Curtains for major players in banks

With the Central Bank preparing to tighten controls on shareholdings in commercial banks, it may be curtains for some powerful business moguls like Harry Jayawardena, Dr. Sena Yaddehige and Dhammika Perera who control banks directly or indirectly through other parties.

Unveiling new monetary policies for 2007 on Tuesday, Central Bank Governor, Nivard Cabraal said the ownership of banks will be broad-based to promote better corporate governance in an effort to reduce the concentration of ownership and to address conflicts of interest that may arise due to large shareholdings. “New policies on share ownership will be issued shortly, where a single entity’s material share ownership would be generally limited to 15 percent of a bank’s share capital,” he told business leaders, bankers and the media.

Under Section 12 of the Banking Act an individual, partnership or corporate body shall not either directly or indirectly or through a nominee or acting in concert with any other individual, partnership or corporate body acquire a material interest in a licensed commercial bank (LCB) without the prior written approval of the Monetary Board. The threshold limit in the Act is 10 percent.
Also under the directions issued under Section 46 (1) (d) of the Banking Act, the maximum percentage of shares held by a group of companies is 20 percent.

An industry analyst, referring to Cabraal’s comments at the presentation on monetary policy, said that mandatory ownership limits would be ineffective if governance rules don’t ensure independence of boards and management, while defining their responsibilities and ensuring accountability. “Restricting ownership limits either in theory or in practice, without enforceable governance, is a high risk strategy,” he added.

The Sunday Times FT, in an analysis of all major banks, found that Jayawardena rules the roost in many banks and may have to shed his stock in time.

Jayawardena-controlled companies are among the first 10 top shareholders of Hatton National Bank. His CBD Exports, Milford Exports and Stassen Exports each hold more than six percent. Sri Lanka Insurance Corporation (SLIC) has 4.88 percent and Distilleries Corporation of Sri Lanka (DCSL) has 2.53 percent. Banking sources say that top car dealer Ishara Nanayakkara, who controls LOLC and Browns together with his associated parties are also making a pitch for a sizable stake in HNB through Browns.
SLIC - Life Fund and Stassen Exports has five percent in Sampath Bank while businessman Dhammika Perera also has five percent.

More than 44 percent of DFCC is owned by Jayawardena controlled companies. Commercial Bank has 13.49 percent, HNB has 12.25 percent, SLIC has 11.81 percent, and DCSL has 6.49 percent.

These companies also dominate Commercial Bank. DFCC has the majority stake in the bank with 29.068 percent, SLIC has 9.682 percent and DCSL has 2.245 percent.

The current Banking Act contains provisions in respect of share ownership in banks in Sri Lanka by connected parties or parties acting in concert. A Central Bank source said that ‘acting in concert’, explained under Section 12 of the Banking Act applies when ‘acquisitions take place’. A local court has presently restricted Jayawardena’s voting rights of the 42.6 percent shares in Commercial Bank through direct and indirect parties to 10 percent.

“The Commercial Bank’s present shareholders can ‘hold’ the stipulated amount, but ‘acting in concert’ applies to a point of acquisition,” an industry source said.

He said that the law is not clear on certain instances and not very straightforward but Cabraal told The Sunday Times FT that the regulator will not tackle this issue.

“Acting in concert is a matter of fact. If there is an allegation of acting in concert, we will certainly examine it,” he explained. He said that the Central Bank will be ‘comfortable’ if a company, group or an individual limits their holding to 15 percent. “We will not be usually comfortable with anyone exceeding this limit,” he added.

The Sunday Times FT also found that the major shareholder at Pan Asia Bank is Dhammika Perera with 14.93 percent while Tay Plak Juay, a Malaysian national has 9.86 percent, Chandra Joseph has 5.88 percent, Harindra Perera has 5.24 percent and Pramuka Bank has 5.01 percent.

At the Union Bank, much in the news in recent time owing to parliamentarian Ravi Karunanayake’s efforts to bid for a major stake with associated parties, the biggest stakeholder is Sampath Bank with rugby promoter and former UNP chairman Malik Samarawickrama and former test cricketer Aravinda de Silva having sizable investments.

More than 40 percent of Seylan Bank is owned by Ceylinco companies, which are in turn controlled by businessman, Lalith Kotelawala. Twenty percent of Nation's Trust Bank is owned by John Keells Holdings, making it the largest shareholder while Central Finance Company has 13 percent.

At NDB Bank (which industry analysts refer to as attractive for a takeover), Dr. Sena Yaddehige has four percent and Richard Peiris which he controls has 10 percent, while Bank of Ceylon has 10 percent and foreign funds collectively have 24 percent. It also has 30 percent unregistered shares. “We have requested the owners of these shares either to comply with the law or obtain Monetary Board approval for the exception. Where these shareholders want to exit, the matter is more complicated than a normal sale, for example because of the existence of unregistered bonus shares. We have worked with our lawyers to arrive at a legal process to validate and facilitate such sales, and this is being discussed with the parties concerned,” CEO Nihal Welikala said in a recent interview.

A Central Bank source said that the current prudential regulations of banks throughout the world are based on the principles recommended by the Basel Committee set up by the Bank for International Settlements based in Basel as international best practice. “These principles are known as Basel Core Principles for guidance of the bank regulators. Principle 4 of such Basel Core Principles for Effective Banking Supervision requires that bank regulators have the authority to review and reject any proposal to transfer significant ownership of controlling interests in banks,” he said, adding that the rationale for this principle is that shareholders, having a controlling interest in banks, should be fit and proper persons and should be subject to assessment by the regulators.

Cabraal said shareholders with an ‘excess’ stake could reapply under the new guidelines to retain their stake – if it falls within these guidelines.

The Bank source said alternatively the excess stakes could be sold within a period of upto five years on a case-by-case basis from now.