Govt. committee to probe BOC-Seylan transaction
The state- owned Bank of Ceylon’s (BOC) controversial sale of a 7.5 per cent stake in the private Seylan Bank and its subsequent reversal according to many in the capital market reeks of unpleasantness and suspicion.
A government committee is being appointed to examine the circumstances by which this happened, but not without a heap of questions by the industry on what actually went down with fingers being pointed at various parties.
The December 16 transaction at the Colombo Stock Exchange ( CSE) was reversed on Tuesday by the bourse amidst concerns by the industry on state intervention in the capital market and the BOC board holding an emergency meeting on Monday to discuss the matter. It is learnt that some directors have expressed displeasure on undue intervention on this matter by state authorities.
Minister of Public Enterprises, Kabir Hashim was upset that he had been made aware of this transaction only through the newspapers. “I am the line minister in charge of the state banks. The BOC should have contacted my Ministry’s Secretary before this transaction happened,” he told the Business Times.
Who calls the shots?
According to the new and confusing structure of the present bureaucracy and protocol, the Treasury under the Ministry of Finance has ownership of the banks. It’s the appointing authority and the appointment/ removal of the director boards in these banks is done by the Treasury Secretary, according to the Minister. “My ministry oversees the state banks, makes decisions pertaining to staff, their leave approvals, day to day operations, their funding, etc,” Mr. Hashim said unraveling the confusion.
So, who should the BOC contact pertaining to the Seylan transaction if the Treasury is in charge and his Ministry oversees the state banks? “They should have contacted my Ministry Secretary,” he stressed.
Explaining the background as to why pre- authorisation was needed to carry out this transaction, he said one year ago a circular was sent to all state- owned enterprises (SOEs) under the Ministry of Public Enterprises specifically stating that any transaction of any significant proportion requires ministry approval. “This circular is crystal clear. All SOEs including the BOC was sent this circular.” The reason behind not selling holdings in banks happened like this.
The Treasury has been requesting SOEs under the Ministry of Public Enterprises for higher dividends, Mr. Hashim explained. “The Sri Lanka Insurance Corporation ( SLIC) told me that they have paid maximum dividends to the Treasury, but if the Treasury wants more that SLIC can divest their shares in other entities. They also suggested divesting their holdings in banks.” As a member of the Cabinet Committee on Economics Management ( CCEM), Mr. Hashim had presented SLIC’s proposal at CCEM’s weekly meeting with the Prime Minister (PM) Ranil Wickremesinghe some three months ago and at the time the PM had advised the CCEM that as a policy decision the government won’t sell any stakes in banks.
Mr. Hashim reiterated that the BOC was aware that SLIC was keen to sell similar holdings as that of their Seylan stake. "Also I specifically told them (BOC) of the PM's decision and that he had informed of the policy decision by the government to not dispose stakes in banks. The same principle as that of SLIC applies to BOC. Why couldn’t they adhere to the direction?”
He reiterated that the Ministry won’t tell BOC or any other under their purview what to do and not to or try to micro manage these institutions. “But they need to inform us, because the policy decision was clearly communicated to BOC.”
BOC’s Mireka asset
In a new turn of events, Mr. Hashim noted that three days prior to the Seylan transaction, the BOC wrote to his Ministry seeking approval to sell its land in Mireka Capital Holding owning Havelock City. “This was a less ‘significant’ transaction when compared to Seylan. In this case the BOC writing to us on a less significant transaction shows that they ‘clearly’ understood that a circular was in existence under the Ministry of Public Enterprises which stated that any transaction of any significant proportion needs the Ministry’s nod.”
The Ministry of Public Enterprises Development will appoint a 4- member committee to find out what went wrong and take necessary action, Mr. Hashim added. “The PM has asked me to carry out a comprehensive investigation.” The Ministry has asked the BOC board to submit all reports regarding the decision taken by them on Seylan.
The government has also initiated an investigation through the Criminal Investigation Department ( CID), Mr. Hashim said as this transaction was illegal. “It has flouted the Ministry of Public Enterprises’ direction. Therefore it’s illegal. That’s why we informed the police. We did a lot of damage control.” He said that there’s been a consensus to neutralise this transaction. “Had we opted for litigation, it would have impacted the capital market badly. The government acted within its right.”
How it happened
According to informed sources, the BOC board along with some senior management had met at a beach hotel in Wadduwa (it isn't clear whether it was for a training programme or an outing) where this sale was discussed. Minister Hashim said that when he checked, there was no board resolution of this sale. "It was 'mentioned' at a board meeting a few months ago. The due process in terms of the BOC’s Head of Investment Department informing the Ministry wasn’t done.”
According to BOC’s Annual Report, the mandate of the Investment Committee, headed by Deputy General Manager Treasury comprise General Manager, Chief Financial Officer and Chief Risk Officer among others, is to assist the BOC directors in discharging its statutory duties and its oversight responsibilities in relation to investment activities of the bank, excluding investments in equity of subsidiaries and government securities.
The Seylan Bank stake acquired in 2009 is shown in the BOC Annual Report as ' financial investments available for sale'. When interjected that such consent wasn’t required and the BOC board was aware that the bank's Investment Committee would decide to divest if the price was attractive, Mr. Hashim stressed that the said circular precedes all such statements.
The PM met with the CSE top brass last Monday and told them of the government's intention to revoke this sale to a Japanese buyer based in Singapore (who some believe could be a front for a local business). Authorities have made it clear that in order to facilitate industry consolidation, the government won’t dilute state holdings in banks.
He told them that there’s a circular which prohibits any state asset or part of it being sold and that the government wants to reverse the transaction because it is illegal. The sale of 13 million shares of Seylan was done at Rs. 100 above the market rate of Rs. 85 and a 7.5 per cent was traded.
CSE CEO Rajeeva Bandaranaike confirmed that after receiving a request from the broker, JB Securities who handled the deal for both parties, to reverse the transaction, the CSE did this on Tuesday.
The stock market has reversed one transaction before this in 2012 due to an alleged corrupt deal when NSB bought into The Finance PLC after harsh criticism by the UNP which was in the opposition then.
Asked if the decision to reverse the share transaction would have a negative impact on the already lackluster stock exchange, Mr. Hashim agreed that this is the precise reason why what BOC has done is so serious. "Had this transaction not been retracted it would've have been better but the Seylan stake owned by the BOC is a strategic stake for the government and to sell it wasn't legal." “That’s why we informed police. We have done a lot of damage control.”
Making connections
It’s interesting that there appears to be a connection between this transaction and the recent budget proposal which seeks to alter the minimum shareholdings in banks. It was speculated by the industry that the buyer could be a front for a local party and this may have raised antennas in state shareholders owning stakes in banks. They added that the move to reverse the deal may have been to thwart any attempt at gaining control in Seylan.
It’s reliably learnt that through this new budget proposal, the commercial banks' single shareholder limit will be relaxed up to 20 per cent with special Monetary Board approval. A Treasury official told the Business Times that this limit is likely to be changed so that a maximum of two shareholders can hold 20 per cent each in a commercial bank. Now with special approval, a single shareholder can own 15 per cent and any number can hold this amount.
This proposal to revisit single shareholder limit in commercial banks has raised alarm as to whether powerful groups will return to raid commercial banks as was seen less than a decade ago. "To increase single shareholder limits in commercial banks isn't good corporate governance. The present limits on commercial bank holdings have improved corporate governance when compared with the past," an analyst said. The biggest non- state shareholders are Browns group and LOLC group who collectively control 23.4 per cent stake with BOC as the sixth largest shareholder of Seylan Bank. SLIC holds a 15 per cent stake, while other state entities among the shareholders are EPF (9.86 per cent) and ETF (1.8 per cent). NDB also holds 8.72 per cent.
He added that the BOC – Seylan deal should have been transparent. “It should’ve been ‘ open’ like the time Hotels Corporation was bid. If it was done in an open market, the Seylan stake would’ve fetched a better price.”
If the government has decided not to dilute state shareholding in banks, they can lock these shares in the Central Depository System ( CDS), according to CSE rules.
“Then when there’s a call for such a transaction, the CSE will always refer to the lock in direction,” a senior stockbroker told the Business Times. Mr. Hashim dismissed this saying that they don’t need to go to that extent. “I wish we can place confidence and trust in those who run our institutions.”