Sri Lankan regulator suspends EAP debenture issue, says conflict with rating agency

A serious conflict of interest between crisis-hit Lanka Ratings Agency (LRA) and the issuer company of the Rs.1.5 billion debenture issue of EAP Broadcasting Co Ltd led to the Securities and Exchange Commission (SEC) on Tuesday deciding to suspend the debenture issue – due to open on Thursday - until an independent rating is obtained. This is the second blow to the LRA after the SEC decided to restrain the ratings agency from providing new ratings from March 25 until the company complies with regulatory requirements imposed by the SEC. In an announcement on the Colombo Stock Exchange (CSE) website, the SEC said that the Commissioners at a meeting on Tuesday “deliberated on the findings of a prima facie conflict of interest in the rating of the proposed debenture issue of EAP Broadcasting Co Ltd by LRA. The conflict of interest arises out from having a common director on the respective boards of directors of both the issuer company and the credit rating agency and two of the directors of the issuing company being members of the rating committee of the LRA”. The SEC said it was of the view that the integrity of the process adopted by the LRA doesn’t appear to support the credibility of the rating (it had issued to the EAP issue). The directors of the LRA are Preethi Jayawardane (Chairman), Adrian Perera (Managing Director), Ms. Priyanthi Liyanage, Jayantha Perera and Dinesh Weerakkody, according to the LRA website. The SEC ordered a suspension of the opening date of subscription of the proposed debenture, scheduled for Thursday June 11, “until a rating on the issue is obtained from an independent credit rating agency registered with the SEC and disclosed to the public”. LRA is one of three rating agencies approved by the SEC, In its announcement, the SEC said the decision was made after “it afforded a hearing to the board of directors of EAP Broadcasting Co Ltd and LRA”. The release said the Commission took serious note of the fact that LRA is in breach of Part V D (vi) of the Schedule to the SEC Act No 36 of 1987 which stipulates the terms and conditions a credit rating agency has to comply with the order to be registered with the SEC . It was unclear whether the issues the SEC has with the LRA pertains to the rating issued to EAP or whether there are other problems too. – ENDS-