Golden Key under fresh CB probe

The Central Bank (CB) is closely examining its various, market-related activities, whether proper risk management processes were followed and whether any individuals – within the regulator and outside – need to be prosecuted in the Golden Key fiasco.

The bank, under a new Governor, is also unlikely to adjust the rupee value right now and would retain it at current levels.

“There is a whole bunch of things that needs to be examined,” noted CB Governor Arjuna Mahendran in an interview with the Business Times on Thursday, emphasising that he is particularly looking at whether there is an Investment Policy Statement, was it followed and, if not, the need to create one.

The CB in the past few years has been criticised for investments – via the Employees Provident Fund (EPF) – in doubtful listed stocks and also in disastrous Greek bonds. The regulator also came under criticism in its handling of the crash of the Golden Key and the resultant collapse in many finance companies.

Mr. Mahendran said the Sri Lankan CB model – with its multifarious activities – was more powerful that the typical central bank model elsewhere and as a result drew a lot of criticism in the proposed merger of banks and using EPF monies to invest in various avenues including the stock market

“The control structure for these various investment activities is something that I am looking at very closely,” he said, adding that what needs to be examined is whether there was a clear separation of the compliance (with all laws) and risk management processes similar to any global bank. “We need to see whether we are properly controlling these risks,” he said, adding “Our priority is to take measures to stabilise the system”. (See Page 2 for comprehensive interview)

On the Golden Key fiasco, he recalled the words of former Chief Justice Sarath Silva, in a judgment saying that the CB had absconded from its duty of ensuring that any institution involved in financing activities must be supervised, and added: “The CB appears to have absolved itself of any responsibility. The chief justice made a very clear point that the CB had flouted its responsibilities. These are issues that we need to look at – the finance company structures, the Golden Key and several other similar companies”.

He said the CB is discussing with the Attorney General (AG) to ascertain whether “we could prosecute certain people (based on evidence) and I am optimistic that we can help the depositors at the end of the day”.

On the financial sector consolidation, he said he was not in agreement with the rationale of consolidation being to make banks bigger so that they could go to the international markets and tap bond and equity funding.

“Even with consolidation, for example, the DFCC and NDB combined are still too small in my view to really make an impact. To me the only consolidation that would make sense is to merge say the NSB and the Bank of Ceylon and then have a US$10 billion bank which is reasonably sized,” he said adding that with his international experience any bank with less than $10 billion won’t make a dent in the market.

The CB has requested technical support from the International Monetary Fund (IMF) to look at these issues from an international perspective and they have agreed to do so. “They would be looking at the financial stability of our financial system; how stable is it and what is impeding faster growth,” he said.

Asked whether the regulator strayed from its stated role, he was of the view that sometimes it did citing the example of its annual report last year praising the Mattala airport.

“The Central Bank’s role is to be more objective… not gush about projects where the feasibility study had not been done. From that point of view, the CB seems to have strayed from its role of being an objective advisor to the Government and the people of Sri Lanka.”

But he was quick to point out that this didn’t mean the entire bank was ‘rotten’ and irredeemable. “I don’t think the CB has lost its way – we just need a slight course correction to get back on track,” Mr. Mahendran said, adding that the bank had a qualified and very competent team of officials to move forward.

On the value of the rupee, he said the currency is at a critical stage with global markets being very volatile. “… exchange rate flexibility has to be the last option; we have to preserve confidence. At the moment the markets are waiting for the budget and the parliamentary election in June, and in that situation you need an anchor and the currency plays that role,” he added.
www.sundaytimes.lk

SEC – Hunt on for new DG

By Duruthu Edirimuni Chandrasekera

Now with a brand new chairman at its helm, the Securities and Exchange Commission (SEC) has ‘restarted’ its hunt for a new Director General, SEC officials say. “There are a few names being discussed,” a SEC source told the Business Times, adding that someone who previously held this post may take it up for the second time.

A new set of Commissioners together with a new Director General will be appointed this week, he added.

The new Chairman, Thilak Karunaratne, while not letting in on who the new SEC Director General will be, told the Business Times that he will have a ‘chat’ with the departments individually this week.

On assuming duties, Mr. Karunaratne had ‘stressed’ to the staff on being ‘absolutely’ loyal to the organization.

“There should not be any divided loyalties. The SEC staff should be faithful to the organization and not to the outside world,” he had said, sending a strong signal to the alleged insiders’ disseminating sensitive information to the outside world.

When Deputy Director General Dhammika Perera in his welcome speech had referred to Mr. Karunaratne as a ‘successful’ businessman, the former had interjected and stressed that he is an ‘honest’ and a successful businessman, eliciting smiles from those preent.

The Colombo bourse fell sharply in Friday’s early trading session, on the back of the mini budget which saw many increased taxes.

The new fiscal plan for the year had many surprises while also accommodating the expected relief proposals as mentioned in the newgovernment’s election manifesto. At the outset, especially for the investors in the equity market this revised budget is nothing short of a shocker with increased taxes and additional levies on alcohol manufacturers and telecos, brokers said.

Analysts said that the introduction of the one off tax of 25 per cent on corporates and individuals who earned a profit of over Rs 2 billion for this financial year would have a significant impact on FY15E profitability of such company shares.
www.sundaytimes.lk

Urgent need to revive SEC probes

Finance Minister Ravi Karunanayake hit all around the wicket, in cricket parlance, on Thursday providing a host of concessions, handouts and relief in the budget to Sri Lanka’s long suffering masses.

He announced a reduction in prices for LPG gas, chillie, Maldive fish, dried fish, green gram, bread, wheat flour, milk powder, sugar, bus and school van fares and kerosene among others.

Taxes were increased for a new category called the ‘super-rich’, liquor manufacturers, casinos and mansion owners to meet some of this expenditure.

Increased taxes on the products of companies listed in the stock market – alcohol and manufacturing among others – saw a sharp fall in the indexes in early trades at the Colombo Stock Exchange on Friday.

Government expenditure has been estimated at Rs. 2.1 trillion, revenue at Rs. 1.6 trillion while the budget deficit has been estimated at Rs.499 billion, according to statistics given by the Finance Minister.

What is refreshing is that all these figures were clearly given in the budget speech this time – like in the good old days of former Ronnie de Mel’s budgets – unlike former President Mahinda Rajapaksa’s practice as finance minister to list it as annexures which was not easily accessible to the public. The move is a sign of the transparency and governance structures being followed, as promised, by the new Government.

It was indeed a revolutionary budget, not only in the range of items that were reduced and the tax increases on the rich, so much so that the Finance Minister was likened to a modern day Robin Hood, but also the fact that the budget process will see many changes.

For example, this is the third time in a single budget that the figures have been altered. When the 2015 budget was presented by then President and Finance Minister Mahinda Rajapaksa last October, the expenditure and revenue figures were altered during the budget debate from the presentation of the Appropriation Bill stage.

The new regime’s budget is an amendment or adjustment of Rajapaksa’s budget contrary to being an ‘interim’ budget or a vote on account to meet just three months of spending. It deals with expenditure and revenue for the whole calendar year with amended expenditure, revenue and deficit numbers. The next question is will there be another budget amendment when a new government is elected in June.

The budget also dealt with a nagging issue; the stock market and the many unsavoury deals that were allegedly swept under the carpet by the Securities and Exchange Commission (SEC) before Thilak Karunaratne took over on Wednesday as the new chairperson. There were many transactions investigated during the tenure of Indrani Sugathadasa and Karunaratne (returning for a second stint) as SEC head. Both officials were then forced out due to pressure from powerful business interests. Former Sri Lanka Insurance Corporation CEO and former Sri Lanka Tourism chairman Nalaka Godahewa was brought to this crucial, regulatory role. During Godahewa’s tenure, the SEC took the position that there was no evidence to proceed with these investigations.

However the Finance Minister on Thursday said the massive transaction involving National Savings Bank and The Finance Company which was traced to insider dealing would be probed. None of the culprits in that deal has been brought to book. “Our government will ensure that the perpetrators of this unholy share deal also will be brought to face the judicial process,” Karunanayake said.

Former NSB Chairman Pradeepa Kariyawasam, husband of recently retired Chief Justice Shirani Bandaranayake, was forced to resign over the deal but there are suggestions that he approved the deal owing to pressure from political higher-ups.

Past investigations into these murky deals in the stock market are expected to be revived by the SEC chairman who is also seen putting together the mechanism to get cracking with these probes and complete them as soon as possible.

A little known fact is that Godahewa, who resigned after initially being reluctant to do so, was part of an election planning committee that included parliamentarian Namal Rajapaksa, businessmen Nimal Perera and Dilith Jayaweera formed in mid-2014 to prepare for the presidential elections. Despite his involvement in a political committee, the former SEC chairman was quoted in newspapers insisting that he is a not a political appointee to the post.

While the new SEC chairman has the onerous task of dusting the old files of the investigation, expectations are high that the perpetrators of these white collar crimes would be dealt with swiftly and some progress seen before the next election in June.Talking of perpetrators, the new Central Bank Governor is also discussing with the Attorney General as to whether action can be taken against those implicated in the Golden Key fiasco and its aftermath. The need for punitive action against individuals and recovery of all assets stems from the desperation of depositors who are still waiting for the ‘light in the tunnel’ to be returned their full dues, after many years of suffering.

There is growing expectations that the Government, its ministers and the different regulatory authorities – in particular the Central Bank and the SEC – would deliver the goods as speedily as possible.

Just like the 100-day programme, the authorities also need to show progress on various corrupt activities with expectations running high from the people. Progress on the SEC probes would provide positive signals to ‘real’ foreign investors who have been concerned about good governance and accountability issues.
www.sundaytimes.lk

DFCC – NDB merger unlikely

The much talked about and much anticipated merger of NDB and DFCC banks is unlikely to go through, with highly placed government officials saying the state entities which collectively own over 30 per cent in each bank will not vote for the merger.

“They (new government) don’t see any business sense in this,” a high government official told the Business Times. A committee reviewing the previous regime’s banking sector consolidation process, headed by Dinesh Weerakkody, who is a Senior Advisor to Prime Minister Ranil Wickremesinghe, is to make a recommendation on this merger soon. “The recommendation by this committee (tentatively) is that DFCC and NDB shouldn’t merge,” a Central Bank source said.
www.sundaytimes.lk

Ravi defends controversial retrospective tax

Sri Lanka Finance Minister Ravi Karunanayake defended a deadly retrospective tax slammed on companies, which analysts fear is a tactic that is likely to be followed by future administrations to finance their election promises.

The tax was supposedly to take back ‘ill-gotten’ gains.

"It may be on the short run we have been offensive in certain areas but we have put fundamental reason as to doing so as well," Finance Minister Ravi Karunanayake said.

"We will ensure when we say it is one-off that it is one-off unless the market decides to behave in a different way."

Karunanayake was speaking at a forum organized by the Ceylon Chamber of Commerce Friday the day after he presented the government budget which announced the tax .

Ill-gotten Super Gains
Ceylon Chamber Chief Suresh Shah had earlier referred to a windfall type 25 percent levy labeled ‘super gains tax’ slapped on companies which supposedly had ill-gotten gains.

Shah said not all companies had made such gains and he was concerned about the perceptions created in the country that all businesses had ill-gotten gains.

Practices followed by the United National Party led administrations such as setting up state companies under the Companies Act instead of an Act of Parliament and the executive presidency itself had been abused by subsequent administrations against the people with interest added.

Karunanayake said the budget was done in a few days to give effect to the ‘political aspirations.’

"Our intention was not to distort the market, but ensure that if there had been any ill-gotten gains in certain areas, certainly there won’ be any mercy on them," he said.

"But any area where there is a genuine error we will be the first to say sorry and get it corrected."

Indrajith Coomaraswamy an economist and former Central Bank and Treasury official said there was a debate whether it was better to increase the overall tax rate rather than have a one-off rate.

"As we go forward we need learn lessons to see whether we have done it the best way," he said.

A retrospective tax means that all shareholders who bought shares on the basis of expected profits per share for the current year on reported earnings will find that the profits are not true and their investment decisions were wrong, an analysts who declined to be named said.

No Witch Hunt
"In my opinion it is not a good thing do," economist Laxman Siriwardene said. "It should not create a precedent. It should be transparent to a company what they have to do."

"The only saving grace is taxation is better than printing money."

There were also perceptions in the market that the retrospective tax and other large one off levies were ‘revenge’ taxes imposed on firms linked to or who supported the previous regime or refused campaign finance, an analyst who declined to be named for fear of reprisals said.

It may have opened a Pandora’s Box for the budget to be used to wreak vengeance by future administrations, critics say.

The claims of being ‘one-off’ bring back memories when an ad hominem or targeted expropriation law was brought against several companies including many owned by those with connections to the United National Party.

"The problem now is that there is no opposition. The opposition anyway is clueless about these issues," one banker said. "The media is also with them. People like Harsha (de Silva) who spoke on behalf of economic freedom and rule of law is also with them. Please don’t quote me."

Minister Karunanayake confirmed that the super gain tax was based on the 2013/2014 financial year but insisted that there was no witch hunt.

"We have looked at two billion rupees (in profits) from a transparent basis. There is no witch hunt on anybody, it is just on what is declared."

He said tax exempt companies will not be included, and there were "effectively 42 companies (caught up in the net)", but we’re awaiting returns to see the exact number.

No profit warnings have so far been issued by any company in the stock market, as it is uncertain which listed firms will get hit. December quarter results are just coming in.

In Sri Lanka some firms including banks have a financial year ending in December and most others March.

Minister Karunanayake said that the ill-gotten gains tax applied only to single entities and not to consolidated group results.

"We are only using a one-off to clear the dead past," Karunanayake said. "We have inherited this. If we can say we can write off what was done in the previous regime, we do not need to have this super tax.

"But owing to the fact that you took everything sitting down for 11 years – you won’t have white vans running around hereafter – so please look at the state the economy is in. Help us to take this forward. That is why we said we are taxing two percent for the benefit of 98 percent."

New Structural Problem
Coomaraswamy however said the new current expenditures initiated by the regime would be permanent streams compared to the one-off tax that would bring some money this year and would have to be fixed later.

"The interim budget has put in place streams of recurrent expenditures, in terms of reliefs offered. But a lot of the revenue measures are one-off and that is a structural challenge that needs to be addressed."

The self-created massive salary hike to state workers had reversed gains in containing current expenditures over several years. This would need more money to be taken from the citizens to be used to finance current state expenses by raising the revenue to gross domestic product ratio.

Sri Lanka’s stocks took a battering on Friday falling 2.6 percent mainly due to the retrospective tax. Stocks were already falling on the basis of the election manifesto of the administration especially the massive salary hike promised to state workers.

Analysts say retrospective taxes, which is a law that applies to the past, are among the worst types of violations of rule of law that a legislature of elected rulers, who control the police and the prisons, can impose on an unarmed citizenry who are like helpless serfs, however rich they are.

Some one billion rupee taxes imposed on sports television stations believed to be targeted at a channel connected to the last regime which was set up with blatant state privilege’s also go against a fundamental principle of taxation, particularly in South Asia which is the ability to pay.

"The Ruler should act like a bee which collects honey without causing pain to the plant," says the Mahabharata, a principle that has also been articulated not only by Ved Vyas but also by Chanakya (Kautilya) in his work Arthashastra and has been followed by Sri Lankan kings as well.

Rule of Law
The very nature of rule of law is predictability. While ignorance of the law is not an excuse, no man can be subject to a rule that did not exist for him to follow in the first place. Economist and philosopher F A Hayek explained this succinctly in his work Road of Serfdom:

"Stripped of all technicalities [the rule of law] means the government in all its actions is bound by rules fixed and announced beforehand—rules which make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances, and to plan one’s affairs on the basis of this knowledge."

The new administration has promised to restore rule of law by reducing the arbitrary powers of the President and re-appointing a Constitutional Council to redress the arbitrary misuse of the public service that was possible after an independent public service was destroyed.

The key tool of the executive presidency was the direct appointment of ‘impermanent’ secretaries to ministries driving the last nail into the coffin of a previously independent public service and killing off the institution of permanent secretaries which was already hit by a constitution in 1971.

The `impermanent’ secretaries are either completely servile to the ministers and have to do wrong things to remain in office or they are very powerful and act like ministers in arbitrary ways.

Critics say if there were permanent secretaries, President Mahinda Rajapaksa would not have been able appoint his brother as defence secretary.

Minister Karunanayake promised a clean administration going forward.

"We are a responsible government and we want the economy to move, not in the hands of a few; open it for a clean operation to go forward," Karunanayake said.

"It is going to be an open government. There will be no necessity for one lot to be moving around the Finance Ministry, the Prime Minister or the President.

"When you look at it initially, I know some of the businessmen in the upper echelons have got a little concerned. But 98 percent of the country is extremely happy."
www.island.lk

JKH expresses confidence on viability of Water Front project

Will “engage” with govt. on proposed restrictions

John Keells Holdings said in a stock exchange filing on Friday that they will "engage with the government" with regard to the Prime Minister’s announcement in parliament on Thursday that the agreements entered into with Water Front Properties (Pvt) Ltd. under the Strategic Development Projects Act will be amended to restrict the ability to rent space for gaming activities.

"Whilst the proposed amendment will constrain the ability to command premium rentals on this component of the project, the multi-faceted nature of this development gives your Board the confidence that the project will still be viable given its diverse portfolio of revenue streams and iconic designs which, we believe, will transform the landscape of Colombo," the filing said.

"As such, the project will continue as planned. The overall brand architecture for ‘Water Front Project’ has now been finalized with the project being branded as ‘Cinnamon Life’ and demand for both the residential and commercial spaces remain encouraging."

JKH on Friday reported healthy profit growth in the third quarter of the current financial year and the first nine months of fiscal 2014/15.

Third quarter group profits before tax (PBT) at Rs. 5.2 bln. was up 27% From the Rs. 4.27 bln. posted a year earlier.

The PBT for the first nine months of the current financial year at Rs. 12.18 bln. was up 33% over the Rs. 9.11 bln recorded in the comparative period in the previous financial year.
www.island.lk

Sri Lanka shares hit 2-month low after govt's retrospective tax plan

Jan 30 (Reuters) - Sri Lankan shares fell 2.89 percent to a more than two-month low on Friday, their biggest fall since February 2011, led by blue chips on concerns over future earnings after the government imposed a retrospective 25 percent 'super gain tax' in its supplementary budget.

Sri Lanka's new government on Thursday announced a budget that imposed new taxes on cash-rich firms to pay for pay hikes for workers and tax cuts on key commodities, hoping to woo voters as it approaches a parliamentary election.

The main stock index, which fell as much as 2.89 percent during the day, ended 2.66 percent weaker, or down 196.46 points, at 7,180.05, its lowest since Dec. 1, Thomson Reuters data showed.

Finance Minister Ravi Karunanayake imposed a one-time super gain tax of 25 percent on individuals or companies that earned more than 2 billion rupees in profits in 2013/2014.

"Today's drop was led by the fall in the big caps after the budget," said Dimantha Mathew, manager, research at First Capital Equities (pvt) Ltd.

"Interestingly huge net foreign buying was seen. With the net foreign inflow, the market fall might slowdown."

Foreign investors were net buyers of 451.3 million rupees worth of shares on Friday, reversing the net foreign trade so far this year to net buying. They have been net buyers of 120.1 million rupees. They bought a net 22.07 billion rupees worth of stocks last year.

Analysts said the market came off due to panic selling because of the super gain tax which affects large caps.

Analysts said the market would trade lower in the coming days on selling in top conglomerate John Keells Holdings , Dialog Axiata, Sri Lanka Telecom, Ceylon Tobacco Company and Nestle as they would have to pay the new tax.

Shares in Dialog Axiata Plc fell 12.41 percent while conglomerate John Keells Holdings Plc fell 5.02 percent, and biggest listed lender Commercial Bank of Ceylon Plc lost 6.56 percent.

After the market closed John Keells posted a 28 percent gain in its third quarter net profits.

Analysts, however, expect the raft of tax concessions and salary hikes in the budget to increase consumers' disposable income and help the market rally over the long term.

Turnover was 2.07 billion Sri Lankan rupees ($15.66 million), more than last year's daily average of 1.42 billion rupees, exchange data showed.

($1 = 132.1500 Sri Lankan rupees) 

(Reporting by Ranga Sirilal and Shihar Aneez; Editing by Anupama Dwivedi)