Chandra J. writes to SEC Chairman on NSB-TFC ransaction

Mr. Thilak Karunarathne

Chairman,

Securities Exchange Commission,Colombo.

Dear Sir,

Re: SEC inquiry connected with the stock exchange transaction where the National Savings Bank acquired shares of The Finance Company

I wish to hail your expressed commitments to initiate with urgency a comprehensive inquiry connected with the stock exchange transaction where the National Savings Bank acquired shares of The Finance Company, all as broadcast over the MTV Channel 1 News.

I am sure that fellow professionals, private sector business leaders and civil society leaders committed to good governance and ethics will join me in thanking you for your expressed commitment. I appeal to you to kindly ensure that the proposed Securities Exchange Commission inquiry is not narrowly focused on this single transaction and that the team engaged traces this transaction, as one case study in a series of similar transactions arising commencing from the financial crisis experienced in late 2008.  It is important that the following key chronological decision points be also reviewed in a focused manner and validated during the inquiry, both in general and specific terms, for any weaknesses in the chain of control, compliance, authorisation, approval, post approval review, regulation and consequential communications and ensuring that management and operations since restructure of failed finance companies were carried out with integrity and within established codes of best practice, ethics and governance;

nLessons learnt from the 2008 financial crisis and the experiences of previous financial sector were built in to regulation, management and operations following the bailout and Government/Central Bank  intervention in 2008/09

• Due care and diligence was exercised by the regulators in allowing the restructure of failed financial institutions and especially the validation of;

-fit and proper criteria of key shareholders, directors and senior managers  post restructure and,

-related party transactions and issues of potential conflicts of interests

-long-term going concern status even under probable stress situations

-the protection of the interests of the present and future depositors

• Due care and diligence was exercised by the regulators in allowing stock market quotations for the restructured failed financial institutions and especially the validation of;

-initial offer price and/or placement terms and conditions

-the estimated future financial performance projections

-contingent liabilities and expected free cash flow estimates as disclosed

-Market information of the businesses these institutions succeeded and the last known audited financial statements and independent audit reports of the original institutions

-related party transactions and issues of potential conflicts of interests

-stock market movements of promoter and key management linked share trades post and prior to restructure

• Due care, diligence and surveillance of trades transactions were exercised by the regulators, where transactions involved promoter and key management, those with fiduciary interest to members, depositors and third parties and in respect of trades involving State institutions
• That regulators took positive bold and timely decisions in the interests of

-the creation and maintenance of a market in which securities can be issued and traded in an orderly and fair manner;

-the protection of the interest of investors;

-the operation of a compensation fund to protect investors from financial loss arising as a result of any licensed stock broker or licensed stock dealer being found incapable of meeting his contractual obligations; and

-the regulation of the securities market and to ensure that professional standards are maintained in such market

I submit for the attention of the inquiry team taking a strategic approach as described above the undernoted documents;

1.Open letter dated 7 April 2011 titled ‘Who Will Look After the Interests of Depositors In The Restructure of Failed Finance Companies/Primary Dealers/Fund Management Companies and Other Regulated Financial Institutions?’

2.Open letter dated 10 May 2011 titled ‘Who Will Look After the Interests of Depositors In The Restructure of Failed Finance Companies/Primary Dealers/Fund Management Companies and Other Regulated Financial Institutions?’

3.Letter to Director General SEC dated 2 June 2011 re Multi Finance Ltd. and restructuring Standard Credit Lanka Ltd.

4.An article identifying several risks titled ‘Are There Buried Mines and Time Bombs under the Stock/Financial Markets?’

5.An article titled ‘Are Sri Lankan Professionals and Professional Associations really “Professional?”’

6.Transparency International Sri Lanka letter to the President dated 2 March 2009

7.Transparency International Sri Lanka Round Table Review Outcomes

8.Golden Key Company-related transparency and governance issues impacting on the economy, depositors and other stakeholders – issues to be addressed by the regulators collectively in pursuit of transparency, good governance, enhanced accountability to depositors and clients and in the interest of financial market security/stability

I take this opportunity to wish you, your fellow Commissioners and the Inquiry Team all success in completing the present inquiry extended in scope in order that best practice governance, regulation and enforcement will be the order of the day in the future, impacting positively on the growth of not only the stock market and financial services sector, but also the nation of Sri Lanka as a whole.

Yours sincerely,

Chandra Jayaratne