Corporate Crooks

• Good Governance Crusader Urges Crackdown On Crony, Corrupt Capitalism

by Wiraj Silva

One of Sri Lanka’s leading corporate governance activists – K. C. Vignarajah urged the United National Front for Good Governance (UNFGG) to immediately ensure that corporate corruption and crony capitalism are eradicated from the private sector in general and public quoted companies in particular.

“Corporate corruption and crony capitalism are still rampant. When inquired, officials and regulators say they are unable  to take action as there are too many loopholes  to crack down on financial corruption in public listed companies. Unfortunately, it is apparent that their duty is to protect fraudsters and not the investors. I call upon them to implement law to the letter in order to protect the investors,” Vignarajah told The Sunday Leader.

He pointed out that the Sri Lanka will not see a  boom with the direction taken by the country’s market watchdog – Securities and Exchange Commission (SEC) of Sri Lanka.

“Authorities have been promoting companies to promote debentures and corporate debt instead of promoting equity burdening companies with debt. This situation would never lead the Colombo Stock Exchange (CSE) to see a boom,” emphasized Vignarajah.

He pointed out that a sense of helplessness against oppressive acts  had caused Shareholder Fatigue currently experienced by the Colombo Bourse.

According to him the following reasons aggravated Shareholder Fatigue.

1.  Poor ‘public float’ (PF) depriving liquidity, marketability,

2.  Poor ‘dividend payout’ (DPO) policy;

3.  Fraudulent valuation of spinoff assets, siphon-off profits through ‘Reorganization Assets/liabilities/Restructuring of Capital’. Some Ministers have become the finest’ con-artistes’ in the World aided by their cronies in the grey capital market. The stock market index is lowest in more than 3 years! (worse than ‘N.A Cabral/PBJ/MR family’ regime), thanks to ‘propped up rupee and high interest rates’ inter alia utilizing precious foreign funds obtained from foreign investors WB, IFC, IMF,ADB, Aid from USAID,EU, India, China, Australia among many others.

4.  Heinous crime of “delisting of shares from CSE”.

“The Companies Act no 07 of 2007 embodies desirable goals to be met for justice and fair play among various stakeholders. However it is unfortunately undermined by operation of these sections by oppressive majority who could do whatever they want by merely altering the articles once they reach certain levels of shareholdings.”

He added that basic rights of minority shareholders were being violated by public quoted companies.

“It is desirable to have entrenched provisions to protect basic rights of minority shareholders to receive reasonable dividends and capital appreciation from the investments of their hard earned money as for many it’s the only means of income for reasonable survival particularly in Sri Lanka with no significant safety net or income support this is important because of high inflation, loss of value of currency and related macroeconomic factors.”

Although Section 224 to 233 of the Companies Act 2007 set out remedies (i.e. action against oppression and mismanagement, derivative actions) that can be sought by minority shareholders, there were several issues faced such as lack of access to all relevant documents necessary for prosecution, mandatory 5% requirement under the said provisions, financial inability to fight against giant Corporate entities, time and cost of litigation which was phenomenal and far beyond the reach of the average decent citizen  whilst the Directors and the Company ability to spend shareholders money, hindered full  realization of its benefits, he lamented.

He added that according to Section 13(P) of the SEC Act, the Commission is vested with powers “..to do all such other acts as may be incidental or conducive to, the attainment of the objects of the Commission or the exercise of its powers under this Act”.

“This is a wide ranging provision, a versatile weapon, which is notable by its absence. As such under the said provision it can be argued that since the SEC has the power to inspect all necessary documents and transactions of a corporate entity it could even institute proceedings against such corporate entities for oppression and mismanagement, in order to achieve its superior objective of protecting the investment and or Investor. Such is the practices adopted in many other countries.”

Although Colombo Stock Exchange (CSE) was one of the worst affected bourse hit by the global economic slowdown, the emerging Indian Ocean island economy has seen the trend reverse since early 2016 and has been on the upward trend, though with jitters, the World Bank noted in its South Asia Economic Focus Fall 2016. (see http://www.thesundayleader.lk/2016/10/09/colombo-stock-exchange-witnessing-an-upward-trend/)

“In South Asia, stock prices in India, Pakistan and Sri Lanka have been on an upward trend since 2015 or early 2016. All three economies saw relatively pronounced increases between July and September, although Pakistan and Sri Lanka experienced jitters more recently.”

SAEF Spring 2016 report released early 2016 noted that most bourses experienced major losses and continued to be volatile. (http://www.thesundayleader.lk/2016/05/01/colombo-bourse-hit-by-global-slowdown/)

“After some strengthening following the August 2015 slump, most markets have started 2016 with yet another pronounced fall in share prices. China began the year 2016 off on a weak note, showing signs of continued slowing and rebalancing.

A rally in Emerging Market (EM) bonds, Foreign Exchange (FX) indices and equity prices through mid-March somewhat reversed the bad start.” However, in light of the broader emerging market outlook, more volatility is to be expected. Chinese markets may be bottoming out, but other BRICs such as Brazil or Russia exhibit a clear downward trend that appears set to continue in the near term. In South Asia, after three years of sustained gains, stock prices in India, Pakistan and Sri Lanka have shown signs of trend reversal around 2015 and early 2016. The decline has been strongest in Sri Lanka.