The scandalous share transaction between the National Savings Bank (NSB) and The Finance Company PLC (TFC) took a new turn last week, with United National Party Member of Parliament Dr. Harsha de Silva highlighting other questionable stock market activities involving the Employees’ Provident Fund (EPF). Ceylon Grain Elevators PLC, Laugfs Gas PLC and Galadari Hotels (Lanka) PLC are similar fraudulent transactions already identified and scheduled to come out at the next sitting day in Parliament.
“The Opposition caught the thieves with the loot in the trunk, but the Government failed to take effective measures to cancel the NSB–TFC transaction immediately after the trading day. We will continue to expose their other fraudulent transactions by moving a motion on EPF, which is the single largest entity investing at the Colombo Stock Exchange,” Dr. Harsha de Silva said.
The EPF was established under Act No. 15 of 1958 and is currently the largest Social Security Scheme in Sri Lanka. With a current asset base of over Rs. 899.6 billion, the EPF is identified as “a little peace of mind” by the Government for the employees of institutions and establishments in the private sector, some of the state owned corporations and statutory boards.
As a long term retirement benefit scheme, the investment policy of the EPF is focused on providing a long term positive real rate of return to the members while safeguarding the value of the Fund and maintaining sufficient liquidity. Hence a major portion of funds is placed with Government securities while the balance is invested in fundamentally sound listed and unlisted equities and high credit worthy corporate debt instruments, according to its website.
According to recent reports, in 2010 the book value of the total investment portfolio of EPF has increased by 17.5 per cent to Rs. 867.1 billion from Rs. 738.1 billion in 2009. In 2010, the major portion of the funds were invested in government securities (94.1 percent) while 5 percent was invested in listed and unlisted equities and 0.7 percent was placed in corporate debt securities. The balance 0.2 percent was invested in Reverse-Repos on government securities to maintain liquidity of the Fund. In the preceding year, investments in government securities and other public/private sector securities were 97.1 percent and 2.9 percent, respectively. During the year under review, the investment portfolio was diversified further by increasing the equity portfolio from Rs. 9.8 billion in 2009 to Rs. 43.6 billion in 2010.
“EPF money can be invested only in the bluechips and not in any ordinary stock. Based on our findings it is clearly visible that public funds were misappropriated by Bank of Ceylon and Peoples Bank as well, and not just the EPF,” he said.
Moving the adjournment motion he stated that all deposits and interest earned thereon of NSB is fully guaranteed by the Government of Sri Lanka as a charge on the Consolidated Fund as expressed explicitly in the statute governing the bank: NSB Act No. 30 of 1971. It is therefore imperative that the NSB is extra cautious in its investments to ensure that the funds of its Rs. 16.7 million deposit accounts are safeguarded.
“Thus, a transaction on 27th April 2012, where NSB had purchased close to Rs. 8 million shares of the loss-making and high risk TFC at a price of approximately 65 percent above the established market price at the Colombo Stock Exchange raised immediate alarm bells. The fact that it was later revealed that proper procedure was not followed in the decision to purchase the said shares at such an inflated price and the fact that the sellers, buyers and brokers were all connected in one way or another, triggered massive protests from various parties including depositors.
“With confidence in the NSB falling and depositors beginning to withdraw deposits from the bank, the unprecedented decision by the NSB to unilaterally cancel the CSE transaction on the directive of the Secretary to the Treasury created a new crisis of confidence in the financial markets. Ironically, the NSB is now attempting to shift public attention from the allegedly corrupt transaction to taking credit for having stopped the same,” added Dr. De Silva.
Article 148 of the Constitution gives Parliament full control of public finances. Given the unique Act under which the NSB was established the said transaction and the fallout of the same becomes directly relevant to the Parliament. As a result the UNP has publicly urged that the Board of Directors of the NSB be removed immediately and the “fit-and-proper” criteria of the entire Board of Directors of TFC re-examined to assess whether they should remain as Directors while demanding all persons found guilty of this transaction be punished by law based on the alleged frauds committed by them individually and collectively. However having noticed that none of the above are being implemented, the UNP submitted the following questions to the Minister of Finance last week in Parliament.
Why was the transaction wherein the NSB purchased almost Rs. 8 million shares of loss-making TFC on or around 27th April, 2012 stopped?
Why was the Board of Directors of the NSB not removed for having committed the allegedly fraudulent transaction? What is the justification for these individuals to remain on the Board given the clear criteria for the assessment of being “fit and proper” to serve on a Board of a financial institution? Will he table the applications filed with the Central Bank and the Central Bank’s assessment of “fit-and-proper” criteria of each Director of TFC and justify on what basis no member of the Board has been removed on reassessment of the said “fit-and-proper” criteria?
What action has the Securities and Exchange Commission taken on the various parties involved in this transaction and what action is it proposing to take on those found guilty of the alleged securities fraud in the sale of TFC shares to the NSB at almost a 65 percent premium. What action is he proposing to rebuild the lost confidence in the nation’s premier savings bank?” NSB was established amalgamating four savings institutions one of which was Ceylon Savings Bank that commenced mobilization of savings in Sri Lanka in 1832, just two decades after a Scottish local Parish Minister called Dr. Henry Duncan started the world’s first savings movement in 1810 in Scotland. With that beginning, NSB won the public trust and came a long way to lead the country’s rupee savings market with a market share of 20.2 percent. Currently it has 16.7 million accounts against 20 million people in Sri Lanka.