May I ask a simple question? Is it reasonable to expect the ordinary laymen to scrutinize the provisions of the “Finance Companies Act, No. 78 of 1988 as amended, Banking Act, No. 30 of 1988 and Companies Act, No. 7 of 2007 etc ”, Rules and regulations made by various regulators including the Central Bank, ROC, SEC and CSE, before they make their investment decisions? Well.., I think it is not. People invest based on the ‘goodwill’ of the investing companies, and believing that the legal framework of the country will ensure the integrity of the financial market.
The recent plight of the Golden Key Credit Card Company and a spate of major corporate accounting scandals including Sakvithi created a severe umbrage amongst the investors in Sri Lanka. In the wake of accounting abuses at Enron, WorldCom, Adelphia, Qwest, Global Crossing and Tyco, to mention a few, integrity of the financial market became an important topic in USA, and it has gained the same attention in Sri Lanka in the very recent past, with the regulatory actions taken by the Central Bank against six persons named by the Monetary Board for carrying on finance business without authority, and due to the recent plight of the Golden Key Credit Card Company.
“Golden Rule” is a statutory or legal document interpretation which facilitates a move from the ordinary sense of as word(s) if the overall content of the document demands it. As the British Columbia Court of Appeal wrote in 1991, [case :Krusel v Firth], published at 58 BCLR 2d 145: "(T)he golden rule ... is most often applied so as to resolve ambiguity in statutory language in favour of that meaning which will best achieve the intention of the legislature revealed by the statute as a whole”. In order to restore the confidence in financial markets, regulators and the judiciary may deviate from the literal rule of interpretation of the law and may play a more proactive role in supervising the operations of sister companies within the Ceylinco Consolidated to restore the confidence in the financial market.
The legal framework of Sri Lanka is enriched with sophisticated laws comparable with the rest of the world. For example, “Solvency Test” as identified by [sections 56] of the Companies Act, 2007 is a major step in ensuring the integrity of the financial market.
“The Solvency Test” required by the companies Act, 2007 contains two different tests: “a balance sheet test” which prohibits distribution that invade or reduce the capital of the corporation below some specified amount ; and “an insolvency test” which prohibits distribution that has an effect of rendering the corporation unable to meet its obligations as they mature.
Further, “Code of Best Practice on Audit Committees” issued by the ICASL in 2002, “Code issued jointly by the Securities and Exchange Commission of Sri Lanka & the Institute of Chartered Accountants of Sri Lanka”, on 26th June 2008 and “Finance Companies (Corporate Governance) Direction, No. 3 of 2008” given by the Monetary Board of the Central Bank (CB) to finance companies ensure the generic corporate governance principles of responsibility, accountability, transparency and fairness in the financial market.
However, there is a gap between the law in book and the law in practice. Therefore, amongst other recommendations, it is recommended that regulators may maintain their web sites that they compile in close to real –time filings made by the companies. This will facilitate the public to access corporate filings and other information with ease and efficiency, and thereby ensure that web site remains user- friendly and not a cluttered bulletin board. For example, Central Bank may maintain in its web site the names of the licensed banks, registered finance companies, specialized leasing companies and the primary dealers, to shield the investors from possible frauds. Corporate websites also offer another valuable avenue of accessibility to information that may be attractive to investors. Therefore, it is recommended that to bolster the availability of disclosure the regulators shall consider the possibility of rule making that could require or encourage companies to post basic information on filings with the regulators on their web sites.
Further, regulators including the Registrar of Companies may scrutinize the financial statements filed with them to identify possible frauds initially rather than taking corrective actions. Additionally, it is vital to note that time has come to make sure that there will not be another “Arthur Andersen” audit firm in Sri Lanka. Note- Collapsed WorldCom in USA inflated its profits and cash flows by about $3.8 billion and the auditing firm was Arthur Andersen.
(The writer is an Attorney at Law and author of the book titled “Principles and Practice of Company Law in Sri Lanka, 2008”. She could be reached at -ruwani_d78@yahoo.com). |
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