Financial Times

Leniency for rule breakers

More than 10 percent of the companies listed on the Colombo Stock Exchange (CSE) are on the default board mainly because they have broken the listing requirements on non-submission of annual reports and quarterly financial statements. This is a startling figure and one that is certainly not encouraging for members of the investing public thinking of spending their money to buy shares on the bourse. The CSE now has 242 listed companies of which 31 have been transferred to the default board.

Some of the companies have been there for up to three years. The default board list includes some well-known firms such as old, established ones, holding companies, firms headed by leading corporate personalities, and newer ones that have grown rapidly.

This surely indicates a lack of concern for abiding by CSE listing rules and disregard for the views of shareholders and investors. It also shows the irresponsible attitude of the managements of these companies.

At least two firms have been transferred to the default board for non-payment of listing fees last year. If listed companies can't meet one of the most basic of listing rules such as filing their accounts on time, how can investors be sure that they will pay dividends on time or comply with other rules?

All the firms listed on the CSE have a market capitalisation of over Rs 145 billion or about eight percent of the country's GDP. Despite the best efforts of the CSE the number of companies listed on the exchange has not grown significantly over the last few years. Nor have its efforts to attract firms in new sectors such as garments had much success. This is certainly not owing to any lack of effort on the part of the CSE but probably more because of the country's general economic climate, the lack of desire to list on the part of companies themselves, many of which are closely held by families who don't want to give up control, and perhaps insufficient awareness about the benefits of listing. Many firms are also reluctant to list because of the need to disclose financial information.

The CSE appears to be rather lenient towards these companies that have broken the rules. According to CSE rules, in addition to being on the default board, the companies may be fined by the CSE Rs. 500 per day for delays in submission of half yearly reports and annual provisional accounts. However, the CSE has never enforced this rule and not a single firm on the default board has been fined so far. Nor is there a specific time limit for the CSE to take action, such as delisting, against companies that violate the rules on submission of their accounts.

The CSE appears to be not taking action in the belief that imposing fines on companies in such great difficulty that they have trouble complying with CSE rules and filing regular financial statements could put them in further difficulty. It also believes that de-listing a company will put the shareholders in difficulty as there would then be no way for them to dispose of their shares.

The regulators have been striving in recent years to make the stock exchange listing and trading rules more liberal, reduce the fees and costs for market participants, and improve the reliability and efficiency of transactions. All these measures were aimed at making the CSE more attractive and to improve its performance.

The least the regulators can do in such circumstances is to penalise those who break the rules. By not doing so they are setting a bad example. The managements of those firms on the default board are also setting a bad example. This is all the more discouraging given the fact that there is no shortage of rhetoric about corporate good governance and improving accountability in listed companies.

Back to Business