Vignarajah writes to SEC on related party transactions and public float

Investor and minority interest activist K.C. Viganarajah has written to the Securities and Exchange Commission on a host of issues concerning new rules on related party transactions and public float. Following are excerpts of the letter which he released to the media as well:

I am pleased to refer to our above meeting, at your invitation, at which we had a pleasant and constructive exchange of views on wide ranging matters arising from, inter alia:
a) The articles on ‘The Hurried Release of New Rules and Directives on Related Party Transactions and Public Float’ referred to herein below, and
b) The contribution I made exactly three months ago at the CSE Investor Forum held on 25 January 2014, at Taj Samudra.

The concerns and issues raised have not been adequately addressed though some progress in attitudes seems to have taken place. The loopholes and escape routes remain and are being brazenly exploited.

There is no inquiry process with the aggrieved shareholders who took up issues being present when the wrongdoers and errant Controlling Interest and Related Parties (CI&RP) are investigated.

Discretion and secrecy facilitates corruption with “files being closed”; no reports of the offences, findings, fines or deterrent punishment etc!

“The CSE has to be commended for organising an Investor Forum on ‘Potential Value of the Market’. They state that “it is an ideal opportunity to clarify matters relating to the capital market ….”

However, the agenda limits the Q&A session to only 15 minutes! We cannot expect a healthy dialogue or satisfactory answers to many vexed concerns expressed on the recent hurriedly announced rules and directives by the SEC. They were highlighted by all the major business media. There has been no credible response as yet.

In a spirit of maximum cooperation, to make this forum a success, in boosting investor confidence, I have noted a few points for the panel to clarify at the forum and give this note to the keynote speaker and the organisers.

* A 7,500 to 8,000 + ASPI and a 4,500 S&P 20,is possible (only if immediate positive action is taken).

This is a market of great opportunities and potential; it will reach the above targets.

However, if SEC/CSE, Secretary to the Treasury, Governor of Central Bank, Auditors and CA Sri Lanka appease and mollycoddle the crooks, the market will crash, after a phony push up.

Meaningful and determined action on a continuing basis, as requested repeatedly by genuine Investor Minority Shareholder (IMS) must be taken now.

* From the articles written, and many numerous statements made by me and fellow genuine IMS, you will notice that we have much greater credibility of honest endeavour, when compared to those market manipulators, insider traders and corrupt Controlling Interests (CI) & Related Party (RP) who profess to push up the market. It is an incontrovertible fact which you can verify from patterns of trade and even publish them.

* The SEC/CSE must perform their duties perfectly, reining in and punishing the wrongdoers.

* Companies must exhibit fairness to current shareholders declaring by dividend payouts of at least 50% of NPAT. They should carry forward, the balance as retained earnings/reserves (which again are the property of all shareholders) , and may be given as scrip dividends, without affecting cash flow, but increase liquidity, shareholder choice, in a better, freer market.

* Myself and the genuine IMS applauded the youngest Chairman of CSE Krishan Balendra, when at the beginning of his term, he emphasised that independent directors should stay and fight the wrongdoers, rather than quit. He also supported preferential tax rates for PLCs with good public floats (“40% was good enough”, moderating IMS request of 45% public float to qualify).

* We believe that the new CEO will also understand that a vibrant, well-regulated “market” is where inter-alia, high liquidity, transparency, accountability prevails. We welcome him to act vigorously on the lines suggested in letters written by me and some of my colleagues from IMS to the chairmen, members of SEC/CSE and given very wide publicity by the eminent editors of all the business media together with their brief comments and emphasis.

* We have always been non-political. The concerted action of all men and women of goodwill is essential to save our country from going into a deep morass from which it will take many years and much effort to pull it out.

* The IMS has urged the CI&RP at AGMs & EGMs: “Do not steal from the small partners (IMS) to unfairly, unjustly, unlawfully, enrich yourselves directly or indirectly through subsidiary/associates companies and R.Ps to pass on such stolen ill-gotten riches to your ill-fated future generations!”

* We have advocated minimum dividend payouts of at least 50% of Net Profit after Tax (NPAT) as cash dividends and balance to retained earnings/reserves. Periodically capitalise and issue script dividends; also split the shares or issue bonus shares to create liquidity, equity, fairness, transparency and good return on investments. These are essential to make the stock market boom.

* Genuine Foreign Investors (FIs) will also storm into the CSE, if the above is implemented.

* The SEC Chairman has stated that a very modest 10% of directors of PLCs are corrupt.

Will he also say they are under investigation and name them as we normally do in other areas of criminal and civil legal activities? Our guess is about 50% including those puppet directors who only stand or sit and stare (they also serve their masters!!). We must bring to the notice of IMS and investing public, re suspected wrongdoers, and the progress of investigations. It is a huge national task. Let the good honest elements of the SEC, CSE perform and act fast to save the good the good name of the institution.

Conflicts of Interest (CoI) have seriously eroded confidence in the market.

* Stockbrokers (SBs) know everything about the trades. They give advice; they buy, sell, hold, give or deny credit, force-sell etc.etc and should come out clean. They should, inter alia:
a) Declare their (and of any related party) transactions and shareholdings. They must post the info on the CSE web site, immediately.
b) The Brokers and RP must immediately disclose all purchases and sales to CSE and website. Obvious, serious CoI, where brokers sell/buy for their own or RP shares accounts must be avoided, if the integrity of the market is to be assured.
c) The Stockbrokers must immediately disclose the completed transaction of directors or Key Management Personnel (KMP) of PLCs shareholdings to the CSE. This should be a primary responsibility of the broker, and should augment the responsibility of the directors to disclose immediately (in some cases has taken almost a year to do so!).

The earlier requirement of immediate disclosure must be followed, instead of within a curiously extended T+5 period within which repeat transactions can take place to manipulate and benefit.

* “The truly Independent Director (ID) must have a keen interest in ensuring a well performing enterprise. He must have a balanced view and preferably have a sufficient stake, or even a significant, stake to be effective to stall errant CI and RP. The Independent Directors should by definition, be not dependent on the CI&RP for their appointment, and of course must not be connected to, related or controlled by the CI or RP. The shareholdings of the Independent Directors must be included in the public float, whereas the shareholding of other directors, KMP and RP should be excluded from the public float.”

We trust that the SEC and CSE will act to vigorously prosecute errant CI&RPs in order to restore confidence of independent investors. I had written on ‘Justice for investors of CIFL & Touchwood’, and here again all leading newspapers published it with the eminent business editor’s comments, and slightly modified headlines.

I heartily applaud the depositors’ court action and the SEC’s supportive action (though delayed) against the directors of Touchwood citing, inter alia, ‘criminal breach of trust’.

The growing knowledge of the criminality of stock market manipulators and frauds, as well as the realism by the law courts in transcending legal technicalities and forms, to go on to award natural justice considering that substance and core issues as most important, are most heart-warming.

It is a serious malady in some companies where CI&RP unjustly enrich themselves when they shun good corporate governance, and create “shareholder fatigue”, to depress prices, deprive IMS of fair and equitable, pro rata share of current profits, benefits, and of growth via a Dividend payout of at least 50% of current profits, scrip dividends, bonus shares, share splits of retained earnings, revenue reserves, and capital reserves, to enhance liquidity, marketability while affording equitable shareholder choice.

I have many a time, given long lists of eminent corporate leaders, and companies which have followed these eminent corporate policies. They enriched the companies and stakeholders to even greater growth and prosperity.

Deshamanya Chari P. de Silva who was honoured at the 175th anniversary of the Ceylon Chamber of Commerce (CCC), was one among this list of fame who had put into practice these ideals. This brave warrior also won in law courts to establish that “capital expenditure should not be at the expense of fair cash dividends,” and that good dividends and rapid growth are quite compatible. How many who bask in the glory of the CCC, follow its hallowed Code of Ethics?

Over to, not only the members of CCC, but more importantly to top office bearers past and present!

Will the CCC consider strong disciplinary action to regain its past glory?
K.C. Vignarajah
Acting in the interests of the IMS, the investing public and national interest.
www.ft.lk

Thank you fro the article. As it says, “capital expenditure should not be at the expense of fair cash dividends” --- If cash it taken away from shareholders, then there has to be a proportionate improvement in the company position. But sad thing is sometimes we as shareholders get neither --- no dividends, no growth.