Financial Times

Harry J rides again
By Duruthu Edirimuni
Harry Jayawardena demonstrated his power by taking control of DFCC Bank by ousting its non-executive Chairman Dr. Nihal Jinasena last week with the tycoon’s next target considered to be Commercial Bank, raising questions about whether this apparent concentration of ownership among banks violates the banking law.

Neither the Central Bank nor the Securities and Exchange Commission were prepared to make any official comments on the development, prompting a stock broker to speculate that there could be two striking possibilities why the regulators are silent on the issue. Jayawardena couldn’t be reached for comment.

“Either the Central Bank is scared of him or in favour of him,” he said. DFCC’s ousted chairman Dr Jinasena said he resigned as he was unhappy with the turn of events and because Jayawardena had threatened to oust him.

Further strengthening the belief that Jayawardena does indeed control DFCC, Dr. Jinasena told The Sunday Times FT that Jayewardena asked him to leave.“He phoned me up and asked me to resign,” Dr. Jinasena said. Jayawardena had threatened to forcibly oust him through an extra general meeting of the shareholders if he did not step down.

“He said ‘I will throw you out, if you don’t resign’,” Dr. Jinasena said, adding that he did not want to be pushed around by anyone at his age. “I am an independent person and at the age of 65 do not want to be pushed around. Therefore I decided to resign,” he said.

Asked whether this is a move that points to Jayawardena taking control of Commercial Bank as well and ousting Mahendra Amarasuriya as its chairman, Jinasena agreed that it is a strong possibility.

“It points to that,” he said.
He said that shareholders should not interfere with the management team or board of directors. “If that is the case and if some do not believe in it, because it is their ‘legal right’, there is no need for a board of directors.”

He said that he has his own style in managing and took decisions with the rest of the directors, according to what was right in his view. “This is a company that is answerable to the people of the country and has many other stakeholders. It is not a company where you leverage your personal agendas,” he said.

With this latest move, Jayawardena, 64, has fuelled speculation about his ambitions and to what extent the regulators are prepared to rein in his efforts to expand his business empire.

A stock analyst said that the Banking Act cannot be enforced on this low profile, publicity wary tycoon who is threatening to consolidate the three major private banks, namely HNB, Commercial Bank and DFCC.

The yet untested banking law, described under Section 12 (1 C) ‘a’ in the Act stipulates that any individual is prohibited from holding more than 10 percent in a bank directly or through related parties and companies.

A lawyer specialising in the banking law said that the regulation is in place to ensure the autonomy of the banks as public deposit taking institutions. “If any one single entity or a person controls these institutions, they can lend money to their own firms or companies or their related parties. When this happens, the whole system becomes highly skewed and the entire trade and commerce crumbles, because the country is small,” he explained.

Industry sources criticising the Act said that if there is a law, which can be flouted easily, it should be removed. “The entire country will start to depend on one or two people to run the entire financial system,” an industry source said.

Central Bank sources confirmed that there is a provision in the Banking Act under ‘concerted parties’ to challenge him, but the law has not yet been tested. Acting in concert refers to acting pursuant to a formal or an informal understanding to actively cooperate in acquiring a material interest in a licensed commercial bank, so as to obtain or consolidate or control that bank. “Through this provision the Central Bank can take action,” the source said.
However he said that the ‘validity’ of the law has not been tested as yet. When suggested that the time may be right to do so, he said that eventually the court will decide the strength of the provision.

He said that the regulator does not have to be informed by anyone to take on a case such as Jayawardena’s alleged control in DFCC. “The Central Bank itself can investigate into such a case,” he said, adding that he was not in a position to confirm or deny whether an enquiry was on, regarding the DFCC issue.

Many stock market analysts said that enforcing the law has been put off by the regulators, because tracking Jayewardene’s ownership of firms is difficult.
“Some firms which own DFCC are British Virgin Island registered, where obtaining a list of shareholders is not possible according to their laws,” he said. However, some stock market analysts said that if Jayewardena’s agenda is to consolidate the three banks, it is good for the banking industry.

“Jayawardena is a very aggressive businessman and he is on the right track,” an analyst said, adding that the country does not need many banks. “I think that the country does not need so many banks and consolidation is the only way for them to overcome the rigorous competition in the present market,” he said.

He said that the country has relatively a much larger spread, because of the many banks. “For an example, Gampaha does not need eight different banks offering the same products. It only needs two. The IT systems and the platforms to set these branches up is a big dent to the bottom lines and if banks merged, they can avoid this cost and lend the customers money at a lower spread,” he explained.

Meanwhile, a stock broker said that contrary to popular belief the country is not ‘over banked’. “We have about six local commercial banks and at the rate they are expanding there is still room for others,” he said.

Ajith Fernando, CEO, Capital Alliance said that the country is over banked in certain segments, but the rapid expansion of consumer credit by some of the foreign banks clearly shows that there is room for more banks. He said there is a huge demand for alternative banking as well. “There is a need for alternative solutions, where there are more finance companies, leasing companies and a developed capital market, which is called Para - banking,” he said. Some argue otherwise. They say that consolidating the institutions may be healthy for the industry, but the ownership should not in the hands of someone as strong as Jayawardena.

“Having two to three large banks is good for the industry, but it is dangerous to have ‘an individual’ in a ‘monopolistic position’,” a stock analyst said. He said a person at such a domineering position could ultimately crush entrepreneurship in the country.

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