, among others, constantly raising these issues at public forums and AGMs.

Recently at a forum on independent directors, the issue of a shortage of independent directors was raised by one of the corporate heads involved in the discussion. Let alone the shortage of ‘good, independent directors’, how can a director be independent if he or she is picked and appointed by the board of directors? Unfortunately the SEC rules prescribe that the board appoints these categories of directors and even though guidelines are given in terms of conflict of interest, in real terms it doesn’t work in the best interests of all stakeholders.

Rarely has an independent director resigned or seen to be raising any objections over the running of a company by the elected directors or opposed any decision of the board. However since boardrooms doings are confidential, the public would never know even if there have been instances. There are however many, many instances overseas -- even in India -- of independent directors stepping down due to a dispute with other directors over the conduct of board affairs or the company.

The role of auditors is also an issue. Though auditors are elected at shareholder meetings, it’s the shareholders who manage the company and have a majority stake who decide. For example how can an audit company which also provides secretarial and recruitment services independently audit the accounts of a particular company if it is also providing such services to the same client? These are issues that have been raised by newspapers and the few whistle blowers like Mr Vignarajah and Mr Ameresekere for many years without any success. The Business Times and other newspapers continue to raise these issues but governance has been become such a big ‘buzzword’ and a nice item in annual accounts that such objective criticism is often ignored or dismissed as ‘irrelevant’.

While the SEC needs to be given a pat on the back for ensuring fairplay at least in the distribution of shares in IPOs this week, a lot more needs to be done to ensure a level playing field and a sense that the stockmarket cannot be manipulated for the benefit of the big players and is well regulated but not to the point of over-regulation.

Another glaring conflict of interest is when directors of a rival company in a particular sector are appointed to another company in the same sector. This is regularly happening in the banking sector and the hotel sector. Do these directors declare their interest when it comes to taking a decision that would affect the business of one against the other? Or how do they ensure a balance that won’t affect the interests of both companies? Given the shortage of good, experienced directors, such appointments may be inevitable but safeguards should also be in place to ensure conflicts doesn’t arise.

The only way the air can be cleared as to governance and transparency in the marketplace is by the appointment of independent and ‘courageous’ officials to the SEC and also the Colombo Stock Exchange who will ensure fairplay and good governance.