Minority shareholders call for collective action

By Devin Jayasudnera

A group of public interest litigants and key figures in the corporate sector came together to form an organisation, with the intention of safeguarding the rights of minority stakeholders in the stock exchange.

This proposed organisation is currently spearheaded by K.C. Vignarajah, the leading activist of small shareholders.  The proposed name of the organisation is Association of Independent Shareholders of Sri Lanka.

This association, still in the formation stage, initially intends to create awareness on stock related issues and empower small investors.

 The association hopes to act on behalf of not only its members but also every small shareholder. Vignarajah defined that a small share holder is any individual who does not have a relationship or influence over a controlling stake.

Vignarajah stressed that it is the minority shareholders who are in peril due to due to the pump-and-dump game currently going on in the stock market.

To prevent this situation, he called for the Securities and Exchange Commission to direct companies in providing information on EPS, forecasted EPS and the re-valued assets so that the shareholders are better informed and thereby the market becomes a fair platform to trade.

Under former Chairman Dr. Tilak Karunaratne, the SEC initiated a price band to curb pump-and-dump schemes, which was very unpopular with the ‘pump-and-dump’ crowd, said Vignarajah.

Referring to the two chairpersons who voluntarily resigned – Indrani Sugathadasa and Dr. Tilak Karunaratne – Vignarajah appreciated their principle-led leadership at the SEC and claimed that their actions had never resulted in the market being overregulated.

Regarding the minority oppression of companies, Vignarajah professed that companies should pay 50% of their disposable profits to shareholders and also disclose the true value of their assets. However, according to him, currently very few companies follow this procedure. He added that recently in the Commercial Court, a rule was issued against a leading public listed company for minority oppression which was huge victory for minority shareholders.

Former SEC and Ceylon Chamber of Commerce Chairman Deshamanya Charith P. De Silva inquired into the perplexing idea of shareholders having lost interest in getting their due dividends.

“There is this contrary notion going on, saying that people are not interested in dividends anymore. The reason that is suggested is that shareholders are now more interested in the play of gambling in the stock market.  This is not a healthy trend as the money that you can make through capital appreciation is far greater than what you could make out of steady growth of cash dividends.”

De Silva also noted that many boards of directors were not accountable to their own shareholders and did not follow the fundamental code of ethics of business.

“The primary obligation of a board of directors is to treat their shareholders fairly and this is clearly stated in the Code of Ethics of the Ceylon Chamber of Commerce, of which many companies are a part. It says that the shareholders are the owners of the business, they are entitled to expect the company to run at a profit and to annually distribute reasonable dividends.”

He added: “The CCC Code of Ethics states that boards of directors should regularly revalue their assets and capitalise their reserves that are created, so that if you have not have given dividends this year, the reserves should be capitalised and given as a bonus to the shareholders the next year.”

The former SEC Chairman recalled when the President in 2006 as the Finance Minister at that time introduced the deemed dividend tax, where he indicated that good companies should distribute 50% of their distributable profits.  

With regard to the interests of minority investors, De Silva claimed that in a shareholder democracy, shares should be seen as an investment that provides some sort of a pension to small of investors.

Former Commercial Bank Chairman Mahendra Amarasuriya expressed that after Dr. Tilak Karunaratne’s resignation, some stockbrokers opine that now the environment is such that there is no fear with regard to trading and that the market is free. “These sudden build-ups will result in a bubble and lead to a major catastrophe,” said Amarasuriya.

He also warned that the danger was that these financial malpractices were occurring more openly and blatantly. “There are some companies with no track record and minimum number of shares, which have gained Rs. 1,000 per share in a very short period of time. These are extremely suspicious situations.”