The case for the minority shareholder

 

 

Mr. K.C.Vignarajah interviewed by Mr.Faraz Shauketaly on TV 1- Hot Seat 25 May 2016

Mr.K.C.Vignarajah

 

Faraz: In the Hot Seat today we have got a person described as a serial investor in the Colombo Stock Exchange(CSE) and a person who has spent a long time calling for greater accountability, transparency to ensure that a solid mechanism is in place. To share some thoughts is Mr.K.C. Vignarajah, serial investor.

 

Thank You for being on Hot Seat Mr K.C.Vignarajah

Vigna: Thank You for having me here.

Q: People Say, Some corporates say, you are a real pain and how would you respond to that?

A: Well, many good corporates are happy with the work Iam doing because it cleans up, or tries to clean up the image of the good corporate sector. Few of the mafia oriented corporates are spreading a lot of stories about me, which are false, and it does not matter to me. The fundamental importance is the work I do to improve the image of the stock market, country and the enterprise sector. The enterprise sector is absolutely important for our country at this particular moment of time. It was important for a long time but at this particular moment there should be a paradigm shift to good corporate governance, transparency and accountability.

Q: As the war was coming to an end, the All Share Index was around 1,500 and soon after the end of the war it surged dramatically to 7,800. (from 5,000 to 7,000). In between we had all other jolly games which we will discuss in a minute like pumping and dumping and so on. Today the share market hovers in and around 6,000. Is it the right level now?

A: Not really. Soon after the war ended there were tremendous opportunities and it is natural that it should go up to a certain level. The problem was that many people took unfair advantage of insider knowledge, ‘pump and dump’, malpractices, manipulating all sorts of stock movement, exchange and interest rates movements - they are interlinked, inextricably interlinked! There was a lot of connivance between a group of investors, Mafia we call them, and some sections of the government and authorities. That was one of the reasons.

In fact, I predicted at one stage in a seminar where Securities and Exchange Commission (SEC), CSE and the investors were present that if they bring about good governance, transparency and accountability that it would hit 7,500. It exactly did that. I predicted when it was about 6,000. Then I said that it will hit 10,000; but rigid governance rules and enforcement of them by the SEC must be there. CSE as the intermediary played a big part or no part. This is the problem. In some areas they help the wrongdoers and in others they just keep quiet when they had to punish the wrongdoers. SEC took a back seat. There were two Chairpersons, Mrs. Indrani Sugathadasa and Mr. Tilak Karunaratna who were eased out or forced out, and at that time I objected. I wrote to the President and the Secretary and it was published in all the newspapers. Somehow the forces that were hidden, forces that were inimical to this won. Again there was pump and dump and all that corruption. So we all wanted a change in government, and after that change we hoped that practices would change. The change is far too slow, and I wonder whether the people who should act are able to act.

Q: In the last 10 years during Rajapaksa administration they say there was a real fear psychosis. In that context how easy or difficult was it for public officials to remain independent and not fall prey to political pressures. Former chairman SEC is in trouble over some matter involving the granting of Rs 5 mln to a political organisation headed by the former President. (Then the) President’s son. What do you think would have happened to him if he didn’t play ball with young Namal’s request? What would have happened?

A: I am not much into politics but at the same time I would say that fear psychosis was there and there’s no doubt about it. Officials were also reluctant to do their job. That was one of the factors, but saving grace is that there were some officials at least who would decline and not comply. They would move away. That is where principles matter. It was very important and the ultimate result the people also felt that they should move out, this type of authoritarianism; so the government was moved out, and replaced!

Q: Why would a stock rise so rapidly? As an investor you should know.

A: It could rise on fundamentals, on expectations of good macro economic fundamentals; as I said if the rupee is competitive, the interest rates are low and all the other factors which are good for exports manufacturing, added value services, tourism etc. If those policies are implemented by the authorities who are in charge of the Central Bank, Treasury, Enterprise Development or whatever and if the people believe the corporates are behaving correctly, then of course those stocks would rise. But then in the context of what has been happening, the mafia had control of most of these functions and they’ve had insider information as well; so if they expect certain fluctuations in the currency or interest rates or taxes, they would move massive funds. Many of them had investments in investment companies, Unit Trusts, debentures and, bond markets, bills, everything. They were into everything so that they could push and pull whenever, whatever and where ever they want.

Q: Shares were propped up artificially. We had an instance where the share of a stock broking firm I think was higher than a bank and it seemed odd. Is circular trading fundamentally wrong?

A: It is not only wrong, it is illegal. It is a crime by decent society. I try to represent the Average Decent Citizen (ADC). They have a right to see the funds are protected, there is sufficient growth to beat the inflation. These are the minimum expectations of a normal investor. Stock market has been trying to attract rural investors and I asked the regulators "are you giving them sufficient protection? Are you taking them for a ride? Are you letting other people take them for a ride?"

When some people asked me to follow this and that procedure, I said I can, but I am also trying to see what would be the position of the average man be, the goviya from Bintenna? We are trying to get his funds. All these brokers at one time went out and told them to invest. What was the protection that we offered them? They said that they should have applied at such a such a time. I said did you make all these things known to them? Then they said you can get them to invest in Unit Trusts.

Unit Trusts again have been manipulated by a group of people. They are into ‘investment companies’, not one but two three or many and have links with every aspect of it. Then the manipulation was easy. In fact they had nominees even at banks. There are honourable people also, but at the same time they keep quiet; that is the problem!

 

Q: You can do great damage by doing nothing?

A: Exactly! You see people trust you as "Independent Directors". The Independent Directors, Auditors have been appointed by the controlling interest and related parties(CI&RP) or the mafia.

Q: Isn’t it shameful when listed Corporates hire reputations in short. Hire people whose reputations which are perceived to be whiter than white. They hire them to be on the boards to lend credibility. How ethical is that?

A: It is totally unethical and not only that they expect them to be mere rubber stamps. But there are also good corporates. They declare good dividends. A good dividend payout, maintaining a good public float etc. that is absolutely important for the marketability. If you have shares in the market it should be marketable, it must be transparent.

Q: Are there rules in place to ensure that an X (certain) percentage of shares of a company must be in the market?

A: I had been fighting for a long time that a minimum public float of 30 percent should be there to ensure marketability.

Q:What’s the amount now?

A: Well they manipulated to bring it down to 20% and there is a talk of increasing it to 25%. Even with 20% they provided a lot of loopholes and escape routes. Now this was public policy announced after a lot of discussion in 2010. At that time, after protests by mafia, they created a loophole saying within such and such period you can de-list. Delisting again is depriving a market for the independent shareholders. Delisting profitable companies which have tremendous potential is a crime. The controlling interest does understand and they are in charge of all the information which the shareholders don’t have. They see the potential and all the studies and they will corner these shares and say we will de-list! This is the worst crime. It is a white collar crime of the highest magnitude. In fact I termed it earlier, when one regime fought the so called armed terrorism, that the economic terrorism of these guys who were with the regime were far greater. They did greater damage. They took all the borrowed funds and siphoned them abroad through various mechanisms.

Q: Would it be fair to call them traitors?

A: Absolutely! Absolutely! It is mentioned that ‘patriotism’ sometimes is the ultimate resort or refuge of the scoundrel. They, in real sense, are absolute traitors to the country, its image and its decent people. Lifestyle and standards of the decent people should have been much higher. We should have been like Singapore if not for these. What is the difference? In Singapore the Prime Minister Lee Kuan Yew had three short versions. "Zero corruption; meritocracy- no discrimination whatsoever; pragmatism - what does it matter if the cat is black or white as long as it catches mice?" Simple fundamentals of good governance that is jettisoned by all our crooks bringing jargons and slogans!.

Now say for instance ‘derivatives’. They want to enter into various products. The CSE only dazzles the other people and the poor masses are misled. Warren Buffet once called derivatives WMD (Weapons of Mass Destruction) and these fellows go out to promote bringing this product and that product. First do the existing products well. Then you will find that the market will take off on its own.

Q: What is the lot of the minority shareholder these days. Is there any rules to protect them?

A: There is no one protecting them, unfortunately. There should be the regulators doing that. There has been some movement recently. I had written to SEC Chairman Tilak Karunaratna and he has responded. At one stage it was said that it was left to the decision of the majority. I argued, then what’s the protection?

There was once a seminar by The Institute of Chartered Accountants, CFA and CSE. We had a 12-page document within a glossy cover. I pointed out many errors. Ultimately they said that what was in it was erroneous and should be ignored. I was given little time. It was difficult from the audience. They didn’t have anyone on the panel who would truly represent the Independent Minority Shareholder and ultimately the conclusion was,"you have the right to go to court". Can you expect the small investor to go to court?

SEC has quasi judicial powers. If you are having an inquiry, you must have, like in a police station, the complainant and the accused face to face. They have never done that. They listen to one story and do nothing; of course now they have, at least in my case, they wrote, which is good. At one stage someone wrote to them that my remarks were defamatory. Ha, ha, I wrote back saying ‘what is the fame they have that I defamed?’ Fame of shrinking the public float or not declaring dividends; or creating ‘shareholder fatigue’, attempting to de-list very good companies; transfer asset at very low values? Now they have easy use the resources of the company, of the shareholders, to litigate.

Q: Capital market is an essential tool in the forward march of the country. Companies go for public listing and raise money but have not done anything. What laws are in place to prevent it? Why does it exist? Instead return the money or pay the market rate of interest for the money.

A: I am happy that you raised it and the knowledge that you have. I am amazed that people in authority who should have this attitude don’t have it.

I disagree with the alternative you gave. Give back the money with the market interest rate. Many people(controlling interest and related parties) would be happy to do it because the potential of the project is enormous, that paying them interest rate would be defeating the purpose of the investors’ original investment. The investor takes a risk to get much better rates than the interest, inflation, currency depreciation etc.

A world renowned authority on valuation of shares, properties on transfers said that it is usually worth 4-5 times the value the transaction that took place. It was a Harvard review. Prof Dr. Mervyn King said here at a seminar.

Value of what? Value at which these transfers had taken place!

One time a public listed company circulated an offer after consideration by the board etc by a so called independent advisor, but obviously an associate, at some 40 odd rupees. I looked at it (waited for all this to happen) and when they were probably about to accept I made an offer which was more than double the offered price for Rs 83. Then they quickly had offers for Rs 91 and 95 from others and said that they are not doing this transaction! What did it mean? If they didn’t want to take my offer they should have taken one of the others. Then the share price dropped to Rs 30 and now it has gone up a bit due to all these issues raised by me.

You rightly said that if it was taken from the shareholders you must keep them (continuously) advised as to what is happening. That is transparency and you cannot detract, deviate without going back to the shareholders and getting permission. Now "shareholder approval" is again a joke, because if you have just the majority you do what you want; if you have 75% you can even perniciously change the Articles. Now that is where it is. There are provisions, but you have to go to court and it will take years and lots of money and by that time it has defeated the purpose.

Q: Small time investors as it is beyond them to delve into minute details you are speaking of now. What do you think of the possibilities of these investors remaining as long term investors or players of the market all very essential to raise funds? What happens to their confidence?

A: This is the same issue that has now been brought into focus as to why the market is not performing. In one word it is lack of ‘investor confidence’ investor confidence that proper things can be done. The remedy is very simple. Now the controlling choose ‘people of integrity’ and put them as ‘Independent Directors’. That is rubbish. They become only mercenaries. They are quite happy in toeing the line or being a mere rubber stamp.

Now what you should do is the real stakeholders the IMS (independent minority shareholders) should elect the Independent Directors; if you have a 10% stake you are a sufficiently interested person or you should, may be get together with two or three related shareholders together and be able to nominate a director for each 10% holding, on the board. Then you have good independent people who are interested in the success of the company and who want to see that it progresses. There is no doubt that the majority should run the company. I agree with it and support it because they have the great stake but the transparency and accountability are only ensured by real independent representatives or the IMS.

Faraz: Thank you very much for your thoughts.

Vigna: Thank you.

Link :http://tv1.lk/the-hot-seat-25-05-16/

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