Energising the stock market and good corporate governance

Friday, 23 November 2012 00:01 -     - {{hitsCtrl.values.hits}}

By K.C. Vignarajah

Glorious opportunities are still available in Sri Lanka for investments, small and large, local and foreign. Therefore, promote sustainable industry growth, with equity. It is essential to ensure a vibrant, clean free market with fairness and equity,’ to shareholders and investors. The few errant Controlling Interests (CI) who do not comply should be made to do so quickly; use the ‘carrot and stick’ now!

‘Revenue Neutral’ measures to energise the stock market:

Increase liquidity: minimum public or free float should be 30% and preferably over 45% (as in India, Thailand, Malaysia, etc.) which may be rewarded by two-tier preferential tax rate, and penalise where free float is less than 20%. (Progress to minimum 25% and 30%).

Encourage CI to increase the public float to 40%, by making their (CI&RP) voting rights in a PLC or subsidiaries restricted to 60% (example of holdings voting shares in banks restricted to 10%). This will not reduce the value, of their excess holdings, as purchasers, (other than RP, obviously) will have usual voting rights.

Encourage high Dividend Payout % (DP) of 50% of Net Profit After Tax (NPAT) and 50% to revenue reserves. Again preferential tax rates (to incentivise/penalise) may be applied.

These measures will create large increase in revenue/cash flow to the State via Withholding Tax (WT) to pay for the other concessions stated above.

Encourage obtaining foreign currency loans to be repaid from export earnings. I have been suggesting this to many companies for over two years. In the early seventies, I negotiated hard with the authorities and CBSL to allow this facility; but ended up with buyer supplying the raw materials on ‘No Foreign Exchange’ (NFE) basis which still was greatly beneficial in many ways to the exporters and the country! That was innovation to circumvent CBSL for the greater good. (Now, thanks to the Budget 2013, it is more profitable, safer, and easier).

If additional capital is required by a company, a ‘rights issue,’ correctly priced, to be fair to the company and all existing shareholders could be made. This should take into account the retained earnings and reserves (shareholders’ fund), on the undeniable principle that these belong to the existing shareholders.

Assets should be properly re-valued and the excess value capitalised; bonus shares should be issued.

Waive stamp duty on the above progressive measures (bonus and rights), to eliminate excuses by the errant CIs, as well as being fair to the shareholders and the market, by increasing liquidity, marketability and availability of greater number of shares at lower cost.

Prevent creation of ‘shareholder fatigue’ by errant (CI) and their collaborators, the so called ‘independent directors, auditors, valuers/advisers and managers and captive company secretaries. They should all be penalised, in cases of dereliction of duty and breach of trust. Some of the white collar criminals and market offenders should be sent to jail as in other respected jurisdictions for insider dealing, market manipulation, unjust enrichment, bribery and corruption, etc., to deter others from doing so or trying to do same.

Encourage corporates and CIs to reward shareholders by giving discounts on goods and services produced or provided by the company. These may be at the same rates afforded to the directors, or may be 5% more than their prices given to whole-sellers, in proportion to their shareholdings. There are very many examples of good companies and CIs, who are doing this in a very equitable shareholder friendly manner as contrasted with other corporates who create shareholder fatigue.

Ensure timely disclosure of material information inter-alia (of new plans, projects and potential). Non disclosure or delay helps CI themselves or Related Parties (RP) to acquire shares at cheap prices, and also to reduce ‘public float,’ delivering a double blow to debilitate IMS and also the market.

The invaluable experience of two of the President’s own well-trusted appointees, as chairpersons of SEC, Dr. Thilak Karunaratne and Indrani Sugathadasa, may now be utilised as Capital Market Ombudsman, and to review progress of investigations into market malpractices/ misconduct.

All the above measures will truly create ‘investor confidence’ and certainly energise the stock market.

Inspire international investor confidence, ‘inter alia,’ by:

1.    Fully implementing International Financial Reporting Standards (IFRS) which had been implemented by more than 100 countries by 2011.

2. Strict adherence to strengthened rules and regulations which eliminate loop holes. Enforcement of law and order impartially, irrespective of personalities and political influence.

3. Good corporate governance, transparency and showing respect for, and sincere compliance with, all international norms of political and social responsibility.

(The writer is an investor and spokesperson for the Promoters of Association of Independent Shareholders of Sri Lanka.)