The Island Editorial

Lessons of Sampath

The shadow of Mr. Don. Harold Stassen Jayawardena, arguably the country’s most powerful businessman, fell over the recent acquisition by new interests of a big slice of the Sampath Bank, originally promoted as a Buddhist Bank but later presented as a financial institution of and for the ‘’sons of the soil." The attempted ‘’takeover" of Sampath created more than ripples in Sri Lanka’s usually sedate business scene with many observers and analysts anticipating a stirring annual general meeting on June 30.

In the event, the AGM, attended by a large number of Buddhist monks among others, did not provide any great excitement. Certainly attendance was an all time high even for a company like Sampath which had over 16,000 members on its share register at the last count. Usually these meetings attract 400 - 500 shareholders, but given the performance of the Sampath share, bid up by competing buyers on the Colombo bourse in the weeks preceding the AGM, it was inevitable that many more members of the company than usual would turn up for the annual meeting.

They did. It was clear that the committee room at the BMICH where the meeting was to be held was not big enough to accommodate all shareholders who turned up and a spillover was seen outside. Although the new interests in the bank’s ownership, the Hatton National Bank (HNB) and the Distilleries Company, had intended outvoting four Sampath directors up for re-election and electing four of their nominees, that challenge was not mounted perhaps because of a court injunction or other reasons. So the incumbent management, strongly supported by the bank’s staff and those shareholders who were able to get into the meeting room, had their way without opposition.

All this is well and good. The courts are always an option for concerned parties dissatisfied with the manner in which events were permitted to unfold. Already there is one case before the courts and the public will no doubt hear more about the Sampath dispute during the proceedings of this case and perhaps others that might follow. What is pertinent to this comment is the fact that when any company gets a listing on the Colombo Stock Exchange and goes to the public for money, it must be prepared for takeover attempts by persons or groups who have the funds to buy up a majority stake.

But banks are a different kettle of fish. The Banking Act. No. 30 of 1988 specifies that no single shareholder or group of people can hold more than 20% of the share capital of a licensed commercial bank. Acquisition over 10% requires the written concurrence of the Minister of Finance and the Monetary Board. These rules are not ironclad and there is flexibility. The promoters of the Nations Trust Bank, for example, were allowed to exceed these limits. The three promoters of the combine which bought the former Overseas Trust Bank and set up the NTB, John Keells Holdings, Central Finance and the International Finance Corporation were allowed 25%, 20% and 15% respectively.

Sampath itself has a restrictive clause in its articles limiting single holdings. There are also provisions in the law regarding related party holdings. Given the maze of parties who may be related who have acquired Sampath shares, including the Provident Funds of HNB and Sampath itself, and HNB employees who are unlikely to command personal resources of the magnitude of the investments made in Sampath shares, there is obviously grounds for the Central Bank’s Bank Supervision Department to investigate whether there has been strict compliance with the law. Such an investigation has already begun and its findings are eagerly awaited.

At the same time, the Securities and Exchange Commission (SEC), has to ensure that the provisions of its Takeovers and Mergers Code of 1995 is satisfied. There is a provision there requiring any person or entity or group acting in concert to acquire more than 30% of the shares of a quoted company, to offer the highest price paid for such shares within the past 12 months to the remaining shareholders of the company. The SEC has said that it has initiated its own inquiries into this matter.

It has been stated that Mr. Harry Jayawardena has been a member of the SEC and the propriety of regulators being players on the turf they are supposed to police raised. It must be stated in fairness to Mr. Jayawardena that although the government did appoint him to the SEC in January this year, he made it clear that he was not accepting this appointment and in fact conveyed it to the then chairman of the SEC. But given the fact that an appointment was made, it was considered valid until the government itself changed the status quo when Mr. Jayawardena was made a member of the board of directors of the Colombo Stock Exchange in March.

Whatever the outcome of the Sampath furore, it is necessary that the regulatory capability of both the Central Bank’s Bank Supervision Department and the SEC is strengthened. The experience demonstrates problems that can come up. If the SEC goes back into its history, it will find at least one instance where a businessman once drove a coach and six through its fences leaving a lot of red faces among experienced businessmen who were well and truly foxed. Given what has happened and what can happen in the future, the safeguards must be in place. Hopefully, the country has the necessary skills to ensure that done.