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.
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.
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
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.
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?
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.
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!
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.
Bank defends role as regulator, rejects allegations
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
The Sunday Times
FT reproduces the full text of the statement for the benefit of
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.
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
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.
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.
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.
this position was clearly explained in the public information notices
that appeared in January and August last year.
use of LPG, other fuels -Shell
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.
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."
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.
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.
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