• Sampath Bank makes surprise move into stockbroking
• Click on to e-mail solutions; get on to OmniBis
• A Central Gilt Office?
• Bell and Suntel to sign MOU with Telecom
• Speedo's Lankan splash
• Mind your business
• The new agenda for industrial development
• Salient Features of the new insurance act
• A levy to evaluate auditor's competence
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Sampath Bank makes surprise move into stockbroking

By Chamath Ariyadasa

Sampath Bank has begun negotiations with CDIC Sassoon Cumberbatch Stockbrokers for a controlling stake in the brokerage. 

CEO, Mr Anil Amaras-ooriya told Sunday Times Business that "we have made an application to the Central Bank for approval". 

He explained that the bank could not bid for a stake lower than 51% according to banking regulations if investing in a non quoted company.

This will be a significant move from a bank that has been seen as cautious in its invetments in the past. 

This bid will also add to the significant shake-up going on in the stockbroking industry at the moment increasing the number of banks looking to have a stockbroking arm. 

Returns in the industry are now low and many brokerages are finding it tough going according to practitioners. The promised deregulation in the industry has also not materialised. 

The balance 49% of the brokerage is likely to go to Chinkara Holdings, an investment fund registered in the Bahamas. 

The fund initially applied for a larger 75% stake but was not approved by the Securities and Exchange Commission. NDB has been looking to sell out of their share of the brokerage through the holding in Capital Development Investment Company (CDIC) as they also own NDBS Stockbrokers. 

The other shareholders Sassoons group, Carson Cumberbatch and People's Bank are also willing to sell. The parties are being advised by Citi National Investments. 

Sampath Bank's very ownership is still in the balance with an attempted takeover by Hatton National Bank cooling its heels at the Attorney Generals Department. A verdict on five cases filed in relation to the HNB - Sampath battle is due to be out in December. 

This March the national budget opened the doors wide open for foreign investors to buy up to 100% equity in stock broking companies. 

But analysts point out that so far only one foreign company has bought controlling interest in a brokerage. Lanka Securities Ltd. a Merchant Bank subsidiary was sold to First Capital Securities corporation of Pakistan earlier this year but other sales of financial institutions have been mainly to local financial institutions. Recently Forbes ABN AMRO stockbrokers was sold to DFCC bank. This sale actually saw a foreign bank quitting the Colombo market. 

Click on to e-mail solutions; get on to OmniBis

An unintended relationship sparked when, Ravin, then an employee of a communication solutions company installed a custom solution at InfoTec Private Limited. CEO of InfoTec, Pinto Senior was so impressed with the solution that he offered Ravin a position in his company. Eranga, then a University undergrad, and the brains of his class joined InfoTec with Ravin. Suren or Pinto Junior was already at InfoTec. Theekshana eventually joined InfoTec and completed the foursome. 

By this time the four had got well acquainted and were not content with being the way they were. So, since the solution Ravin installed was remarkable, the four ventured out to discover what else they could come up with to market as a viable solution. 

After much deliberation and much more experimentation, the four came up with an e-mail solution. They decided to shelve that and venture on. As they soon discovered, coming up with a viable and innovative solution had too many obstacles. 

So they decided to take up the e-mail solution and develop it. That was the birth of the first Sri Lankan Advanced Internet Messaging service – OmniBis and a parallel service offering 10 MB free internet e-mail service.

The launch of OmniBis, Sri Lanka's and probably the Regions first Advanced Internet Message service is an indication that the tech start-up frenzy has come of age in our island. Wavenet Private Limited, the most recent tech start-up company and the creators of OmniBis offer corporates and individuals with a personalised internet e-mail access solution. 

In other words, they offer clients access to their e-mails and other related communication tools on the internet and with their own domain name (name@company.com or name@your_specifi-cation.com). 

Clients can either host the service themselves or outsource the service to OmniBis. Wavenet CEO, Suren Pinto said that the key was to offer a customised solution, which would suit each individual need. 

This venture by four young men holds the promise of a much larger operation spanning out and into the whole Asian region and perhaps beyond. 

Suren said that they were indeed considering venturing into the region soon. He added that they hoped to introduce many more facilities in addition to their present services including the world wide e-mail notification SMS available now, and WAP service due out in 1Q 2001, to provide the user with an irresistible service. Since its launch on October 18, they have more than 600 registered users for their free e-mail service and have got an estimated 500,000 hits from around the world. 

A Central Gilt Office?

The broad framework of the new debt exchange for government securities has been sorted out even though there seems to be difficulty in finding a good name. 

An agreement between the Primary Dealers Association, Stock Exchange and government authorities is scheduled for finalising next week With this new setup treasury bills and bonds will be available to the public from primary dealers on a system similar to that used for equity trading. 

Colombo Stock Exchange will offer its sophisticated central depository system and settlement and trading systems for use by the new exchange incorporated by primary dealers. 

Each of the primary dealers will contribute Rs 10 million towards this company as will the Central Bank. 

According to Dula Wee-rathunga, President, Primary Dealers Association "A scripless environment will improve things greatly as there's no hassle of transferring; there will also be price transparency" 

Mr Hiran Mendis, Director General, Colombo Stock Exchange said "It is very positive, we can improve the delivery of T Bills and Bonds which will develop the government debt market and have knock on effects on the corporate debt market." 

Stockbrokers will not be involved in trading for the moment as unlike the status of a dealer, brokers are not allowed to quote two way prices and deal on their own account. 

The SEC will not be able to give dealer licences as the right to permit gilt trading is vested with the Central Bank under a government debt securities ordinance. 

Primary dealers are also reluctant to see an increase in dealers due to the high seed capital of Rs 150 million each of them injected earlier this year. They are badly off at the moment due to the unexpected rise in interest rates. 

A scripless system in the inter-primary dealer market will be required before the retail market goes scripless and this is expected early next year. 

The move is quite timely as transparency in quotes will prevent investors from shopping around which happens at the moment. Easier management of accounts through the CDS will also help the public invest. 

Dealers will be maintaining their own account at the CDS as they are required to have a portfolio of gilts to quote 2 way prices. They will also maintain a CDS at the Central Bank which will regulate the exchange.

The word "exchange" has been a contentious one due to exclusivity claimed in another piece of legislation. A likely candidate is the "Sri Lanka Central Gilt Office" similar to the department under the Bank of England. 

Dialogue has however been accelerated through financial core group meetings mediated by the Treasury Secretary and the launch is targeted for the 1st of April. 

Bell and Suntel to sign MOU with Telecom

By Dinali Goonewardene

Sri Lanka Telecom, Lanka Bell and Suntel are in the throes of working out a Memorandum Of Understanding which will decide the fate of interconnection fee sharing. 

The MOU, which sought to broker a negotiated settlement for the embattled telecom players was signed in September and set a three-month trial period ending in December, industry sources said. 

The parties to the agreement chose to remain silent but speculation was rife that Sri Lanka Telecom (SLT) had agreed to fork out more than the Telecommunications Regulatory Commission (TRC) had directed previously. 

According to this directive international calls terminated on their lines would enable Suntel and Lanka Bell to charge SLT Rs.9.50 per minute while 20% of the tariff on outgoing international calls originating on their lines would accrue to them. 

The balance 80% was SLT's share of the pie. This directive was challenged in courts by SLT. 

Suntel and Lanka Bell subsequently opted to bypass the SLT gateway and use companies providing enhanced voice services, who, according to sources, charged less than SLT. 

Electroteks and Lanka Internet are two such companies which use their own satellites to transmit, thereby bypassing the SLT gateway. SLT took these companies to courts but failed to obtain an injunction against such companies using their own gateways. 

The new MOU saw WLL operators switch from their partnerships with data operators such as Electroteks and Lanka Internet who were bypassing the Sri Lanka Telecom gateway and using their own satellites to transmit. 

But these operators were quick to protest and have been successful in obtaining court injunctions preventing WLL's switching business contrary to the contracts entered into. While Lanka Bell was forced to remain in business with them Suntel switched trading partners on the basis that they were owed money which had not been paid up. 

Interconnection agreements have long been a cause for grouse in the telecommunications industry with even the mediation team flown in by the TRC in 1998 failing to make ground. 

Thus the TRC was forced to make a ruling on the issue for the second time in 1998. The first ruling was made in 1996. The subsequent ruling of 1998 saw SLT take the regulator to courts in 1999. 

Speedo's Lankan splash

Leading players in the garment industry are poised to establish a joint venture to set up a factory to manufacture swimwear for the Speedo brand. MAS Holdings, Mast industries of USA and Speedo's UK arm are expected to invest in the project. Investment is estimated to be around US $10-15 mn industry sources said. 

Sarinda Unambuwa who is presently employed at the John Keells Group is billed to take over as Chief Executive Officer of the new unit in January. The factory's range will include high tech competition swimwear. 

The utilisation of quota for swimwear was below 25%in 1999. This was due to the inability of manufacturers to supply these products in the required quantity. While the phasing out of the Multifibre Agreement will remove the cushioning, swimwear manufacturers will benefit from initially, cost efficiency is expected to have set in by the time the agreement is not in operation. The introduction of new technology and development of marketing relationships with the buyers of non-quota items will therefore be crucial for survival in the future. 

Mind your business

Jumping the gun

New brooms sweep clean they say. But sometimes these brooms may try to sweep areas that are not their own. 

Those were the sentiments of some exasperated officials of a state run institution who were summoned by a newly appointed minister for what seemed to be a pep talk on how he wanted the work done. 

What the minister did not-know and no one dared to tell him-was that under the new allocation of subjects the institution no longer came under his purview. So, the officials listened to the sermon and came away while the minister learnt the truth only a while later. 

No apologies have been made to date to either to the minister really in charge of the institution or to the officials, or course... 

Healthy reforms

Drastic health sector reforms have been proposed for some time now by the various 'task forces' entrusted with the task, but their implementation has been delayed for a variety of reasons. 

But now the ball finally seems to be rolling and the idea of proposing mandatory health insurance for public servants earning more than stipulated minimum wage is being mooted. 

At last, some insurance giants have been asked to study the cost-effectiveness of such a scheme... 

More the merrier for cellulars

And the cellular network war is still raging unabated, just in case one thought there was a cease-fire. 

One network came up with the bright idea of offering tempting discount offers for professional bodies but other networks soon cottoned on to the idea. 

Now most professional bodies are being tempted with discount offers from almost all cellular networks. 

At least, it's more the merrier and the consumer will be the winner... 

The new agenda for industrial development

Amidst an irrational bifurcation of ministries there is one exception. The Ministry of Industrial Development has brought within its umbrella three key related areas of business activity the Board of Investment(BOI),the Export Development Board (EDB) and the Department of Industries, together with its several affiliates. These three key agencies are now within a single ministry. 

By bringing together these three related areas of activity it would be possible to have a more integrated and effective process of industrial development. 

It is also a recognition that industrial development in a small country must necessarily be export based. Any effort to expand industrialisation on the basis of the very limited local market with most raw materials imported is an economically irrational and non-viable proposition. The future of industrialisation lies in it being predominantly export-oriented. 

Professor G.L. Peiris with his new portfolio of Minister of Constitutional Affairs and Industrial Development lost no time in meeting the business community and expressing some elements of a strategy he advocates. The strategy he proposed at a recent meeting of businessmen may have distinct merits. 

However we urge a more careful study of the issues before embarking on a programme of action. This is particularly relevant in the case of resuscitating defunct industries. The assistance to small and medium industry is vital, yet can be misguided if state intervention thwarts economic forces and becomes a burden to the country rather than a benefit to the economy.

There are however some institutional mechanisms which he has suggested which would resolve some of the problems businessmen face. These include a forum for the discussion of problems that businesses face in their day-to-day operations. 

Such a forum could be extremely useful as government officials without hands on experience in the business world require to develop an understanding of a very different world to their own. Exchange of ideas,discussion of various problems faced and efforts to find speedy 

resolution of difficulties are vital for effective industrial development. We hope that the forum that is envisaged will meet with these requirements. There are at least two other purposes it would serve. 

The very fact that the business community could openly discuss their problems would ensure greater accountability by public servants. 

In addition it would enable a greater degree of co-ordination between the government agencies. 

The Minister's intent is to not only develop an effective co-ordination between the agencies within the Ministry, but to also use the forum as a means of bringing to the fore problems with respect to other departments and agencies of the government. It would indeed be necessary to sort out bottlenecks that delay implementation of policies and resolve inconsistencies in policies. 

It is also encouraging to know that the Minister intends to even discuss bottlenecks arising in government agencies under other ministries that affect the efficiency of industrial enterprises and increase the costs of industrial production. 

The Minister's intent to make the garment quota system a transparent one is indeed most welcome. One of the grudges of leading garment manufactures is that the quota system as currently operated creates considerable uncertainties and confers favoured treatment on some, to the disadvantage of others. 

Ultimately a non transparent system leads to corruption and adds to the costs of manufactures, and in turn to a lesser competitiveness of Sri Lankan industry in international markets. A transparent quota allocation system can do considerable good to our most important and growing export industry. 

These are favourable developments and we hope the strategies would be effective action programmes. Despite the importance of these actions of the Minister, it has to be recognised that the most important requirement for rapid industrial development is the macro economic environment. 

The Minister is moving into action at the very time when several of the critical macro economic variable are deteriorating. The depreciation of the currency may seem superficially an advantage to export industry, but any such advantage may be more than off-set by the increases in interest rates, higher import costs and inflation. The expectation of a further deterioration in the economic fundamentals could lead to an erosion of business confidence. 

It is therefore vital that the government gives signals that it intends to set aright the imbalances in the economy, especially the burgeoning fiscal deficit. 

Without economic conditions which are conducive to economic enterprise, the strategies proposed by the Minister, however useful, would have limited potential. 

Salient Features of the new insurance act

By D.P. Lokuarachchi

The Regulation of the Insurance Industry Act No. 43 of 2000 that has been passed in Parliament seeks to introduce a new set of laws on regulating the local insurance industry. Though the new Act has been passed it has not been given effect to at the time of writing. 

Key aspects of the proposed Act includes the establishment of an Insurance Board, provision to levy a cess on annual premium income and the liberalisation of investment requirements. 

The Insurance Board

The regulatory powers which were vested with the Controller of Insurance under Act No. 25 of 1962 are to be transferred to a statutory body called the Insurance Board of Sri Lanka under the new Act. 

In terms of the Act the primary objective and responsibility of the Insurance Board shall be to ensure that insurance business in Sri Lanka is carried on with integrity and in a professional and prudent manner.

The Board would consist of 7 (seven) individuals of whom 3 (three) shall be ex-officio members and hence, the Deputy Secretary of the Treasury, a Deputy Governor of the Central Bank to be nominated by the Monetary Board, and the Director General of the Securities and Exchange Commission of Sri Lanka, shall by virtue of the positions they hold be entitled to become members of the Insurance Board. 

The remaining 4 (four) members of the Board are to be appointed by the Minister in charge of the subject of insurance from amongst persons with qualifications and experience in the fields of Insurance, Commerce, Financial Management, Business Management, Economics, Law or from such other fields having relevance to the Industry. 

The insurance Board shall be the primary regulator and shall be entrusted inter alia with the following tasks:- 

a. To register Insurers and Brokers. 

b. Advise the Government on the development and regulation of the local Insurance Industry. 

c. Implement policies of the Government in relation to the Insurance Industry. 

The Act proposes to enable the Insurance Board to establish its own fund for the purpose of meeting costs and expenses incurred in the running of the regulatory body. 

The Chief Executive of the Insurance Board shall be its Director General and has to be appointed by the Minister in consultation with the Board. The Director General, though not a member of the Board is directly accountable to the Board with regard to implementing the policies of the Board in relation to the regulation, development and supervision of the domestic Insurance Industry. 

Compulsory Cess

The new Act empowers the Minister to levy a cess on the annual net written premium income of every insurer transacting life and non- life insurance business, stipulating the statutory maximum rate of the cess. In terms of the Act the annual levy chargeable on the insurers shall not exceed one half per centum of their annual net premium income. 

The Minister is expected to consult the Insurance Board and obtain their concurrence in determining the rate of cess. Within four months of such determination the Minister is required to table the rate before Parliament and seek validation for such imposition. 

Registration Requirements

A person seeking to establish and operate an insurance business in Sri Lanka is required 

o to be a public company incorporated under the Companies Act No. 17 of 1982. 

o to have a minimum share captial of not less than an amount to be prescribed.

o to deposit with the Treasury such an amount prescribed by the Board.

o to comply with such other criteria as may be laid down by the Board for the purpose of ensuring proper conduct of such industry to safeguard the interests of the insured public. 

Investment Provisions

The stringent investment requrements under Act No. 25 of 1962 have been liberalised to a great extent under the new Act. Under the previous act a company carrying on life insurance business was required to invest 50% of its reserve funds in government securities and the balance reserves upon such instruments which were classified as approved investments within the meaning of the act. 

There were similar requirements in respect of the investment of general insurance reserves and 30% of the general reserves had to be invested in government securities with the balance invested as stated above. 

A noteworthy deviation in the new Act is the removal of the stringent requirements pertaining to investments. Apart from the minimum 30% and 20% investments in government securities of the life and general reserve respectively, the rest of the provision seems to be enabling in that the Board has been given the authority to determine the institutions or instruments upon which the balance reserves should be invested. It appears that these enabling provisions have vested the Board a greater degree of autonomy in this area. 

Reinsurance

Insurers have been given a free hand under the new Act to negotiate their reinsurance arrangements and programs without the intervention of the Board. 

However, this does not mean that the regulatory body has relinquished control over reinsurance activities of a local insurer, as it is authorized to examine and review reinsurance arrangements and where necessary to issue directions to insurers prohibiting their activities with specified reinsures where such reinsurance arrangements are deemed to be detrimental. 

Miscellaneous

a. Insurers or their holding or subsidiary companies are specifically prohibited under the new Act from holding shares or appointing their nominees to serve in the directorate of any company which has been registered as an Insurance Broker under the Act. 

b. The Act has statutorily vested powers upon the insurers to repudiate liability arising under policies of general insurance where premiums relating to such policies have not been paid. However, the Act specifies that where a bank guarantee has been furnished by the insured or the broker the insurer could not avail of the aforesaid statutory right. 

c. The Board has also been given the authority to determine minimum and maximum tariff rates in the case of fire, motor and employers liability insurance. 

d. The new Insurance Act proposes to set up a Policy Holders Protection Fund to be under the control of the Insurance Board. 

The monies lying to the credit of the Policy Holders Protection Fund shall be utilized for the purpose of meeting the obligations of insurers who are unable to satisfy their contractual obligations. In keeping with international insurance practices it is expected that this fund will be utilised for the purpose of satisfying claims of policyholders who have purchased insurance contracts from companies which had gone into liquidation subsequently. 

e. In keeping with the previous Act, the new Act has to a greater extent re-enacted similar positions for governing insurance brokers who are regarded as professional intermediaries arranging deals with customers and insurance companies. 

The insurance brokers are required to be incorporated companies with limited liability and are required to satisfy minimum professional indemnity insurance requirements. Furthermore, the new Act has imposed safeguards to prevent brokers from becoming aligned or tied agents of insurance companies. For example, a Director or a specified officer of the broker, or a Director or the Chief Executive Officer of an associated or subsidiary company of a broker is specifically prohibited from becoming a director, shareholder or an employee of an insurer. 

f. As far as the insurance agents are concerned they continue to be individuals and are only permitted to represent one insurance company.

g. The new Insurance Act has abolished the requirement of the Compulsory Cession in the case of fire and marine insurance business, to the National Insurance Corporation. 

In terms of the Act No. 25 of1962 every insurer other than the National Insurance Corporation is required to cede 15% of their gross written premium income of fire and marine insurance business to the national Insurance Corporation. 

By virtue of this cession the insurers were entitled to re-claim 15% of the cost of claims incurred by them from the National Insurance Corporation. These requirements have been abolished under the new Act. 

h. In terms of the new Act, from and after the appointed date, all insurers carrying on insurance business in Sri Lanka shall come within the purview of the new Act. However, the new Act has specifically exempted the Social Securities Board, the Export Credit Insurance Corporation and the Agricultural Insurance Board from complying with the requirements of the new Act. 

D.P. Lokuarachchi, LLB is Manager Legal & Compliance, Eagle Insurance Company Ltd. (Courtesy - Achievers) 

A levy to evaluate auditor's competence

A Point of view 

By Ranjit Perera

The Sri Lanka Accounting and Auditing Standards Monitoring Board (SLAASMB) has brought to the attention of the business community the need for specified business enterprises to file annual accounts with them. On reading some of the articles which appeared in the print media many investors are of the view that quoted companies should not be made to make any payments to SLAASMB, for them to check whether the accounts of the companies they have invested in have been prepared in compliance with Sri Lanka Accounting Standards (SLASs). 

The reason being the accounts of every quoted company are audited by a firm of Chartered Accountants. All auditors who are registered with the Institute of Chartered Accountants of Sri Lanka (ICASL) should conduct the audit in accordance with the Sri Lanka Auditing Standards. In accordance with such standards the auditors are required to report if a client has not complied with any SLAS. 

The shareholders when appointing auditors expect them to conduct a proper audit for the fees they levy from the company. The least the shareholders could expect is for the auditor to highlight non conformities with SLASs in their audit report. This being the case, why should companies make an additional payment to SLAASMB for the same purpose? 

In fact the excuse given by some of the leading audit firms lately for very significant increase of audit fees is that they are now required to carry out more work to ensure compliance with Sri Lanka Accounting Standards. No wonder the ICASL is promulgating more and more accounting standards for adoption in Sri Lanka. 

It is very unfortunate that no quoted company has made any protests regarding the levy charged by SLAASMB. Specially so as it is mandatory for quoted companies to prepare a balance sheet and profit and lost account in accordance with accounting standards and pronouncements of the Institute of Chartered Accountants of Sri Lanka and certified accordingly by the company's auditors. 

This is rule 3.3 of the continuing lifting requirements of the Colombo Stock Exchange, rules & regulations which was applicable even prior to establishment of SLAASMB. Therefore the CSE will obviously raise the issue of non compliance with SLASs by quoted companies when highlighted by the auditors. 

However, it is admitted that the SLAASMB has a role to play in ensuring that the audits are carried out in accordance with Sri Lanka auditing standards as there is no other regulatory body in existence for this purpose. This process of monitoring will automatically result in the detection of non compliance with SLASs. If there is non compliance with standards then the auditors should be advised as appropriate. They in turn will advise their clients accordingly. Then obviously the quality of accounts presented to the shareholders will improve. Presumably this is what the regulatory bodies and professional institutions advocating the adoption of SLASs by the business enterprises desire to achieve. If this is the objective why are some accountants trying to make matters too complicated by getting the business enterprises dragged into this process? 

A spokesman for the ICASL is on record that with regard to compliance with SLASs the SLAASMB is expected to initially assist the companies lacking the necessary accounting competence; but it had not been explained as to what assistance this Board can provide which the auditor of a company is not competent to provide. The spokesman of the ICASL do not seem to be aware that all Specified Business Enterprises which are required to file their accounts with SLAASMB can only be audited by audit firms registered with the Institute of Chartered Accountants of Sri Lanka. Therefore the question is whether there is a necessity to improve the quality of the auditors in our country to be on par with the auditors of other countries so that they could given the necessary advice to their clients. The ICASL has a responsibility to ensure that the auditors registered with them are at least competent to advise their clients on matters relating to SLASs. Instead of educating the auditors the ICASL is advocating that business enterprises should get assistance of a regulatory body. 

It appears that on a strict interpretation of the relevant Accounting Standard, the annual levy payable to the SLAASMB by a company need to be disclosed in the accounts under the expense classification auditor's remuneration. In the final analysis it is nothing but proper for the fees levied for checking of the accounts filed with the SLAASMB to be charged from the auditors and not from the auditee (the company). 

The present basis tantamount to a company making a payment to SLAASMB to evaluate the competence of their auditor. Fair enough even if the SLAASMB charges the levy from the auditor, they in turn will recover it from their client. However, a business enterprise is likely to be more receptive to incur an expense the nature of which is clearly understood by them. A payment of a fee to their auditors which comprise of two components - one for the conduct of the audit and another, a re-imbursement of cess levied from the auditor by SLAASMB together with re-imbursement of other expenses incurred by the auditor in relation to the audit. 

The business community is hopeful that steps will be taken by the relevant authorities to ensure that additional financial burdens they are required to bear are passed on to them at least with their true identity without being cleverly disguised. The accountancy profession need to convince the business community that there are no hidden agendas within the process of ensuring compliance with SLASs. It is important for them to safeguard their credibility with the business community.

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