SEC Act to be further reformed to strengthen enforcement

Wednesday, 4 June 2014 00:00 - - {{hitsCtrl.values.hits}}

Following are excerpts from an interview with SEC Chairman Dr. Nalaka Godahewa: By Cathrine Weerakkody Q: What is your view on the practicality of term and age limits for directors, as finding good directors to sit on a PLC board is no easy task? Also, the question is whether term limits should be decided by the shareholders or by the regulator? A: At this stage of development in our market it is more appropriate to allow the shareholders to decide whether there should be an age limit for a board director and if so, what that limit should be for the respective company. Perhaps a more critical issue is board diversity and the need to have the right balance. Boards must have systems in place for self assessment and succession planning. Regulators in most parts of the world share a similar view.

Q: On managing shareholder expectations of dividends, any thoughts? A: Recognising the shareholders’ expectations should be one of the company’s highest management priorities. A listed company should aim to provide shareholder returns through comprehensive consideration of the business environment, including business performance, retained earnings, and a balance between dividends and funds required to support growth plans. However the dividends policy if not managed well can also lead to problems such as raising unrealistic expectations amongst shareholders and creating over dependence on regular dividend payouts. Increasing demands for dividends can strain cash flow and prevent the company from reinvesting profits in future growth, as well as for badly needed capital improvements. This can lead to an illiquidity spiral which hinders the company’s ability to pay dividends in the future. In terms of allocation of financial resources, dividends are not necessarily the only way of meeting shareholders’ return-on-equity objectives. Q: To ensure a strong capital market with long-term investments and also create an opportunity for investors to hedge risks what role can the regulator play? A: The role of the regulator involves developing, implementing and promoting consistent standards of regulation, oversight and enforcement in order to protect investors, maintain fair, efficient and transparent markets, and addressing any systemic risks. In order to achieve these, the regulator should have operational independence and accountability in the exercise of its powers and functions and observe the highest professional standards including appropriate standards of confidentiality. The regulator should not overstep their mandate and allow the markets to evolve within the accepted parameters. Q: What is the SEC doing to promote more liquidity for potential foreign investors? A: The approach is twofold. Firstly the recent issued directive to make it mandatory for public listed companies to maintain a minimum 20% public float is expected to release more closely held stocks to the market. Secondly there is an active effort to promote more IPOs into the market targeting a large number of successful but non-listed companies Q: The ever increasing cost of compliance would be a challenge for most small time businesses to grow and expand. What are your thoughts? A: Compliance has a cost but the benefits of listing overweight those costs. It is actually lack of awareness of opportunities preventing most companies away from the market. Q: Are there any initiatives from the SEC side to build capacity in the boardroom? A: SEC recently endorsed two corporate director training programs initiated by the Institute of Chartered Accountants of Sri Lanka and the Institute of Directors respectively. Both programs had SEC input in developing the curriculum. The corporate governance code was revised in 2013. SEC is currently studying rules imposed by regional counterparts related to independent directors to assess what initiatives are required in this area. Q: What are your thoughts on our financial reporting standards? A: We are very much up to date with evolving global standards. The accounting bodies have been doing a good job keeping our accounting standards up-to-date. Q: Finally, what are the key milestones in your road map to create a vibrant capital and debt market? A: There are 10 key initiatives in the road map. They involve Demutualisation of the Colombo Stock Exchange where the process has already begun and we hope to complete same in 2015 and perhaps list the CSE in 2016. Improving the corporate debt market where initiatives have already shown results with the corporate debt market growing over 400% in 2013 and showing similar growth potential in 2014 Strengthening the broker back office system through harmonisation amongst the brokering houses and modernisation with latest technology which has now come to the implementation stage which should commence within the next few months. Enhancing capital market education and improving financial literacy an ongoing project where we have been very aggressive during the last two years. Introduction of a central counter party system or CCP which is essential to broad base our product portfolio and our project team has key representations from SEC, CSE and also the Central Bank of Sri Lanka. This too will be completed by end 2015. Amending the SEC act to further fine-tune our regulatory framework where major emphasis would be on providing civil and administrative enforcement powers to SEC where we currently limited to criminal sanctions. This project is completed and the draft act is now with the ministry of finance to be submitted to cabinet and then to the parliament. Developing the Unit Trust industry will be a major emphasis. Particularly with us trying to attract more retail investors we see potential for this sector. Expanding the product portfolio will be also linked to the CCP because derivatives can be introduced only after the CCP is in place. But several other things such as expanding bond products, introducing ETF, Introducing REITS etc are in the pipeline. Increasing the number of listed companies in the market. Currently we have 293 listed companies and we have about 45 companies who are already in discussion with us showing interest to list within the next three years. I expect many more to come in with the type of promotions the teams are doing Attracting new investors both local and foreign. Even the road show which was held in UK on 30 May was part of that process. Prior to that we have covered India, Dubai, HK and Singapore and the next one would be USA in September 2014. (The writer is a CIMA finalist and a final year undergraduate student in the UK)