The Colombo bourse, touted as the best performing in the region, has been on a high roll these past two weeks notwithstanding low intensity war that continues and the forthcoming Martyr`s Day speech by Velupillai Prabhakaran on Monday. The week before saw both the All Share and Milanka Price Indices tracking the market`s progress achieve all time highs on three consecutive days. There was a little cooling thereafter and last week`s volumes, though below the billions of the previous week, were healthy. The indices too moved upwards and the market closed on a high note on Friday with turnover once again topping the billion rupee mark and the Milanka Price Index hitting an all time high.
The government`s spin doctors read these trends as a positive indicator of Mahinda Chinthana magic. They believe (or like to tell the world) that these are clear signals that the Sri Lanka economy, notwithstanding galloping inflation and a fast depreciating rupee, is on a recovery path and that investors who will not knowingly back losing horses are putting their money into the Colombo Stock Exchange with expectation of profit. Protagonists of the government see it in a different way. They say that the Colombo bourse is the biggest laundromat in the region and that is the short explanation for current stock market behaviour. However that be, it must be conceded that this country has been soldiering on for a long time to attract foreign funds into the local capital markets. When then President J.R. Jayewardene opened the national economy after his 1977 electoral landslide, he made his celebrated `let the robber barons come` remark. Flippantly or otherwise that is what he said. Have they finally arrived 25 years and more later?
There is no gainsaying the fact that our regulators have not been particularly efficient in many matters. It is common knowledge in business circles that various stock market investors big players and not plain tea and plantains retailers have over the years used various foreign funds incorporated in tax havens like the British Virgin Islands to evade the Securities and Exchange Commission`s mandatory offer rule under its Takeovers and Mergers Code. This requires anybody acquiring 30% of the equity of any listed company to offer all shareholders of that company the top price he/she had paid for the company`s shares in the preceding 12 month period no sooner he crosses the threshold. This, it is well known, has been avoided by some investors who have taken control of certain big companies. The regulators have been writing letters to various foreign funds, suspected to be fronting for whoever, asking who the beneficial owners of such funds were. They have got less than satisfactory replies, if any, and whatever suspicions there were of parties acting in concert have been laid to rest. It has been business as usual thereafter.
The ceiling on share ownership in the banking sector, imposed under the Banking Law, has been better enforced than some of the other laws in the statute dealing with corporate matters. Readers may remember that the Sampath Bank some years ago successfully resisted what it regarded as a predatory raid. A rival bank and parties accused of acting in concert were eventually compelled to sell off shares they had bought which the Sampath board had refused to register under terms of its own articles. These placed a cap on the percentage of the bank that a single individual or entity and parties acting in concert could own. But Sampath, under pressure, is now in the process of amending its articles to remove what has been perceived to be a restrictive provision. There have been concerns about moves by a monolith already strong in the Hatton National Bank to directly and indirectly influence/control the Commercial Bank of Ceylon and the DFCC Bank with a degree of success. The banking grapevine has it that a ruling is on the way that will require some shedding of shares. But cynics can easily conclude that given the manner in which foreign funds can operate with regard to equity ownership here, the transfer of these shares from one pocket to another is easily possible.
The National Development Bank has declined to register some of its shares acquired by a party believed to have exceeded the statutory shareholding limit. This matter was complicated by the bank making a one for two bonus share issue and declaring a fat dividend which was denied to the unregistered shares. This created a great deal of understandable unhappiness on the part of the buyer who had paid for what he bought and was being denied what he perceived to be a legitimate entitlement. There has been a lot of negotiation with the stockbroker representing the share buyer, the Central Bank and the Securities and Exchange Commission with a practical exit route for the buyer being intensively sought. The NDB itself was looking for an `acceptable` buyer and it was hinted that a method of making good the deprived entitlement, without placing the bank at risk of being sued for denying a shareholder his dues, was under exploration. The buyer was believed to be the seller of some 2.7 million NDB shares sold on Friday and market watchers were speculating that the sales proceeds may hone in on John Keells Holdings in which the seller is interested.
The JKH directors, despite some of them being big shareholders of the company, are less than enthusiastic about the new kid on their block who has pushed their share price through the roof with nary a query by the Colombo Stock Exchange. The CSE routinely ask companies to declare any possible reason for unusual movements of their share prices but this has not happened in this instance. Foreigners buying into the Colombo stock market must do so through what is called a Share Investment External Rupee Account (SIERA). The banks through which such SIERA funds flow are responsible to ensure that no money laundering is taking place. JKH has been registering the shares that have been purchased but it is well known that its directors are not happy about the buyers who are believed connected to an organization that engaged in the now outlawed pyramid marketing scheme.
What is happening now raises the question `do we want investment from even robber barons?` If so, well and good and we can cheer the bourse on its upward swing. If not, how good are our regulation and regulators?