Unfortunate merger of regional banks

The budget brought brickbats and bouquets from all and sundry. Company directors were unhappy over the dividend payment but shareholders unconnected with the company were pleased and all these views are reflected in our continued budget cover this week.

The argument against this proposal is that the government should leave the private sector alone because successive governments have declared this sector as the engine of growth as the state steps out of business.

On the same point however, one sees the state getting more involved in business and probably entangled if one is to look at just two proposals – the reinsurance business and the merging of regional development banks with the Lankaputhra Bank. The regional banks got a good rating last week and now find themselves sucked into the centre instead of being separate and being able to service their community’s needs effectively, with transparency and with the community as the watchdog.

A further negative issue is that while the accent is on devolving power to the regions and maximizing it, the proposal in relation to regional development banks is going in reverse gear. By this move the community will not have much of a say in the running of these banks, which has and must be a vital part of the decentralization process.

Be that as it may, concerns by companies over the government proposal on the tax on dividends below a certain level are well founded because ‘good’ companies generally distribute these profits or reinvest in productive ventures. But how many ‘good’ companies are there? According to analysts, probably 10 or 15 percent of companies listed on the stockmarket!

The general perception is that companies don’t declare proper dividends, that there is a lot of dipping into company funds through various ruses like jacking up directors fees or the typical case of plantation companies charging a hefty management fee which drags down profitability. These are clear examples as to why small shareholders are wary about the way companies manage their affairs.

On the other hand the companies argue that if dividends are not attractive then shareholders are free to take their funds elsewhere. But is that the solution? Companies go to the market to raise equity and raise money from the public. Thus they are under an obligation to deliver results and ensure decent returns to investors. Often we hear of cases where ‘minor’ shareholders are shouted down by company directors at board meeting or simply ignored when issues are raised. On the other hand, there are also shareholders who raise issues for no reason.

Transparency and accountability in companies was recently tackled by the Securities & Exchange Commission (SEC) – or so it seems – through the appointment of independent directors. Who appoints these directors? The companies themselves in which case can one call them independent, whatever the credentials of the individual? One suggestion is that independent directors should either be approved by the SEC or elected by non-company shareholders to endure true independence.

A case in point is a particular independent director brought into a financial institution who now is the chairman of another company that comes under this group. What happens to this individual’s independence? Isn’t it compromised?

Another related development is where the powerful Dharmadasa brothers – Jayantha and Upali - have been hauled up before court along with others on price manipulation charges. Until the charges are proved, they are deemed innocent. However the fact that the former Nawaloka financial director, his wife and daughter are separately facing charges of insider dealing suggests some serious transparency issues in the company.

Now what were the independent directors there doing while alleged price manipulation and alleged insider dealing was taking place? Sri Lanka’s listed companies have a long way to go coupled with the weakness of the SEC to go after the sharks and make the stockmarket ‘clean and transparent’.