Three investors have made representations to the Securities & Exchange Commission (SEC) on the proposal to implement a minimum public float as a continuous listing requirement, welcoming the move but raising some concerns.
The group -- K.C.Vignarajah, Dr. Dilesh Jayanntha and Tissa Seneviratne – in a letter to the SEC says that while the preamble of the consultation paper ‘is well worded, the implied inference in the last sentence therein (that there could be leniency in treating the gross transgress of the compact with the public at the time of listing), has led to great anxiety on the part of investors, local and foreign.”
 The letter said that the possibility of delisting, however remote it may be, is dampening their enthusiasm. “It has also given heart to violators and calculating transgressors, who have taken advantage of regulators who were hitherto generally in deep slumber, or afraid to ruffle the feathers of the predatory kind,” the trio said.
The letter says:
“.. the first undersigned (Mr Vignarajah) has, on numerous occasions over many years, publicly spoken, commended and written about the iconic chairmen and a majority of exemplary directors. They have faced no problem or embarrassment from us. On the contrary, we have even gone to Courts to defend them against related parties controlled by corporate raiders. Even the larger but diversified majority in Commercial Bank needed Court protection gained through the activism of anti-monopolistic shareholders.
Currently, there is no particular fiscal or other attraction in being a listed company. We emphasize, therefore, that delisting is not a deterrent to Controlling Interests (CI), which may wish to abuse their positions. Indeed, it may be welcomed by those who plan to defraud the public and the independent and minority shareholders in order to take hugely disproportionate benefits for themselves! Thus, unless the public float requirement is coupled with appropriate fiscal, administrative and good governance measures, there is no incentive to comply. The voting rights of the CI should be capped at 60% initially, as an interim measure, to deter moves to delist and encourage the public to invest in the PLCs. On the issues raised, we have the following comments.
On the question of the definition of ‘public’ float (Issue 1), we suggest;
- Statutory institutions (with no representation on the Board of Directors of the listed entity) could be considered a part of the public float up to a maximum of a 5% holding;
- Private unit trusts and funds should be specifically excluded as, in Sri Lanka, these are very often heavily influenced or controlled by related parties. (The case of DFCC and HNB indirectly controlling NAMAL is most pertinent in this context). The term affiliate should also include the adult children, siblings of directors and employees.
The term ‘affiliate’ should be further extended to cover companies, or institutions in which any director also has direct or indirect influence, sits on the Board or has a significant (say 10% or more) shareholding. A recent well-known example of an employee (a warehouseman) holding 60% of an unlisted company (of which he was not even a director) which had a strategic investment in a major bank speaks volumes of the need to define related parties, affiliates and operation by remote control! Due to the convoluted definitions, loopholes, lax supervision and inaction by regulators hitherto, it took concerned parties considerable effort, time and financial resources to restrain a caucus of related parties from ousting Mr. Mahendra Amarasuriya, an outstanding chairman of the Commercial Bank.
The courts restrained these related parties from exercising cumulatively voting powers in excess of 10%, though the related parties had about 42%. In the light of such examples, our long-standing demand is to include those obviously related parties like children over 18 years, siblings, employees and companies and institutions with common Directors or owners in the term ‘affiliates’ and therefore outside the public float. It would be a farce to exclude these categories from any definition of related parties.
The current proposal by some to entice the minority shareholder and the general public to invest in the stock market via unit trusts and mutual funds is fraught with many dangers. There is no control by the stakeholders over direction, policy or management, whatsoever. They only have the option of encashment of their holdings on specified terms. Therefore, one can well perceive the abuses that the fund manager could resort to, to distort the market. The role of providing adequate information to evaluate investments in a timely manner should not be abdicated or assigned to another set of controllers.
On the question of a minimum public float (Issue 2), we suggest a figure of at least 30% initially. PLCs could be given a maximum of one year to raise this minimum float of 30% to 45%, in order to continue enjoying proposed fiscal benefits. This will encourage a rapid increase in urgently needed new investments and the liquidity of the market.
On the variation in the minimum required public float (issue 3), however, it is best to have a uniform percentage (due to the complexity and evasiveness of many companies in reporting and accounting), rather than vary this according to market capitalization or sector listing. We would stress that holding companies which indirectly control listed subsidiaries and/or associates be required to have a higher threshold, in order to have greater transparency, accountability and less susceptibility to stealthy takeover bids of valuable assets.
Further, provisions should be designed to prevent undue concentration of ownership of large conglomerates and possible abuse of power through leveraged holdings.
Regarding the time given to comply with the new requirement (Issue 4), we feel that this should be a maximum of one year.
Regarding the time given to a company to increase its public float, where it has dropped below the minimum (Issue 5), this should be about three months. As noted, currently there is every incentive not to comply; so that new fiscal, legal and administrative measures are required if the proposals made are to be effective.
Regarding the consequences of non-compliance (Issue 6), we suggest that delisting should not be permitted, as it only plays into the hands of CI out to defraud the public and is in fact a reward instead of a deterrent or punishment. Laws should be amended to achieve this. A punitive delisting levy should be imposed on any affiliate which has consistently increased its stake, in order to acquire excessive control and reducing the public float.
The buying patterns of the affiliate (or combination thereof) in a period of a minimum of five years prior to the minimum public float being breached should also be examined for probable insider dealing. An automatic triggering mechanism to analyze this should be established by the SEC for this purpose. Appropriate declarations and affidavits of all transactions should be obtained from the concerned affiliate (or combination thereof) and the Company Secretary to quicken the process. Where insider dealing is found, the criminal aspects of it must be pursued vigorously, as in many other countries. This would be the only significant deterrent to such activity. The disgorgement and compensatory payment should also be a part and parcel of the scheme of justice that should be ensured.
Independent Directors, Advisers and Auditors should be truly independent of the CI which manages the business. They should therefore be appointed by the independent and minority shareholders represented by the public float. The CI (represented by the affiliates A, B and C referred to in your Consultation paper No.6) should have no say in this vote. However, if the nominee has interests in conflict with the business of the company, he should not be considered. It is indeed convoluted thinking to deem Directors, Advisers and Auditors appointed by the CI as ‘independent’. Indeed, the last nail in the coffin is the audacity of resolutions which empower the directors to fix the remuneration of Auditors and Independent Directors.
Many large and reputed independent investors, local and foreign, have cited the small public float of the PLCs as discouraging investment in the CSE. It has also facilitated market manipulation and thereby contributed to losses suffered by some of the genuine investing public. This has the potential to undermine public confidence in the CSE in the medium to long term.
In this context it is important that the SEC seeks to increase the minimum public float, whilst simultaneously pressing for an array of fiscal, legal and administrative measures for firms to list. We feel that the SEC should certainly NOT reduce the minimum public float. In the current fiscal, legal and administrative framework, it will only encourage delisting and reverse the growth of the Sri Lankan capital market, inflicting a death blow to genuine investors. Many Sakvithis and Dandugam Mudalalis are lurking in the sidelines. The SEC should also have enhanced powers in this context, such as the right to send representatives or nominees to General Meetings of the PLCs.” |
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