Chandra J welcomes SEC’s new moves for IPO Grading and Equity Research

Good governance activist Chandra Jayaratne has welcomed Securities and Exchange Commission’s (SEC) public consultation on IPO Grading and Independent Equity Research, in addition to making several new suggestions.

Here are excerpts from Jayaratne’s letter sent to SEC Director Capital Market Development and Research Vajira Wijegunawardene which was copied to Secretary to the Treasury, Chairman, Securities Exchange Commission, Chairman, Colombo Stock Exchange, Director General, Securities Exchange Commission, Director General, Colombo Stock Exchange, President Institute of Directors, President, Institute of Chartered Accountants of Sri Lanka, President, Chartered Financial Analysts Association, President, Chartered Institute of Secretaries,

Chairman, Ceylon Chamber of Commerce, Chairman, Colombo Stock Brokers Association and the media:

I write with reference to the public notice issued by the Securities Exchange Commission of Sri Lanka calling for public comments on Public Consultation Paper No; 16.

At the outset I wish to state that I am in total support of the ‘Way Forward Strategy’ of The Securities and Exchange Commission of Sri Lanka, all as proposed in regard to the IPO Grading and requirement for Independent Equity Research.

I support the aforesaid proposal as;

1. It satisfies a much needed transparency and good governance process requirement of the capital market

2. It meets with some aspects of similar recommendation submissions previously made by me

3. It closes to a significant extent a serious loophole available for misleading potential investors through misrepresentation and non disclosure of critical information

4. It will close a specific avenue previously made use of by errant directors, with the offering entity preparing financial estimates and expected future business performance results on bases contrary to accepted best accounting practices; thus reflecting misleading future business results; and having them validated and stamped by accountants and auditors , who hide under a certificate given that they have merely checked the statements as given and not questioned nor validated the accuracy and applicability of assumptions and methodology of developing financial estimates and business result projections.

5. Enhances the decision making options of investors, now made aware of bench mark linked grading information and independent equity research once the proposal is implemented.

It is further recommended that the eligibility requirements for listing of equities on the CSE be amended to recognise the following amended criteria, which will ensure that only entities with a track record of positive operations under a committed management and board of directors will be listed (ie. start up and green field businesses to be thus encouraged to seek venture capital, investment/development banking and other specialist Fund Management entity equity capital support);

Diri Savi Board

a. Stated Capital at the time of listing be not less than Rs. 250 million

b. Net profit after tax stipulation as per main board listing requirements

c. Positive net assets stipulation as per main board listing requirements

d. Operating history of at least three years prior to listing application

e. None of the companies in the group to have had their last three years audited accounts to be qualified by the auditors nor have audit qualifications or audit highlights in regard to solvency, going concern or other key financial stability and solvency linked associated areas

f. The directors and officers including the CEO to affirm by affidavit that they satisfy at present and have not over the past 10 years ever failed to satisfy the stipulations relating to being classified as “fit and proper persons” and in addition have not been associated with the promotion or operation of any failed public entity

g. The directors and officers to certify by affidavit that full disclosure of all related party transactions and conflicts of interest positions over the past five years are detailed along with any such transactions and conflicts as are deemed likely to arise in the future as presently foreseen.

h. The directors and officers by affidavit to agree due compliance with the following

i. That accounts and financial reports of the entity have been prepared from the inception of business in terms of Sri Lanka Accounting Standards and Audited in compliance with Sri Lanka Auditing Standards

ii. That special post audit reports in respect of the period one year and three years after the listing, compiled by the directors and validated by the auditors, will be tabled before members at the Annual General Meeting convened after the expiry of such period

Main board

a. None of the companies in the group to have had their last three years audited accounts to be qualified by the auditors nor have audit qualifications or audit highlights in regard to solvency, going concern or other key financial stability and solvency linked associated areas

b. The directors and officers including the CEO to affirm by affidavit that they satisfy at present and have not over the past 10 years ever failed to satisfy the stipulations relating to being classified as “fit and proper persons” and in addition have not been associated with the promotion or operation of any failed public entity

c. The directors and officers to certify by affidavit that full disclosure of all related party transactions and conflicts of interest positions over the past five years are detailed along with any such transactions and conflicts as are deemed likely to arise in the future as presently foreseen.

d. The directors and officers by affidavit to agree due compliance with the following

i. That accounts and financial reports of the entity have been prepared from the inception of business in terms of Sri Lanka Accounting Standards and Audited in compliance with Sri Lanka Auditing Standards

ii. That special post audit reports in respect of the period one year and three years after the listing, compiled by the directors and validated by the auditors, will be tabled before members at the Annual General Meeting convened after the expiry of such period.

I would be pleased to elucidate any issues requiring further clarification.