Come, come Mr. Choksy, if not for …

The SEC saga finally ended last week with the Attorney General having the final say. The battle between the SEC Secretariat and the Commissioners has been won by one party but the war is still on.

The commissioners representing the private sector are hanging onto their positions with the exception of Hemaka Amarasuriya who did the honourable thing by quitting on a matter of principle. Its chairman Michael Mack - at the centre of the investigation scandal - has also resigned

What are the others waiting for? The issue will now take its course in the courts which would decide whether Mack and Co are guilty or not. Our reports today connected to the SEC issue throws up the many conflicts that some Commissioners have had.

The government has also been slow to react to the evolving crisis at the SEC. Finance Minister K.N. Choksy says he stepped in at the last moment at the time the crisis came to his doorstep ... so to speak. The gentle finance minister also rejects criticism that the matter would have been swept under the carpet. Does anyone want to take any bets on that?

Come, come Mr. Choksy, if not for the constant pressure from the entire media, this matter would have ended with the Commissioners deciding not to proceed with the Attorney General's advice in the first place.

The moment things went wrong at the SEC, with the Commissioners and the staff being divided, the government should have stepped in and nipped in the bud the growing rift instead of waiting till the last minute. Public confidence in the SEC is currently at zero level.

The SEC drama has opened a can of worms. For instance, if unknown Punchisingho or citizen Perera representing a small company, were hauled up for insider trading, would they have been given the benefit of a second opinion like Mack and Co? The smaller guys would have been torn to bits by everyone in the name of good corporate governance. Are the big guys sacrosanct?

World Bank Vice President Mieko Nishimizu had an interesting message the other day. She implored the big banks in Sri Lanka to learn lessons from a small women's rural banking unit in the south called the Janashakthi Bank which she said was a shining example of transparency, accountability and honest work.

The silence that greeted the unbelievable happenings at the SEC was unexpected from a private sector that chose in the past to bash politicians over transparency and governance but slink away from the truth when it happened in their own backyard. Or was it because the concerned parties were powerful members of the business community?

Over and over again, one of the defences of Mack and Co was that they were honourable people and would not resort to the things they have been accused of. The media was bashed for speaking out and “threatened” for reporting the developments. Again we say … what would have been the position of an unknown director of a small company accused of similar charges? No one would have cared even if his friends spoke about his honesty!

The aggrieved parties must thank their stars that we not in the US or UK where the media would have staked out the homes of the accused, 24 hours a day following not only their movements but also their families. That is how the free press works.

They are lucky that the Sri Lankan media is not that aggressive so as to intrude on the privacy of top private sector officials even if they undertake jobs that come under public scrutiny. Chandra Jayaratne, a former chairman of the Chamber of Commerce, believes one of the problems of the business community is that it lacks credibility. "If the business community needs to rebuild public trust, they've got to be responsible to the society as a whole, and must adopt and employ independent analysis and accept media reviews of their conduct," he told a seminar last week.

There are a few other top individuals in the business community, some of whom are known to the connected parties, who felt justice was lacking and conflicts of interest were coming into play in the SEC issue.

As the battle now shifts to the courts, this newspaper will continue to push for much needed reforms in the SEC, particularly the need to appoint commissioners who don't have any conflict of interests when undertaking the duties entrusted to them, and also for more transparency.

Central Bank defends role as regulator, rejects allegations

The Central Bank said on Friday in a statement that if the public is forewarned of any decision to close down the bank, there will be an immediate run on the bank and it would collapse immediately, perhaps prematurely and unnecessarily.

The Sunday Times FT reproduces the full text of the statement for the benefit of investors:

On December 18, 2002 the Central Bank of Sri Lanka announced that the Monetary Board examined a report by its Director of Bank Supervision that unsound, improper and imprudent practices and mismanagement by those responsible for the affairs of the Pramuka Savings & Development Bank (PSDB) has resulted in the bank being insolvent; gave an opportunity to the Chairman and the board of directors of PSDB to respond to these findings; concluded that the directors and shareholders did not show a meaningful and practical commitment to revive the PSDB; and therefore, had no option but to cause the Director of Bank Supervision to take action to wind up the PSDB under the Monetary Law Act and to cancel the license issued to it under the Banking Act.

The above decision followed the suspension of PSDB on October 25th 2002 after its financial condition indicated insolvency and the proposals made by the management to rehabilitate the bank were found to be unrealistic and impracticable.

Consequent to the said decision various statements have been made in the media regarding this matter. In view of its obligations under the law the Central Bank has not responded in detail to these statements despite serious inaccuracies and misrepresentations contained in them.

In Court
The public would be aware that the decision of the Monetary Board is now being challenged in court. This places a further constraint on public discussion of the issues. The Central Bank will, however, place its findings relating to the PSDB in full before court, at which stage the public will be made aware of such findings.
It is, necessary in the meantime that the public should be informed of the role of a Central Bank as a regulator and supervisor, as there appears to be some misconceptions on this issue.

In all countries there are a variety of financial institutions and persons that seek financial deposits and investments from the public, and who perform a variety of lending and financial services. Unlike in other institutions where the turnover of activity is closely related to the capital, these financial institutions are highly leveraged i.e. their turnover is several times the capital because the turnover depends on a large volume of deposits that the public makes with them on trust. Hence, if the depositors' monies are misused and lost, the depositors have recourse only to a small capital base to seek relief. That is why these financial institutions are supervised and regulated to at least safeguard depositors' money. Nowhere are all these transactions guaranteed by the State or any institutions, except in a few instances where small deposits are guaranteed, for which an additional premium is payable for insurance. It is not practicable to secure all these transactions because it could lead to reckless deposit taking and lending, generally referred to as "moral hazard". The universal feature of these activities is therefore a higher element of risk, for which a rate of interest (or reward) is paid or charged.

In such a context, the public should be vigilant in assessing risks that are inherent in financial markets. In Sri Lanka, as in other countries, the major participants in the market are supervised and regulated by supervisory institutions, the Central Bank, in the case of commercial banks, specialized banks and finance and leasing companies. This leaves out a large number of other institutions dealing with finance, sometimes even without legal authority, which are almost impossible to regulate or supervise because of their size, nature, diversity and wide dispersal. The Central Bank of Sri Lanka has been explaining this situation in cautionary public notices from the beginning of last year, where it was clearly explained that the mere fact of Central Bank regulation does not assure absolute safety of one's funds - that such regulation only attempts to ensure that institutions which solicit funds from the public act in a prudential manner, which will reasonably assure the safety at least of the depositor's funds.

This is done by regular off-site and on-site supervision. Under the former, the institutions are required to send monthly information on critical performance indicators such as non-performing loans, capital adequacy and liquidity. Where this information reveals a cause for concern, an immediate on-site examination is conducted and findings evaluated. Regular and more comprehensive on-site examinations are also conducted to assess the prudential conduct of the institution. After these supervisory examinations, directors and officials of these banks are informed of the findings and any corrective measures are agreed upon. Penalties are imposed on violations of legal requirements. Where banks persistently fail to take corrective action, they are issued with orders to "cease and desist" from imprudent and unsound practices. Where that too fails, the bank is called upon to submit detailed proposals for rehabilitation as a viable institution, such as by injecting new capital, effecting cost savings etc. Where such proposals are deemed inadequate, the regulator is required to wind up the bank.

It should also be mentioned that the regulatory authority imposes minimum prudential requirements on licensed banks and supervises them to ensure, as far as possible and practicable, that such requirements are complied with. For instance, the banks are required to maintain a minimum ratio of capital to advances, a minimum ratio of liquid funds, and limit the volume of lending to a single customer and the directors. However, the soundness, the strength and the viability of the particular bank ultimately rests on the internal governance of that bank in a prudent manner, by its chairman and board of directors, operating through the senior management. In fact, detailed guidelines for good corporate governance have been issued by the Central Bank to banks last year. Monthly meetings are held with banks where problems and policies are discussed. Other than that, the regulator cannot and does not step into the shoes of the directors or the management of the bank to run the daily operations of the bank.

Intervention by the regulator is only effective in a context that the bank submits itself to a regulatory regime whose aim is to safeguard the safety of the financial system. Where a bank seeks to defy or evade the regulations, and also engages in fraud, the regulatory process loses its effectiveness. In such rare instances, a more comprehensive and intrusive investigation beyond the action that could be taken by a regulator has to be carried out. Such an examination would be time-consuming and expensive and a bank under examination has to be required to suspend operations. Until that time, a regulator and supervisor can only make spot examinations and require the bank to take corrective action. It expects the bank to comply. No amount of external supervision or regulation can correct an institution that is unresponsive to regulation and engages in fraudulent activity while misleading the public with false information.

In order to discourage such misrepresentation by public companies, the company laws require banks to disclose their "true and fair" position by publishing their financial statements certified by qualified auditors. In the case of banks, these financial statements and auditors' observations are required to be published with an annual report of its performance within five months of the end of the financial year. These reports should be made available at all offices of the bank for public examination. Also, the banks are required to publish a statement of accounts of their financial performance, every six months in the newspapers.

The Central Bank has an approved list of auditors for engagement by domestic banks. Foreign banks are required to publish the financial statements of their global and local operations. The public is expected to inform itself of the true and fair condition of their bank from these reports. The financial media often analyses these reports and its comments are an important source of information to the public.It has been argued that it is the duty of the regulator to inform the public early as soon as any bank is faced with problems, so that the depositors could be safeguarded. But there is no easy way by which the timing of such a caution can be ideally determined. By the very nature of banking business, banks frequently face liquidity problems and central banks provide regular financial accommodation. Where the problem is deep seated and not deemed to be a need for purely temporary accommodation, central banks are justified in declining such requests and seek proposals from the bank for rehabilitation, such as an injection of new capital. If the proposals are inadequate, the Central Bank will have no alternative but to close down the bank and settle the depositors, creditors etc. The time to go public is at that time and not earlier. If the central bank goes public earlier, there will be an immediate run on the bank and it would collapse immediately, perhaps prematurely and unnecessarily. Hence, a central bank does not have the option to warn the public of an impending collapse, except to take steps to prevent such a collapse and attempt to rehabilitate the bank.

A careful perusal of audited financial statements and annual reports of banks should yield a satisfactory picture to the public of the strengths and weaknesses of a bank. In this regard, the auditors of the bank primarily have a duty to ensure that timely and accurate financial statements are maintained and published. The Central Bank works closely with the auditors to ensure that audits are done and information published as legally required.

It has also been argued that the publication by a central bank of the names of authorized or licensed banks signifies a recommendation to the public that they could deposit their monies in the licensed institutions with assured facility of withdrawal.

That could happen only if deposits are guaranteed, for which an insurance fee will have to be paid. Otherwise, financial savings will have to be made at some risk and the rate of interest payable on the deposit will naturally reflect the degree of risk. Generally, only lending to a government is considered risk free and hence such lending attracts the lowest rates of interest, which then becomes the price for losing personal control over the money for the duration of the lending.

Incidentally, this position was clearly explained in the public information notices that appeared in January and August last year.

Conserve use of LPG, other fuels -Shell

With international crude and LP Gas prices continuing their upward trend, there is justifiably a major concern on how this impacts domestic prices of petroleum fuels and LP Gas in particular and the cost of living in general, says Shell Lanka. "The public debate that is raging in the media these days about gas prices and cost of living is focused on who is to blame, whether the current or the past government, one minister or another, Shell or Laugfs. This kind of debate is irrelevant, as it completely misses the point," said Roberto Moran, Country Chairman and Managing Director of Shell Companies in Sri Lanka.

"The growing likelihood of war in Iraq, the lingering effects of the paralysing strike in oil producer Venezuela and a very cold winter in the Northern Hemisphere, have driven LPG prices around the globe to record levels," Moran explained. "In February, the Saudi Aramco Contract Price, the LPG benchmark, will jump further to $368 per tonne, the highest level since this benchmark began. This reflects a whopping 93% increase since the $191per tonne level in March last year. Crude oil prices have increased by 60% since a year ago. These are completely external developments, outside of Sri Lanka. No one in Sri Lanka is to blame, nor can any one in Sri Lanka do much about it."

According to Moran, the rise in global prices of crude oil and petroleum products including LPG will likely continue in the short term, and there is much uncertainty about what will happen if war breaks out. He said those involved in the public debate need to accept the realities, and then soberly assess how Sri Lankan consumers and the country as a whole can manage through what is becoming a real crisis situation. That is the more relevant and responsible thing to do. Supplies need to be secured and contingency measures put in place for worst-case scenarios. As prices increase, conservation measures need to be taken, and the creativity and technical know-how of Sri Lankans can contribute ideas to how these can be done practically and simply.

"Our advice to Sri Lankan consumers is to conserve the use of LPG and other fuels. Simple methods like boiling water in a covered container and not automatically setting your gas cooker on 'high' position can lower your LPG consumption. Plan your trips and consider car-pooling with co-workers and neighbours. Drive slower: it saves fuel and lives, too," said Anthony Mylvaganam, Shell's corporate Health, Safety & Environment Manager. "A few industrial customers have undertaken energy audits to implement conservation measures like using heat recovery. Others might also do the same," Mylvaganam added. Shell said it welcomes further conservation suggestions and will share these with consumers.

Countries and people around the world will be forced to take steps to conserve the use of gas and other fuels because they need to manage their budgets. Whilst prices will likely continue to go up in the short term, by conserving energy, demand globally can be reduced so that supply will eventually overtake demand, resulting in prices inevitably coming down.

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