Colombo will have to rely more on self-regulation and place an emphasis on keeping to the spirit of the law, if it was hoping to become an international financial services centre, a veteran British regulatory official has said.
You need practitioner input in order to ensure that regulation is kept up to date in a market which is fluid and ever changing, a former Director of the Securities and Investment Board (SIB) in Britain, Graham Russell said.
If you wait for the lawyers or legislators to write the regulations it will take years
Mr. Russell was addressing members of the Sri Lanka Association of Securities and Investment Analysts (SLASIA) in Colombo. He had been a member of the London Stock Exchange council for 17 years and has also served as Deputy Chairman of the Stock Exchange. He is currently the Chairman of the Securities Institute, a professional institute for the practitioners in the securities industry and the examinations setter for the SIB.
When the Financial Services Act (FSA) was introduced in the Britain in the 1980’s a whole new system of regulation had to be introduced to the markets.
The challenge was to superimpose a new piece of legislation onto a large, complex, dynamic, existing, financial market without harming either its flexibility or innovative skills, Mr. Russell said.
Earlier the Council of the London Stock Exchange had been mainly responsible for regulation.
The FSA had set up the SIB as the senior regulator for the securities industry and several self-regulatory organizations (SROs) covering different parts so the securities market had also been designated.
The stock broking was covered by the Securities and Futures Association (SFA) , fund management by the Investment Managers Regulatory Organization (IMRO) and independent investment advisors and insurance professionals by Personal Investment Advisors (PIA).
In addition, professional institutes of lawyers accountants and which regulated their members for years were also recognized by another body. Finally exchanges were included under Recognized Investment Exchanges (RIE).
At first the SIB had made the mistake of over-regulation.
Rule books were appearing every other day and people were deluged under too much regulation Mr. Russell said.
The SIB had then executed an about turn and decided that it was not their role to go into details of regulations and that was the role of the SROs. The SIB had instead issued a set of rules that came to be known as the ten commandments to guide the SROs.
The details were left to the SROs that were closer to the market edge with much practitioner input, he said. This helped make regulations relevant to the market.
The main aim was to make market practitioners to keep to the spirit of the law and avoid creating a situation where anything which was not against the law was thought of as acceptable.
That is no way in which to run a financial market , Mr. Russell remarked.
He says the best example of this principle is seen in the takeover panel, which is a non-statutory body controlling the primary markets, that is entirely self regulatory.
Though its regulations have no statutory force they are binding on the participants.
You could be hauled up before the panel even if you have not broken any of their written regulations but because they believe that you have broken the spirit behind one, Mr. Russell revealed. That is the essence of good regulation.
This degree of success has not yet been achieved in the broader securities field.
The globalization of financial markets in the eighties spurred by removal of exchange controls and rapid advances in telecommunications had re-confirmed the importance of London as an international financial centre, he said.
The foreign exchange business done in London exceeded the forex business done in New York and Tokyo combined. There were more bank offices in London than in New York and Tokyo combined. However both Tokyo and New York were bigger in domestic volumes than London.
Over 40 per cent of the business done in London is overseas, Mr. Russell said.
The eighties has also seen the increasing importance of London as a centre for fund management with many overseas investment houses establishing the city as a base. In evaluating the success of the new regulatory framework, Mr. Russell says, on the negative side, Robert Maxwell’s pilfering of pensions funds and the Bearings disaster showed that there still were shortcomings which needed to be rectified. There were also complaints of compliance costs with companies having to set up compliance departments.
On the positive side however, London still retained its lead as the main international financial centre in the world. It also continued to attract newcomers demonstrating that it was still able to instill confidence in market participants.
Last year, Deutsche Bank and Dresdener Bank, two of Germany’s biggest banks said they were going to make London their European centre for primary markets he said. Deutsche Bank bought Morgan Grenfell, Dredener bought Cleinworts, despite Frankfurt wanting to be financial centre for Europe.
To create jobs and achieve economic prosperity, Sri Lanka will have to focus on exports, an International Monetary Fund (IMF) official said.
"Experience has shown that for a small country there is no better development strategy than one of export led growth," IMF Resident Representative in Colombo, Thomas Morrison said.
Mr. Morrison was speaking at the 4th Annual Export Awards ceremony organized by the National Chamber of Exporters last week.
During the last 15 years the country's economy had gained strength from exports and was today, much more diversified and able to withstand shocks. Manufactured exports as a percentage of total exports had grown from a mere 16 per cent in 1980 to 75 per cent today, he said.
To bring down inflation and interest rates it was necessary to reduce the budget deficit.
"This really is the next big challenge for Sri Lanka," Mr. Morrison said.
Chamber Chief Patrick Amerasighe said earlier the exporters were promoted by grants and refinancing schemes.
"But over the years these have been withdrawn and our competitive edge has been declining," he said.
Mr. Amerasinghe said the export sector had grown at an impressive rate over the years.
In 1980, 1117 exporters had produced 476 different types of products. By 1990, 3785 exporters were producing 2110 products. In 1995 there were 57 exporters with annual revenues of Rs. 500 m and 31 exporter with revenues over Rs 1 billion. In 1980 there wasn't a single exporter with revenues of Rs. 500 m.
However there was cause for concern.
"We should not get complacent, and sit back and do nothing," Mr. Amerasinghe said.
In 1995 export growth had declined to 12 per cent from 20 per cent. Capital investments in BOI enterprises had fallen to Rs. 8.7 b from Rs. 12.7 b and among non-BOI enterprises capital investment had more than halved to Rs 2 b from Rs. 4.7 b.
Various governments had experimented with economic policy for 50 years after independence, but countries that were behind us then were now ahead.
"We seem to be going behind these countries asking what we should be doing," he observed.
There were enough entrepreneurs in the country who were capable of changing the economy of the country, and should be listened to.
"We have a vast army of entrepreneurs to invade the world market and bring economic prosperity to the country," he said.
Blue Diamond Jewellery Worldwide Ltd., bagged the trophy for the Best Sri Lanka Export Brand, at the National Chamber of Exporters (NCE) award ceremony on Tuesday.
Dankotuwa Porcelain won the gold award for the large industrial exporter category. Srimith Seafoods Ltd. and Edna Exports (Pvt.) Ltd. won the gold awards for the medium and small industrial exporter categories.
In the services sector, Flexport won the gold award in the small enterprise category. In the medium services category the only award, a bronze went to Roton-Vander Freighting Ltd.
Among agricultural exporters, Euroscan Exports bagged the gold award in the large category, Sinbad (Pvt.) Ltd., the gold in the medium category and Ocean and Tropical Exports (Pvt.) Ltd., the gold award in the small category.
A gold award was also given to the best woman exporter. This was won by Hiran International Dehydration company (Pvt.) Ltd.
A special award was also given to Flexport (Pvt.) Ltd. and Coirpack Chairman Mr. P. N. Nandadasa who had developed and exported a lightweight eco-friendly packaging product.
Mr. Nandadasa had won the Gold Cup of the President of the International Federation of Inventors Associations, in Switzerland earlier this year, for the product.
Stock brokers could expect some relief when the PA's third Budget is presented in Parliament an November 6.
A list of concessions requested by brokers, recently and put forward again at a meeting with President Chandrika Bandaranike Kumaratunga on August 26, is "being given thought on the eve of the next budget", Deputy Finance Minister G.L. Peiris said.
The Minister was speaking at the inauguration of the Central Depository System of the Colombo Stock Exchange last Wednesday.
Dr. Peiris said these concession were "being studied intensively and a favourable outcome was possible at least in part".
The concessions are mostly tax-related and include the complete waiver of stamp duties, on stocks and debenture trading, Capital gains tax, exemption on debenture trading and an extension of tax exemptions on Unit Trusts. A partial reduction in stamp duty on stock trading was made in the last Budget.
However there was no quick-fix remedy or magic wand to wave to revive the Colombo Stock market, the Minister said.
Colombo Stock Exchange (CSE) Chairman Ajith Jayaratne said the market seemed to be lacking total investor confidence "I do not know how to restore it." he added. Mr. Jayaratne also said he did not agree with certain politicians' views, expressed in the media that the stock market was not a barometer measuring the country's economic well being. Mr. Jayaratne added that he hoped these statements by politicians may possibly have been misquoted in the media, and that they do not actually hold these views!.
Mr. Jayaratne urged the government to give the share market the same level of importance as the BOI in generating foreign direct investment.
He said he was disappointed that the privatisation of certain enterprises had bypassed in CSE. A part of privatisation is that a significant quantum of the privatised enterprise is sold on the CSE, Mr. Jayaratne said.
Responding to Mr. Jayaratne's statements, Dr. Peiris said what was mentioned in Parliament was that the stock market was a reliable indicator of health of the economy, but not necessarily the principal indicator. Prof Peiris said PA parliamentarians views on this have been endorsed by MP. Ronnie de Mel, Finance Minister of the UNP Government and the opposition's official spokesman on economic affairs.
Dr. Peiris added that a low tax regime is more important in driving investor confidence than short term concessions. Interest rates are 3-4 times more here than in other Asian countries, he said. But attractive fiscal concessions will not be effective in the absence of political stability, the minister said, quoting from Malaysia's Economic Consultant Tun Dain Zainuddin's comments, on his recent visit here.
Constitutional reforms, including devolution of power to the provinces, scheduled for next April should bring the political stability the country urgently needs, he said.
Dr. Peiris also said the government was also looking into alternatives to BOO/BOT projects to expedite infrastructure development projects.
For example major projects like the Colombo Matara highway may be funded by the government's budget to generate economic activity throughout the country, he said. This may be a precursor to the revival of economic activity he added.
Responding to Mr. Jayaratne's concerns on privatisation methods. Dr. Peiris said when privatising public utilities with monopoly status, the government has to ensure that the buyer was the financial ability and the technical expertise for the continuity of the enterprise.
The share market is not the sole entity for privatisation and the maximum price is not the only consideration in privatisation of public enterprises, especially those which are public utilities which are also monopolies. Dr Peiris said. "We are already having problems with some privatised ventures which have closed down. There has been complete asset stripping of these companies. Unemployment has been created by these companies shutting down, the Minister said.
Legislation will be shortly presented in Parliament to empower the state to deal with such situations Dr Peiris added.
The new legislation will be set up restrictedly within certain parameters, unlike the new abolished draconian Business Acquisition Act, he added.
The Finance Co. Ltd., has reported 31% increase of net turnover from Rs. 283.2 m. to Rs. 371.9 m. for the quarter ended June 30, 1996, according to the provisional accounts.
The company's net profit with zero tax provision was up by 4.2% from Rs. 10.5 m. to 10.9 m. As a result the company was able to carry forward Rs. 14.2 m. as undistributed profit for the period.
For the year ended March 31, 1996, Asia Capital Limited recorded a consolidated turnover of Rs. 110.7m. showing 2.5% increase over the previous year. But the group made an operating loss for the period amounting to Rs. 38.1m. compared to the previous year's loss of Rs. 8.8 m.
However, as a result of the other income of Rs. 149.4 m. received during the year, the group was able to earn Rs. 11.2m. pre-tax profit as against Rs. 76.6 m. the previous year.
Profit after taxation was Rs. 57.8 m. sharing a 356% increase over the previous year. However, with the inclusion of an extraordinary item, a loss of Rs. 344.6 m. which arose as result of a change in accounting policy, the group recorded a loss after taxation and extraordinary items of Rs. 286.8 m. compared to Rs. 1.6 profit in the previous year. This led to drop in shareholders' funds by 19% from Rs. 1501.0 m. to Rs. 1214.1 m.
Having considered the retained profits and the share premium account, the directors have declared a bouns issue of one share for every 10 shares held by members as at the close of business on September 13, 1996.
Earnings per Asia Capital share based on consolidated profit after taxation but before extraordinary items, amounted to Rs. 0.58 (1995: Rs. 0.02)
"Asia Securities was affected by the decline in trading volumes on the CSE and substantial reduction in market capitalization during financial year", says CEO. Ian Hardy commenting on the performance of the group.
Lanka Walltile Limited recorded 41% increase in turnover from Rs. 664 m. to Rs. 940 m. and by 41% drop in profit before taxation for the year ended 31st December, 1995 according to the published accounts approved by the Board of Directors on 3rd July, 1996.
Profit before taxation was Rs. 160 m. as against Rs. 273.9 m. the previous year. Profit after taxation dropped by 45% from Rs. 179 m. to Rs. 98 m. This was signified by decline in EPS from Rs.7.62 to Rs.2.86. However, shareholders' funds increased by 8% from Rs.145 m. to Rs.153 m.
"Due to a lull in construction activities resulting from temporary shortage of cement and a general inertia stemming from the volatile situation in the country, the volume of turnover generated in the local market decreased by 4.0 m. tile points compared with 1994. Nevertheless, the company' concerted efforts in export marketing paid off, and export turnover increased by 9% despite stiff international competition to register 92.0 m. tile points in 1995. An unrealistic exchange rate however, prevented the company from realizing the full benefit of this increase", says Chairman, Tissa Jayaweera reviewing the performance.
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