UNP MP renews warning over fate of EPF’s questionable investments in stock market

aUNP MP and the party’s Economic Spokesman Dr. Harsha de Silva yesterday renewed his warning over the fate of EPF’s questionable investments in the stock market.

In a statement, he urged that EPF must follow its own investment guidelines and code of professional conduct or else members would soon begin to suffer. Here is the full statement by Dr. de Silva:

The Central Bank-managed Employees Provident Fund (EPF) has lost a massive Rs. 270 million in just one week on its highly-questionable stock market transaction of Laugfs Gas company. It is well known in the market that the EPF purchased the said shares at an unjustifiable Rs. 48 per share on Monday 10 October when it was trading at around only Rs. 40 just a few days prior to that.

As expected the price of Laugfs shares fell and as at end of business on 18 October the share was trading at just Rs. 39.80, inflicting the said huge losses to the members of the EPF.

It is quite evident that certain officials are acting with impunity. Just as certain corrupt and murderous politicians running the country have no respect for the law, these equally corrupt wannabe politicians running State establishments have begun to shoot the rules and regulations in the face. They seem to believe they are above all accepted professional codes of conduct.

EPF is not supposed to purchase shares of companies not classified as ‘blue chips,’ or in other words, nationally recognised, well-established and financially sound companies. Section 2.6.2.2 of the Investment Policy Statement and Standards of Professional Conduct of the EPF/Central Bank of Sri Lanka clearly states that EPF investments in the Colombo Stock Exchange (CSE) shall be limited to blue chip securities. However, the Central Bank managed EPF continues to purchase all types of shares at will, leading to numerous allegations of unethical practices. The Galadari fiasco comes to mind.

As a matter of fact, Laugfs is not even listed on the Main Board of the CSE. It is listed on the Secondary Board, named the ‘Diri Savi Board,’ meant for small, medium and start-up companies. Thus the investment in Laugfs Gas goes completely against the spirit of the investment policy of the EPF investing only in large, highly-recognised and stable companies.

The code of conduct also stipulates that the EPF must ‘carry out a thorough study of the company and related macro factors which relate to the future performance of the company prior to recommending to the Investment Committee’. It is questionable why, if at all, a recommendation was made to purchase Laugfs shares at such an inflated price or if current information on its finances was even available. It is relevant to note that Laugfs has not yet submitted its financial statements for even the quarter ending 30 June 2011.

I have also pointed out on numerous occasions both inside and outside Parliament that Section 2.6.2.2 prohibits the EPF from trading in listed shares of commercial banks. The exact wording in the document, which ironically was removed from the EPF website upon my first revelation of the Section, is: ‘The Fund cannot invest in stocks of the banking and financial sector since the Monetary Board regulates both EPF and banks and financial institutions.’

This refers to very evident conflicts of interest generated by information that is not publicly available. But EPF is among the largest shareholders of almost every private bank in Sri Lanka and has now begun in earnest to appoint directors to their boards; in one case, even a convicted criminal.

In this background the UNP is highly perturbed at the high-handed behaviour of these officials, which will only end up in calamity for the millions of members of the EPF and also destroy the image of the CSE. Over the medium term this loss of confidence will certainly spill over to the larger investor community, causing irreparable damage to Sri Lanka’s post-war development plans. Therefore, we urge the Government to immediately take steps to streamline the fund management activity of the EPF and direct its Investment Committee to work within its Investment Policy Statement and Standards of Professional Conduct.

It cannot be stressed enough that these activities are taking place at a time when numerous allegations are being made on market manipulation and securities fraud at the CSE. Even though the Securities and Exchange Commission (SEC) has recently said that certain individuals and stock broking firms have been found to have committed fraud, none of them have been named so that the vast number of innocent investors could take steps not to transact business with them.