Comment - Transparency in stock market vital

Expanding its operations to the provinces, the Colombo Stock Exchange (CSE) opened its fourth regional branch in Negombo on August 2.

According to the senior officials of the CSE the regional branches contribute 15% of the business turnover of the CSE and 22,000 investors reached the market via the regional branches since 1999. The CSE set up its first branch in Matara in 1999, followed by Kandy in 2003 and Kurunegala, in 2005.

Investment in the share market is a business with high returns but with a high risk. The people who are now entering the share market normally bring the money from their savings, the only convenient and safe investment mode they had.

With the new promotional programs of the CSE these investors have got the opportunity of being the shareholders of the blue chip companies in the country. The investors are the minority shareholders of these companies.

There are various measures taken by the Securities and Exchange Commission (SEC) to minimise the risks of the investment in stocks, but more has to be done. Investors should be educated and it is the duty and responsibility of the companies and the board of directors. The SEC should ensure the dissemination of that information.

Our corporate private sector is more vigorous when they level charges against government institutions and politicians against corruption. However, the dealings of the companies, directors and auditors in respect of financial statements of some of the reputed companies are appalling.

Matters revealed at AGMs of some of the reputed companies are unbelievable. Directors at times are blamed for unethical conduct for controlling interest of purchasing shares or de-listing. The independent and minority shareholders are deprived as a result of these acts and these are serious white collar crimes.

Though the companies publish quarterly financial statements according to SEC directives, under this situation it is difficult to believe whether all information published in the statements is correct. There are allegations against directors for incorrect information such as undervaluing share prices, undervaluing assets and concealing liabilities.

Some directors mislead the investors by providing false information. We have a great deal of information on discussions at AGMs of some of the reputed companies where shareholders expressed reservations of the accuracy of the financial statements presented by the Directors.

Recently at the AGM of a reputed company, shareholders stressed the need for the directors to act with more responsibility citing the deteriorating performance of the company and very poor dividends paid. Surprisingly, the chairman of the company and half of the directors were not present at the AGM.

Shareholders called upon the board to convey their disapproval to the chairman for his failure to attend the only meeting where the shareholders could meet him and seek clarifications on certain important matters.

The company in question had incurred a loss of Rs. 300 million by investing in shares. The directors report reported this massive loss under the post balance sheet event and shareholders reprimanded the auditors for their negligence.

The shareholders also pointed out the misleading information in the annual report. The Annual Report said the profit attributable to the shareholders was increased but actually it had declined.

The other serious matters raised by the shareholders were about some fires in some factories (they called them "lucky" fires), not revealing the current market values of the real estates shown in the annual report and huge differences in book values of such assets, purchase of properties at twice the market price, suppressing details of overseas owners of the majority of the company's share.

In another reputed plantation company, shareholders had questioned the payment of Rs. 100 million as management fees, writing off shareholders funds. Another company on the verge of de-listing had undervalued over Rs.2 billion worth land and buildings in Colombo and land and factories in the main Industrial Park at Rs. 17 million in the financial statement.

Another reputed company had paid hundreds of million rupees as management fees to a company for five years in advance.

Stock market analysts say that the wide fluctuation of share prices within a year or six months is also a result of inside information. Inside information of companies is released by errant directors to interested parties. Market manipulation takes place coupled with lack of information to the ordinary shareholders.

Surprisingly these annual reports are audited by reputed audit firms and certified that the information is true and fair. According to this evidence the investors, especially the ordinary people now being attracted to invest in stocks have to be more vigilant.

The general information provided by the directors and audited by reputed auditors is at times not correct. They are deprived because affluent shareholders have inside information and tend to manipulate the market.

However, this practice is taking place in the business world. An AP report published last week said that conflicts of interest are still rampant on the Wall Street. A new study has revealed that nearly two-third of investment firm analysts received favours from executives of companies they cover and suggest that the companies get favourable ratings in return.

The dealings of our corporate private sector are no second to the massive corruption of some of our politicians as revealed in the recent COPE report and Auditor General's report. It is the responsibility of all stakeholders to ensure the dissemination of accurate information related to the companies.

The transparency of the activities of the companies is vital if more and more ordinary citizens are to enter the stock market business.