Persisting conflicts of interest

by FS

(September 06, Colombo, Sri Lanka Guardian) Colombo’s stockmarket is getting so heated up that its difficult to stay away editorially each week without commenting on the developments. The uncertainty, lack of governance and ineffective powers to the Securities & Exchange Commission (SEC) are being cited as some of the reasons why foreign investors are yet to return in a big way to the market, and why there are victims, particularly, retail investors.

Among the biggest issues in the market are conflict of interests and insider trading – two segments that the regulators, the SEC and the Central Bank – have, as yet, no effective answer. Guidelines and laws are there to tackle these problems but Sri Lankan investors are too smart to be ‘foxed’ by regulations or laws. Similar to what happens in the market, almost every week, this week’s trades saw subtle ways used by powerful investors to increase their stakes to over the 30% threshold in some companies through cross—purchases and other devices that circumvent the rules.

Is the SEC sufficiently geared to tackle the avalanche of trading in the post-war era and handle insider trading, conflict of interests among other issues?

For example, latest reports of a measly Rs 10 million fine to be imposed on Environmental Resources Investments (ERI) and its Directors by the SEC for securities-related offences is a pathetic attempt to instill confidence and warn unscrupulous investors in a topsy-turvy market. The fine is under the provisions of compounding an offence, a penalty that would hopefully be a provision that the SEC will not rely on when more stricter rules on a range of issues are applied under proposed amendments to the SEC Act, which however may take some time. Compounding offences has been a weak provision in the law and, rather than serve as a deterrent, providing a comfortable exit for offenders without being declared ‘guilty’.

Ten million bucks is peanuts to any big player in the market, some of whom make 10-20 times that money in profit-taking in a single day.

Economist and opposition Parliamentarian Harsha de Silva who, along with independent investor and stock-market watchdog K.C. Vignarajah, are among a few individuals raising ‘hell’ over the deals in the market, has cricised the SEC compounding in the ERI case. He has also, very rightly, raised the issue of conflict of interest particularly since ERI is a key player in the state-sponsored Commonwealth Games project.

In his statement published elsewhere in this section, Dr De Silva says: “… ERI had agreed to build the 2018 Hambantota Commonwealth Games Village along with Sri Lanka Insurance Corporation and become the largest private sector investor of the Games while the SEC was investigating the company for alleged securities fraud and or disclosure offences. This almost seems like buying oneself out of trouble and most certainly a conflict of interest.”

Some may argue that the opposition legislator is a biased party and raising the issue just because he is in the opposition. Yet no one can deny that there is a perceived conflict of interest in this case.

There is also speculation that ‘interested’ parties want the SEC Chairperson Indrani Sugathadasa removed due to her efforts to ward off any influence and ensure market regulation is free of such interference.

Another issue that was raised this week was the emergence of two relatives on a board of a company. Experienced public servant, Dhara Wijeyatillake was appointed as a director to the Sampath Bank board in which her brother, Sunil Wijesinha is the deputy chairman. The appointment has been approved by the Central Bank. Both are professionals and respected in their different fields and this is no reflection of their ability and integrity. However in the book of good governance this may not be the right thing to do.

As the Business Times has repeatedly stated, the stockmarket has not only grown by leaps and bounds in the post-war era but soared leading to all kinds of issues in the market with essentially the small retail investors becoming victims, partly however due to their own fault in not properly understanding market technicalities and other nuanses.

Furthermore the regulators doesn’t seem to have all the resources (tough laws in particular) to tackle the problems that have arisen from post-war trading in the market. A case in point in the ERI case and the miniscule fine.

Whistle-blower Vignarajah, a former Chairman of the Ceylon National Chamber of Industries whose presence at many AGMs is refreshing to small and independent investors but a source of worry and annoyance to directors, is again beating the drums of ‘evil’ in the market. In a letter to the SEC, he says there are small groups or clubs of people acting in concert with ‘crooked’ directors, errant auditors, compliant lawyers, independent advisors and company secretaries making them an impenetrable fortresses of evil. “An upright SEC acting together with honest members and officials of the CSE, utilizing the commitment, knowledge, invaluable experience and insight of IMS (Independent Minority Shareholders), will be the most effective way to handle these issues,” he said.

The challenge of monitoring an effective stockmarket ultimately lies in the SEC’s ability to rein in wrongdoers and rise above ‘influential’ interests, which are fast becoming the powerhouse of Sri Lanka in many sectors of the economy. In this context, any move to ease out the SEC chief if it is for the reason of bringing sanity and respectability to the market should be strenuously opposed and rejected by the authorities.