The arrest in New York of Mr. Raj Rajaratnam, a Sri Lanka born U.S. citizen named by the prestigious Forbes Magazine earlier this year as being the world’s 559th richest individual, will for many reasons reverberate here not only because he is of Lankan descent but also for the fact that he is one of the biggest investors in our stock market which is often described in global reports as ``tiny.’’ He is among the biggest shareholders of John Keells Holdings, a highly diversified conglomerate enjoying the top market capitalization of any company quoted on the Colombo bourse. The founder of the U.S.-based Galleon Hedge Fund, Rajaratnam is a billionaire with interests in several quoted companies here.
As reported in our pages today, his name transpires in a High Court case in which indictments have already been filed. This relates to a move to buy into the Union Bank PLC, an entity quoted on Colombo Stock Exchange, for which money had been remitted here. These funds had been frozen, for whatever reason, and we do not wish to discuss aspects of a matter that is sub judice. Suffice it to be said that any foreigner investing in our stock market must do so through what is called a Share Investment External Rupee Account or SIERA. That ensures such investments are made from funds remitted from abroad and not from rupee resources held here.
The mere fact that Rajaratnam has been arrested does not mean that he is guilty; of for that matter if he is acquitted that he is not guilty. It may be that prosecutors lacked sufficient evidence to make their charges stick as is often the case. The fact that this arrest, with some others, on charges of insider trading, has made big news in Wall Street and other big centers of global finance is an index of how important the people caught up in this scandal are in the global financial world. Manhattan-based Galleon Partners, Bloomberg reported, has offices in London, Singapore, Mumbai and Menlo Park, California. That’s how big its operations are. Among the co-accused are ex-directors of the well known Bear Stearns brokerage and other big ticket US companies like McKinsey and IBM. Chances are that the prosecution will not be quickly concluded and whatever determination made will be appealed, whoever is convicted or not convicted. Reports indicated that court-authorized wiretaps had been used to listen to some conversations of the people involved in an investigation going back at least as long as November 2007.
Readers may not be altogether familiar with what the offence of ``insider trading’’ that Rajaratnam and his co-accused face is all about. In simple terms it means that the persons concerned had information about companies whose shares they traded that the market was not aware of. That gives them an advantage over other players. This is why most stock exchanges worldwide, including our own, require that market sensitive information is disclosed by companies in a timely manner to enable all participants play on a level field. Most companies have rules regulating how their executives and other employees possessing information that can react on their share prices may or may not trade in their shares. There have been instances here where the Securities and Exchange Commission has investigated cases not only of insider trading but also of manipulation giving a false appearance of the market. Many such cases have too often been compounded on payment of a fine usually credited to the SEC’s Compensation Fund. Such penalties are generally assessed on the basis of the illegitimate profits made. Unfortunately nobody has been jailed here for such offences. In the US, offenders risk mandatory sentences.
Here in Sri Lanka, as in other parts of the world, there is increasing conciousness about money laundering where proceeds of criminal activity, including narcotics, are channeled into legitimate businesses like stock markets. That is why the Central Bank is increasingly insistent that not only banks but even stockbrokers know their clients and KYC (``know your client’’) is a key word very much in use today. Stock brokers get their clients to fill in forms including personal details that were not previously sought and banks often ask constituents making big deposits what the source of the funds were. Big stock exchange transactions of over a million rupees are also reported. While such measures are not absolutely fool proof, and untaxed money more than proceeds of criminal activity are most likely invested in instruments such as bank and treasury deposits and quoted shares, it is to the good that the authorities are tightening their grip in an effort to ensure that such activity is in order. There was a time when policy makers closed their eyes to some aspects of financial transactions on the premise that fund movement from the informal to the formal sector was economically beneficial. This, however, has been changing in more recent years.
While the Rajaratnam case will continue to hold attention here largely for the reason that he is of Sri Lankan origin, and also because he is a significant investor in companies here, we must not forget that he was a generous contributor to post-tsunami rehabilitation projects both in the north and the south. He had, on Colombo’s initiative, also agreed to substantially support the rehabilitation of LTTE cadres. Given the size of the funds he controlled, quite apart from his own personal investments in quoted companies here, his Galleon Funds have invested significantly in the Colombo stock market. He would also have undoubtedly influenced other portfolio investors in the US and elsewhere in the west to look at our market which would certainly have had a beneficial effect on what we now trumpet as the ``world’s best performing stock market.’’ While we do not condone infringements of the law anywhere by anybody and wish the enforcement authorities in the US the very best in bringing wrongdoers to book, we would also record that Rajaratnam’s investments here was not without benefit to our market.