Business Times

Is Sri Lanka ready for future Golden Key scandals?

Despite the existence of a plethora of financial sector regulations in Sri Lanka the recent Golden Key scandal suggests that investors are still being duped. While welcoming changes made to corporate legislation in Sri Lanka including the Companies Act No. 7 of 2007 (CA7 2007) and Finance Companies (corporate governance) Direction, No. 3 of 2008 by the Central Bank of Sri Lanka (Direction-CBSL), in this article, I would like to highlight some of the loopholes in the existing law and invite the reader to explore new avenues, to revamp the current patchy and fragmented financial sector legal framework into a robust legal framework.

One contentious issue is whether Lalith Kotelawala, as the Chairman of over 200 companies under Ceylinco Consolidated was unable to oversee the operations of all the companies. In the financial literature whether limiting the number of directorships any one individual can hold should be left to the pragmatism (as individuals have different energy levels, capacity and effectiveness and companies have varying degree of complexity) and integrity of the professionals themselves, or should be statutorily mandatory, is a controversial issue. However, given the stringent compliance requirements on board meetings and due to the law of diminishing returns and biological fatigue, holding too many directorships is both undesirable and unfair. In the USA, the National Association of Corporate Directors (NACD) recommends that directors with full-time positions should not serve on more than three or four other boards, while the Council of Institutional Investors (1998) suggests that directors with a full-time job should not sit on more than two other boards. Therefore, there has to be a sensible benchmark on the number of directorships.

File photo shows Golden Key depositors engaged in a protest.

In Sri Lanka, according to the CBSL, a director of a finance company shall not hold office as a director or any other equivalent position in more than 20 companies/societies / bodies corporate, including associate companies and subsidiaries of the finance company - provided such director shall not hold office of a director or any other equivalent position in more than 10 companies that are classified as Specified Business Entities in terms of the Sri Lanka Accounting and Auditing Standards Act No. 15 of 1995. The direction is a right approach to prevent future Golden Key scandals which reduced depositors of Golden Key and other companies in the group like Ceylinco Shriram Capital Management Services Co. (Pvt.) to paupers. Though some analysts try to twist the scandal with black money and tax avoidance issues (which need to be addressed separately), one cannot forget the fact that the collapse of the group has shattered the lives of more than half a million people indirectly as many lost their lifesavings earned through years of hard work.

Another welcome approach of recent corporate legislation in Sri Lanka is the statutory definition of the term “director” contained in section 529 of the CA 2007 which covers “shadow directors” as well. A shadow director is a person who is not formally appointed but in accordance with whose directions or instructions the directors tend to rely or who tends to control the decisions of the directors. Therefore, directors of financially distressed companies cannot raise the defence that they were not directly involved in the management of such companies. Generally, where a company is a parent company, the possibility of it being deemed to act as a shadow director of its subsidiary companies is more practical, the greater the level of control exercised by the parent the higher the chances are that it will fall within the definition. Therefore, although a company cannot itself be appointed a director of another company, (see section 202 (2) (f) of the CA 2007), it is possible for a company to be a shadow director of another company (see Standard Chartered Bank of Australia Ltd v. Antico (1995)).

Another welcoming approach of the CA 2007 is section 511, which imposes a penalty for false statements, on “any person” who makes a false or untrue statement through any document like balance sheet, profit and loss account, return, prospectus, intentionally, thereby causing a loss to the people who rely on such documents. Further, “any person” who with intent to defraud or deceive a person falsifies records shall be liable under section 512 of the CA 2007.

Further, CBSL in its report titled, “Recent Economic Developments: Highlights of 2009 and Prospects for 2010” has mentioned that the laws relating to banking, finance and insurance are to be amended to further strengthen the regulation and supervision of financial institutions and to promote a sound and progressive financial system. As part of this, directions will be issued on integrated risk management procedures and the implementation of pillars 2 of the Basel 11 Accord. In addition, the CBSL is in the process of formulating “a deposit insurance scheme”, which is expected to safeguard small depositors and contain the cost of resolving failed banks, thereby increasing public confidence and the resilience of the banking sector. Further, the definition of “deposits” will be widened to cover a broad range of fund mobilization activities. In addition, a law to regulate and supervise micro-finance institutions is also being formulated.

Nevertheless, in Sri Lanka though the financial legal armoury is literally rich, the enforcement is still very much in an embryonic state. For example, whether the Registrar of Companies conducts investigations as empowered by section 173 (1) (b) (ii) of the CA 2007, to investigate the affairs if it appears to him that there are circumstances suggesting that a company was formed for any fraudulent or unlawful purpose ; or whether the provisions of the Sri Lanka Accounting and Auditing Standards Act (No. 15 of 1995) like section 23 (functions of the board), section 25 (submitting annual accounts), section 26 (power to investigate) and section 27 (offences-directors, officers & auditors) are interpreted broadly (purposive approach of statutory interpretation), to prevent scandals, is still not evident.

Top to the page  |  E-mail  |  views[1]
SocialTwist Tell-a-Friend
Other Business Times Articles
LTTE wipe-out curbs ‘Hawala’ trade
Climate change, restive workforce dogs Dankotuwa Porcelain
Confifi’s minority shareholders cry foul
Cabraal re-appointed Central Bank governor
Private managers essential to run Shell under state control
Comment - Govt: Stay out of business
Feature - Is Sri Lanka ready for future Golden Key scandals?
Feature - Annals of gullibility: Next Golden Key is around the corner
John Keells Group wins 9 Presidential Awards for Travel and Tourism
Infotel to kick off at the end of September
Import duty cuts pull down computer prices
LB Finance shows Rs 500 mln profit, unscathed from run on deposits
Malnutrition could affect future human resources
First for First Guardian Equities
Indian mobile phone maker Micromax enters the Sri Lankan market
Letter - Drilling for oil in the Gulf of Mannar
Letter - CEPA : A medical perspective
Factories closing? Think again
Seven insights for Corporate Managers
Hirdaramani Group diversifies into IT, looks at other investments
Offers to Tokyo Cement shareholders
Desktop PCs have come down to Rs 30,000 from Rs 90,000
Sri Lanka lags behind in education – Maldives businessman
Derivatives – the good , bad and the ugly
New website promotes Alien book and tourism in Sri Lanka
Asian Paints trains & accredits local painters
Heritance hotel team at Singaporean culinary challenge
Coke makes donation to Habitat for Humanity
UNIDO to recommend Brandix Seeduwa as green example
Top global accountant at CMA Summit
Sri Lanka to sell power to India
Worry over possible exploitation of Northeast workers
U.S. apparel retailers turn their gaze beyond China
CEAT records five-fold profit growth in Sri Lanka
Seylan Bank to implement Manpower Plan
Long wait for 100 GK depositors to get money back
Sunshine says had 'solid' performance in 2009-10
From rags to riches, Nawaloka Mudalali enters 90th year
BAM Holdings – TESCO join hands in Community Service
Sri Lankan management consultants for Maldives Electricity Board
Mobile app development portal launched
Dambatenne estate enhances living standards of estate community


Reproduction of articles permitted when used without any alterations to contents and a link to the source page.
© Copyright 2010 | Wijeya Newspapers Ltd.Colombo. Sri Lanka. All Rights Reserved.| Site best viewed in IE ver 6.0 @ 1024 x 768 resolution