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FINANCIAL CHRONICLE™ » EXPERT CHRONICLE™ » Dominating shareholders influence not healthy for Sri Lankan Banks

Dominating shareholders influence not healthy for Sri Lankan Banks

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Sstar

Sstar
Vice President - Equity Analytics
Vice President - Equity Analytics
Dominating shareholders influence not healthy for Sri Lankan Banks 110

“A company dances to the will of dominant shareholders shows nothing but the tragic fate of everyone concerned with the company including the majority shareholders themselves”

The shareholder regime that exists in Sri Lankaas in most of the other developing countries is known as controlling shareholder regime, where a large block-holder controls the corporation by owning a majority of shares. According to the majority rule which laid down in the caseFoss v Harbottle the decision of the majority shareholders will prevail over minority shareholders and the minority shareholders are required to accept the decisions made by the majority shareholders.

ikewise most of the banks are dominated by an individual person, family members, relatives or separate corporate entities belonging to the same individual. Usually in Sri Lanka 80-20 rule of ownership applies with regard to the banks where the 80% of the shares are held by 20% of the shareholders and the remaining 20% of the shares are held by 80% of the shareholders. Further the majority shareholders may form different companies both regulated and unregulated under their direct or indirect ownership to make a control pyramid to confer power over the bank.
This regime is on hand beneficial. The concentrated ownership is beneficial for corporate valuation, because large shareholders are better at monitoring managers (Jensen and Meckling). Notwithstanding the benefits this model may adversely affect the interests of other stakeholders, the corporation and the economy as a whole as there is the tendency of dominant shareholder abusing his dominant position.
Usually in Sri Lanka where the Boards of Directors are also consistedof close alliances of the dominating shareholdersit acts not in the interest of the company, but in their own individual interests which will be detrimental to all other stakeholders of the bank.
In these two banks board meetings, annual reports, and other corporate governance mechanismsdid not serve its intended purposes rather they had been ceremonial and a marketing mechanism. Therefore eventhough Sri Lanka has necessary laws to control the conduct of the directors and make them accountable to the shareholders they are being crippled in the traditional ownership context in Sri Lanka.
B. The weak role of the minority shareholders

'Get up, stand up, stand up for your rights. Get up, stand up, Don't give up the fight’.
-Bob Marley


The second basic reason for the failures in the corporate governance in Sri Lanka is the poor role played by the minority shareholders. Even though they are provided with the mechanisms to protect their rights they are reluctant to resort to such mechanisms. One of the basic reasons behind this is the higher legal costs that a plaintiff will have to bear in the Sri Lankan legal context. The second reason is the lack of faith on the part of minority shareholders on the judicial system in Sri Lanka which was exceedingly under the influence of the executive in recent past.

Due to these reasons there is no proper implementation of the existing minority shareholder protection mechanisms and where there is no implementation the laws are of no value.

“When the director board consists of family members the company affairs become family affairs’
In the controlling shareholder regimes the majority shareholders may take various steps to retain the power within them. One of the basic methods of achieving this purpose is forming a board of directors consisted with family members and friends. The examination of the annual reports of the banks disclosed that approximately 80% of the banks are controlled by the family members. The chairman, CEO and the members of the board usually belong to the same family and the Chairman and CEO positions were generally held by the same individual regardless of the existing laws and regulations.
Further there is a huge gap between the annual and corporate governance reports of the bank and the reality. The inspection of these reports revealed that the corporate ownership structure is not properly revealed in the reports. There are many in-law relationships, friendships and other alliances between and among the majority shareholders and directors (including non- executive directors) which are unknown to the shareholders or public and which cannot be traced from the annual or corporate governance reports of the banks

In summary the political influences and family affairs continue to affect the corporate governance legal structure in Sri Lanka relating to banks which is particularly supported and strengthened by the ignorance or unwillingness on the part of other stakeholders to compel the banks to comply with the laws and regulations.

Empowering Minority Shareholders.
The excessive powers held by the majority shareholders shall be controlled, checked and balanced in such a manner that they will not be able to abuse their dominant position. Minority shareholders shall be made aware and encouraged to resort to minority shareholder protection mechanisms conferred by the law.

http://www.kdu.ac.lk/proceedings/irc2015/2015/law-012.pdf

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Dammika Perera is trying to Control PABC and Sampath Bank
Harry Jayawardena is trying to control HNB and DFCC
John Keells trying to control Nation Trust Bank
Ishara Nanayakkara is trying to control Seylan Bank

All of them are violating Central Bank regulations for maximum shareholding's of 15% .
Why Central Bank is silent?

Dominating shareholders influence not healthy for Sri Lankan Banks 26b48b10

Dominating shareholders influence not healthy for Sri Lankan Banks 963dcc10
Dominating shareholders influence not healthy for Sri Lankan Banks D854b110
Dominating shareholders influence not healthy for Sri Lankan Banks 9556eb10

Dominating shareholders influence not healthy for Sri Lankan Banks 52a25a10
Dominating shareholders influence not healthy for Sri Lankan Banks C9876410
Dominating shareholders influence not healthy for Sri Lankan Banks 8da29010

Dominating shareholders influence not healthy for Sri Lankan Banks 3f50f210

Dominating shareholders influence not healthy for Sri Lankan Banks Cda03810

@ChooBoy wrote:

Dominating shareholders influence not healthy for Sri Lankan Banks Cda03810

The Union Bank of Colombo PLC board of directors obtained approval from the Central Bank of Sri Lanka for Cultural Financial Holdings Ltd. to acquire 75% of shares from Union Bank of Colombo PLC and reduce it to 15% in 15 years thereafter.

Dhammika Perera’s influence in two banks revealed

Details of influence still wielding by Dhammika Perera ,the quintessential strategist and business specialist in Sri Lanka on Pan Asia and Sampath Banks even after his stepping down from directorship of these banks have been revealed.

https://srilankamirror.com/news/4017-dhammika-perera-s-influence-in-two-banks-revealed



@ChooBoy wrote:Dammika Perera is trying to Control PABC and Sampath Bank
Harry Jayawardena is trying to control HNB and DFCC
John Keells trying to control Nation Trust Bank
Ishara Nanayakkara is trying to control Seylan Bank

All of them are violating Central Bank regulations for maximum shareholding's of 15% .
Why Central Bank is silent?

Dominating shareholders influence not healthy for Sri Lankan Banks 26b48b10

As per the new directive, the new maximum percentage of ownership of shares is 15% for any shareholder referred to in Sections 12(1C) and 46(1) (d).

The limit is 20% for Multilateral Fin-ancial Organisations (MFOs) such as the World Bank, International Finance Corporation (IFC), Asian Development Bank (ADB) and any other similar institutions as approved by the Monetary Board of the Central Bank of Sri Lanka. The 20% expansion is subject to the condition that the material interest so acquired have to be reduced to 15% within a period of 10 years from the date of stipulation. The move follows the Monetary Board having considered the benefits to the banking system through the investments by multilateral financial organisations in the shareholding of licensed commercial banks.

This specific move on MFO will facilitate the recent $ 50 million investment by IFC funds in Commercial Bank via a private placement for a 15.2% stake.Maximum shareholding in several banks vary. Among major commercial banks, such as COMB and HNB the maximum shareholding previously allowed was 10%. However at HNB, business tycoon Harry Jayawardena directly owns 18%, but was restricted to 10%.

At Sampath Bank, business leader Dhammika Perera-controlled Vallibel One holds 14.95% and Seylan Bank, the Sri Lanka Insurance holds 15%. At DFCC Bank, HNB owns 15% stake whilst at Nations Trust Bank, John Keells Holdings Group owns nearly 30%. At Pan Asia Bank, Dhammika Perera again owns near 30%.

http://www.ft.lk/front-page/CB-relaxes-limits-on-maximum-ownership-in-banks/44-705823

I believe 15% stake is just the direct ownership. They are and could be owning more than that with indirect ownership by acquiring shares through other organizations which they have a controlling stake. It has always been the case. Smile Smile Smile

Corporate Governance is also increasingly acknowledged as being an important instrument to address “ownership issues” as well. With the current practices that are available worldwide which can hide the identities of true owners, it is now almost impossible for regulators to only rely on ownership limits to deal with undue influence, or be assured that seemingly unrelated parties are not actually related! Consequently, markets are increasingly looking towards the application of good Corporate Governance practice to overcome any ill-effects that may arise out of ownership concentration and it is generally believed that if good governance is in place, concentrated ownership, known or unknown, may not adversely affect the risk management process of the institution. In the case of banks especially, regulatory limits on ownership in banks are prescribed in a number of countries to prevent banks from being controlled by a single owner or a group of connected owners. However, a majority of countries in the world still do not have such regulations. In fact, according to a World Bank survey of 157 countries in 2003, 112 did not have regulations on ownership limits. Nevertheless, in many countries, indirect regulations such as limits on related-party transactions and fit and proper tests for bank directors and executive officers are in place to promote this aspect of good Corporate Governance, and I think, regulators genuinely believe that such practices would increasingly ensure the better risk management of banks, thereby leading to a more sound system.

Case for trial by a jury of investors.

@dayandacool wrote:I believe 15% stake is just the direct ownership. They are and could be owning more than that with indirect ownership by acquiring shares through other organizations which they have a controlling stake. It has always been the case. Smile Smile Smile

This is always the case pal!!!

CHRONICLE™ and dayandacool like this post

Central Bank should clarify regarding 15% rule.
If they wish they could make it 30% .. no issue but all shareholders should be given the same right,

Dinesh steps down as HNB Chairman, Cabral appointed Acting Chairman.

Top professional Dinesh Weerakkody yesterday stepped down as Chairman of Hatton National Bank PLC whilst Dr. Harsha Cabral PC was made Acting Chairman.

Weerakkody who was due to retire from his office as a Director had notified HNB that he was not offering himself for re-election. The move by Weerakkody, who steered the HNB in a professional manner, was due to personal reasons. He was appointed as HNB Chairman in May 2018 after he joined as an Independent, Non-Executive Director in June 2017.

HNB’s single largest private shareholder is business tycoon Harry Jayawardena whilst funds/institutions owned or influenced by the state control 27% stake.

Previously Weerakkody served as Chairman of Commercial Bank Plc and was a Director on the Board of DFCC Bank.

http://www.ft.lk/front-page/Dinesh-steps-down-as-HNB-Chairman-Cabral-appointed-Acting-Chairman/44-715645?fbclid=IwAR3VeoEDfRPL7aEf81sZrIA6-6a8H69TpFvfF6hW7PbmdIO0WftgVC0k1u8

Professionals are leaving. Sad..

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