New SEC disclosure rules: Too many escape clauses for the mafia
View(s):A group of stock market investors, concerned about good governance in the Colombo market, is urging the authorities to take stern action against manipulators and wheeler-dealers if sanity is to prevail.
“Many failures of timely disclosure requirements, transfer valuations and manipulations overlooked by the SEC and the CSE have to be exposed, if further ignored, to obtain justice for Independent Minority Shareholders (IMS),” the group has said in a January 10th letter to the chairman and members of the Securities and Exchange Commission (SEC) and the chairman and members of the board of the Colombo Stock Exchange (CSE).
The group comprises respected good governance advocate K.C. Vignarajah, Dr. Dilesh Jayanntha and Tissa Seneviratne.
The letter titled ‘The Hurried Release of New Rules and Directives on Related Party Transactions (Fri 13th Dec) and Public Float (Sat. 21st Dec)’ says:
“It was the season of goodwill, peace and harmony. The first undersigned (Mr. Vignarajah) was holidaying with family and friends; mobile connectivity was breaking down and unclear. Thus his brief response to respected independent media was that the attention and the steadying signals by SEC/CSE were most welcome even though long overdue (seems to be evolving slowly despite tremendous resistance from the stock market mafia!). The 20 per cent minimum public float was a step forward towards our goal of at least 30 per cent, going up later to above 40 per cent with a preferential tax rate to be offered to them. This would be revenue neutral with penalties for slabs below the public float of 30 per cent.
Faced with the reality of a crisis of confidence in the stock market, the mindset of the directive powers at SEC seems to be changing for the better. The momentum for change to a clean, well regulated market will have to be very rapid if confidence is to return and make Sri Lanka proud. We have to be cautious, but supportive of the SEC and CSE to act transparently to make this a clean and vibrant market that will attract investments, local and genuinely foreign (not the local recycled ones), in many multiples of the current volume.
The directive is very limited and inadequate. We must encourage the SEC and CSE to be watchful and monitor attempts at manipulations by errant Controlling Interest and Related Parties (CI & RP). They have to quickly respond to protect the IMS and the integrity of the market. Wrongdoers must be immediately arrested, transparently investigated and heavy deterrent punishment meted out.
Appeasing and molly coddling the white collar criminals, to whom notice has already been given about three years ago, after years of agitation by IMS is totally unacceptable. After permitting this extended period of impunity further legalizing aspects of white collar crimes may be the ultimate result. The mafia toasted the new rules.
Though the new rules look rigorous (with a vigorous marketing pitch) unfortunately many loopholes have been provided by way of extension and/or exemptions guide the wrongdoers to escape the law, instead of closing the escape routes.
Every act of discretion to extend/exempt/waive or compound charges breeds high corruption. It is a terrible price extracted from the decent citizens of our country, while empowering and grossly enriching the wrongdoers.
Manna from heaven: The worst scenario is the huge bonanza that could be given in the guise of punishment (suspension from trading or even winning ‘mandatory delisting’ which is the cherished goal of ruthless corporate crooks and fraudsters intent on impoverishing and debilitating the innocent helpless IMS and the investing public). If the confidence of investors is to ever return, delisting has to be banned, particularly until this transitional period is satisfactorily completed. The criminal unjust enrichment of CI & RP has to stop. A powerful wide ranging investigation into patterns of trade over the last 10 years has to be diligently undertaken. The wrong-doers must be punished. They must compensate the victims out of their personal property and funds without burdening the company. Terminate such management which attempted to defraud the small investors/shareholders (small partners) unlawfully misusing the powers entrusted to them by the shareholders.
Rules 6 (i) & (ii) must be deleted-it is ‘Manna from Heaven’ for corrupt CI & RP as it serves the purposes of the culprits very well. These rules defeat the purpose of the whole exercise in trying to have liquidity, marketability and fairness to IMS and the investing public. Instead of these escape routes the CI & RPs must be subjected to:
File pic of the Stock Exchange
a) Deny voting rights in respect of their shareholding in excess of 60 per cent of the equity capital of the company. This measure will expedite compliance to make the “market” respectable.
b) Extension limited only upto 31st December 2014. No exemptions.
c) Impose severe cash penalties on directors consenting to wrongdoing on Public Float and Related Party Transactions.
d) Debar directors consenting to wrongdoing, from being directors in any other Public Listed Companies (PLCs)
The public float has to be raised to a minimum of 30 per cent for Main and 20 per cent for Diri Saviya Boards, respectively. Indian, Pakistani, Thai and Malaysian Stock Exchanges enjoy above 45 per cent public holdings. Developed countries on average enjoy above 60 per cent public holdings. Even JKH has a public float of 88 per cent.
We must ensure strict criteria of stated capital/shareholders’ funds/revenue/NAV for differentiating between Main and Diri Saviya Boards, as the classification meant to encourage smaller companies has been abused by very big companies.
In earlier times the invitation to the public, to buy shares of PLCs was set out in a prospectus. It was a binding compact. There was no need to specify “continuous listing requirement”. A big public float is a vital consideration of the investors and signifies inter-alia, the confidence of larger liquidity, marketability, transparency and greater support of larger number of public shareholders, who could be an asset as customers, even protectors of company property and personnel, against wrongful acts by unscrupulous persons/politicians/authorities.
As regards related party transactions, the earlier Commissions headed by the illustrious Ms. Indrani Sugathadasa and Tilak Karunaratne, had done a lot of preparatory work. Consultation Paper 17 issued in September 2012 sought public views on the issue of related party transactions. In this Paper it is noted that “in approving Related Party Transactions, great emphasis has been placed on Boards approval, the tendency being for this task to be given to a committee of Independent Board Members. There are often continuing questions about how to ensure effective independence of Board Members from controlling shareholders. In several jurisdictions shareholders have been given a say in approving certain transactions, with interested shareholders excluded. An abusive Related Party Transaction would be against the interests of non-controlling shareholders and thus represent breach of duty…..” (Page 4). Consultation Paper 17 also proposed under item 12 that “if the Related Party Transaction requires the shareholder approval as mentioned above, the Related Party and/or any associate of the Related Party must not vote on the Resolution. Further, the entity should take all reasonable steps to ensure that the Related Party and its associates will abstain from voting at the meeting” (Page 6).
The second undersigned wrote to the Director, Corporate Affairs by letter dated 30th October 2012, sent under registered cover, regarding the enforcement of this and certain other commendable proposals in Consultation Paper 17. Unfortunately, these proposals contained in Consultation Paper 17, have been totally deleted from the Code of Best Practices on Related Party Transactions, now issued by the SEC. Instead, a special resolution is all that is required and this can include the related party itself. Even this supposed protection is illusory, because if the public float is only 15 per cent, the CI & RP can, by circular resolution, effect the transaction. Clearly the objective of protecting shareholders is NOT being met under the new rules if IMS can be totally overridden!
The Employees Provident Fund (EPF) and Employees Trust Fund (ETF), representing the compulsory life savings of a substantial portion of Sri Lanka’s population, are major shareholders in several listed entities where ‘pump and dump’ practices have been taking place. Looting of companies through related party transactions aided and abetted by inadequate checks and balances are actions tantamount to defrauding these people, many of whom are from the middle and poorer sections of society. Good corporate governance, along the OECD Guidelines, is therefore essential in the wider public interest. There were some earlier SEC Chairpersons who were sensitive to these factors and strove to maintain and enforce good corporate governance. They displayed high standards of professional and personal integrity. We do hope that these same standards will continue to be maintained.
The very serious loss of confidence in the SEC and CSE was the result of non-existent/poor regulatory action. These sometimes led to the perpetrators of the malpractices and/or criminal acts being the ‘heroes’ of the vocal, vulgar, protected mafia. Such was the impunity. No big offender has still been brought to justice. The public has no authoritative information of the offenders, offences and punishment meted out, if any.
The principles of natural justice, good corporate governance, unjust enrichment, fraud, misappropriation, criminal breach of trust, manipulation, and concealment of the property of the shareholders, oppression and mismanagement have to be punished if Sri Lanka is to become the desired investment hub or the cherished goal of becoming the Wonder of Asia.
It is worth recalling that the first undersigned made representations, spoke at the AGMs and EGMs of many companies relating to all factors stated herein with further emphasis on creation of ‘shareholder fatigue’ poor dividend payouts, transfer pricing, etc. Specific instances and case studies will be serialized in the near future.
Many failures of timely disclosure requirements, transfer pricing erroneous valuations on Related Party deals and manipulations overlooked by the SEC and the CSE have to be compensated by the CI & RP to obtain justice for IMS.”