* CB uses S&P clarification to justify EPF investment in banking stocks
* S&P maintains exposure to conflict of interest very much there
The Central Bank EPF Department yesterday issued a public statement using a quotation from a Standard and Poor’s clarification to justify its stance on using the EPF to invest in banking sector stocks, but omitted sentences in the very same paragraph quoted by it which raised concerns.
"The Employees’ Provident Fund (EPF) welcomes the clarification made by Standard and Poor’s (S&P) that there was ‘no information of any specific incidences occurring’ of ‘a potential conflict of interest’ due to the Central Bank’s oversight of the EPF which is ‘a large investor in Sri Lankan banking stocks’," the Central Bank statement said, choosing to omit certain key sentences in the same paragraph quoted by it. "In the clarification, S&P has also stated that they ‘expect the central bank to have mechanisms to limit this risk’," the bank statement said.
However, S&P in its clarification still notes that the Central Bank is exposed to potential conflict of interest.
"The monetary board of the Central Bank of Sri Lanka oversees EPF investments as well as policy formulation and supervision of banks. The EPF is also a large investor in Sri Lankan banking stocks. For these reasons, we think the central bank is exposed to a potential conflict of interest, although we have no information of any specific incidences occurring," S&P said.
"We expect the central bank to have mechanisms to limit this risk. However, in our globally consistent assessment, we assess systems without such potential conflicts of interest as relatively less risky than those with," the ratings agency said, (see Page 4 for the S&P clarification).
The Central Bank statement said: "In this connection, the EPF wishes to re-affirm that the Central Bank has the required mechanisms to limit any risk referred to, particularly because the EPF functions independently of the Bank Supervision Department, Public Debt Department, and other departments of the Central Bank, with the required firewalls having been established for such purpose.
"These firewalls are particularly effective, since in terms of Section 45(1) of the Monetary Law Act, No. 58 of 1949, every officer and servant of the Central Bank is legally bound to preserve and aid in preserving secrecy with regard to all matters in performing their duties.
"Consequently, in its investment decision making process, the EPF does not enjoy any advantage with privileged information from the Bank Supervision Department or any other Department, and only accesses publicly available information and research, which other investors too access. Hence, no conflict of interest or unfair practice arises in the EPF’s investment process.
"Further, in terms of Section 5(1)(e) of the EPF Act, the Monetary Board is empowered to invest the moneys of the Fund in such securities as it considers fit, and sell such securities as well. Hence, the EPF has clear authority to invest in the share market, including the banking and finance sector. In this regard, the EPF also wishes to state that it would be highly prejudicial to the EPF members, if the EPF, as the country’s biggest Fund, were to refrain from investing in the best performing sector in the Colombo Stock Exchange, namely, the banking and finance sector," the Central Bank said.
The EPF has also invested in listed companies sustaining heavy losses, such as The Finance Company.