By Chandra Jayaratne –

Chandra Jayaratne, who is a past Chairman of Ceylon Chamber of Commerce, writes to COPE Chairman, D.E.W. Gunasekera. Chandra Jayaratne is a Fellow of the Institute of Chartered Accountants of Sri Lanka and a Fellow of the Charted Institute of Management UK. He is the “Sri Lankan of the year 2011.” – Colombo Telegraph. 

14^th August 2012.

Hon. D.E.W. Gunasekera M.P.

Chairman,

COPE,

Parliamentary Complex,

Sri Jayawardhanapura,

Kotte.

Dear Sir,

The Priority Need for the “Voice of and Effective Response Actions by the COPE”

Following the Review of the Securities Exchange Commission and its Regulatory Operations

I address this note to you with much respect for and high expectations from your leadership of COPE, in the context of mixed feelings of happiness and sadness in reading the news reports published since the recent COPE review of the Securities Exchange Commission and its regulatory operations.

I am happy that living up to public expectations of COPE, you have initialed a review of the Securities Exchange Commission and its regulatory operations. I fully support your directing the said review and expanding its scope to go beyond the narrow confines of an oversight of the financial performance of independent regulators in order to ensure their observance of financial discipline in their operations. I believe that so long as such reviews do not impinge on the operational independence and not directive in nature and are conducted within a framework of serving a role similar to that assigned to an audit committee; it will serve the interests of all stakeholders, including the state as well as the regulatory body concerned.

I am however deeply saddened by the continuing pressure and external interference on the Chairman and Board of Directors of the Securities Exchange Commission, as reported in the news media, especially at a time there are initiatives led by the Chairman to have in place effective and best practice regulations which will ensure a stable, sustainable and professional securities market and will assure long term growth and rewards to all stakeholders.

I believe that the role of the COPE must extend to ensuring that operational freedom, independence, international best practice embedded operating rules and regulations and unrestricted enforcement capability are in place for the Chairman, the Board and the professional management team to effectively discharge their accountability and meet the agreed long term vision and mission, within agreed framework of Core Values and Ethics.

It is only in such an operating environment as described above, that necessary reforms, effective regulations, operating rules with effective governance and enforcement will be possible, meeting long term goals and satisfying stakeholder expectations.

I wish to draw your kind attention to my attached letter of 22^nd July 2012, supporting the decision of the Securities Exchange Commission to institute a regulatory framework which requires IPO Grading and Independent Equity Research. I wish in addition to draw your particular attention to the reforms involving specific amendments to the eligibility requirements for listing of equities on the CSE as suggested therein.

Only a Chairman and Board, with the full support and endorsement of all stakeholders, duly empowered by the State and effectively supported by those in leadership positions in the Executive, and allowed to exercise with due accountability independence and professionalism in the development of regulation embedded with international best practices duly tailored to our particular circumstances and the enforcement of such regulations, will ensure stable, sustainable and growing securities market.

I therefore appeal to you, through COPE with the due endorsement of the Legislature to publicly air the “Voice of the Legislators” unreservedly, supporting the urgent and priority need for the securities market regulators to be empowered by all stakeholders, and duly empowered by the State and those in leadership positions in the Executive, and enabled to exercise their independence and professionalism in the development of regulation and enforcement thereof.

I trust that this appeal and request for priority response action will receive your due attention and that your initiatives will be duly endorsed and further supported by those persons copied on this letter

Chandra Jayaratne

cc;

H.E the President and Hon Minister of Finance & Planning,

Speaker of Parliament,

Leader of the House,

Leader of the Opposition,

Secretary to H.E. the President,

Secretary to the Treasury,

Governor of the Central Bank,

Auditor General,

Chairman, Securities Exchange Commission,

Chairman,Colombo Stock Exchange,

President Institute of Directors,

President,Institute of Chartered Accountants of Sri Lanka,

President, Chartered Financial Analysts Association,

President, Chartered Institute of Secretaries,

Chairman,Ceylon Chamber of Commerce,

Chairman,Colombo Stock Brokers Association,

Editors of the Financial & Business Media -For Publication

 

22^nd July 2012.

Mr. Vajira Wijegunawardene

Director -Capital Market Development and Research

I write with reference to the public notice issued by the Securities Exchange Commission of Sri Lanka calling for public comments on Public Consultation Paper No; 16.

At the outset I wish to state that I am in total support of the “Way Forward Strategy” of The Securities and Exchange Commission of Sri Lanka, all as proposed in regard to the IPO Grading and requirement for Independent Equity Research.

I support the aforesaid proposal as;

1. It satisfies a much needed transparency and good governance process requirement of the Capital Market
2. It meets with some aspects of similar recommendation submissions previously made by me
3. It closes to a significant extent a serious loophole available for misleading potential investors through misrepresentation and non disclosure of critical information
4. It will close a specific avenue previously made use of by errant directors, with the offering entity preparing financial estimates and expected future business performance results on bases contrary to accepted best accounting practices; thus reflecting misleading future business results; and having them validated and stamped by Accountants and Auditors , who hide under a certificate given that they have merely checked the statements as given and not questioned nor validated the accuracy and applicability of assumptions and methodology of developing financial estimates and business result projections.
5. Enhances the decision making options of investors, now made aware of bench mark linked grading information and independent equity research once the proposal is implemented.

It is further recommended that the eligibility requirements for listing of equities on the CSE be amended to recognize the following amended criteria, which will ensure that only entities with a track record of positive operations under a committed management and board of directors will be listed ( ie. start up and green field businesses to be thus encouraged to seek venture capital, investment / development banking and other specialist Fund Management entity equity capital support );

1. Diri Savi Board
   1. Stated Capital at the time of listing be not less than Rs 250 million
   2. Net profit after tax stipulation as per main board listing requirements
   3. Positive net assets stipulation as per main board listing requirements
   4. Operating history of at least three years prior to listing application
   5. None of the companies in the group to have had their last three years audited accounts to be qualified by the auditors nor have audit qualifications or audit highlights in regard to solvency, going concern or other key financial stability and solvency linked associated areas
   6. The directors and officers including the Chief Executive Officer to affirm by affidavit that they satisfy at present and have not over the past 10 years ever failed to satisfy the stipulations relating to being classified as “fit and proper persons” and in addition have not been associated with the promotion or operation of any failed public entity
   7. The directors and officers to certify by affidavit that full disclosure of all related party transactions and conflicts of interest positions over the past five years are detailed along with any such transactions and conflicts as are deemed likely to arise in the future as presently foreseen.
   8. The directors and officers by affidavit to agree due compliance with the following
      1.                                                                i.      That Accounts and Financial reports of the entity have been prepared from the inception of business in terms of Sri Lanka Accounting Standards and Audited in compliance with Sri Lanka Auditing Standards
      2.                                                              ii.      That special post audit reports in respect of the period one year and three years after the listing, compiled by the directors and validated by the auditors, will be tabled before members at the Annual General Meeting convened after the expiry of such period
2. Main Board
   1. None of the companies in the group to have had their last three years audited accounts to be qualified by the auditors nor have audit qualifications or audit highlights in regard to solvency, going concern or other key financial stability and solvency linked associated areas
   2. The directors and officers including the Chief Executive Officer to affirm by affidavit that they satisfy at present and have not over the past 10 years ever failed to satisfy the stipulations relating to being classified as “fit and proper persons” and in addition have not been associated with the promotion or operation of any failed public entity
   3. The directors and officers to certify by affidavit that full disclosure of all related party transactions and conflicts of interest positions over the past five years are detailed along with any such transactions and conflicts as are deemed likely to arise in the future as presently foreseen.
   4. The directors and officers by affidavit to agree due compliance with the following
      1.                                                                i.      That Accounts and Financial reports of the entity have been prepared from the inception of business in terms of Sri Lanka Accounting Standards and Audited in compliance with Sri Lanka Auditing Standards
      2.                                                              ii.      That special post audit reports in respect of the period one year and three years after the listing, compiled by the directors and validated by the auditors, will be tabled before members at the Annual General Meeting convened after the expiry of such period

 

I would be pleased to elucidate any issues requiring further clarification.

Yours Sincerely,

Chandra Jayaratne

cc

Secretary to the Treasury,

Chairman, Securities Exchange Commission,

Chairman,Colombo Stock Exchange,

Director General, Securities Exchange Commission,

Director General,Colombo Stock Exchange,

President Institute of Directors,

President,Institute of Chartered AccountantsofSri Lanka,

President, Chartered Financial Analysts Association,

President, Chartered Institute of Secretaries,

Chairman,Ceylon Chamber of Commerce,

Chairman,Colombo Stock Brokers Association,

Editors of the Financial & Business Media -For Publication