Authorities must address criticisms over the adequacy of safeguards when investing in the Colombo Stock Exchange through the Employees’ Provident Fund (EPF) and make the entire process more transparent, according to a statement by a local think tank.“Considerable controversy has arisen regarding Employees’ Provident Fund (EPF) investment in the Colombo Stock Exchange (CSE). There have even been calls to stop all such investments. There are positive arguments in favour of such investments.
However, it is necessary to create the appropriate enabling environment to avoid criticism based on conflicts of interest, a lack of transparency and an erosion of investor confidence.”
“It is important that we ‘do not throw the baby out with the bath water’. There is a case, instead, to improve the efficacy of the framework for the EPF investment in the stock market to addressing some of the issues that have been brought out by the recent public debate on the subject,” the Pathfinder Foundation said.
In particular, the statement urged authorities to make the current guidelines for the EPF investments in the stock market available to the public in order to promote a greater degree of transparency.
It also recommended the establishment of a separate unit, independent of the Central Bank of Sri Lanka, to manage the fund's investments.
“Consideration could also be given to using private fund managers on a performance-based fee scheme to run part of the portfolio as in China. This would address issues related to conflicts of interest that arise from the Central Bank not only administering the EPF but also regulating financial institutions which account for a large share of market capitalization,” it stated.
In order to promote local and foreign and local investor confidence with regards to government involvement in private companies, the report urged authorities to maintain a passive stance as investors.
“The EPF should be a passive investor that does not seek a presence in the boards of private companies. This would serve to address confidencerelated concerns that have arisen regarding government involvement in the running of private companies, among both domestic and foreign investors. This is at a time when Sri Lanka needs to maximize private investment to meet the government's growth and employment targets. The oversight related arguments that could be made for a Government Board presence are less persuasive in the case of listed companies which are subject to strict accounting and disclosure rules.”
“The EPF investments in the CSE play a useful role in increasing liquidity in a thin market. They can, therefore, have a positive impact in terms of capital market development. Such investments also create the opportunity to secure higher rates of return for EPF members, provided the investments are handled professionally,” the statement noted.The report cited China's massive investments into private equity funds through its National Social Security Fund, alongside the California Public Employees' Retirement System and South Korea's National Pension Service, which established a separate unit to handle investments in equities, as potential models for the EPF to emulate.