Heading for turbulent times
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Heard this week in the corridors of a Colombo brokerage: “Machan, I hope the FCID will not come knocking at my door!”
It was said in jest over Prime Minister Ranil Wickremesinghe’s order to the CID to probe the sale of a 7.5 per cent stake in Seylan Bank by the Bank of Ceylon (BOC), a state bank.
Jokes aside, the PM’s intervention in the share market has shocked many in view of the government’s laissez-faire policies. While the direction to the BOC board to cancel the transaction was bad enough, the call to the CID to investigate the transaction triggered alarm bells in the market.
Simply said, ‘brute force’ than tactful and less-damaging intervention measures was used to forestall a legal transaction. It was without finesse and tact.
For a market that has seen lukewarm trading over the past 18 months owing to lack of consistent policies exacerbated by political uncertainty and constant squabbles in the Cabinet between the ministers of the two parties – UNP and SLFP – the cancellation of a share market transaction is not only bad for sentiment but good governance and transparency that the authorities have vowed over and over again.
Though market concerns were not reflected in the BOC’s issue of 8-billion-rupees worth of debentures which were oversubscribed on the opening day –Wednesday itself – the Colombo bourse has been blackened by these incidents. For a market that has been trying to recover from a lacklustre 2015-16, the year 2017 is likely to continue on the same, uncertain path notwithstanding the paid engagement of the Oxford Business Group (OBG) to profile the country as a ‘great place to invest’.
Rather, consultancy firms like Oxford would be more useful in damage-control efforts when the government makes a hash of things like the BOC-Seylan Bank deal for instance. The house must be kept in order, neat and tidy, before welcoming guests (investors), so to speak!
As our story on the BOC- Seylan Bank issue below reveals, many questions remain unanswered in the hurry to cancel the transaction.
Minister of Public Enterprises Kabir Hashim says that the BOC board was privy to a circular sent a year ago to all state-owned enterprises (SOEs) coming under his mandate for ministry authorisation being a requirement in any transaction ‘of significant proportions’ and thus should have obtained its consent. If so, why on earth do the BOC annual reports for the last four years list the Seylan Bank stake as among those available for sale?
In the BOC annual reports for the years ending 2015, 2014, 2013 and 2012 (the last three during the term of the previous regime) under the title ‘Statement of Financial Position’, there is an entry called ‘Financial investments – Available for sale’ with additional information contained in a reference to item 27 in the ‘Notes to the Financial Statement’. Item 27 lists several items for sale including shares in NDB, People’s Leasing & Finance PLC and Seylan Bank PLC.
This same information, without any change, is listed in all these four annual reports. If the government had issued an order last year that the sale of strategic investments should get ministry approval, shouldn’t these stocks have had (at least) another footnote with a rider saying ‘subject to approval’ in the BOC’s 2015 annual report which was issued in March 2016? If such investments (are BOC’s stakes in NDB and People’s Leasing also constrained by the government ruling?) explicitly state that they are ‘available for sale’, isn’t it misleading to investors, particularly foreign investors whom the government is so desperately trying to attract, when they are, in reality, not freely tradable?
Some arguments emanating from the BOC imply that the transaction was not ‘significant’ enough to inform the ministry as per guidelines. But if one is to believe this theory, was the board blind to the fact that the Maithripala-Ranil administration has signalled – after a lot of drama last year – that strategic state investments in private banks will not be disposed of. The UNP when in opposition (and vociferously espoused in Parliament by then opposition legislator Harsha de Silva), opposed government control of private banks – Commercial Bank, HNB, NDB and Seylan — accusing the former regime of using public funds (EPF/ETF/Sri Lanka Insurance) for this purpose. However, the party when in power chooses to continue such control, appointing government nominees to chair these banks.
Thus, while government policy is clear that government control of some private banks will continue, it is not only puzzling but also raises suspicions as to why the BOC board would choose to sell its stake in a private bank, a contradiction of a clear policy, even if the annual report said this and other entities were ‘listed for sale’.
Another argument trotted out in defence of the BOC board of directors is that government authorities have repeatedly stated their intention to sell off non-strategic investments by state entities and that such a sale was in line with such policy. On the flip side however, can the Seylan Bank stake be considered non-strategic or insignificant given the clear policy of the government in terms of state control of the banks?
Also why did the PM intervene so fast, within hours of the transaction, when in the case of a bigger issue – the tainted Treasury bond scam where the BOC made a huge investment on behalf of another party — there was nary a word? Even today, the PM and the UNP section of the government are firm in their belief that nothing was wrong as opposed to the views of the President who went on record saying the (then) Governor should resign, and the findings of the long-drawn and tug-of-war plagued COPE report!
The last time a transaction was reversed was by the Securities and Exchange Commission (SEC) — at that time too Thilak Karunaratne was its chairman – in 2012 in a tainted investment by the NSB in The Finance. Even though that was a bad precedent, it could be viewed as a regulator’s right to undo something bad in the market, unlike today when the transaction itself was legitimate though one may argue the decision to sell was questionable.
So what does this reversed transaction mean to the market at large? Again the unnecessary overlapping of functions – the PM’s office and the ministries involved in public enterprises and finance having a different role in the operations of state banks – comes to the fore. This uncertain delegation of functions and its negativity are seen in a Central Bank ruling for the removal of the Lankaputhra Bank chairman being held up due to the intervention of other authorities. Furthermore, the reversed transaction has again exposed the inconsistency in the way the government works; public officials, as claimed by the government not listening to their orders.
Not the best signals for a market that is desperately hoping to recover in 2017 amidst turbulence — local government elections, a continuation of clashes and disputes in the Cabinet and uncertainty with a people’s vote sought for key constitutional and political reforms.
And to add some spice, learned economist, Prof. Razeen Sally’s three scenarios enunciated at a public event this week on which way the economic winds are blowing (See story On Page 4) are more sour pills for the powers that be. More than anything else, the priority for the government is to get its act in order and also put a stop to deal-making which is fast becoming a hallmark of this regime.