Dr. Harsha de Silva challenges Central Bank on EPF’s investments

In response to yesterday’s issue of Daily FT publishing the Central Bank’s August 2010 statement on EPF investing in the stock market, UNP MP and Consultant Economist Dr. Harsha de Silva fired a fresh challenge against the Central Bank on the same. In support of his stand, Dr. de Silva issued the following statement yesterday:

The Central Bank (EPF Department) is attempting to defend its trading of shares of listed commercial banks in the Colombo Stock Exchange taking cover under Section 5(e) of the EPF Act of 1958. But it is a futile attempt.

The Central Bank issuing a statement says, “In terms of the section 5(e) of the EPF Act, Monetary Board may invest the monies of the fund in such securities as the Monetary Board may consider fit and may sell such securities.”

I agree with this statement as it is the verbatim reproduction of Section 5(e). However, the Central Bank then adds its own sentence and says: “Accordingly, the EPF clearly has the authority to make investments in the share market, including the banking and financial sectors.” This is supposedly the Governor’s interpretation of the word ‘securities’.

The EPF website, under the section ‘Investment of Funds,’ explains how its funds are invested and managed. It says: “As the custodian of EPF, the Monetary Board is responsible for the investment of the moneys of the Fund and to earn a reasonable real rate of return to the EPF members in the longer-term. Hence, the Monetary Board has established an Investment Committee to support and advise the Monetary Board and the Employees Provident Fund Department. The Investment Committee has designed an Investment Policy Statement and an Investment and Securities Guideline for the EPF with the approval of the Monetary Board.”

So, what exactly are the regulations and professional guidelines in this ‘Investment Policy Statement’ with regard to buying and selling shares of listed commercial banks? It is very clear. It says: “The Fund cannot invest in stocks of the banking and financial sector since the Monetary Board regulates both EPF and banks and financial institutions.”

The reason for this good governance regulation is based on the legal interpretation of the word ‘securities’ in Section 5(e) of the EPF Act. Based on the opinion of the then Attorney General and given the fact that the Central bank has advance and detailed information of commercial banks under its own regulation the Monetary Board prohibited the Central Bank (EPF Department) from trading in shares of listed commercial banks. This was then written into the Investment Policy, which according to the EPF, it follows to the letter.

In this background, how can the Central Bank say that it is free to buy and sell any amount of shares of listed commercial banks on the CSE? Does not this kind of cavalier attitude create negative perceptions about governance in Sri Lanka? Does it not disincentivise genuine investors from coming to this country? The only thing that is becoming clear is the Government’s plan to wrest control of private commercial banks with no respect for moral and ethical, let alone professional, behaviour.