New Government, Same Old Ways

The new government's treatment of Sunil Wijesinha, until recently chairman of NDB Bank, shows little has changed

By devan daniel.

Published on May 17, 2015 with No Comments

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There are many ways to survive Sri Lanka’s governing structure in the public and private sectors. One is to play ball with the ruling class. Another way to survive is to build a reputation for fairness and unbending principles, valuable currency even for autocratic rulers. But this takes a long time to establish and guarantees job insecurity. This has been Sunil Wijesinha’s experience as chairman and director of several state sector institutions. He has been offered many positions for his qualifications and principles, only to be removed because of these. The new government promised to undo the autocratic structures taken to new heights by the Mahinda Rajapaksa regime, but its treatment of Wijesinha, until recently chairman of NDB Bank, shows little has changed. He spoke to Echelon about all these and the now on-hold consolidation of DFCC Bank and NDB Bank.

swYou served in various boards in the public and private sectors. Playing a straight bat in the public sector is rife with challenges. What was your experience like?
My first experience as head of a financial institution was when I was called by president Premadasa soon after he took office in early 1989 and offered me the post of Chairman, Employees Trust Fund Board. At 39 years it was a daunting task to handle the ETF. I was able to run it very efficiently, introducing many Japanese style management techniques and produce outstanding profits.

I was under a lot of pressure to invest in various projects and companies and with the help of a very strong board withstood all these pressures. The crunch came when I resisted instructions to invest Rs1.5 billion in a government debenture to raise money for a housing project at (If my memory is correct) 3% less than the treasury bill rate. When this debenture closed without subscription, apparently the president was told that the housing programme would stall because “Wijesinha refused to give money”. Obviously my resignation was called for. I resigned and sent a letter to the president explaining my position. When the president later realised that my stand was in the best interest of the ETF he re-appointed me. I held the post until the change of government in 1994 and the new Minister of Labour Mahinda Rajapakse asked me to resign.

In 1998 I was asked to take over as Managing Director of Merchant Bank of Sri Lanka which was on the verge of collapse. I was able to restructure the institution, and resigned in June 2005 after paying the first dividend after seven years. I served on the board of SriLankan Airlines but when I objected to what was happening at the airline I was taken out of its board.

sw5You were the chairman of NDB Bank until very recently when controversially the government asked you to resign
I was verbally informed one day that three nominations from the government would arrive through the Sri Lanka Insurance Corporation. Since we had only one vacancy we were wondering how to handle it. When the nominations came I was pleased that the nominees were well known and experienced professionals. A subsequent letter from the same source indicated that one of the nominees should be made the Chairman at the conclusion of the AGM which was to take place in a week. I was naturally taken aback because I was not coming up for re-election nor was I retiring. I always considered myself above politics and have given my services to every government that asked for it. I along with some of my board members visited the minister and clarified what his intentions were. Once that was clear I decided to resign and a day or two later when I had thought things over I decided that since the intention of the minister was clear I should not stand in the way and it would not be appropriate for me to preside over an AGM of a company of which I would resign immediately after, and therefore I decided to resign and announce my resignation before the AGM.

The merger with DFCC Bank was underway when the new government came into power. What were some of the challenges?
Although the initial idea of consolidation came from the government, we saw a lot of merit in it. Obviously the costs relative to income would be reduced and there would be economies of scale. The strengths of the two institutions would be merged and enhanced. There would be more capacity to service large clients. While the legal migration would be the first phase, the full integration which is the second stage would have been tedious and time consuming. The biggest challenge would have been getting the two sides to agree on a swap ratio.

What do you mean by ‘swap ratio’?
We would create a new bank and this will issue shares based on relative valuations of the two entities to shareholders of DFCC and NDB. For example, depending on the valuation, if an NDB shareholder gets one share of the new bank for each share he had of NDB, a DFCC shareholder may get 2 shares of the new bank for each DFCC share held. This is the swap ratio. So this would have been a challenge because valuations are always subjective and the two boards have to agree to this ratio. Of course finally the two groups of shareholders would decide at the Extraordinary General Meeting. Each board had a concern whether they could cut a deal that would satisfy and be fair to their shareholders. We had just begun this negotiation when the new government halted the merger because it wanted to re-evaluate it.

700_4444Were the negotiations aggressive? Would there have been a deadlock on agreeing to a swap ratio?
No. relations between the two banks were cordial and cooperative and we could have arrived at an amicable solution but may have taken time.

Is there still a case for consolidation?
Sri Lankan banks are too small, some say even if we merge the new banks would still be too small, but it is better than not doing anything at all. The variability of profits to size of the bank show that bigger banks can absorb small shocks whereas smaller banks would face significant changes in profits. Bigger banks can also engage in long term project lending. IT costs are also huge irrespective of the size of a bank. I attended a forum in Japan when three banks merged. They said one of the main reasons for the merger was that it would create a huge critical mass and make IT more affordable. The process of merging DFCC and NDB was at a peak and everybody else was working on their consolidation plans and things were gradually falling in to place. The hold would dampen the enthusiasm of everybody and the process may have to begin again from scratch.

The government’s role in the banking sector has since of late become one of dominance. What are your thoughts?
Obviously the banking sector has to have some alignment with the national policies enunciated by the government in power. Being an important component of the economy, the manner in which the banking sector operates and conducts itself will be of much concern to the government. It is obviously in the interest of the banks too to be aligned and be sensitive to the policies and programmes of the government. The development of the banking sector has to be a two way process.

With regard to government controlled funds investing in banks there is no issue because investments must be made to get the best return for the funds. The EPF and ETF are not owned by the government. The Monetary Board and the ETF Board are mere trustees. I doubt that the Acts by which these funds were established list as objectives the “control of investee enterprises” or “nominating directors to investee companies”.

In fact as chairman of ETF, I was always against using ETF funds to nominate directors or to vote for or against resolutions on the election or re-election of directors. The ETF Act has objectives such as “promoting economic democracy”, “promoting industry and commerce”. I drafted an investment policy sw4where ETF investment will not exceed 10% of the issued share capital of any investee enterprise. In fact in the early 1990s when the stock market was just developing and foreign fund managers were getting interested in Sri Lanka I was able to model an investment policy based on what foreign funds had. Unfortunately after my departure this was ignored and much more significant stakes were taken. I have always held the opinion that it is incorrect for the government to use EPF and ETF members’ funds to further the secret agenda of the government.

What can you say about governance in the private and state sectors?
Corporate Governance has undergone a paradigm shift in Sri Lanka. I recall being a resource person in a CIMA organised corporate governance workshop conducted by the Swedish Institute of Directors for which I carried out a study on the level of compliance with the Governance Code which prevailed then. The findings were revealing. Even some of the more prominent companies were falling short of compliance. For example on the item pertaining to director training one chairman says “our directors are all qualified and experienced persons and they do not require any further training”.Today the situation has significantly improved.

In the state sector most of the directors do not know what their role is. I have found that many state sector managements take the boards for a ride. After I left ETF and a few years later was re-appointed to the board I found that the management had not briefed the board appropriately. My constant questioning and exposes resulted in the rest of the board being re-appointed except me. It is very disheartening to note that today all state controlled boards are filled with political appointees. I am told that after every election a list is made of all SOEs and people are slotted in. I was expecting this to change. Was I expecting an unrealistic wonderland, I don’t know.

Is the culture getting worse under the new regime?
Yes. There was a time a state owned company could identify and appoint professionals to fill a skills gap. But now you cannot do so, most appointments are purely political and this is the first time private sector banks have been subject to board changes with a new government coming in.

You don’t blame the government for asking you to step down from NDB and removing other appointees in other banks?sw3
I don’t blame them because government institutions together have a significant stake, but I don’t think this culture is right and this is the first time the government has done it to private banks. The government controlled institutions together hold 30% or more and under the Banking Act there is a ceiling of 10% for any shareholder and you cannot act in concert because then it defeats the purpose of the ceiling and this is exactly what this government is doing openly and what the previous government did surreptitiously. And I have always been against nominees being placed for the EPF and ETF. The EPF, ETF and Bank of Ceylon own stakes in NDB and it is through these the government has assumed control. Under the Companies Act you have the right to ask for nominee directorship, and under EPF and ETF they have no moral right, it is not government money, it is only managing the fund on behalf of members.

For someone who has taken a stand against this, your name was suggested to lead NDB and you took up the position?
was not in favour of taking up the chair. I told them that I was enjoying my retirement. My wife was dead against this. But they were persistent and I had to reluctantly accept. However, I was not going to bend. I believe I was a suitable person to lead the NDB and felt I could do a good job given my experience in the financial sector. The government’s rationale in recommending my name was that it wanted the development bank to realign itself to serving small and medium enterprises, export sectors and entrepreneurship. I accepted because I felt I could do something.

Did you face any political pressures while serving as Chairman of NDB?
Not until the recent incident. There was no pressure to lend, and even if there were I would have resigned. There was the occasional request by politicians to provide jobs to various individuals, and we subjected them to the usual selection process and treated them like anybody else. If they did not qualify or get through the exams and interviews, they were not recruited.

sw2How is the interim government fairing?
For one thing, policy formulation is ad hoc. Taxes on the telecom sector and the super gains tax were not thought through well enough. These were some of the things we had been fighting against the previous regime. The whole country is driven to chaos when duty structures are changed suddenly, when companies spend years formulating plans.

Are you disappointed with this government?
I am very disappointed. May be our expectations were very high, maybe too high. Now people are saying it was foolish to have expected anything different. But there are positives. Corruption and waste will be controlled, you cannot eliminate it. I expected a change in the culture of political appointments, this has not happened and I am disappointed with that.With regard to clear and consistent policy, more participation and discussion, I am disappointed in that. I don’t think this government knows what exactly the people wanted. The government already knows the business community is not happy with them, and on the other hand rural people are not happy about the government either. So it will be a great shame if the reforms to rout corruption and waste are not allowed to continue as a result of this political bungling.

I understand that this is an interim government, and I hope that long term thinking will prevail after the elections. Most of the professionals would support a government going in the right direction. In the new environment where constructive criticism is welcome I believe that professionals must guide and help the Government with exposure and criticism.

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