Brokers to come under scrutiny

By Arthur Wamanan

Financial analysts and experts have urged the necessity for a mechanism to keep a check on Registered Investment Advisors (RIAs) employed by stock brokering houses and market intermediaries in order to ascertain their standards, ethics and background information for the benefit of market investors and stakeholders.

Speaking to The Nation Gain, Chartered Financial Analyst and Director, Candor Equities, Ravi Abeysuriya stated that Sri Lanka needed a platform to regulate the RIA’s in Sri Lanka, for the benefit of those investing on stock market.

“The Securities Exchange Commissions of countries such as the USA have a website which provides details of stock brokering advisors, their qualifications, and information with regard to any investigations on them. Sri Lanka needs a mechanism like that,” he said.

When contacted, Deputy Director General, Securities and Exchange Commission of Sri Lanka, Dhammika Perera also admitted that there needed to be a mechanism to monitor the conduct of brokers. “We do have certain broker conduct rules and administrative sanctions. But they should be combined, strengthened and put in black and white,” he said.

“The stockbrokers are certified, but that is inadequate. They could play out clients while being in a firm and then move on to another firm. Such instances need to be monitored and addressed,” Perera said.

Accordingly, Sri Lanka has 29 stockbroker firms. “Therefore, it is not difficult to formulate a mechanism to do a background check on individuals attached to firms,” Perera added.

He added that there was no platform for the public and stakeholders to ascertain their performance, conduct and standards. “The industry too can formulate the mechanism as well,” he added.
Chairman, Colombo Stock Brokers Association (CSBA), Dihan Dedigama when contacted stated that the CSBA had an informal system which looked into the ethics and standards of brokers. “But we welcome any system that would improve the quality of our work,” Dedigama said.

Addressing a seminar titled ‘Stock Market: regulatory Frame Work and Investment Challenges’, organized by the Ceylon Chamber of Commerce (CCC) recently, Abeysuriya pointed out that the absence of such a mechanism was a drawback for current and potential investors as there was no system to provide information on their performance.

He further stated that Sri Lanka was among the lowest in terms of domestic stock market participation adding that the lack of trust on the capital market played a key role in the very low level of public participation.

He also stated that the perception that the market was manipulated and controlled by a ‘mafia’ also played a crucial role in their lack of trust on the system.

Abeysuriya in his presentation also spelt out key reasons contributing to the lack of public trust. Accordingly, the lack of ethical culture within firms was a key problem. In addition, market disruption, poor government enforcements and poor government regulations also play key factors in the lack of trust.

He suggested that factors such as transparency and open business practices, responsible actions to address the above mentioned issues, and ethical business practices along with voluntary code of ethics would instill confidence of the public on the market and increase their participation.

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SEC wants fresh laws creating auditors as whistleblower

The Securities and Exchange Commission (SEC) says they want audit firms to ‘blow the whistle’ as and when they come across ‘anything unusual’ in listed firms they audit.

“We want them to tell us if they notice anything unusual in the accounts. We want them to whistle-blow,” SEC Chairman Thilak Karunaratne told the Business Times when asked about his recent comments made at the certificate awarding ceremony of the Corporate Directors Program jointly conducted by the Institute of Chartered Accountants of Sri Lanka and the SEC recently.

He added that the SEC is planning on bringing fresh laws mandating auditors to bring any financial irregularities to the SEC and that similar laws are adopted in countries such as Malaysia. “We are exploring the possibility of placing a legal duty on audit firms carrying out audits of listed companies to report any irregularities or improper conduct they find in the financial statements of the company to the SEC”.

The Corporate Directors Programme is a distinct and timely initiative that is designed to enhance the knowledge and skills of directors in listed entities, he said, adding that knowledgeable and progressive leadership in these companies is important for the smooth functioning of the capital market. “It is under such conditions we at the SEC signed the MOU with ICASL in May 2014 to provide financial assistance for this programme.”

Inculcating good governance in a country would not be possible unless and until the essence of this ideology cascades down the line to all important segments inter alia the economy, he said, adding that this programme conducted jointly by ICASL and SEC will provide the knowledge and skills required in promoting good governance which in essence is corporate governance within the respective organisations of the participants.

“However, I must stress here that effective corporate governance is not merely complying with rules, but is about intellectual honesty and adhering to the true spirit to the essence of good governance.” He said that this type of responsibility imposed on auditors will assist the regulator to be more vigilant and take pre-emptive action to protect the interest of investors. “This would lead to increased credibility and greater transparency of both listed companies and audited reports particularly in the mind of potential investors. This is a legal requirement present in other jurisdictions such as Malaysia.”

Auditors being more accountable Thilak Karunaratne, Chairman of the SEC (Securities & Exchange Commission) has (as reported recently in the media) stated that the SEC is considering imposing an extra liability for the auditors of listed companies to report irregularities and improper conducts of listed companies they may come across during the audit, directly to SEC. The objective of this move is not to take action against listed companies for irregularities reported by the auditors. The aim is to give red signals to the investors to make informed investment decisions. As per the view of SEC officials this will improve the credibility and transparency of the financials of the listed companies. CSE investors hail this proposal. This could increase the risk of the auditors while it will enhance the profile of the auditors and importance of the audit function. Anyway this action will require rigorous legislative arrangements. Also the proposed report of the auditors (from 2016) will have a much detailed report. Dulika Vidanage Colombo

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CID questions SEC officials on Rs. 5 mln Tharunyata Hetak grant

By Duruthu Edirimuni Chandrasekera

Criminal Investigation Department (CID) recently summoned several officials attached to the Securities and Exchange (SEC) to record statements on the Rs. 5 million ‘grant’ by the regulator for a youth movement headed by former President’s son and politician, Namal Rajapaksa’s Tharunyata Hetak Fund some two years ago.

Senior CID sources told the Business Times one official was questioned for five and a half hours on this last week. At the time it was said that these funds were disbursed by the SEC for ‘awareness creation regarding capital markets’. SEC Deputy Director General Dhammika Perera was quoted as telling media in October 2013 that the funds were provided to Tharunyata Hetak due to the ‘penetration this movement has in the country’, the funds were provided to cover the costs for the organisation and for it to conduct awareness programmes on capital markets,” he has said. He has also said that a proposal in this regard was submitted by Tharunyata Hetak, to the SEC and that “after careful consideration of the proposal we decided to release the funds”.

“Former SEC Chairman Nalaka Godahewa and the former Commission members are also to be summoned before the CID to record statements,” a senior CID source said. Meanwhile, in a latest turn of events, one time powerful stock market investor Dilith Jayaweera was questioned by the Financial Crimes Investigation Division (FCID) over alleged share market malpractices involving Lanka Hospitals shares on Thursday, which sent shockwaves in the industry, sources said.

In what was inconceivable a few months ago actually happened and the FCID recorded a statement from him at a start of a probe in which several other high profile traders such as Mr. Jayaweera will also be called to record statements, they added.

The statement was on his share transactions in Lanka Hospitals just before a large parcel traded in 2011 when Singapore-based Fortis Global Healthcare Holdings (p) Ltd, owned by the founders of India’s Fortis Healthcare Ltd bought a minority stake in Sri Lanka’s Lanka Hospital Corp.
The privately-held company of Indian billionaire brothers Malvinder Mohan Singh and Shivinder Mohan Singh bought a 28.6 per cent in Lanka Hospitals, which runs a 350-bed hospital and is majority owned by the government-owned Sri Lanka Insurance Corporation. Former Defence Secretary Gotabaya Rajapaksa was chairman of the hospital company during the tenure of the previous government.

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