The Central Bank (CB) came under fire from some stock market players and banking industry analysts over rising investments in publicly listed commercial banks through the Employees Provident Fund (EPF).
Analysts said these investments raise questions of conflict of interest since the EPF is managed by the CB which has access to all bank files and information that no one else in the market, including ordinary shareholders are privy to.
A senior banker recalled that in 1998 the CB’s Monetary Board decided to refrain from investing in institutions which it regulates. “This decision was based on the fact that it could be open to accusations that the Monetary Board was using confidential information relating to banks when deciding on such investments which takes the form of insider dealing,” he said.
It was only on one occasion where an exception was made – and that too, on a temporary basis - when the EPF was asked to buy the CB's holding of NDB shares when that bank became a commercial bank in 2004, the banker told the Business Times.
The CB has another story to say. “The EPF does not belong to the government neither the CB. It belongs to the members. The CB is a regulator, but the EPF is operating as a separate entity. According to the EPF Act, the EPF is a part of the Labour Department and for prudential purposes, the management of the fund was given to the CB’s Monetary Board,” according to R.G.D.D. Dheerasinghe, the Bank’s Deputy Governor.
He said the EPF doesn’t hold controlling stakes in any commercial bank. “The holdings that we have are mostly non-voting and neutral holdings. There’re limits of 10% holdings in banks (for individuals and institutions),” he said.
He also added that these banks’ management will ‘never’ be interfered with by the CB. “We need to make money for the EPF. If others can invest in the CSE and make money, why prevent the EPF (from doing so)?”
Mr. Dheerasinghe noted that it isn’t fair to stop the EPF from making money. “The bottom line is that the EPF has to generate money for the members. For 2009, it has paid 13.75% which is the highest ever late of interest paid so far to the members – since EPF was established in 1958,” he said.
He said that EPF has an asset base of Rs. 750 billion and is the largest fund in the country. “This money has to be used for the benefit of the people. We need to see it from a positive frame of mind,” he said.
He noted further, “Banks are the largest sector in the CSE. The EPF can steamroll the entire market (if it so wishes), but we’re not doing it. We are not interested in holding any controlling interests in banks.”
However, industry analysts raise issues, asking whether the CB is an investor or a regulator.
“There’s a serious ethical issue, because banks are a sector it regulates,” an analyst said.
A stock market analyst noted that by investing in such entities, the CB is sending false signals of stability. “By doing this CB is telling people that since the government is a shareholder in these listed entities, there’s implicit state support to them,” he noted.
He said there’s no dispute about the EPF investing in banks as long as the regulator is not involved. “At times due to the CB’s regulatory activities, they can be privy to insider information,” he said, adding that the line between regulatory responsibilities and acting as an investor by the CB are is thin.
Mr. Dheerasinghe disagreed. “On the face of it one would say that. The conflict of interest will only arise if CB holds the controlling stakes. We’re silent shareholders. The CB’s Monetary Board is not a private body. The benefits of whatever decision it makes will go to the people, not to the Monetary Board members,” he noted.
He said that the CB operates strictly operates within its compartments and within its firewalls. “There’s absolutely no conflict of interest,” he assured.
The ETF is a shareholder in HNB, NDB and Commercial Bank while also having interests in other non-bank companies like Lighthouse hotel.