The Sunday TimesBusiness

22nd September 1996




British case spotlights unit trust regulatiuons

The regulation of unit trusts or mutual funds has come to the fore with a leading investment bank being punished by Britain's Investment Management Regulatory Organization (IMRO) for failure to comply.

The mutual fund managed by a British firm connected to a German bank was found to have invested in unquoted securities above its authorised limit.

Earlier a top investment management group based in Britain with a joint venture in Hong Kong had been penalised with some of the heaviest fines over by IMRO and Securities and Futures Commission in Hong Kong.

Analysts say that in a manner which somewhat resembles a compliance failure in one Sri Lankan unit trust management company, a UK fund manager had, over two years, diverted profitable trades to his own account and another trust with which he was associated with at the expense of public funds.

The investment group had agreed to refund US $ 19.3 mn to three mutual funds as compensation. At least US $ 3 mn of this came from the chief investment officer of the fund, who was at the centre of the scandal.

Hong Kong and British regulators had in addition imposed fines over one million dollars on the grop. This was said to be the third highest fine imposed in the regulatory history of Hong Kong and Britain.

A former chief executive of one mutual fund management company in the group became the first individual to be struck off the register of IMRO.

IMRO's investigation had begun when the compliance officer of the investment group itself reported a number of breaches of IMRO rules and refused to sign accounts. The investment group had then reported these moves to IMRO.

CN to launch credit plan to promote self-work

The Central Bank of Sri Lanka will shortly launch a Credit Scheme intended to promote self- employment. It is one of two new self employment credit schemes of the Government, the other being for Samurdhi beneficiaries to be implemented by the Ministry of Youth Affairs, Sports and Rural Development in collaboration with the two state banks, and styled Samurdhi Sanwardhana Naya or SASANA Scheme.


The Central Bank scheme called the SURATHURA Scheme will be inaugurated in October 1996 and its objective will be to generate self-employment opportunities by the provision of credit facilities and support services to the unemployed, specifically to the educated youth. The unemployed will be encouraged to engage in market oriented income generating activities by undertaking micro-enterprise self-employment projects.


Eligible projects will include small scale agricultural, industrial and trading activities and will be selected by the target groups by their utilising their own knowledge and skills on the basis of the easy availability of raw materials and markets for their products or services. Such projects should be market oriented to enable beneficiaries to dispose of the end-product without difficulty.

Beneficiaries should obtain market information as regards type of products having a high demand.


Eligible borrowers will be persons between the ages of 18 and 45 years, and should be non recipients of Samurdhi benefits. Only those setting up new ventures will be eligible for loans which will not be available for improvement of existing projects. The Samurdhi Niyamakas will identify the target beneficiaries. They will also exercise both pre and post credit supervision.


The maximum loan will be Rs. 50,000 and the period of loan will be a maximum of 2 years including a grace period of 6 months. Interest will be charged at 10 per cent per annum for regular payments and for irregular payments it will be 12 per cent per annum. Repayment could be weekly, monthly, quarterly within the maximum two year period but early repayment will be encouraged. The loan will be collateral free, but a guarantee from an income earning family member will have to be furnished. Borrowers should be committed to a savings programme, saving at least Rs. 25 per month and such savings should be deposited in to a designated savings account. borrowers should be able to demonstrate the viability of the projects and that the income generated is adequate for repayment of the loan.


Initially, the Bank of Ceylon, the Hatton National Bank and the People's Bank will participate in the scheme. These participating credit institutions (PCIs) will be eligible for refinance from the Central Bank at an interest rate of 5 per cent per annum payable half-yearly. The PCIs will be granted a grace period of 5 years (during which they will be required to pay interest at the stipulated role. The refinance loan should be repaid within 2 years from the laps of the grace period. The PCIs may recycle loan recoveries during the grace period. Such recoveries should be kept in a 'SURATHURA' Credit Fund at the bank and be utilised to provide further loans for eligible projects under the Scheme. The Central Bank will monitor and supervise the Scheme and will also co-ordinate with appropriate training institutions for the provision of necessary training to beneficiaries, staff of PCIs and Samurdhi animators.


The Scheme will initially be implemented in the districts of Bdulla, Gampaha, Hambantota, Kalutara, Kegalle, Matale, Moneragala and Ratnapura. Depending on requirements the Project will be extended to other areas.

Chamber sees TUs as snags

By Ruvini Jayasinghe

Trade unions are organising strikes to boost membership, a Ceylon Chamber official charged last week.

Exports Section Chairman Lyn Fernando said a majority of the 300 odd strikes organised this year had been in "well established companies."

Although these strikes give the impression of being organised against violation of workers' rights like salary anomalies, EPF/ETF dues etc., most strikes have occurred in well established companies where workers' rights are generally not violated, he reasoned.

He told journalists at a press briefing last week that labour unrest and the power crisis were the two key factors that affected productivity this year.

With a 30% to 50% drop in productivity in the first half of this year, total export growth was only 13.09% in the first half of 1996, in rupee terms as compared to 26.26% in the first half of 1995.

The declining trend is likely to continue in the second half of 1996, with total export growth not exceeding 9% -10%, Mr. Fernando said.

The highest income generating sector - garments and textiles (45.3% of total exports) - recorded a very low growth of 6.58% in rupee terms for the first half of 1996, compared to 29.74% in the same period of 1995.

Manufacturing, which is 84% of total exports, also had a low growth of 14.94% in the first half of 1996, compared to 32.35% in the first half of 1995.

The highest growth of 89.12% was recorded from the petroleum sector in the first half of 1996, as against -9.63% during the same period in 1995.

Mr. Fernando said Labour Minister Mahinda Rajapakse has been quoted in the media as saying that the "Workers' Charter is a collection of existing labour laws ". But, the proposed Workers' Charter contains a key clause, the mandatory recognition of trade unions which existing laws do not provide for, he pointed out.

Answering questions from journalists about the presence of big multinationals like Shell, and the keen interest shown by others to snap up major privatisation projects like the Ports, Telecommunications and AirLanka, Mr. Fernando said private investors who bought up establishments with monopoly status could ride over strikes..

Exports Section Deputy Chairman Ravi Jayawardena explained that it was the smaller businessmen competing in an international market who are most affected by these "wildcat' strikes.

Mr. Fernando said there had been no response from the government to their recommendations to amend the Industrial Disputes Act, to provide some cover for businessmen against trade union action. The Chamber wanted the Act to be amended so that trade unions could be sued for any loss or damage to property, through trade union action. Mr. Fernando cited the example of "Iron Lady," ex-British Prime Minister, . Margaret Thatcher who controlled labour unrest which threatened to disrupt Britain's industry, by introducing such legislation.

He said the closest the Chamber had got so far to counter measures for disruptive trade union action was the proposed Employment Relations Bill which was now being studied by a cabinet sub- committee.

Mr. Fernando said countries like Vietnam, Malaysia, the Philippines were advertising strike free zones. Some local companies have set up business in Vietnam, he added.

Mr. Fernando said about 35 garment factories, of the total 700, had closed down this year.

While labour unrest and the power crisis took centre stage in reducing productivity this year, exporters have also been hit by the withdrawal of some export concessions, Mr. Fernando said.

The Chamber's export section called for the restoration of the Central Bank refinancing scheme, (where low interest financing was made available to exporters) and the EDISS scheme (an export development incentive scheme).

Most exporters would like the rupee to be devalued to Rs. 60 to the dollar, at least, or to introduce alternative export incentives, Mr. Fernando said.

Most companies have a 10% - 20% drop in export orders this year and have sustained an average of 20% drop in turnover, he added.

Smoking out unfair practice

By Ruwanti Ratnayake

Despite the illegal smuggling trade currently underway, Ceylon Tobacco Company will introduce duty paid Benson and Hedges to local consumers, CTC, Corporate and Legal Affairs Director, Vijaya Malalasekera, said recently.

The product has so far been available through illegal trading, which has been a great loss to the government by way of tax and excise duty. "Unfortunately, the growing demand for international brands has been met in Sri Lanka through illegal smuggling", CTC Chairman, Michael Fenn said. This illegal trade has deprived the government of much needed revenue while the consumers too, are never assured a stable price for the product.

Even though it was observed that tough action needs to be taken by the government to curb the smuggling situation, CTC officials are certain that there will be a market for the brand, which will have a steady supply in addition to the assurance of quality, which cannot be met by illegal traders. Furthermore, customers would be assured a stable price unlike in smuggled goods, where the price fluctuates.

However, the fact remains that a smuggled pack could be relatively cheaper in price to a duty paid pack in the local market and consumers would always be left with a choice. In order to avoid this, CTC officials have made several suggestions to the government to curb the prevailing conditions with strict laws and regulations, ranging from seizing and destroying the smuggled goods when found and imposing fines on these traders. "We estimate that the government may be losing anything up to Rs.1.3 billion in terms of lost excise and import duty, on these illegal products", Mr. Fenn said, adding that the total smuggled cigarettes account for 8 per cent of the market and about 50 per cent of this would be Benson and Hedges.

In terms of distribution, CTC will be initially concentrating on the 4 major urban districts of Colombo, Kandy, Galle and Ratnapura. This form of distribution would enable the Company to have control over distribution and ensure quality, it was observed. The duty paid packs marketed by CTC will have the government health warning in Sinhalese, English and Tamil, making it easily identifiable from the smuggled packs.

Cyntex:: stay out of Kelaniya

Stiff opposition to the proposed Cyntex showroom has kept its doors shut, well past its scheduled opening.

At large poster in Sinhala which roughly translates as "Watchout. Do not set foot here. We don't want Gnanam in Kelaniya," has been strung across the front glass facade of the leased out building.

A spokesman for the Cyntex Group told the Business Times that an MP of the area together with some textile 'mudalalis' were whipping up anti-Cyntex sentiments.

Too much democracy is bad economics

Is there a trade-off between too much democracy and good economics? In an article contributed to the Guardian Weekly Richard Thomas says "a new truth is emerging: too much democracy makes for bad economics." But, says Thomas, politicians and economists are reluctant to come clean about this, although there is mounting evidence that political freedoms do, at some point, compromise economic progress. Thomas points out that Harvard economist, Robert Barro having surveyed 100 countries between 1960 and 1990 demonstrates that while economic freedoms such as free markets, rule of law, strong property rights and limited corruption are powerful determinants of growth rates, political freedoms appear to have the opposite effect. Although some democracy is better than no democracy, lots of democracy characterised by more frequent votes, at more levels, on more issues is worse than none.

Thomas gives to reasons why this is so. In the first place voters want to feel good now, not tomorrow and so even if we feel that a recession is necessary, we would rather put it off. Secondly, because politicians know this, the economy is run in line with "our short-term greedy wishes". And this is the argument he says, that underpins calls for independent central banks.

Politicians will be under pressure to deliver short-term growth and so they neglect inflation and rising inflation puts the brakes on longer-term expansion. Thomas states that Professor William Keech in his book Economic Politics supports independence for central banks, but denies that his stance is undemocratic. Thomas says that this is nonsense. In a democracy the universal electorate has the capacity to throw out those they believe to have fouled up. But, Thomas points out, while we can do this to politicians who decide monetary policy, we cannot do this to un-elected central bankers so that independent central banks become less democratic.

According to Thomas the point that proponents of central bank independence make is that loss of some democracy is worth it because of the improvement in economic prospects. People can choose to give up some of their democratic power in exchange for something else. Thomas cites the case of the Bundesbank which, he says, is the least accountable central bank in the world, but which is wholeheartedly supported by a population among whom the scars of pre-war hyper-inflation still run deep.

Pyramid Unit Trust pays deirdend to unitholders

CKN Fund Management the Manager to the Pyramid Unit Trust has declared a tax free dividend of cents 40 per unit for the financial year ended March 31, 1996. A spokesman of the company said that this dividend will be paid to Unitholders whose names appear in the Register as at 30th August, 1996.

The audited financial statement of the Trust for the financial year ended 31st March 1996 reflected a profit available for distribution to Unitholders of Rs. 20.2 million. In the Manager's Report accompanying the financial statement, Vajira Kulatilaka, the Chief Executive Officer of the management company had stated that the Pyramid Unit Trust has grown by 2.45% during the last four year period from the inception, compared with a negative market growth of 3.52%. The net Asset Value of the Pyramid Unit Trust as at 31st March, 1996 had been Rs. 299.1 million inclusive of accrued income. The different asset classes in which the funds of the Pyramid Unit Trust had been invested as at 31st March, 1996 consisted of equity, redeemable debentures, treasury bills, convertible debentures and short term money market instruments. The noteworthy feature in the portfolio is the decline in funds allocated to equity.

Mr. Kulatilaka has said that some portfolio funds from the USA shifted towards the Emerging Markets and the markets in the Asia Pacific region benefitted by the increasing of market indices between November, 1995 to February 1996 but unfortunately Sri Lanka could not attract these funds. "However, due to the longer than expected bull run of the US stock markets and the unexpectedly attractive turn around of the Japanese economy, the overall inflow of funds to emerging markets was below expectations, the Chief Executive Officer said.

"The country's interest rates started moving up during the second quarter of 1995/96 and the call money market rates recorded very high levels and also the treasury bill rates moved above 20% which was higher than fixed deposit rates in commercial banks and other financial institutions. However the structure of the interest rates moved down during the fourth quarter of 1995/96. The call money and treasury bill rates too recorded a similar trend since January, 1996 as a result of the improvement of the liquidity situation", said Mr. Kulatilaka.

Estates only for screened bidders

The plantations privatization process may be changed to allow only pre-qualified bidders to take part in the future market sources said.

This would involve a preliminary 'screening' of the balance plantation companies that are to be sold on the stock market.

It is believed that the new process would require sealed bids to be submitted by the screened bidders. After opening the bids the prices would be announced to all the bids and another round of bidding will take place.

Market analysts say, if the proposal is implemented it would be yet another move of the government sidelining the stock market whether intentionally or not.

Stock brokers have been hard hit by the falling market and plantations deals have provided business to at least a few brokers.

Maturata Plantations was taken off the boards two weeks ago, to make changes to the offer document.

However Udupussellawa Plantations was put on the boards as scheduled on the 14th of September.

Jardine Fleming HNB had submitted a bid of Rs. 10 for the 51 per cent stake, which was topped by John Keells Stockbrokers with a with of Rs. 10.25..

Minority stakes in Elkaduwa Plantations (managed by Metropolitan), Elpitiya (Carsons), Kahawatte (Pickle Packers), Malwatte (Magpeck), Maturata (CIC) and Namunukula (BC Computers) remains to be sold by open bidding.

1 stop into centre

The internet would be a key promotional tool of the Board of Investment in the future, the BOI has said.

"The BOI's objective is to create a One Stop Information Center in cyberspace for investment in Sri Lanka," BOI Deputy Director General in charge of promotions, Manilal de Mel said.

"In fact a prospective investor can fill out an application form and have it transmitted instaneously without even having to move from his office located anywhere in the world."

He was speaking at the launch of BOI's website on the World Wide Web this week. The 34 page website is said to be the largest institutional website out of 80 Sri Lankan organizations that have a web presence.

Mr. de Mel said the website would enhance Sri Lanka's attempts to provide a superior service to prospective investors, in a fiercely competitive market for global foreign direct investment.

Over 50 million users around the world in 150 countries are estimated to have direct access to the internet. This is growing at the rate of 10 - 15 per cent a month, he said. Over 300,000 companies in the world are believed to have a presence on the internet.

The website will have information on Sri Lanka's location, business environment, human resources, quality of life, investment opportunities, about the BOI and the Bureau for Infrastructure Investment which is dedicated to infrastructure approval and a news page which is constantly updated.

Senior BOI officials have their own electronic mail (e - mail) addresses at which prospective investors browsing through the web can reach them and ask for additional information.

The website is also linked to other websites for users who would like to know more Sri Lanka.

The URL of the BOI website is http://

The web production and consultancy services were provided by the company, Cybermarket assisted by Q and E advertising.

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