Internal firewalls keeps CB, EPF apart

Kalyanee Gunatilake

Central Bank’s EPF Superintendent Ms. Kalyanee Gunatilake says internal firewalls are in place to prevent conflict of interest and possible insider trading because they kept the Central Bank, the regulator of the banking system, away from the EPF, which was investing in listed banking stocks.

"The EPF Department functions independently from all other departments of the Central Bank. We have stringent firewalls within the Central Bank. These are adhered to at all times and the integrity of the Central Bank or the EPF is not compromised," she says.

She said yesterday that the Employees Provident Fund was never prohibited or restricted to invest in banking sector stocks.

"The Monetary Board of the Central Bank has from time to time, changed its investment strategies, considering both the trends in the global and domestic economy and the developments in the financial sector and this is also in line with that decision."
Here, she is in conversation with this newspaper in an interview where she addresses the contentious issues of the country’s largest Pension Fund’s investments in banking sector shares, perceived to have conflicts of interests.

A: At all times, the EPF investments have been done according to its governing Act, the Employees’ Provident Act, No.15 of 1958. In terms of the EPF Act, the Monetary Board of the Central Bank of Sri Lanka is entrusted with the responsibility of managing the Fund, as its custodian. The overall objective of the Fund in investing its moneys is to provide a reasonable return to members, while safeguarding and enhancing the value of the Fund. In terms of Section 5(1)(e) of the EPF Act, Monetary Board may invest the moneys of the Fund in such securities as the Monetary Board may consider fit and may sell such securities. Accordingly, EPF clearly has the authority to make investments in the share market, including the banking and finance sector.

The Monetary Board of the Central Bank has from time to time, changed its investment strategies, considering both the trends in the global and domestic economy and the developments in the financial sector. Even though the EPF may not have invested in the banking sector until 2009, it took into consideration the rapid growth of the banking and finance sector in view of the economic prosperity foreseen in the country, and decided that refraining from investments in one of the fast growing and most profitable sectors seemed to be prejudicial to its members. Thus, having followed proper approval processes, investments in the banking sector were made, and this sector is expected to provide significant returns over the medium to longer term to the fund. We are sure the wisdom of this move will be realized in the future, when large scale capital gains are made.

A: As already mentioned, the EPF had never been prohibited or restricted by any law to invest in banking sector shares. In keeping with the internal Investment Policy statement and Standards of Professional Conduct of 2002, the EPF had voluntarily refrained from investing in banking sector shares in the past. As per the provisions in the same Policy statement, the investment policy was reviewed, and EPF has invested in the shares of National Development Bank in 2005. Subsequent to the policy change EPF has been investing in the banking sector since 2009, the required approvals of the Monetary Board were obtained to make investments, and that did not require a public announcement, as an internal investment policy change, properly approved, did not need an amendment to any law.

A: The EPF Department functions independently from all other departments of the Central Bank. We have stringent firewalls within the Central Bank. These are adhered to at all times and the integrity of the Central Bank or the EPF is not compromised. Different departments in the Central Bank deal with exclusive fields of high confidentiality with professionalism and it is a practice adopted by all departments, and not only within the EPF. For example, over 90% of EPF funds are invested in Government Treasury Bills and Bonds that are issued by the Public Debt Department of the Central Bank. So, if there was a conflict of interest in investing in banking stocks as some try to make out, such conflict of interest should have been present in Government investments as well. Clearly, there has been no such conflict of interest, and these allegations seem to be designed to achieve a different objective.

A: No. Not at all. The reason has been emphasized in the fact that supervision of banks is carried out by the Bank Supervision Department, whereas EPF investments are made by EPF department of Central Bank. Similarly various departments within the Central Bank handle information coming under their purview on a strictly confidential basis, and do not have access to information of another. Having installed such stringent internal controls within the bank, each department operates independently. The EPF does not possess any more information regarding the banking sector than what is available to any other investor on the CSE. Therefore the EPF does not have any unfair advantage.

The objective of the investment in shares of the banking sector by the EPFhas been mainly to add value to the Fundover the longer term andprovide a better return to its members. Accordingly, the majority of such investments have been treated as strategic medium to long term investments.

A: We have countered that suggestion, and the IMF has not raised the issue since then. Why isn’t that also being said? For the record, let me say that the EPF is one of the largest institutional investors in the country. It is quite normal, as in other stock exchanges in the world that the larger institutional investors provide stability and depth to a share market. Since the EPF has invested in stock market with a medium to long term view to generate profit in the future considering the intrinsic value of shares of selected companies, their future outlook, the possible enhancement of share value in the medium to long term, the company’s governing structures, future plans, the quantity of shares available of such companies, the viability and growth potential of the relevant industry and the possible impact of the growing economy on the company, a careful due diligence has taken place in relation to all its investments. Further, as is practised by many large long term funds all over the world, the EPF also maintains its equity portfolio as a pool of investments, which comprise a varied collection of stocks representing key sectors. So, we can confidently say that the EPF will proceed without any problem, notwithstanding the attempts by some to disturb this sentiment.

A: The EPF’s stock market transactions are carried out with utmost care, diligence and professionalism in terms of the guidelines approved by the Monetary Board. The persons who make investment decisions are highly qualified, trained and experienced persons. We also have many checks and balances to ensure the integrity of the process. Therefore, we are confident that the necessary safeguards are in place to prevent any malpractices.

A: The EPF accesses publicly available information and research that other investors also access. Of course, we have our own EPF research teams too, that carry out further research to help us in our decision making process. As we informed you many times, different departments within the Central Bank handle the information coming under their purview on a strictly confidential basis and do not provide access to information to others. Hence, there is no unfair practice.

Your question makes it sound as if Deputy Governors of the Central Bank started holding Board positions in the public sector commercial banks only after the EPF commenced investing in these banks. That is far from the truth. Over the past many years, many Central Bank Deputy Governors and Assistant Governors have held Board directorships in commercial banks, after they retired. Such a situation is probably due to the fact that these persons have had outstanding careers and impeccable track records that made them highly sought after professionals, after their term of distinguished service at the Central Bank. Recently too, this same trend has continued and the fact that those outstanding personalities have been invited to the Boards of Banks and other institutions, is not at all connected to the EPF investment practices.