Contents

2 Members of the Commission

4 Principal officers of the Secretariat

5 Chairman’s Review

7 An overview of the Performance of the SL Economy

9 Equity Market - 2003

11 Review of the Director General

OPERATIONAL DIVISIONS

16 Corporate Affairs Division

21 Investigations Division

23 Legal and Enforcement Division

26 Supervision Division

30 Public Relations and Market Development Division

33 Finance and Administration Division

36 Unit on Policy Development

38 Calendar of events for 2003

PERFORMANCE IN FINANCE

42 Balance Sheet

43 Income and Expenditure Statement

44 Statement of changes in Net Assets

45 Cash flow Statement

46 Cess fund - Cash Flow Statement

47 Compensation fund - Cash Flow Statement

48 Notes to the Financial Statements

60 Report of the Auditors

62 Auditors Comments MEMBERS OF THE COMMISSION

12345

678910

1 Lt. Gen. J.E. DENIS PERERA VSV.D Litt (Honoris Causa) FCMI also a Chartered Engineer and a Fellow of the Institution of CHAIRMAN - (from March 2003) Engineers,Sri Lanka. Lt. Gen. Perera having had his professional training at Dr.Jinasena was appointed as a Member of the Securities and prestigious institutes in Britain and India concluded a Exchange Commission of Sri Lanka in October 1995 and is the successful career of 32 years as a soldier reaching the rank of Senior Most Member of the Commission. Commander of the Sri Lanka Army and retiring after a period of 4 years, at which point he was the first officer of the Armed Dr.Jinasena is a Board Member of DFCC Bank since December Forces to be decorated by the President with the Vishista Seva 1991.He is also a member of the Presidential Task Force on Vibushana (VSV) for his distinguished services. Science and Technology and a Member of the Presidential Commission on Trade and Tariffs. He was then appointed High Commissioner for Sri Lanka to Australia and the South Pacific States for four years and on his 3 MR. D. K. HETTIARACHCHI return, was appointed Adviser to the President on Manpower COMMISSION MEMBER Mobilization and headed the Reserve Affairs Council. An Attorney at Law by profession, he joined the Department of In 1989 he joined the private sector where he was a Director Registrar of Companies in 1986 as an Assistant Registrar and and Chairman of six leading companies and Chief Executive of was promoted to the position of the Registrar of Companies in one multinational company. He has been the President of many 1997. Servicemen's Associations and has been a Fellow of the Institute of British Management (now known as the Chartered He is also an Ex-officio member of the Sri Lanka Accounting Institute of Management) for 30 years and was awarded the and Auditing Standards Monitoring Board. Honorary Fellowship in 2003 by the Sri Lanka Institute of Mr. Hettiarachchi has many years of management experience. Management.

He has been conferred with the Honorary Degree of Doctor of 4 MR. MANIK NAGAHAWATTE Letters by the General Sir. John Kotelawala Defence Academy COMMISSION MEMBER for his services towards National Security and for initiating and Holds a Bachelor of Laws Honours degree and a Master of Laws establishing the said Academy in 1980 and is it's present degree.Since joining the Central Bank in 1966 he held the Chancellor. positions of Controller of Exchange, Superintendent of the EPF, Additional Chief Accountant and Executive Director till 1999, He brings with him over 50 years of management experience to when he was appointed to his present position as Deputy the SEC. Governor. 2Dr. NIHAL JINASENA He served in several government institutions and has been a COMMISSION MEMBER Director of the National Development Bank and of the Private Dr.Nihal Jinasena is an eminent Industrialist and is the Sector Infrastructure Development Company. Chairman/Managing Director of the Jinasena Group of Presently, he serves as a member of the Insurance Board of Sri Companies. Lanka and Chairman of the Credit Information Bureau of Sri He has a B.Tech Degree in Mechanical Engineering and an Lanka. Honorary Doctorate from Loughborough University, U.K. He is He brings over 48 years of management experience.

2 Annual Report 2003 SECURITIES & EXCHANGE COMMISSION OF SRI LANKA 5 MR. FAIZ MOHIDEEN council of the University of Kelaniya. He Counts over 26 years COMMISSION MEMBER of experience with the Merchant & Investment Banking and Presently, holds a prestigious position as Deputy Secretary to Business Consulting. the Treasury. Mr. Mohideen holds a B.Sc in Mathematics from Mr. Peiris is an Attorney – at – Law holding a BSc in Economics the University of London and a M.Sc in Econometrics from the and Law and a MBA from Post Graduate Institute of London School of Economics. Management, University of Sri Jayawardenapura.

6 MR. CUBBY WIJETUNGE 9 MR. W. UNAMBOOWA COMMISSION MEMBER COMMISSION MEMBER Holds the prestigious position as Executive Vice President, A distinguished planter for 17 years before joining Carson Corporate Affairs and Executive Director of Nestle, Sri Lanka Cumberbatch & Co.Ltd. and elected to the Board of Directors and is the Chairman of The Industrial Association of Sri Lanka, within 5 years. He was appointed as Acting Chairman in 1987 Ceylon Breweries Ltd. , Lion Breweries Ceylon Ltd. and Union and was confirmed as Chairman in 1988 and continued in this Residencies (Pvt) Ltd. (Jaic Hilton). capacity for a period of 5 years. After retiring in 1993 he remained He is also a Director on the board of four leading Organizations as Non-executive Chairman and Consultant to the Company's Oil and is a Committee Member of the Ceylon Chamber of Palm plantations in Malaysia and Indonesia till 2003. Commerce and also the Ministry of Agriculture & Livestock He was also appointed to the Board of Directors of Union Development, as well as a Trustee of Joseph Fraser Memorial Assurance Ltd. in 1988 and was elected Chairman 1991 –1993. Hospital. Mr. Wijetunge has several years of management experience. Mr. Unamboowa has over 50 years of management experience.

7 MR. G. C. B. WIJEYESINGHE 10 MR. A. I. FERNANDO COMMISSION MEMBER COMMISSION MEMBER Mr Wijeyesinghe is a Past President of the Institute of Chartered A Chartered Accountant by profession he currently holds the Accountants of Sri Lanka and the Organisation of Professional position of Director / Chief Financial Officer of Forbes & Walker Associations of Sri Lanka and former Precedent Partner of Group. He is also the Director of F&W Tea Brokers (pvt) KPMG Ford Rhodes, Thornton & Co. He also served on the Limited., F&W Commodity Brokers (pvt) Ltd., and Forbes KPMG Asia Pacific Board of Study, Post Graduate Institute of Services (pvt) Ltd. Management the Accounting & Auditing Standards Monitoring Currently the President of the Institute of Chartered Board and a Council member of the Commonwealth Accountants of Sri Lanka (ICASL), he has been a Council Association of Corporate Governance. He is a Fellow of the Member and the Vice-President of the organization and has Institute of Chartered Accountants of Sri Lanka and a Fellow of chaired several committees. the Association of Authorized Public Accountants-UK He is a Fellow of the Institute of Chartered Accountants of Sri Lanka (FCA), the Chartered Institute of Management 8 MR. W. R. JOHNSON PEIRIS Accountants United Kingdom (FCMA) and was a Director of COMMISSION MEMBER the National Investment of Business Management and Post Holds the position of Deputy Secretary General of the National Graduate Institute of Management. Commission of Sri Lanka (UNESCO). He is also a member of the Mr. Fernando has many years of experience to his credit.

SECURITIES & EXCHANGE COMMISSION OF SRI LANKA Annual Report 2003 3 PRINCIPAL OFFICERS OF THE SECRETARIAT

1 Ianthie Jayaratne Director Finance & Administration

2 Palitha Silva Gunawardene Director General

3 Lasinee Seresinhe Director Corporate Affairs 6 5 7 4 Marina L Fernando 2 Director Legal & Enforcement 1 3 4 5 Benny Tissera Director Supervision

6Malik Cader Director Public Relations & Market Development

7 Dhammika Perera Director Investigations

4 Annual Report 2003 SECURITIES & EXCHANGE COMMISSION OF SRI LANKA CHAIRMAN’S REVIEW

short span of time, we have been able to harness the pragmatism displayed by the country in general and map out a path of growth and development for the SEC, working on some areas that had already been paved the previous year.

In today’s highly impulsive corporate context, the spotlight, more often than not has fallen on the role of auditors and good governance, both priorities in the context of accountability, transparency and responsible management. The SEC for its part has finalized guidelines for auditing of Listed Companies, creating a responsible and disciplined environment where all stakeholders of companies can be confident that the Listed Companies will take up the mantle of complete transparency in disclosure and related requirements. Governance too, being almost a buzzword in corporate circles is a high priority area for the SEC, which appointed a high powered Committee to formulate a Code of Governance for companies.

After the Parliamentary amendment of the Securities and Exchange Commission Act, which aimed to give more strength and relevance to the workings and requirements of the SEC, we embarked on a strategic review of the SEC with the objective of creating a more pragmatic and pertinent Macro Economic Overview environment for us to function in. The year under review can be deemed as one of pragmatism and renaissance with the economy showing signs of further Concurrently, the SEC nominated an expert panel to resurgence, closing on a growth of 5.5% compared to 4% in conduct a Human Resources Review, which will carve the 2002, despite the political uncertainty generated in path of our human resources, their career aspirations and November 2003. Sagacious growth policies saw an future development as well as compatibility and improvement of macro-economic conditions, the convergence to our corporate goals and vision. This will continuation of the Ceasefire Agreement, which also correspond to the findings of the Strategic Review and will heralded an absence of conflict and a furtherance of the focus on total Human Resource Development concentrating peace initiative, declining interest rates, increased capital on creating a culture of continuous improvement, flows, foreign donor support, decreasing inflation and a motivation, loyalty and excellence. Further, continuing the stable foreign exchange market had a positive impact on premise of transparency, which we are trying to impel overall economic growth. across the corporate sector, we also introduced an in-house Audit Committee to monitor and audit our own operations, Performance of the service sector especially the banking, setting an example on self-governance to other companies insurance and real estate areas, saw an impressive growth and related organizations. of 79%, while the industry and agriculture sectors contributed 14% and 7% respectively. The role and performance of Unit Trusts’ has been reviewed with the Chairmen and Chief Executive Officers of Unit Overview of the SEC Trusts with a view to improving their activity, particularly I took over the reins as Chairman only in late March 2003 with the non-urban sector of society. and the new Director General who came into office only in July 2003 has ably assisted me since then. The Members of Perceiving the future the Commission and the staff of the SEC had not only We are now in the process of streamlining arrangements as diligently overlooked the work of the Commission during host for the most impressive and biggest event in the the change of stewardship, but also supported me and the calendar of global SECs, that of the International new Director General after we assumed duty. Within this Conference of Securities Exchange Commissions to be held

SECURITIES & EXCHANGE COMMISSION OF SRI LANKA Annual Report 2003 5 CHAIRMAN'S REVIEW (Contd.)

in Colombo in 2005. We have already had the Deputy indecisive trend towards the early part of 2004. I do hope Secretary General of the International Organisation of that stability on all fronts will return as the encouraging Securities Commissions (IOSCO) here in Sri Lanka, whose performance of the market this year exhibited the promise confidence in our abilities to host this large gathering of 700 and potential that Sri Lanka has and that the SEC, in this for the four day conference at the BMICH has been light, will have the ability to provide the necessary thrust to categorical. We aim to make this event a platform for not the economy and development of the nation. only the SEC, but also for the country, showcasing investment opportunities and tourism which are imperative for an economy like ours that is now on the fast track to development.

Even though during the year, the stock market’s Lt. Gen. Denis Perera VSV performance was probably one of the best in the world, post Chairman November 2003 given the political uncertainties, the Securities & Exchange Commission of Sri Lanka market displayed its tendency to be erratic, perceiving an

6 Annual Report 2003 SECURITIES & EXCHANGE COMMISSION OF SRI LANKA AN OVERVIEW OF THE PERFORMANCE OF THE SRI LANKAN ECONOMY

The economy is projected to grow at 5.9 % compared with increase and a relatively stable exchange rate leading to a 3.9 % in 2002 despite the uncertainty generated by the decline in the rate of inflation to a single digit by the middle political events that took place in November 2003. of 2003.Inflation as measured by Colombo Consumer Price Improved macro-economic conditions, continuation of the Index (CCPI) took a downward trend in 2002 to cease-fire and the peace initiative, declining interest rates, approximately 9.6% and further declined to 6.3 % in 2003. increased capital flows, foreign donor support, falling The Sri Lankan Consumer Price Index (SLCPI) which is a inflation, favourable weather conditions and a stable more representative inflation indicator, declined shortly foreign exchange market impacted positively on the overall from 10.2% in 2002 to 2.6% in 2003. Declining inflation economic growth. The third quarter growth performance rates over an extended period will gave rise to investor indicates that the Services sector contributed to 79% of the confidence and improved investment by enabling investors overall growth benefiting mainly from the banking, to take a longer term view of the economy. insurance and real estate sector. The Industry sector Although the budget aimed at reducing the fiscal deficit to contributed to 14% and the contribution of the Agriculture 7.5% a shortfall in revenue collection resulted in an sector was 7%. This trend continued to prevail in the fourth upward revision of the overall budget deficit to 7.8% of quarter as well, bringing about a higher economic GDP, but this is still an improvement compared to the performance in the whole of 2003. overall deficit of 8.9% of GDP in 2002.The major cause for this is the shortfall in government revenue, particularly tax GDP GROWTH receipts. Lower government expenditure has been due to 8 savings on interest payments and strict controls on recurrent expenditure as well as restrictions on the release 6 of funding for low priority capital expenditure.

4 The decline in interest rates enabled the issue of Treasury Bonds with longer-term maturities i.e 10, 15 and 20 years

% Growth 2 treasury bonds. This extended the benchmark yield curve

0 and provided a benchmark for pricing long-term debt securities in the market. Thus the debt market improved -2 due to lower interest rates, improved market liquidity and

1998 1999 2000 2001 2002 2003 the implementation of the settlements systems. Year

BUDGET DEFICIT AS A PERCENTAGE OF GDP On the expenditure side, consumption expenditure grew faster than investment raising the share of consumption in 0 total expenditure to 85.1% in 2003 from 80.1% in 2002. This was entirely due to an increase in private -5 consumption, which accounted for about 72% of total consumption. Increased consumer confidence with a recovery in the economy and an increase in demand in the % Growth -10 North and the East stimulated growth in private consumption. In 2003 Sri Lanka's Gross National Savings increased to 21.3% of GDP as compared with 19.7% in -15 2002. Meanwhile, the Gross Domestic Investment rose to 1998 1999 2000 2001 2002 2003 22.2% of GDP in 2003 from 21.3% in 2002 reflecting the Year slack in private investment and a shortfall in government investment under severe budgetary constraints. Sri Lanka's external payment position improved during 2003. Higher growth in exports than imports, improved The prudent monetary policy implemented by the Central utilization of foreign aid, higher inflows in foreign Bank was supported by an improved agricultural investment, strong growth in tourism and port services production, lower import prices, the containment of wage were contributory factors. The increasing surplus in the

SECURITIES & EXCHANGE COMMISSION OF SRI LANKA Annual Report 2003 7 AN OVERVIEW OF THE PERFORMANCE OF THE SRI LANKAN ECONOMY (Contd.)

capital account of US dollars 61 million and financial BALANCE OF PAYMENT account of US dollars 746 million was more than sufficient 400 to offset the current account deficit of US dollars 130 million (0.7% of GDP) and record an overall balance of 200 payments surplus of US dollars 501 million. Total external 0 assets of the country are estimated to increase to US dollars 2,920 million in 2003 thus raising the import coverage to -200 5.8 months as at the end of the year. Overall Deficit (US$ Mn.) -400 The growth achieved can be sustained only with improved macro-economic management, political stability, peace -600 initiatives, greater fiscal disciplined continued economic 1998 1999 2000 2001 2002 2003 reforms. Year

8 Annual Report 2003 SECURITIES & EXCHANGE COMMISSION OF SRI LANKA EQUITY MARKET – 2003

The Sri Lankan securities market ended the year with an time high of 1,378.8 point was recorded 9 years ago on 1st excellent performance with the key market indicators March 1994. Following the same pattern, the MPI too showing record performances in 2003. At the year-end, the registered its highest-ever point 2,584.2 on 31st October Colombo Bourse, All Share Price Index (ASPI) appreciated 2003 which was introduced in 1999. The ASPI recorded an by 30 per cent mainly influenced by the peace process and unprecedented growth of 73.77% and MPI recorded a subsequent peace talks between the Government and the significant growth of 88% for this year upto October 2003. LTTE in the country. The peace process helping towards a stable political

ASPI 2003

1,400.0

1,200.0

1,000.0

800.0

600.0

400.0 1/2/03 5/8/03 6/5/03 7/3/03 1/16/03 1/30/03 2/13/03 2/27/03 3/13/03 3/27/03 4/10/03 4/24/03 5/22/03 6/19/03 7/17/03 7/31/03 8/14/03 8/28/03 9/11/03 9/25/03 10/9/03 11/6/03 12/4/03 10/23/03 11/20/03 12/18/03

environment, successful donor conference, tax amnesty, During the year under review the All Share Price Index low interest scenario, economic development followed by (ASPI) gained 247 points i.e. 30.3% to close the year at strong corporate earnings were attributed to the improved 1,062.1 while the more sensitive MILANKA Price Index fundamental outlook of the Colombo bourse, indicating that (MPI) appreciated 523.2 points i.e. 38% to close the year at aggressive investment opportunities were available in the 1,897.8 points. In 2003 both indices, ASPI and MPI reached securities market in Sri Lanka. their highest-ever point which surpassed a level supported by the fundamentals. The ASPI broke through the ASPI GROWTH (%) psychological important 1400 level and reached its all time 70 high 1,423.5 points on 23rd October 2003. The previous all 60 50

40 Index performance 30 20 Year ASPI Growth (%) 10 0

1993 979.3 61.7 -10

1994 986.7 0.8 -20 -30

1995 663.7 (32.7) -40 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 1996 603.0 (9.1) Year 1997 702.2 16.4

1998 597.3 (14.9) However, during the last two months of this year, the ASPI reacted negatively, attributable to the prevailing political 1999 572.5 (4.2) uncertainties in the country, which moved down by 25% 2000 447.6 (21.8) i.e.354.3 points from November to December and ASPI 2001 621.0 38.7 recorded the steepest drop within a day on 5th November 2003 i.e.173.1 (12.9%). The 2004 Budget announced a 15% 2002 815.1 31.2 tax on profits earned from the sale of shares, which was to 2003 1,062.1 30.3 be implemented from April 2004.

SECURITIES & EXCHANGE COMMISSION OF SRI LANKA Annual Report 2003 9 EQUITY MARKET – 2003 (Contd.)

Trading activities in the Colombo Stock Exchange (CSE) Foreign investors continued to be net buyers in the market saw peak performances with the annual turnover achieving for the second consecutive year with net foreign inflow of SLR 73.8 bn in 2003, registering the highest annual turnover SLR 209.3 Mn in 2003. Foreign purchases amounted to SLR in CSE’s history and erasing the previous record on SLR 13,943.9 Mn while foreign sales amounted to SLR 13,734.6 34.5 bn in 1994. The average daily turnover SLR 307.6 mn Mn. Foreign direct and portfolio investments are likely to was recorded this year, 140% up when compared to the increase, reflecting the impact of improving investor SLR 128 mn in 2002. The highest-ever turnover for a single confidence.

MARKET PERFORMANCE 80,000 350 70,000 300 60,000 250 50,000 200 40,000 SLR Mn

150 SLR Mn 30,000 20,000 100 10,000 50 0 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Total Turnover Average Daily Turnover

month amounting to SLR 16.5 billion was registered in Primary Market September this year, surpassing the SLR 10.5 bn recorded in Nine companies obtained listings on the CSE namely Sri June of the same year. Also the highest-ever daily turnover Lanka Telecom Ltd; The Lanka Hospital Corp. Ltd; Land & in CSE’s history amounting to SLR 4.8 bn was registered on Building Ltd; Hayleys-MGT Knitting Mills Ltd; Ceylon 19th September this year. A total of 482,954 trades were Leather Products Ltd; Hemas Holdings Ltd; Housing executed in 2003 compared to 283,126 trades recorded in Development & Finance Corp. Ltd; Ceylon Hospitals Ltd; 2002. The domestic investors, contributed 81% of the total and HNB Assurance Ltd. It is anticipated that this could market turnover whilst foreign participation was 19%, in increase the market capitalization at the CSE to SLR 262.8 2003. The market capitalisation was registered as SLR bn in 2003 from SLR 162.5 bn in 2002 (i.e. 61%). This 262.8 bn on the last day of this year against SLR 162.5 bn in increased the ability of the CSE to absorb new investments 2002, whilst the Market Price Earnings Ratio was 11.1 in and thereby attract further foreign investment inflows into this year compared to 12.1 in the previous year. The the country. contributory factors for the high growth includes improved and stable macro economic environment, improvement in real economic activity and ongoing structural reforms.

The Price Indices of 14 Sectors recorded gains while 5 Sectors moved down during the year under review. The Oil Palm Sector recorded the highest growth of 89% while Services and Hotels & Travels Sectors gained 64.5% and 60.7% respectively. The Hotels & Travels Sector index showed a considerable growth this year increasing investor enthusiasm towards hotel sector counters, expecting higher earnings prospects of tourism sector, due to a heavily booked winter season.

10 Annual Report 2003 SECURITIES & EXCHANGE COMMISSION OF SRI LANKA REVIEW OF THE DIRECTOR GENERAL

It has been internationally accepted that regulators must be dynamic in approach to each issue and situation whilst being equitable and consistent in its decision parameters. This requires highly skilled and motivated staff that is constantly at the cutting edge of securities regulation.

In recognition, we initiated efforts to strengthen the operational efficiency of the SEC with a new strategy as well as review our human resources policies and structures. We believe that this internal focus is imperative to strengthen our regulatory role as well as to enhance the unwavering commitment to facilitate the development of our capital market.

The increased globalization of Capital Markets makes global co-operation vital for regulation. In this context we have decided to actively participate in global debate on standard setting as well as in deciding the approach to issues of common interests. Therefore, we commenced actively participating in the relevant discussions of emerging market issues at the International Organisation of Securities Commissions (IOSCO), which brings together securities regulators globally. This apart, we were also successful in being accepted as the twenty fifth signatory to While we weathered several changes at top management the Multilateral Memorandum of Understanding (MMOU) level during the year we also ensured, that every initiative of IOSCO, thus becoming one of the first countries from the was taken towards a the twin approach of effective market emerging markets to sign up to this MMOU signifying both regulation and facilitation of market development. We also our commitment to and benefit from international co- conducted a strategic review and a human resources review operation. in relation to formulating an effective strategic plan for the We also successfully hosted the Asia Pacific Regional institution and strengthening the human resource Committee (APRC) of IOSCO for its meeting in January development of its staff respectively. 2003 in Colombo. 50 delegates representing 14 countries Looking back at 2003 it is best described as a year of from the region attended this Conference. We have also transition and transformation for both the SEC and the commenced preparations to host the IOSCO Annual Capital Market. It has been essentially one of charting a Conference in Colombo during April 2005. These efforts three pronged approach based on the SEC’s unwavering included selection of a professional convention’s organiser commitment to facilitate the development of the capital as well as promoting Sri Lanka at the 2003 IOSCO Annual market whilst maintaining a prudent regulatory stance in Conference held in Seoul, South Korea during October keeping with Government policy as well as actively 2003. participating in and benefiting from international We serve as a member of the Financial Sector Reform experience and deliberations in this area. Committee (FSRC) the apex body, which brings together As detailed earlier in this report the Colombo Stock senior officials from both the public and private sectors Exchange ranked amongst the best performing stock under the chair of the Governor of the Central Bank of Sri markets across the world, during 2003. The significant Lanka to facilitate financial sector reforms. In this, we feature on this occasion was that local investors largely actively contributed to financial sector reform in the Capital spearheaded this. The SEC was pleased to contribute to the Markets. This included chairing the Task Force, which CSE’s efforts to expand its reach with the co-financing of its studied and developed a matrix for the establishment of an Kandy branch, which turned profitable during a short pace Exchange Traded Corporate Debt Market as well as of time. implementing Capital Market reforms already adopted. It is

SECURITIES & EXCHANGE COMMISSION OF SRI LANKA Annual Report 2003 11 REVIEW OF THE DIRECTOR GENERAL (Contd.)

imperative that we develop an exchange traded corporate The SEC recognizes the importance of a minimum skill debt market, which the experience obtained in other base for the sustainable development of the Capital Market. countries has shown to boost as well as create alternate Hence it is imperative that there is both rigorous training sources of medium to long term funding. and formal evaluation of such skills spanning the current expanse of Stock Broker examinations conducted by the The SEC also initiated a dialogue with the Unit Trust CSE and the Chartered Financial Analyst examinations. It is Industry with a view to facilitating greater market access, our considered opinion that such institutional framework is particularly in the rural areas through Unit Trusts. The SEC fast developed through regional co-operation. For this recognizes several impediments which faultered previous purpose the Skills Development Committee has both efforts to facilitate the development of the Unit Trusts. This invited bids for a consultancy as well as sought assistance includes issues of perception on risk in comparison to from both the Bombay Stock Exchange & the Securities alternate forms of investment. This requires sustained and Commission Malaysia with request for assistance to set up often grass root level investor awareness programmes. a Capital Markets Training Institute. Efforts are under way to implement such programmes. With fluctuations in the Capital Market, take overs and Towards the facilitation of the development of the Capital mergers have gained increased significance. In this context, Market the SEC identified impediments and proposed the present Code which was primarily based on the amendments to the Companies Act as an immediate voluntary UK Code, has outlived its usefulness. Hence measure, pending the complete revision of the Companies efforts were initiated to review the Code based inconclusive Act. efforts few years ago and on Codes of other jurisdictions. The SEC successfully brokered a reduction in the brokerage This is expected to address areas in the present Code which commission and the fees levied by the CSE. We also appears ambiguous or has gaps. reduced our own levy on share transactions. We recognise Efforts to issue guidelines for auditing of listed companies that such fees could be further revised downwards and was also continued with vigour. In this instance extensive have requested the CSE to work in consultation with the consultations were held to collate an useful and effective Stock Brokers to move towards negotiable commissions code whilst not impeding entrepreneurial flair. Such during 2004. efforts have since been concluded. A working document is The SEC identified Stakeholder Committees and now before the listed companies with a request for Consultations as a key method to drive policy and implementation. regulatory development in the Capital Market. In this 2003 also witnessed the enactment of amendments to the context the SEC appointed three such Committees to SEC Act, which was deliberated and formulated over a long deliberate on Corporate Governance, Skills Development period. Such amendments sought to enhance SEC’s and to review the Takeovers and Mergers Code whilst the investigative powers as well as bring several new market existing stakeholder committee pursued in earnest the intermediaries under its regulation. This included Credit development of guidelines for auditing listed companies. Rating agencies, thus becoming one of the few jurisdictions, Corporate Governance initiatives were based on the Code which regulate such intermediaries. With the assistance of developed by the Institute of Chartered Accountants of Sri an International Consultant, through a consultation process Lanka, which was compared with similar codes developed the SEC formulated criteria for registering and supervising in the US, UK, Europe and by OECD for further refinement. such new market intermediaries. Following this enactment It is expected that with refinements, this code will be with the approval of the Hon. Attorney General, the SEC published initially for voluntary adoption. Based on the also formulated an investigation procedure, which is now experience, it is expected that some of the provisions would in place. The SEC also strengthened its working relations be mandated through its incorporation in the rules with the Attorney General’s Department with the applicable to listed Companies. It is indeed pertinent to appointment of a Senior State Counsel as a Legal note that Sri Lanka’s efforts in this area commenced before Consultant, in addition to the Solicitor General. the much publicized scandals in the West. The drafts During the year, the SEC implemented several measures to developed are in line with efforts of other jurisdictions. strengthen its market surveillance and supervisory

12 Annual Report 2003 SECURITIES & EXCHANGE COMMISSION OF SRI LANKA REVIEW OF THE DIRECTOR GENERAL (Contd.)

capabilities. Such efforts would continue in earnest during We will endeavour to continuously strengthen both our 2004. These efforts will revamping procedures, increasing skills as well as resources to effectively and dynamically electronic links, further automating such surveillance, regulate the market in a manner to both enhance investor enhancing skills and closer monitoring. It is our intention confidence as well as to facilitate market development. that such efforts act as an effective detterent to market I take this opportunity to express my gratitude to the abuse whilst not curbing the entrepreneurism of the Chairman and Members of the Commission for their investors. guidance and support in such efforts. I also take this Towards increasing its own efficiencies, the SEC launched opportunity to congratulate the Directors and Staff for their its own local area network, providing electronic commitment and excellent efforts. I also acknowledge the communication both internally and externally. Such efforts co-operation of all market intermediaries in our efforts. to strengthen its information technology capabilities continue. This is expected to play a pivotal role in both regulation as well as market development.

Focus on 2004 We expect to continue our multi faceted efforts to strengthen regulation whilst facilitating market Palitha Silva Gunawardene development. In addition, the SEC endeavours to increase its active participation in international efforts to deliberate Director General issues of mutual interests. The development of the market Securities & Exchange Commission of Sri Lanka would necessarily focus on issues such as transition towards a negotiated brokerage commission, reduction of the settlement cycle, transition to Delivery vs Payment for equities etc. as well on demutualisation of the CSE. The SEC notes that the CSE agrees to demutualisation in principle and would continue its discussions on the modalities with a view to an early decision.

SECURITIES & EXCHANGE COMMISSION OF SRI LANKA Annual Report 2003 13 OFFICE OF THE DIRECTOR GENERAL

1 Carmen de Silva Executive Secretary

2 Sharon Perera Co-ordinating Secretary

3 Palitha Silva Gunawardene 3 4 Director General 1 2 5 6 4 Sajeevani Bakmedeniya Executive

5 Sharmila Panditaratne Executive

6 Ruwanganie Gooneratne Executive Secretary

14 Annual Report 2003 SECURITIES & EXCHANGE COMMISSION OF SRI LANKA OPERATIONAL DIVISIONS

A

SECURITIES ION OF SRI

& EXCHANGE OMMISSION OF SRI

COMMISSION OF SRI LANKA • OMMISSION OF SRI LANKA • N OF SRI LANKA • SECURITIES & SECURITIES & EXCHANGE

COMMISSION OF SRI LANKA • SECURITIES & A • SECURITIES & EXCHANGE COMMISSION OF

EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & GE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & ITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES &

EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE A • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITI

COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI NKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE NKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITI COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & NKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITI EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES IES & EXCHANG NKA • SECURITIES & EXCHANGE COMMISSIONA • OF SECURITIES SRI LANKA & • SECURITIEXCHANG IES A • SECURITIES & EXCHANGE COMMISSIONIES OF & SRI EXCHANG LANKA & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & KA • SECURITIES OF& EXCHANGE SRI LANKAGE COMMISSION COMMISSION • SECURITIES OF &OF EXCHANGE SRISRI LANKA COMMISSIO • SECURITI EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE

COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI

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COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECUR

EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANK

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& EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LA

& EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LA EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LAN LANKA •• SECURITIES & EXCHANGE COMMISSION OF S & EXCHANGECURITIES COMMISSION SRI& EXCHANGE LANKA OFEXCHANGE SRI • SECURITIES COMMISSION LANKAMMISSION COMMISSION • SECURITIES &MMISSION EXCHANGE OF OF SRI SRI OFLANKAMMISSION & LANKA OFSRI EXCHANGECOMMISSION SRI LANKA• SECURITIESCHANGE LANKA• OFSECURITIES •COMMISSIONSRI SECURITIES •COMMISSION ECURITIESOF SECURITIESLANKA & SRI EXCHANGE &LANKA MMISSION•EXCHANGE SECURITIES &OF EXCHANGE& OFSRI• EXCHANGECOMMISSIONSECURITIES NKASRI LANKA OF LANKA COMMISSION • & SRISECURITIES COMMISSIONEXCHANGE CURITIES• LANKACOMMISSIONSECURITIES &• SECURITIESOFEXCHANGE SRI CURITIES• &SECURITIES OF&LANKACOMMISSION EXCHANGE EXCHANGE OF&SRI OFEXCHANGE&COMMISSION SRI NKA EXCHANGELANKA•&SRI SECURITIES LANKAEXCHANGE &LANKA• COMMISSIONCOMMISSIONEXCHANGE SECURITIESOF•MMISSION COMMISSION SECURITIES•SRI COMMISSION SECURITIES•OF &SECURITIES LANKACOMMISSION SRIEXCHANGECURITIES COMMISSION LANKA &OF OFOF &• EXCHANGE SRI OFSECURITIESSRI&SRIEXCHANGE MMISSIONOF& & •EXCHANGESRICOMMISSION LANKASECURITIESEXCHANGE LANKAEXCHANGE LANKASRIOF LANK OFLANKASRI I COMMISSION •SRI •&• COMMISSION OFLANKASECURITIES COMMISSIONEXCHANGE LANKACOMMISSIONCOMMISSION&•SRI SECURITIES EXCHANNKA LANKA • SECURITIES• • SECURITIES SECURITIES OF&COMMISSION •OFNKA EXCHANGESECURITIESEXCHANGEOF & SRIOF OFSRI EXCHANGE SRI SRILANKA &LANKA• LANKLANKA &MMISSIONLANKA &EXCHANGE EXCHANGE SECURITIES COMMISSION COMMISSIONOF& • EXCHANGE COMMISSION• •SRI•SECURITIES SECURITCURITIES SECURITIESSECURITSECURITIES LANKA COMMISSION OFCOMMISSION MMISSION COMMISSIONOF &SRI• & SECURIT&OF & SRI EXCHANGEXCHANGSRILANKA LANKA LANKOFOF S CORPORATE AFFAIRS DIVISION

1Manjula Chandraratne - Officer 2 Christobel Silva - Conf. Secretary 3 Sheena Hewagama - Executive 5 4 Lasinee Seresinhe - Director Corporate Affairs 3 7 5 D.M.G. Priyantha - Officer 1 6 Thamari Senanayake - Legal Executive 2 4 6 8 9 7 Sharmalene Alles - Executive 8 Dinesha Perera - Audit Officer 9 Ranmini Jayathilake - Executive Information Systems

CORE FUNCTIONS KEY ACTIVITIES

• Examine financial statements of companies with Review of Annual Reports reference to compliance with relevant laws and The SEC places great emphasis on protecting the interest of regulations on "true and fair" disclosure. investors and all its stakeholders, as the capital market • Monitor market activity to detect and prevent depends on timely and accurate information to function market abuse. efficiently and fairly. It is important, that the disclosures released to the securities market are true, fair and timely. •Promote Corporate Governance Practices. All listed Companies are required to submit annual reports • Inquire into and resolve complaints of markets, within six months of the end of the financial year to their intermediaries and investors. shareholders and the Colombo Stock Exchange, and must •Verify the accuracy of the notices/announcements comply with the relevant legal provision. The audited published by issuers and listed companies. accounts should be prepared and presented in accordance

• Monitor compliance with the Companies' Takeovers with the Sri Lanka Accounting Standards. and Mergers Code 1995. The Corporate Affairs Division reviews Annual Reports of •Process and approve off-the-floor share transactions Listed Companies to ascertain the degree of compliance with the SEC Act, CSE Rules, Sri Lanka Accounting • Respond to surveys conducted by IOSCO. Standards (SLAS) and relevant provisions of the •Process and approve the Delisting applications. Companies Act. The objective of this exercise is to enhance • The Unit on Information Technology was the quality of Annual Reports and Accounts submitted by amalgamated with the Corporate Affairs Division Listed Companies and facilitate the Commission in and is responsible for the development and researching the degree of comparability of financial management of the SEC's information technology statements produced by Listed Companies. Listed infrastructure Companies are required to disseminate material

16 Annual Report 2003 SECURITIES & EXCHANGE COMMISSION OF SRI LANKA CORPORATE AFFAIRS DIVISION (Contd.)

information promptly in order to establish transparency In reviewing the Annual Reports the Division and accountability in the Securities Market and ensure that focused on the following areas: professional standards are maintained. • Compliance with Colombo Stock Exchange (CSE) We also reviewed interim accounts, market disclosures and Rules other information that Listed Companies are required to • Compliance with Sri Lanka Accounting Standards disseminate to the public as a part of their continuing (SLAS) listing obligations to reduce asymmetry of information. • Compliance with Companies Act Requirements and other relevant legislation

Key Areas of Non Compliance with Sri Lanka Accounting Standards

RELEVANT SLAS AREAS OF NON COMPLIANCE

SLAS 3 Accounting Policies with regard to the following areas: Presentation of Financial Statements • Revenue recognition • Employee benefit costs • Investment properties • Foreign currency translations • Definition of business and geographical segments and the basis for the allocation of costs between segments • Definition of cash and cash equivalence •Investments •Capitalisation of borrowing costs • Leases • Contingencies Directors' responsibilities Rights, preferences and restrictions of shares Nature and purpose of reserves Inadequate cross references Sub classifications of the line items presented SLAS 5 Amount of inventories pledged Inventories Cost formula used SLAS 14 The amount of tax losses Accounting for Taxes on Income Tax Reconciliation

SLAS 16 Defined Contribution Plans Retirement Benefit Costs

SLAS 18 Details of re-valued assets Property, Plant & Equipment Amounts of restrictions on title of Property Plant and Equipment

SLAS 30 Elements of related party transactions Related Party Transaction

SLAS 28 Financial Information by segments Reporting Financial Information by Segment

SLAS 22 Fair value of Investment Properties Accounting for Investments

SLAS 33 The amount of non- performing loans and the basis of

Revenue Recognition and Disclosures in the calculation. Financial Statements of Finance Companies

SECURITIES & EXCHANGE COMMISSION OF SRI LANKA Annual Report 2003 17 CORPORATE AFFAIRS DIVISION (Contd.)

• Corporate Governance Practices views/comments of public market participants on all aspects of the working of the Code for this purpose. The • Shareholder and Investor Information committee decided to study the applicability of laws of • Financial Summary specific countries in order to make the necessary revisions.

• Chairman's Report There were nine mandatory offers and two voluntary offers

• Report of the Auditors during the year under review, and we ensured that there was due compliance with the Takeovers and Mergers Code • Financial Highlights by those concerned. Details of these Takeovers and Mergers • Corporate Information are set out in Table A.

• Management Discussion and Analysis Approval of Off-the -Floor Share Transactions We reviewed approximately 110 Annual Reports and We approved 398 exceptional transfers. These transfers Accounts of Listed Companies and communicated with were in order to facilitate margin trading, fund twenty companies on matters relating to non-compliances management, delisting and restructuring where beneficial considering the nature and the materiality of the issues. The ownership would not change. responses of Listed Companies were extremely positive to this endeavour. In most instances, the SEC cautioned the Before the amendments effected to the SEC Act, the practice companies to ensure that such deviations were not repeated was that the SEC approves the transfer of shares pertaining in future submissions. This process has contributed to to conveyance. However with the SEC amendment Act of improving the level of awareness of companies and 2003 coming into force, this process has been deemed auditors regarding the obligations placed upon them in the unnecessary and thus the application form for the transfer preparation and presentation of Annual Reports and of securities was reformatted. Accounts. Handling of Complaints Takeovers and Mergers The Division received 27 complaints from shareholders of The Takeovers and Mergers Code was formulated in 1995 Listed Companies out of which one complaint was referred and has not undergone a comprehensive review and to the Investigations Division. revision. A committee therefore, comprising of The details of the complaints and their status as at 31 stakeholders was formed in August 2003 to formulate December 2003 are given in Table B revisions to the Code. The committee sought the

TABLE A

Offeror Sector Offeree Type of offer

Universal Enterprises Private Ltd Hotels & Travels Mahaweli Reach Hotels Ltd Mandatory Takeover

Connaissance De Ceylon Ltd Hotels & Travels Ruhunu Hotels & Travels Ltd Mandatory Takeover

Mr K D D Perera Hotels & Travels Hotel Reefcomber Ltd Mandatory Takeover

Mr K D D Perera Banks, Finance & Insurance L B Finance Ltd Mandatory Takeover

Mr K D D Perera Manufacturing Royal Ceramics Lanka Ltd Mandatory Takeover

John Keells Holdings Ltd Hotels & Travels Asian Hotels Ltd Mandatory Takeover

Banyan Tree Holdings Pvt Ltd Hotels & Travels Beruwela Walk Inn Ltd Mandatory Takeover

Mr H A D U G Gunasekera Chemicals & Pharmaceuticals Union Chemicals Lanka Ltd Mandatory Takeover

Lanka Tiles Ltd Manufacturing Parquet (Ceylon) Ltd Mandatory Takeover

Brandix Textiles (Private) Ltd Footwear & Textiles Kuruwita Textiles Mills Ltd Voluntary Takeover

Associated Electrical Corporation Ltd Motors Associated Motorways Ltd Voluntary Takeover

18 Annual Report 2003 SECURITIES & EXCHANGE COMMISSION OF SRI LANKA CORPORATE AFFAIRS DIVISION (Contd.)

TABLE B

Nature of complaint Total no of Pending Referred to Referred to the Referred to the complaints Investigation Complaints Attorney Division Committee General

Unauthorized Transactions 5 1 1

Complaint against an investor 1 - 1

Non-receipt of rights/ dividends/payments 5 -

Non-disclosure of financial information 2 -

Issues related to CDS Statements/ Registration of accounts 2 -

Unit Trusts 1 1

Takeovers and mergers 2 1 1

Miscellaneous 9 -

Market Monitoring In addition, individual files for information collation on The Corporate Affairs Division, via a real time computer corporate behaviour, profiles and disclosures are assisted surveillance system, conducts continuous maintained for Listed Companies. monitoring of market activities of Listed Entities in order to During the year, the surveillance staff examined the detect unfair transactions that may violate laws and following issues listed in Table C. regulations. These include market manipulation, insider To strengthen market surveillance, technical assistance has dealing, wash sales, front running, short selling, cherry been requested for the following: picking etc. • Review current market surveillance methodologies Subsequent to the detection of any market irregularities, the and procedures and advise on its adequacy Division proceeds to analyse all material information and will conduct a preliminary inquiry to determine whether a •Provide a detailed report of the recommended system and procedures, bearing in mind fully-fledged investigation into the issue is warranted. It compatibility issues with the ATS, CDS and also scrutinizes various news sources including newspaper Registrar of Companies and the Central Bank articles, advertisements, rumours, information on the internet to verify any irregularities caused by misconduct. • Draft specifications for an affordable system-based solution, which automates or partly automates the processing of key information

TABLE C

NATURE OF SURVEILLANCE NO OF ISSUES ACTION TAKEN

Heavy Trading / Unusual Trading Pattern 27 • Two matters were referred to the Investigations Division.

• After conducting preliminary inquiries the other matters were closed since it was not necessary to pursue them any further.

References from newspaper reports 02 Observations of the parties concerned were called for. No further action was required.

SECURITIES & EXCHANGE COMMISSION OF SRI LANKA Annual Report 2003 19 CORPORATE AFFAIRS DIVISION (Contd.)

•Provide advice during the system's development Other Matters and implementation In terms of the prevalent rules, during the year under •Provide training review, we reviewed one de-listing application.

Issues pertaining to Information Technology Approvals under Section 28A of the SEC Act • Administrate the SEC Local Area Network and In terms of Section 28A of the SEC Act, if a public company ensure the integrity of the system wishes to allot shares or any securities convertible to shares to any person prior to its listing on the Stock Exchange with • Administrate the SEC Website an intention of obtaining a listing within a period of one • Administrate and maintain SEC mail and database year of such allotment, prior approval of the SEC is servers efficiently and effectively with minimum required. The intention of the legislature for inclusion of down time this section was to avoid a situation where a company could place shares at a discount to the public issue price • System backups - Accounting information on a daily with selected individuals and institutions prior to basis obtaining a listing on the Stock Exchange and trade in the • Monitor the capacity usage of access and time market an undue price advantage subsequently.

• Develop policies and Guidelines According to the said Section, approvals were granted to •Update workstations regularly to ensure that all six entities, of which two companies have already obtained systems are protected against harmful common listings on the Colombo Stock Exchange.

computer viruses Types of allotments that took place were: • Administrate the other computerised systems Private placements • Accpac- Accounting package Bonus shares • Paypac- Employees Salaries Conversion of preference shares • Hexagon- HSBC Employee Share Option Plans (ESOP) Shares issued in lieu of advances received • Cheque outsourcing [COS] - HSBC

20 Annual Report 2003 SECURITIES & EXCHANGE COMMISSION OF SRI LANKA INVESTIGATIONS DIVISION

1 Madhugayanie Balapitiya - Legal Executive

2 Dhammika Perera - Director Investigations 2 3 3 Shalini Perera - Conf. Secretary 1 4 4 Dulanga Perera - Executive

Core Functions non-disclosure of material information by a Listed • Deal with complaints that appear to require the Company, a case which was filed by the SEC based on institution of legal or other proceedings or the findings of a previous investigation. imposition of sanctions; Probably the most significant regulatory step for the SEC is

• Conduct investigations into fraudulent activities in the acquisition of vital long overdue investigative powers the securities market and violations of securities through the amendments to the SEC Act which came into laws and regulations; operation on 29 April 2003. Previous investigative powers vested in the SEC proved to be highly inadequate with the • Conduct inquiries with regard to proposed SEC being able to call for information only by way of takeovers and mergers where it is alleged that the written notice, an impediment to conducting investigations mandatory offer provisions contained in the effectively. The augmented investigative powers Takeovers & Mergers Code have been triggered; and empowered the SEC to summon witnesses, record • Conduct training programmes on securities related statements, visit premises, inspect and take copies of investigations. records etc. which will no doubt contribute immensely towards building a stronger regulatory framework. Key Activities Further, a formal procedure in conducting investigations by In the year under review, the Investigations Division the SEC was introduced in conformity with the statutory conducted a total of sixteen investigations, of which nine provisions contained in the SEC Act, which was duly were completed during the year. The details and a brief documented and approved by the Commission and the description of the action taken/current status of the said Hon. Attorney General. investigations are given on page 22. Necessary steps were also taken during the year to We obtained the services of a Senior State Counsel with strengthen the ability of the Investigations Division to extensive expertise to facilitate the investigations. conduct investigations in a more effective manner by Although the SEC did not institute any legal proceedings in recruiting additional staff with adequate qualifications and relation to the matters investigated during the year, the experience. Division participated in the on-going litigation relating to

SECURITIES & EXCHANGE COMMISSION OF SRI LANKA Annual Report 2003 21 INVESTIGATIONS DIVISION (Contd.)

NATURE OF INVESTIGATION NO. OF ACTION TAKEN/CURRENT STATUS INVESTIGATIONS

Insider Dealing 1 06 Material/evidence elicited in the course of one investigation was referred to the Hon. Attorney General for advice and the advice was received to the effect that there exists a prima-facie case of insider dealing against two persons connected to the said investigation. This matter is presently before Courts.

After detailed investigations, three investigations were terminated due to the lack of evidence to establish charges of insider dealing, whilst the other two investigations were on-going as at end of the year 2003.

Inquiries into the Business 01 Since the evidence/material elicited during the investigation Affairs of Listed Companies did not reveal any contravention of the provisions of the securities laws, rules and regulations, our investigation was terminated. However, since it came to light through our investigation that a possible case of criminal misappropriation of the funds of the shareholders of the listed company may exist, the matter was referred to the Police for further investigations.

Forgery/Cheating 03 Since the investigations by the SEC revealed prima-facie cases of forgery and cheating, all three cases were referred to the Police for further action.

Investor Complaints 03 As at the end of the year under review, investigations were in progress.

Market Manipulation 2 02 One investigation was terminated as the evidence elicited during the said investigation did not reveal a case of market manipulation under the provisions of the SEC Act, whilst the other investigation was on-going.

Front Running 3 01 Following a detailed investigation, the case was terminated due to lack of evidence.

1 Insider Dealing 3Front Running Trading in the shares of a listed company whilst in the Execution of trades whilst having the knowledge of the orders possession of unpublished price sensitive information in to be executed, with the intent of making available the shares respect of the securities of the said Company. to the prospective investors at a profit.

2 Market Manipulation Creation of a false or misleading appearance in respect of the trading, or the price of any securities listed on a stock market.

22 Annual Report 2003 SECURITIES & EXCHANGE COMMISSION OF SRI LANKA LEGAL AND ENFORCEMENT DIVISION

1 Nihara Mallawa - Executive

2 Hasini Amaratunga - Conf. Secretary 2

3 Marina L Fernando - Director Legal & Enforcement 1 3 4 4 Damayanthi Fernando - Executive

Core Functions Providers, Investment Managers, Credit Rating •Provide legal support and advice to the Commission Agencies and Clearing Houses. and its various Divisions. • Instruct the Attorney - General in the prosecution of

• Review and develop the framework of laws within persons charged with the violation of the provisions which the Securities and Exchange Commission of the SEC Act, and subordinate legislation made functions, with a view to ensuring that such laws thereunder. optimally reflect better developed and more •Process and approve applications by foreign funds appropriate policies to invest in the Sri Lankan securities market.

• Review, suggest and draft amendments to the •Present matters at inquiries before the Commission. Securities and Exchange Commission of Sri Lanka Act and subordinate legislation made thereunder. Key Activities

• Review and approve rules of the Colombo Stock A Litigation Exchange. Cases Filed by the SEC •Process and approve applications for the issue and 1. SEC vs. Magpek Exports Ltd. and its Directors renewal of licenses to Stock Exchanges, Stock The SEC filed charges against this Company and its Brokers, Stock Dealers and Managing Companies of Directors for not immediately disclosing to the market, Unit Trusts. material information that would prevent the creation of a •Process and approve applications for the grant and false market for shares of Magpek Exports Ltd., as required renewal of registration to Underwriters, Margin by the SEC Rules.

SECURITIES & EXCHANGE COMMISSION OF SRI LANKA Annual Report 2003 23 LEGAL AND ENFORCEMENT DIVISION (Contd.)

Charges against three of the defendants were compounded funds, have been formulated by the SEC and circulated. on an application being made in that respect. These guidelines seek to prevent the entry of money connected with illegal transactions into the country. As at 31st December 2003, the trial against the remaining defendants is continuing in the Magistrates Court. The case C. International Organization of Securities for the prosecution has been concluded. Evidence in Commissions (IOSCO) Multilateral MOU support of the defence is scheduled to commence. The SEC has made an application seeking permission to Cases Filed Against the SEC become a signatory to the IOSCO MOU, which constitutes an understanding between signatories facilitating the 2. Michael Mack (Petitioner) vs. SEC and the exchange of information. The SEC responded to queries Commission Members (Respondents) raised by the teams of the IOSCO, which were formed to The Commission’s decision to prosecute Michael Mack on consider and approve the suitability of the SEC’s charges of insider dealing in violation of Section 32 of the application. The Screening Group accepted the application SEC Act (as amended) was not proceeded with in view of an and recommended that signatory status be granted. The application being made by the Petitioner to the Court of SEC is presently awaiting the decision of the three member Appeal of Sri Lanka, for the issue of Writs of Certiorari and Committee and anticipates being granted signatory status Prohibition. A Writ of Certiorari is sought to quash the within the year 2004. decision of the SEC to commence proceedings to prosecute the Petitioner and a Writ of Prohibition is sought to prevent D. Takeovers and Mergers Code the SEC from taking any further steps in that respect. Rule 31 of the Takeovers and Mergers Code 1995 was The SEC has filed their objections to the Application. amended to make provision that no person will incur a Hearing of the Application has been scheduled for liability to make an offer in terms of Rule 31 unless such February 2004. person has sufficient financial resources to implement the offer in full to the shareholders, to whom such offer should 3. H. N. Gunewardena (Petitioner) vs. SEC and the be extended. Commission Members (Respondents) A Committee was also set up to study and review the The Commission’s decision to prosecute H. N. efficacy of the Code against standards developed and Gunewardena, on charges of insider dealing in violation of Section 32 of the SEC Act (as amended) was not proceeded utilized by other jurisdictions and to recommend with in view of an application being made by the Petitioner amendments to the Code. to the Court of Appeal of Sri Lanka, for the issue of writs of Certiorari and Prohibition. A Writ of Certiorari is sought to E. Revision of Transaction Fee Structure quash the decision of the SEC to commence proceedings to The transaction costs for equity trading was reduced with prosecute the Petitioner and a Writ of Prohibition is sought effect from 1st December 2003. The revised transaction fees to prevent the SEC from taking any further steps in that are as follows; respect. The CSE was requested to forward a proposal on negotiable The SEC has field their Objections to the Application. brokerage commission in consultation with the Colombo Hearing of the Application has been scheduled for February 2004. < Rs.1 Mn. > Rs. 1 Mn. (%) (%) B. Approval of Country and Regional Funds SEC Cess 0.090 0.090 Approval has been granted to thirty regional and country CSE Fees 0.105 0.105 funds in compliance with the criteria laid down in the Gazette Extraordinary No. 720/12 of 24th June 1992 to CDS Fees 0.030 0.030 invest in listed companies incorporated in Sri Lanka. Brokerage Commission 1.000 0.800 Guidelines setting out the criteria, on the fulfillment of Total 1.225 1.025 which approval may be granted to regional and country

24 Annual Report 2003 SECURITIES & EXCHANGE COMMISSION OF SRI LANKA LEGAL AND ENFORCEMENT DIVISION (Contd.)

Stock Brokers’ Association. The SEC proposes to consider I. Renewal of License as a Stock Broker the suitability of introducing negotiable brokerage. Applications forwarded by 15 Stockbrokers for the renewal of their license as Stock Brokers were processed and F. Introduction of Five New Market approved. Intermediaries The Amendment No. 18 of 2003, to the SEC Act No. 36 of J. Registration as a Stock Broker and a Stock 1987, introduced five new market intermediaries subject to Dealer regulation of the SEC. They are margin providers, The application forwarded by Seylan Merchant Bank to be investment managers, underwriters, credit rating agencies licensed as a Stock Broker and a Stock Dealer was processed and clearing houses. and approved. Additional requirements which ought to be fulfilled by intermediaries to qualify for registration have been K. Memorandum and Understanding (MOU) for introduced through ‘Terms and Conditions’ being Assistance and Mutual Co-Operation formulated by the SEC. These are additional to the terms The SEC signed a MOU with the Securities and Exchange and conditions set out in the SEC Act. Board of India (SEBI) and the SEC Pakistan, with a view to facilitating the exchange of information and to further Registrations of market intermediaries commence from the bilateral ties between the two countries. 26th of January 2004.

G. New Unit Trust Code L. Miscellaneous The SEC proposed amendments to the Companies Act The new Unit Trust Code rescinding the Unit Trust Code of No.17 of 1982 to enable: 1995 has been approved by the Legal Draftsman’s Department. The Code will be gazetted shortly, and will be the issue of shares, below par value without Court applicable from that date. sanction; and the issue of commercial papers without fulfilling the currently prevalent H. Rules of the Colombo Stock Exchange requirement to publish a prospectus.

The SEC has examined and recommended the amendment These matters are under consideration by the of the rules referred to below, in terms of Section 24 of the Registrar of Companies. SEC Act.

1. Listing Rules

These constitute rules binding on listed companies of Sri Lanka.

2. Rules Governing Trading, Clearing and Settlement of the Beneficial Interest of Government Securities of the Colombo Stock Exchange (CSE) including related rules for Member Firms of the CSE

The Colombo Stock Exchange has securitized the beneficial interest arising out of Government Securities such as Treasury Bills under the name ‘Beneficial Interest in Government Securities’ and developed an infrastructure to facilitate the trading thereof. These Rules regulate such trading.

3. Automated Trading Rules of the CSE

Automated Trading by the Colombo Stock Exchange is regulated by these rules.

SECURITIES & EXCHANGE COMMISSION OF SRI LANKA Annual Report 2003 25 SUPERVISION DIVISION

1 Harshana Wanniarachchi - Officer 2 Chamari Ekanayake - Executive 3 Himani Kotagama - Executive 4 4 Krishanthi Muthuthanthrige - Conf. Secretary 1 2 3 5 5 Benny Tissera - Director Supervision 6 7 6 Saumi Kodippily - Executive 7Viraj Rajapakse - Executive

Core Functions liquidity and net capital requirements and any violation to • Monitor the financial and operational performance the SEC Act. In addition, on-site supervision is conducted of licensed Stockbrokers and Management annually to check the financial stability of the Stock Companies of Unit Trusts by conducting on-site and Broking Companies. During the year, there were fifteen off-site inspections of Stock Broking Companies and Stock Broking Companies, which number has remained Management Companies of Unit Trusts in order to unchanged since 1994. ensure that adequate capital is maintained and these The SEC in order to implement the objective of monitoring Companies are financially stable. the financial and operational performance and financial

• Ensure that Stockbrokers employ competent staff to stability of licensed Stock Broking Companies, requires conduct business. Stock Broking firms to maintain a minimum net capital requirement* which was increased from Rs. 5 million to Rs. • Ensure that laws and regulations of the SEC are duly 11 million effective from 01st October 2003, due to the complied with by Stockbrokers and Management bullish market sentiment that prevailed. In addition to the Companies of Unit Trusts. minimum net capital requirement, Stock Broking firms are required to maintain a specified liquidity requirement, Key Activities appoint competent compliance officers capable of Broking Companies overseeing regulatory compliance procedures, maintain separate client accounts and follow an established Central Supervision of Stock Broking Companies Order Desk (COD) Procedure pertaining to the receipt, The Securities and Exchange Commission of Sri Lanka Act, execution and allocation of orders. The Stock Broking No.36 of 1987 As Amended By Act, No. 26 of 1991 & Act, companies are required to submit monthly unaudited No.18 of 2003, requires all Stock Broking firms to obtain a accounts and compliance reports to the Commission. These license annually and to be members of a licensed Stock reports are reviewed by the officers of the Supervision Exchange. The license is granted on assessing the financial Division to ensure that compliance procedures are adhered position of the Company, Compliance to the Colombo Stock to. Unaudited accounts are used to monitor and compare Exchange member regulations, Circulars pertaining to the performance of the broking industry.

* A minimum net capital requirement is defined as shareholders’ funds adjusted by all unsecured amounts.

26 Annual Report 2003 SECURITIES & EXCHANGE COMMISSION OF SRI LANKA SUPERVISION DIVISION (Contd.)

The Supervision staff monitor the Stock Broking companies It is evident that during the year 2003, brokerage income off-site, by reviewing the returns and documents submitted improved significantly from Rs. 595 Mn (approx.) to Rs. 1.4 viz., monthly unaudited accounts, net capital statements, bn (approx.) respectively, in line with the bullish market debtors and creditors age analysis, liquidity position, and trend. assessing financial stability of the company. The division also reviews the Compliance Reports to ensure compliance Unit Trust Funds with procedures adopted by the CSE. All fifteen Stock There were twelve Unit Trust Funds managed by five Broking firms were visited at least once during the year, to management companies as at 31st December 2003. Namal ensure that the companies are operating according to the Optima Fund was in operation for 18 months and expired SEC Act and rules of the CSE. During December 2001, the on 18th March 2003. SEC and CSE reached an understanding that the COD The market share of each Unit Trust Management Company Procedure during on-site inspection would only be verified as at 31st December 2003 is reflected in the following chart: if an investor lodged a complaint. This decision was based on the representations made by the Stock Brokers through MARKET SHARE OF UNIT TRUST the Stock Brokers’ Association due to the practical MANAGEMENT COMPANIES difficulties in adhering to the current COD procedure which 36.71% 40.83% was included before stock brokers commenced operations using automated systems, to enter orders according to time priority. Therefore, the disclosure of the COD procedure in the Compliance Report was removed with effect from May 2003, with the amendment to the CSE Compliance Circular.

Performance of the Stock Broking Companies 0.43% 13.05% The overall brokerage income earned by broking companies 8.99% during the year was approximately Rs. 1.4 bn (approx.), an NAMAL UTMC Eagle increase of Rs. 856 Mn (approx.) compared to the year 2002. Commercial Vanik The main reason for the increased brokerage income was due to enhanced investor confidence in the market, which, in turn, raised market prices and increased the turnover. This was evident with the All Share Price Index recording an all time high of 1,423.5 points on 23rd October 2003 and the Milanka Price Index reaching the highest point since its inception in January 1999, of 2,584.2 points on 31st October 2003.

The following graph depicts the Brokerage Income of Stock Broking Companies in the years 2002 and 2003:

BROKERAGE INCOME OF STOCK BROKING COMPANIES 1,600

1,400

1,200

1,000

800

Rs. (Mn.) 600

400

200

0 2002 2003 Year

SECURITIES & EXCHANGE COMMISSION OF SRI LANKA Annual Report 2003 27 SUPERVISION DIVISION (Contd.)

Structure of the Management Companies Names of the five Management Companies and the twelve Unit Trust Funds as at 31st December 2003 are listed below:

Management Company Managed Unit Trusts Type of Fund

National Asset Management Company Ltd. National Equity Fund Balanced Fund

Namal Growth Fund Growth Fund

Namal Income Fund Income Fund

Unit Trust Management Company (Pvt.) Ltd. Ceybank Unit Trust Balanced Fund

Ceybank Century Growth Fund Growth Fund

Eagle NDB Fund Management Company Ltd. Pyramid Unit Trust Balanced Fund

Eagle Income Fund Income Fund

Eagle Growth Fund Growth Fund

Eagle Gilt-edged Fund Gilt-edged Fund

Commercial Fund Management Company (Pvt.) Ltd. Comtrust Equity Fund Balanced Fund

Vanik Asset Management Co. Ltd. Vanik Index Fund Index Fund

Vanik Income Fund Income Fund

Supervision of Unit Trust Management were informed thereof and the companies have agreed to Companies rectify these discrepancies.

The Supervision Division visited each Management The SEC reviewed the monthly accounts and returns Company once during the year under review. The submitted to the Commission in respect of the twelve Unit inspections were carried out in accordance with the Audit Trust Funds. Unit Trust Management Companies are Programme developed by the Supervision Division of the required to maintain a minimum net capital whilst the Unit SEC in order to verify whether the investment parameters Trust Code 1995 stipulates that the Company maintains a for Unit Trust Funds were maintained as set out in the Unit minimum liquidity position, and investments in Trust Code and relevant Trust Deeds and whether the government securities and in licensed commercial banks do Management Companies are financially stable. A few not exceed a maximum level. One Company was found to discrepancies were noted and included incomplete have fallen short of the minimum net capital requirement application forms for registration as a unit holder, non- and was provided a time period to correct this position. In maintenance of an investment register and cheque addition, the Supervision Division also monitors exposure payments to unit holders being delayed for more than seven levels of the unit trusts according to investment limitations days for unit redemptions. The Management Companies set out in the Trust Deeds. A few Funds were found to have

As at 31st December General Growth Index Fund Income Gilt-edged Total Purpose Funds Funds Funds Funds

No.of Units - 2002 322,140,105 25,958,346 237,609 18,486,361 91,800,626 458,623,047

- 2003 263,828,152 24,635,758 701,986 22,752,939 5,522,207 317,441,042

Unit Holders - 2002 22,517 1,279 49 661 746 25,252

- 2003 21,359 1,382 87 675 563 24,066

Fund Value in Rs. - 2002 2,829,534 323,259 3,625 203,834 1,054,699 4,414,951

000’s - 2003 2,844,124 401,442 14,132 239,887 60,379 3,559,964

28 Annual Report 2003 SECURITIES & EXCHANGE COMMISSION OF SRI LANKA SUPERVISION DIVISION (Contd.)

exceeded the levels and not maintained the liquidity previous year. The main reason for the decrease was due to requirements stipulated in the Unit Trust Code and Trust Namal Optima Fund (NOF) ceasing operation in March Deeds. The SEC requested the Management Companies 2003. This accounted for 161 unit holders, 85 Mn (approx.) concerned to correct the situation. The Management units in circulation and a NAV of Rs. 989 Mn. Companies concerned corrected the funds that exceeded Approximately 67% of the Unit Trust Funds (excluding the limits, except for one fund, that could not rectify the Income Funds) were invested in the equity market. Income position. The Management Company requested time to Funds invested on an average more than 25% of their funds correct the position to be able to sell the securities at a in Treasury Bills. Due to the improved market conditions, favorable price. the Net Asset Value of the funds showed an increase of Rs. 134 Mn (approx.) during the year under review (excluding Furthermore, the SEC approved advertising material, press Namal Optima Fund in the comparison) compared to the releases, interim reports and annual financial statements. previous year. This can be mainly attributed to the increase The documents submitted were reviewed and necessary in the Net Asset Values of Balanced Funds, Growth Funds, amendments recommended by the SEC. It was also noted Index Funds and Income Funds. The primary reason for the that one Company published an advertisement without the improvement in the Net Asset Values of Balanced Funds, prior approval of the SEC. This Company was issued a letter Growth Funds, Index Funds was due to the Bullish Market of show cause and warned. conditions which prevailed at the Colombo Stock Exchange. Performance of the Unit Trusts The Unit Trust Industry recorded a negative growth of 4.7% THE OVERALL POSITION OF UNIT TRUST FUNDS AS AT in terms of unit holders and 31% in units issued, while the 31ST DECEMBER 2003 AND 31ST DECEMBER 2002: fund value recorded a positive growth of 19.4% when The SEC during the latter part of 2003 and early 2004 compared to the previous year. commenced a series of meetings with the five management

Details of the funds with regard to number of units, number companies in order to chart a course for the development of of unit holders and value are as follows: the Unit Trust industry. One of the main concerns addressed at the meetings was the need to create investor awareness At the end of 2003, 12 unit trust funds recorded 317 Mn amongst prospective small and medium scale investors in units in circulation, compared to 458 Mn at the end of 2002. rural areas. The SEC requested the Companies to submit a The number of unit holders had decreased from 25,252 as at projected plan during February 2004 to develop the market 31st December 2002 to 24,066 as at 31st December 2003. and increase unit holders in greater geographical areas, with The overall Net Asset Value of funds decreased by Rs. 0.9 the prime focus on small and medium scale investors. bn (approx.) from Rs. 4.4 bn to Rs. 3.6 bn compared to the

31/12/03 31/12/02 Change %

Net Asset Value(NAV) (Rs.Mn.) 3,560 4,415 (19.4)

No.of Unit Holders 24,066 25,252 (4.7)

No.of Units Issued (‘000) 317,441 458,623 (30.7)

Investment in Equity (Rs.Mn) 2,378 2,536 (6.2)

Investment in Treasury Bills (Rs.Mn) 899 1,330 (32.4)

Investment in other Instruments (Rs.Mn) * 164 549 (70.1)

* (E.g. Commercial Papers, Promissory Notes and Debentures)

SECURITIES & EXCHANGE COMMISSION OF SRI LANKA Annual Report 2003 29 PUBLIC RELATIONS AND MARKET DEVELOPMENT DIVISION

1 Sanali Weerasekera - Executive

2 Juliet Allegakoen - Conf. Secretary 2 4 3Malik Cader - Director Public Relations & Market Development 1 3 4 Kumari Siriwardena - Sinhala Typist 5 5 Suneth Perera - Executive

Core Functions financial sector are expected to participate at this •Handle International Relations conference.

•Handle publications The SEC awarded the tender to the Professional Conference Organizing - John Keells Conventions as event managers. • Develop and conduct training programmes on Capital Market, Securities Law and related subjects. The Asia Pacific Regional Committee (APRC) and Enforcement Directors' meetings - 2003 in Colombo • Conduct training programmes for SEC Staff In January 2003, Sri Lanka hosted approximately 50 • Coordinate the development of the SEC library delegates from Australia, New Zealand, China, Hong Kong, Japan, Singapore, Korea, Malaysia, India and Pakistan Key Activities where all regulators reinforced the need for and International Relations commitment towards regional co-operation and effective supervision of markets to enhance investor confidence. • International Organization of Securities Publications Commissions (IOSCO) The following were published during the year: Having competed with Spain, Sri Lanka won the bid to host the 30th Annual Conference of IOSCO from 4 - 7 April 2005 • Annual Report 2002 of the Securities and Exchange in Colombo. The IOSCO which was created in 1983, Commission of Sri Lanka comprises more than 100 securities market regulators and • Publication on "An Introduction to the Stock Market" affiliated organizations including International Stock in Sinhala by Y W Gunawardane, a former civil Exchanges, Fund Managers and relevant NGOs. Over 750 servant, mainly targeted at investors, highlighting the high profile delegates representing the international practical aspects of share trading in Sri Lanka.

30 Annual Report 2003 SECURITIES & EXCHANGE COMMISSION OF SRI LANKA PUBLIC RELATIONS AND MARKET DEVELOPMENT DIVISION (Contd.)

Training •Programme on Capital Markets for the students of the University of Colombo Teacher training on Capital Markets The SEC in association with the National Institute of •Programme on Capital Markets for the new recruits Education (NIE) organized six comprehensive training to the Sri Lanka Foreign Service - 2003 programmes, three programmes each in Sinhala and Tamil, •Presentation on the "Role and Functions of the SEC to educate regional teachers on the subject of capital and Take Overs and Mergers Code" at the Investment markets and current developments. One such programme Advisors Training Programme was organized for the first time for the North and East • Seminars were conducted on the "Capital Market of teachers, where participants from Jaffna, Chavakachcheri, Sri Lanka and current developments" to the Mannar, Trincomalee, Vavuniya and Batticaloa attended the Advanced Level students of two outstation schools. seminar. The three day residential programmes were held at the NIE auditorium, Maharagama, with field visits to the “Yuga Dekma” Industrial Exhibition in Matara Colombo Stock Exchange and the SEC. Organised by the Ministry of Industries from 5 - 11 The SEC was instrumental in introducing the subject of September 2003, the SEC, the CSE and the Unit Trust capital markets to the Advanced Level curriculum in the Association participated and educated thousands of early 1990s. Annually about 60,000 Advanced Level students, investors, potential investors and the general commerce students offer the subject at the examination. The visiting public on the Securities Market and the Regulation subject of Capital Markets has also been included in the of the Securities Industry. Ordinary Level Curriculum, exposing the subject to over Training Programmes for the SEC Staff 500,000 students. Several training programmes were conducted in-house for • Other seminars and programmes the staff on technical issues and subjects of general interest, covering :

• SEC Consultation on the Role of Auditors • New Amendments to the SEC Act •We organized a half day consultation on the "Role of • Futures and Options Auditors" on 26 September 2003 for 73 participants, who included auditors, representatives of listed • Money Laundering companies, law firms, stockbrokers and Unit Trust • Day Trading companies. The objective was to discuss the proposed guidelines for the role of auditors and to • New Market Intermediaries review observations received from the public. The • Corporate Governance - Current Issues comments made at the consultation and the relevant observations were incorporated in the guidelines. TV Quiz Programme - Sinhala Medium 2003 The division conducted a Do-You-Know Contest on Seminar on the Amendment to the SEC Act National Television for Advanced Level students with the We also co-ordinated the arrangements of the SEC intention of creating awareness to the public and educating sponsored seminar on the amendments to the SEC Act on students on the subject of Capital Markets. Each school, 24 June 2003. A total of 190 participants attended the which offers Advanced Level Commerce, was requested to seminar with Kithsiri Gunawardane, Director Legal and nominate one student to take part in the contest. An Enforcement of the SEC making the main presentation. Examination was held in seven provinces to select six participants from each province to take part in the semi- In addition to the above the division conducted the finals of the TV Do-You-Know contest. Each winner of the following seminars: semi-finals proceeded to the finals. Each student was given •A Programme on Capital Markets for the students of an opportunity to answer eight questions within a period of the Sabaragamuwa University two minutes. All semi-final contests and the finals were televised over Rupavahini on a weekly basis. • Seminar on the "Role and Functions of the SEC and new amendments to the SEC Act" for the students of the University of Colombo.

SECURITIES & EXCHANGE COMMISSION OF SRI LANKA Annual Report 2003 31 PUBLIC RELATIONS AND MARKET DEVELOPMENT DIVISION (Contd.)

The programme was conducted in association with the SEC Stakeholder Committee on "Skills Development" National Institute of Education, Maharagama. Similar Recognizing the importance of attracting, training and programmes were conducted by the division in 1997, 1998 retaining a skilled human resources pool for capital market and 1999. development, the SEC set up a stakeholder committee to draw up an action plan to develop skills of persons in the TV Quiz Programme - Tamil Medium 2003 securities industry. The ultimate objective is to set up a An all island Do-You-Know Contest for Advanced Level Capital Market Training Institute, which will help the Tamil students was conducted for the first time in the year industry to source and train industry personnel. The SEC 2003. All Tamil medium schools which offer Commerce for expects to retain the services of a consultant and has sought the Advanced Level examination were requested to international assistance for this purpose. nominate one student each for the contest. An examination was held in all provinces to select students for the semi- Library Development final stage. However, provinces were merged for the semi- The division made arrangements to add new publications to final contest based on the number of schools in each the library. The library was re-arranged for easy access and province. Accordingly five semi-finals and the final were details of books are now available on a computerized televised of over the Rupavahini and Eye Channels on a database. Arrangements have also been made to obtain the weekly basis. British Council Library membership for staff members.

32 Annual Report 2003 SECURITIES & EXCHANGE COMMISSION OF SRI LANKA FINANCE AND ADMINISTRATION DIVISION

Seated - Left to right A.G.I. Priyanganie-Receptionist, Ashoka Dayarathne-Officer, Lashan de Silva-Executive Administration, Ianthie Jayaratne-Director Finance & Administration, Rupika Bandara-Executive, A.C. Dias-Printing Clerk, Lakshmi Wickramayake-Officer, Dhanesha Rajapura-Conf. Secretary

Standing - Left to right W. Ariyaratne-Driver, Chandran Nagendran-Office Aide, Pathum Niroshana-Office Aide, S.D. Dharmasiri-Driver, Anura Perera-Driver, Lakshman Piyatissa-Office Aide, M Jayasekera-Driver.

Core Functions The approved Cadre and the Human Resource strength of • Financial control and budgeting including the Commission as at 31.12 2003 are depicted below. preparation of monthly, quarterly and annual accounts. Post Approved Cadre In Employment

• Managing the Cess Fund, Compensation Fund and Director General 01 01 Settlement Guarantee Fund. Directors 08 05 • Personnel Management Executives 22 20 • Supervising general maintenance and upkeep of the Staff 17 14 Secretariat Office Aide 07 07 •Procurement of Supplies Total 55 47 • Handling publication of reports and submission of the Annual Report to Parliament. Training Key Activities Training and Development forms an integral core in personnel development to allow staff to discharge the Staffing mandate entrusted to the Commission effectively and From the inception of the SEC, emphasis was placed on efficiently. Foreign training provided during the year recruiting suitably qualified personnel with relevant and included the Cambridge International Symposium on recognized experience to the Commission. Accordingly, the Economic Crime, APEC Financial Regulators Training only appointment made during the year under review was Initiative, Capital Market Promotion Policy, Tokyo that of the Director General. Three members of the staff Enforcement Seminar and Emerging Markets Programme. resigned - the Director General, Director Legal and Some staff also had the opportunity of visiting the Thai Enforcement and the Receptionist. Information Centre. Additionally, wherever applicable, the

As at 31st December 2003 the SEC had 47 staff members SEC enabled its personnel to attend training courses that serving the Commission as against an approved Cadre of 55. would further enhance their capabilities. 47 staff members comprise 17 males and 30 females.

SECURITIES & EXCHANGE COMMISSION OF SRI LANKA Annual Report 2003 33 FINANCE AND ADMINISTRATION DIVISION (Contd.)

The following table depicts the number of staff at all levels, • The settlement cycle presently followed in CSE is of who received local and foreign training. a two-tiered nature.

Ownership of shares traded is transferred no sooner Number of staff Number of staff a trade is executed. The buyer is required to pay on Posts who received who received T+5 i.e. the 5th day following the day of trading and Local Training Foreign Training the seller is settled on T+6 i.e the 6th day following the trade. This relatively long interval between Director General Nil 01 transfer of ownership and receipt of proceeds which Directors 03 06 gave rise to an unsecured settlement risk Executives 17 09 necessitated the establishment of SGF.

Staff 15 04 • The Trustees of the Fund hold office ex-officio and comprises the Chairman of SEC, the Chairman of Office Aides 07 - CSE, the Deputy Secretary to the Treasury, the Total 42 20 Director General of SEC and the Director General of CSE. The Cess Fund • The Government of Sri Lanka has contributed a sum The SEC pursuant to an administrative arrangement with of Rs 50 Mn to the said Fund. This money has been the Colombo Stock Exchange, levies a Cess on share trading invested in Government securities in terms of the transactions of the Colombo Stock Exchange in order to Trust Deed. SGF can also receive donations, gifts enable the Commission to reduce its dependence on the and endowments as replenishments. Treasury for funds to finance its market, regulatory and Broker/custodian banks are presently not required to development functions and administrative expenses. The contribute to the Fund. Ministry has granted approval to the SEC to levy such a Cess. The rate of Cess Charged by the SEC is 0.1% on each • The balance lying to the credit of the Fund as at transaction. The Cess charged by the SEC was reduced to 31.12.2003 amounted to Rs 87 Mn. The growth of 0.09% with effect from 1/12/03. The balance lying to the the Fund between 1998 and 2003 is depicted in the credit of the Fund as at 31.12.2003 amounted to Rs 419 Mn. following graph.

The growth of the fund during the period 1995-2003 is depicted below: SETTLEMENT GUARANTEE FUND (SGF)

CESS FUND 1995-2003 100

500 80

400 60

300 Rs. Mn 40

Rs. Mn 200 20

100 0

0 1998 1999 2000 2001 2002 2003 Year 1995 1996 1997 1998 1999 2000 2001 2002 2003

Year

The Settlement Guarantee Fund (SGF) The Compensation Fund (CF) Launched on 22 May 1998, the Fund was established for the The Compensation Fund came into operation along with purpose of guaranteeing the settlement of trades between the establishment of the SEC in 1987. The Securities and participants of the Central Depository System of the Exchange Commission Act No 36 of 1987 as amended states Colombo Stock Exchange. The operation of the SGF is as as follows: follows:

34 Annual Report 2003 SECURITIES & EXCHANGE COMMISSION OF SRI LANKA FINANCE AND ADMINISTRATION DIVISION (Contd.)

• “A Compensation Fund shall be established for the respect of any application made, and the decision of such purpose of granting compensation to any investor Committee on any such assessment or award shall be final who suffers pecuniary loss resulting from the failure and conclusive”. of a licensed stock broker or licensed stock dealer to • The Act also provides the procedure for applying for meet his contractual obligations.” compensation. According to the Act, the Committee The Compensation Fund shall consist of such sums of may, after examination of the documents and other money as may be voted upon by Parliament for the purpose evidence produced in support of the claim by an of the Fund. applicant, or in any case where an inquiry was held Such sums of money may be credited to the Fund under on the conclusion of such inquiry, allow or disallow Section 51A; such claim for compensation. Up-to-date no claims have been recorded from the Fund. • “The Minister shall appoint from among the Members of the Commission, three Members who shall comprise the The balance lying to the credit of the Fund as at 31.12.2003 Compensation Committee. The Committee shall be amounted to Rs 29 Mn. The growth of the Fund is depicted responsible for assessing and awarding compensation in below:

COMPENSATION FUND 1995-2003 30

20

Rs. Mn 10

0 1995 1996 1997 1998 1999 2000 2001 2002 2003 Year

SECURITIES & EXCHANGE COMMISSION OF SRI LANKA Annual Report 2003 35 UNIT ON POLICY DEVELOPMENT

Core Functions confidence in such processes as well as safeguarding their • Receive input on policy developments and interests. undertake comparative surveys in order to ascertain The Unit coordinated a workshop for the public in order to shortcomings. conclude this process of deliberations and conducted a

• Policy analysis, formulation and recommendation. consultation on 26th September 2003. Pursuant to the workshop/consultation, the Unit amended as appropriate • Monitoring of policy implementations. the Guidelines incorporating public views. The Committee, •Providing information backstopping services to during the year 2004 will revise & finalize the Guidelines other Divisions with regard to regional and for Best Practice on the “Role of Auditors.” international trends and developments Currently the Guidelines have been forwarded to the Director General, Sri Lanka Accounting & Auditing Research on Financial Sector Statutes and Key Standards Monitoring Board for re-wording of selected Functional Areas areas. The Unit researched on a function-wise analysis of Financial Sector Laws, identified at a Consultation on The Guidelines are expected to be finalized by April 2004 Future Financial Markets, initiated by the Securities and in consultation with the Central Bank of Sri Lanka, Ceylon Exchange Commission of Sri Lanka. The research Chamber Commerce, Sri Lanka Institute of Directors and the concentrated on recommendations and revision to Institute of Chartered Accountants of Sri Lanka.

Financial Sector Acts, Ordinances and Statutes in addition In addition to the above the SEC is also examining the to problem areas perceived by practitioners. An attempt was feasibility of incorporating certain provisions outlined in initiated to analyse the financial sector statutes in relation the Guidelines in the Listing Rules of the CSE for to seven key functional areas, namely: mandatory compliance. (a) Mobilizing funds Corporate Governance and Related Issues (b) Procedural aspects Presently, the corporate sector is following a Corporate (c) Regulatory aspects Governance Code issued by the Institute of Chartered Accountants of Sri Lanka (ICASL) adopted voluntary. (d) Establishment of institutions, corporate bodies or schemes During the year, the Unit initiated a Consultation relating to Corporate Governance issues with Mr. Ajith Nivard Cabraal (e) Dispute resolution in order to assess the necessity to develop and facilitate (f) Facilitate finance and financial transactions good Corporate Governance practices within the corporate (g) National policy facilitation and development sector.

As per these key areas, the Unit researched on the feasibility Additionally, the SEC appointed a “Committee on of developing and/or revising and/or amending a majority Corporate Governance” with Members being key of these financial sector laws in order to achieve an stakeholders of the Corporate Sector to contribute in terms investor-friendly framework with attractive fiscal and other of knowledge and interest in promoting good governance incentives. practices in Sri Lanka. The Unit is entirely responsible for assisting and coordinating the Committee.

Auditor Guidelines The Unit is currently coordinating two surveys – one in The Unit reconvened the SEC Committee on the “Role of consultation with the Colombo Stock Exchange (CSE) and Auditors” in August 2003 to finalize the draft proposal, the other with the Consultant, in order to collate which would supplement existing legislation, rules and information to revise (where necessary), the existing guidelines followed by the Listed Companies of the Institute of Chartered Accountants of Sri Lanka (ICASL) Colombo Stock Exchange. The objective of this exercise was Code on Corporate Governance and to mandate selected to strengthen the effectiveness of the auditors and the audit areas. process in listed companies and pave the way for greater self-regulation in addition to strengthening investor

36 Annual Report 2003 SECURITIES & EXCHANGE COMMISSION OF SRI LANKA UNIT ON POLICY DEVELOPMENT (Contd.)

Formation of the Financial Services Authority Publications The Unit Coordinated three consecutive meetings during • Annual Report -The Unit reviewed the internal divisional reports of the Annual Report in addition the months of November and December with representative to revising the final draft version. Additionally, the officials of the World Bank, the Central Bank, the Unit coordinated and edited the Report in order to International Monitory Fund, the Ministry of Finance, the release it concurrently with the International Sri Lanka Accounting and Auditing Standards Monitoring Organization of Securities Commissions (IOSCO), Board, the SEC, the Insurance Board of Sri Lanka (IBSL) and Asia Pacific Regional Committee (APRC) & Enforcement Directors’ Meeting. a rating agency. Discussions were based on the formation of a Financial Services Authority in Sri Lanka. • The Unit compiled the following reports /publications: Task Force on Corporate Bond Market • Ministry reports – The Unit compiled, edited and finalized reports for the four quarters. The Unit coordinated a Committee Meeting for the above Task Force comprising officials of the Ministry of Finance •Brochures – The Unit coordinated the compilation, editing and finalization of International (MOF), the Central Bank, the SEC, Sampath Bank and a Organization of Securities Commissions (IOSCO), rating agency, Chaired by the Director General of the SEC in Asia Pacific Regional Committee (APRC) & October 2003. The Meeting was convened to discuss Traded Enforcement Directors’ Meeting brochure. Corporate Bond Market development action matrix compiled by the Unit, and to set timelines for Strategic Review implementation of same. The Unit coordinated the Strategic Review Process for the

The Matrix identifies the action that is required to facilitate SEC with the assistance of Mr. Ranel Wijesinha as the the expeditious development of an Exchange Traded consultant. Corporate Bond Market and was approved by the Financial The objective of the assignment are to enhance the Sector Reforms Committee (FSRC), in November 2003. It effectiveness of the Commission in regulation and was decided that the time frames for implementation could facilitation of market development and to address in detail be fixed in consultation with the relevant institutions. plans for April 2004 to June 2005 and a general plan till December 2006. Takeovers and Mergers Code In order to facilitate the assignment the following activities The Unit coordinated several meetings with Members of the will be undertaken by the Consultant: Committee, Who were appointed by the SEC to formulate the revisions to the Takeovers and Mergers Code. The • Study identified regulatory agencies and regulatory environments in two countries to draw lessons for revisions would be based on the comments/views of the Sri Lanka. public. • Study the available material on proposals for market development/ regulatory reforms and government IOSCO - APRC Enforcement Directors’ Meeting policies. The Unit coordinated the International Organization of • Assess the adequacy, effectiveness or shortcomings Securities Commissions (IOSCO) – Asia Pacific Regional of internal systems and processes for regulation and Committee (APRC) Enforcement Directors’ Meeting which market development and reasons therefore. was held from 23rd – 26th January 2003. • Identify focus areas, specific action and time bound plans to increase effectiveness of regulatory and Additionally, the Unit also coordinated a separate market development initiatives. programme for the “spouses” of the officials attending the • Identify the required resources and skills. said Meeting. • Develop forecast financial statements and identify the expected surplus or deficit and means of The Stock Brokers’ Association recouping same. The Unit coordinated a meeting with representatives from •Prepare a comprehensive strategic plan, which the Stock Brokers’ Association at the Secretariat on 12th incorporates the above-referred information. December 2003 to discuss issues pertaining to the development of the Capital Market.

SECURITIES & EXCHANGE COMMISSION OF SRI LANKA Annual Report 2003 37 CALENDAR OF EVENTS FOR 2003

JANUARY

The SEC hosted the IOSCO Asia Pacific Regional Committee and Enforcement Directors' Meetings in Colombo. The inauguration ceremony was officiated by the Minister of Finance Hon. K N Choksy. Meetings were held at the Taj Samudra Hotel, Colombo.

A three-day residential training programme on Capital Market was held for the first time for North and East Tamil Master Teachers and Teachers.

FEBRUARY

Seminar on "Capital Market of Sri Lanka" for the Finance and Management Faculty students of the Sabaragamuwa University, Belihuloya.

Seminar for the Law Faculty students of the University of Colombo on the "Role and Functions of the SEC and new amendments to the SEC Act".

MARCH

A three-day residential training programme on "Capital Market of Sri Lanka" for Master Teachers and Resource Teachers at the National Institute of Education Maharagama.

MAY

Programme on the "Capital Market of Sri Lanka" for the new recruits to the Sri Lanka Foreign Service - 2003.

Presentation on the "Unit Trust Industry in Sri Lanka" for undergraduates of the Faculty of Business Studies of the Sabaragamuwa University.

SEC sports day at Malay Grounds

JUNE

Seminar on the "Amendment to the SEC Act" at the Taj Samudra Hotel, Colombo.

A three-day residential training programme on "Capital Market of Sri Lanka" for Master Teachers and Resource Teachers at the National Institute of Education, Maharagama

Presentation on "Money Laundering" by an IMF Consultant.

38 Annual Report 2003 SECURITIES & EXCHANGE COMMISSION OF SRI LANKA CALENDAR OF EVENTS FOR 2003 (Contd.)

JULY

All island TV Quiz Programme in Sinhala Medium on Capital Markets - 2003. The SEC conducted preliminary examinations in Colombo, Matara, Ehaliyagoda, Kurunegala, Badulla, Anuradhapura and Kandy.

AUGUST

Eight recordings of the all island TV quiz programme in Sinhala Medium on Capital Markets - 2003.

A three-day residential training programme on "Capital Market of Sri Lanka" for Tamil Master Teachers and Resource Teachers at the National Institute of Education Maharagama.

SEPTEMBER

The SEC Consultation on the "Role of Auditors" at the Ceylon Continental, Colombo.

Prize giving of the all island TV quiz programme in Sinhala Medium on Capital Markets - 2003.

Formation of a Skills Development Committee.

Participated at the “Yuga Dekma” Industrial Exhibition in Matara.

OCTOBER

The International Organization of Securities Commissions (IOSCO) Annual Conference was held in Seoul, Korea. The SEC, together with the Professional Conference Organizing, John Keells Conventions conducted a promotional stall at the conference.

All island TV Quiz Programme in Tamil Medium on Capital Markets - 2003. The SEC, conducted preliminary examinations in Colombo, Matara, Ehaliyagoda, Badulla, Kandy, Anuradhapura, Kurunegala, Jaffna, Kilinochchi, Mannar, Vavunia, Trincomalee, Batticaloa and Kalmunai.

A three-day residential training programme on "Capital Market of Sri Lanka" for Master Teachers and Resource Teachers at the National Institute of Education, Maharagama

Presentations for the SEC staff on

• Day Trading

• New Market Intermediaries

• Corporate Governance - Current Issues

SECURITIES & EXCHANGE COMMISSION OF SRI LANKA Annual Report 2003 39 CALENDAR OF EVENTS FOR 2003 (Contd.)

NOVEMBER

Six recordings of the all island TV quiz programme in Tamil Medium on Capital Markets - 2003

A three-day residential training programme on "Capital Market of Sri Lanka" for Tamil Master Teachers and Resource Teachers at the National Institute of Education, Maharagama

DECEMBER

The SEC Annual Christmas Party at the Ceylon Continental Hotel, Colombo.

40 Annual Report 2003 SECURITIES & EXCHANGE COMMISSION OF SRI LANKA PERFORMANCE IN FINANCE

A

SECURITIES ION OF SRI

& EXCHANGE OMMISSION OF SRI

COMMISSION OF SRI LANKA • OMMISSION OF SRI LANKA • N OF SRI LANKA • SECURITIES & SECURITIES & EXCHANGE

COMMISSION OF SRI LANKA • SECURITIES & A • SECURITIES & EXCHANGE COMMISSION OF

EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & GE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & ITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES &

EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE A • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITI

COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI NKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE NKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITI COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & NKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITI EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES IES & EXCHAN NKA • SECURITIES & EXCHANGE COMMISSION • OF SECURITIES SRI LANKA & • SECURITIEXCHAN • SECURITIES & EXCHANGE COMMISSION OF SRI LANKAIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & KA • SECURITIES &F EXCHANGE SRI LANKAE COMMISSION COMMISSION • SECURITIES OF &OF EXCHANGE SRISRI LANKAIES COMMISSIO &• SECURITI EXCHAN EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE

COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI

LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES &

EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANK

• SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISS

LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE C

LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE C

SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSIO

EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANK

SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHAN

COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECUR

EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANK

& EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LA

& EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LA

& EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LA

& EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION OF SRI LA

& EXCHANGEXCHANGE COMMISSIONURITIES COMMISSION SRI &OF EXCHANGE SRI LANKA LANKAOFXCHANGE SRI• SECURITIES COMMISSION •LANKA SECURITIESMMISSION COMMISSION • SECURITIES &MMISSION EXCHANGE OF& OF EXCHANGE SRI SRI OFLANKAMMISSION & LANKA OFSRI EXCHANGECOMMISSION SRI COMMISSION LANKA• SECURITIESCHANGE LANKA• OFSECURITIES •COMMISSIONSRI SECURITIES •COMMISSIONECURITIESOF SECURITIESLANKA &OFSRI EXCHANGE SRI &LANKA MMISSION• EXCHANGELANKA SECURITIES &OF EXCHANGE& OF•SRI EXCHANGESECURITIESCOMMISSION •NKASRI SECURITIESLANKA OF LANKA COMMISSION • & SRISECURITIES COMMISSIONEXCHANGE CURITIES• LANKACOMMISSIONSECURITIES &• SECURITIESOFEXCHANGE& EXCHANGE SRI CURITIES• &SECURITIES OF&LANKACOMMISSION EXCHANGE EXCHANGE OF&SRI OFCOMMISSIONEXCHANGE& SRI NKA COMMISSION EXCHANGELANKA•&SRI SECURITIES LANKAEXCHANGE &LANKA• COMMISSIONCOMMISSIONEXCHANGE SECURITIESOF•MMISSION COMMISSION SECURITIES•SRI COMMISSIONOFSECURITIES• &SECURITIESOF LANKACOMMISSIONSRI EXCHANGE SRICURITIES COMMISSION LANKA & OFLANOFOF &• EXCHANGE SRI OFSECURITIESSRI&SRIEXCHANGE MMISSION OF& •& EXCHANGESRICOMMISSION SECURITIES LANKAEXCHANGE LANKAEXCHANGE LANKASRIOF LANKA OFLANKASRI COMMISSION •SRI LANKA•&• COMMISSION OFLANKASECURITIES COMMISSIONEXCHANGE LANKACOMMISSION&COMMISSION•SRI O SECURITIESEXCHANG NKA ••LANKA • SECURITIESSECURITIES• • SECURITIES SECURITIES OF&COMMISSION •OFNKA EXCHANGESECURITIESEXCHANGEOF & SRIOF OFSRI EXCHANGE SRI SRI LANKA &&LANKA• LANKA &MMISSIONLANKA &EXCHANGE EXCHANGE SECURITIES COMMISSION COMMISSIONOF& • EXCHANGE COMMISSION• •SRI•SECURITIES SECURITCURITIES SECURITIESSECURITSECURITIES LANKA COMMISSION OFCOMMISSION MMISSION COMMISSIONOF &SRI• & SECURIT&OF & SRI EXCHANEXCHANSRILANKA LANKA OFLANKOF S BALANCE SHEET

AS AT 31ST DECEMBER 2003 Note 2003 2002 Rs. Rs.

ASSETS NON CURRENT ASSETS Property Plant & Equipment 1 19,492,965 17,299,032 Cess Investment & Others 2 419,309,556 310,673,051 Compensation Investment & Others 3 29,452,097 26,808,610

CURRENT ASSETS Inventories 4 368,363 429,594 Receivables 5 545,582 1,278,528 Deposits, Advance and Prepayments 6 1,093,213 960,322 Stamps 9,955 9,845 Cash and Cash Equivalents 7 2,532,778 479,258 TOTAL ASSETS 472,804,509 357,938,240

FUNDS AND LIABILITIES FUNDS EMPLOYED AND RESERVES Reserves 8 2,861,009 2,861,009 Accumulated Fund 9 (4,007,615) (4,306,945) Cess Fund 10 419,309,555 310,673,051 Compensation Fund 11 29,452,097 26,808,610

NON CURRENT LIABILITIES Finance Lease Liabilities 12 2,723,103 5,898,781 Deferred Income 13 12,617,282 8,646,468 Retirement Benefit Obligation 14 3,246,830 2,464,545

CURRENT LIABILITIES Creditors & Accruals 15 4,154,198 2,919,781 Receipts in Advance 310,892 222,257 Current Portion of Finance Lease Liabilities 12 2,137,158 1,750,684 TOTAL FUNDS AND LIABILITIES 472,804,509 357,938,240

The Accounting Policies and Notes appearing on pages 48 to 59 form an integral part of the Financial Statements.

The Members of the Securities & Exchange Commission of Sri Lanka are responsible for the preparation and presentation of these Financial Statements.

FOR AND ON BEHALF OF THE SECURITIES AND EXCHANGE COMMISSION OF SRI LANKA

Lt. Gen J.E.D. Perera Palitha Silva Gunawardene Chairman Director General

42 Annual Report 2003 SECURITIES & EXCHANGE COMMISSION OF SRI LANKA INCOME AND EXPENDITURE STATEMENT

FOR THE YEAR ENDED 31ST DECEMBER 2003 Note 2003 2002 Rs. Rs.

INCOME Broker License Fees 183,568 179,055 Sale of Publications 28,500 29,325 Unit Trust License Fees 0 212,500 Sundry Income 147,728 179,084 Loss on Disposal of Property, Plant & Equipment (3,250) (63,535) Surplus - Termination of Leases 259,870 - Recognition of Grants 13 6,138,047 4,624,064 6,754,463 5,160,493 Less: EXPENDITURE Personnel Costs 16 30,786,890 28,408,111 Administration & Establishment Expenses 17 32,294,345 25,962,221 Capital Market Development 4,690,038 2,798,876 Total Expenditure 67,771,273 57,169,208

Excess Expenditure over Income (61,016,810) (52,008,715) Transfers from Cess Fund to meet Operational Expenses 61,316,140 54,755,487 Excess/(Deficit) for the Year 299,330 2,746,772

The Accounting Policies and Notes appearing on pages 48 to 59 form an integral part of the Financial Statements.

SECURITIES & EXCHANGE COMMISSION OF SRI LANKA Annual Report 2003 43 STATEMENT OF CHANGES IN NET ASSETS

FOR THE YEAR ENDED 31ST DECEMBER 2003 RESERVES ACCUMULATED TOTAL FUND Rs. Rs. Rs.

Balance as at 1st January 2002 2,929,077 (7,121,785) (4,192,708) Decrease due to Disposal of Assets (68,068) 68,068 - Net Surplus/(Deficit) for the period - 2,746,772 2,746,772 Balance as at 31st December 2002 2,861,009 (4,306,945) (1,445,936)

Balance as at 1st January 2003 2,861,009 (4,306,945) (1,445,936) Net Surplus/(Deficit) for the period - 299,330 299,330 Balance as at 31st December 2003 2,861,009 (4,007,615) (1,146,606)

The Accounting Policies and Notes appearing on pages 48 to 59 form an integral part of the Financial Statements.

44 Annual Report 2003 SECURITIES & EXCHANGE COMMISSION OF SRI LANKA CASH FLOW STATEMENT

FOR THE YEAR ENDED 31ST DECEMBER 2003 Note 2003 2002 Rs. Rs.

Cash Flow from Operating Activities Net Surplus after transfers from Cess Fund 299,330 2,746,772

Adjustment for Depreciation 1 7,071,476 3,309,881 Surplus on Termination of Lease (259,870) - Loss on Disposal of Property, Plant & Equipment 3,250 63,535 Recognition of Grants 13 3,970,813 (2,819,551) Provision for Gratuity 14 1,184,120 641,302 Finance Charges 662,684 477,355 Prior Year Adjustments Net Surplus before Working Capital Changes 12,931,804 4,419,294

Change of Working Capital (Increase)/Decrease of Stocks 61,121 144,837 (Increase)/ Decrease of Receivable 732,946 (511,932) (Increase)/Decrease of Deposits Advances & Prepayments (132,891) (430,219) Increase/(Decrease) of Receipt in Advance 88,635 944 Increase/(Decrease) of Creditors & Accruals 1,234,417 78,225 1,984,229 (718,145) Cash generated from Operating Activities 14,916,033 3,701,149 Gratuity paid during the year (401,836) (245,250) Net Cash from Operating Activities 14,514,197 3,455,899

Cash Flow from Investing Activities Purchase of Property Plant and Equipment (10,125,660) (1,804,512) Proceeds from sale of Property Plant & Equipment 2,000 25,520 Net Cash from Investing Activities (10,123,660) (1,778,992)

Cash Flow from Financing Activities Payment of Finance Lease Liability (2,337,018) (1,227,890) Net Cash from Financing Activities Net Increase/ (Decrease) in Cash and Cash Equivalents 2,053,519 449,017 Cash and Cash Equivalents at beginning of period (Note a) 479,258 30,241 Cash and Cash Equivalents at end of period (Note b) 2,532,778 479,258

Note (a) Cash and Cash Equivalents at beginning of period Cash at Bank 469,258 25,241 Cash in Hand 10,000 5,000 479,258 30,241 Note (b) Cash and Cash Equivalents at End of period Cash at Bank 2,522,778 469,258 Cash in Hand 10,000 10,000 2,532,778 479,258

The Accounting Policies and Notes appearing on pages 48 to 59 form an integral part of the Financial Statements.

SECURITIES & EXCHANGE COMMISSION OF SRI LANKA Annual Report 2003 45 CESS FUND - CASH FLOW STATEMENT

FOR THE YEAR ENDED 31ST DECEMBER 2003 2003 2002 Rs. Rs.

Cash Flow from Operating Activities Net Increase of Cess Fund 108,636,505 37,329,604

Net Surplus before working capital changes 108,636,505 37,329,604

Change of Working Capital (Increase)/Decrease of Staff Loans 244,174 (1,752,205) (Increase)/Decrease of Receivables 2,459,119 (2,542,883) (Increase)/Decrease of Withholding Tax Receivable (9,506) (21,028) (Increase)/Decrease of Interest Receivable on Treasury Bills (3,180,682) 18,670,707 Increase/(Decrease) of other payables (173,938) (2,999) (660,833) 14,351,592

Net Cash from Operating Activities 107,975,672 51,681,197 Cash Flow from Investing Activities Investment of Treasury Bills (112,139,721) (51,103,324) Net Cash from Investing Activities (112,139,721) (51,103,324)

Net Increase/(Decrease) in Cash and Cash Equivalents (4,164,049) 577,873

Cash and Cash Equivalents at beginning of period (Note c) 4,365,089 3,787,216

Cash and Cash Equivalents at end of period (Note d) 201,040 4,365,089

Note (c) Cash and Cash Equivalents at beginning of period Cash at Bank 303,565 716,226 Repo Investments 4,061,524 3,070,990 4,365,089 3,787,216 Note (d) Cash and Cash Equivalents at end of period Cash at Bank ** (4,598,960) 303,565 Repo Investments 4,800,000 4,061,524 201,040 4,365,089

** Current account is linked to an Overnight Repo account and the balance as per the bank statement as at 31/12/2003 amounts to Rs.52,255.12

The Accounting Policies and Notes appearing on pages 48 to 59 form an integral part of the Financial Statements.

46 Annual Report 2003 SECURITIES & EXCHANGE COMMISSION OF SRI LANKA COMPENSATION FUND - CASH FLOW STATEMENT

FOR THE YEAR ENDED 31ST DECEMBER 2003 2003 2002 Rs. Rs.

Cash Flow from Operating Activities Net Increase of Compensation Fund 2,643,487 3,330,768

Net Surplus before Working Capital Changes 2,643,487 3,330,768

Change of Working Capital (Increase)/Decrease of Receivables - - (Increase)/Decrease of Withholding Tax Receivable - - (Increase)/Decrease of Interest Receivable on Treasury Bills 545,664 (1,253,386) Increase/(Decrease) of Other Payables (15,723) 545,664 (1,269,109)

Net Cash from Operating Activities 3,189,151 2,061,659

Cash Flow from Investing Activities Investment in Treasury Bills (3,205,724) (2,036,356) Net cash from investing activities (3,205,724) (2,036,356)

Cash Flow from Financing Activities --

Net Increase/(Decrease) in Cash and Cash Equivalents (16,573) 25,303

Cash and Cash Equivalents at beginning of period (Note e) 58,560 33,257

Cash and Cash Equivalents at end of period (Note f) 41,987 58,560

Note (e) Cash and Cash Equivalents at beginning of period Cash at Bank 6,909 21,000 Call Deposits 51,651 12,257 58,560 33,257 Note (f) Cash and Cash Equivalents at end of period Cash at Bank (15,167) 6,909 Call Deposits 57,154 51,651 41,987 58,560

** Current account is linked to an Overnight Repo account and the balance as per the bank statement as at 31/12/2003 amounts to Rs.21,000/-

The Accounting Policies and Notes appearing on pages 48 to 59 form an integral part of the Financial Statements.

SECURITIES & EXCHANGE COMMISSION OF SRI LANKA Annual Report 2003 47 NOTES TO THE FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES For the purpose of the Cash Flow Statement, Cash and Cash Equivalents consist of cash and call deposits at banks. 1. GENERAL ACCOUNTING POLICIES 2.4 PROPERTY, PLANT AND EQUIPMENT 1.1 BASIS OF PREPARATION Property, Plant & Equipment together with The Financial Statements of the Commission any incidental expenses thereon were are prepared under the historical cost revalued as at 31.12.2001 and depreciated at convention in conformity with Generally their respective useful lives. Equipment Accepted Accounting Principles and received as grant from institutions are brought Accounting Standards laid down by the to account at their fair value and depreciation Institute of Chartered Accountants of Sri thereof is charged against respective reserve Lanka (ICASL). No adjustments have been account. Depreciation is provided on the made for inflationary factors affecting the straight-line basis applying following rates: financial statements. The accounting principles are applied consistently with due Motor Vehicles 25.00% regard to prudence, materiality and substance Furniture, Fixtures and Fittings 12.50% over form criteria as explained in the Office Equipment & framework of Sri Lanka Accounting EDP Equipment 25.00% Standards. Where appropriate, accounting Training Equipment 25.00% policies are disclosed in succeeding notes.

Full year depreciation is provided for all 1.2 CONVERSION OF FOREIGN CURRENCIES assets purchased during the first half of the All foreign exchange transactions are financial year and no depreciation is provided converted to Sri Lanka Rupees, which is the on assets purchased during the second half of reporting currency, at the rates of exchange the year. prevailing at the time the transactions were effected. 2.5 LEASING OF MOTOR VEHICLES The assets on finance leases are capitalized at cash cost. Depreciation and finance charges 2. ASSETS & BASES OF VALUATION arising out of such leasehold assets are 2.1 INVENTORIES charged to the Income & Expenditure Inventories are valued at lower of cost and net account, whilst the payments of lease rentals realisable value. The cost of inventories are are recognized to reduce the lease liability. arrived at by using the first-in, first-out (FIFO) basis. 3. LIABILITIES & PROVISIONS 2.2 RECEIVABLES 3.1 RETIREMENT BENEFITS Receivables are stated at the estimated realizable value. 3.1.1 DEFINED BENEFIT PLANS Gratuity liability is computed in terms 2.3 CASH AND CASH EQUIVALENTS of the Payment of the Gratuity Act No. Cash and Cash Equivalents are defined as cash 12 of 1983. The liability is provided in in hand, demand deposits and short-term the accounts as stipulated by the Sri liquid investments, readily convertible to Lanka Accounting Standard No. 16 known amounts of cash and subject to irrespective of whether or not the insignificant risk of changes in value. employee has completed 5 year’s service.

48 Annual Report 2003 SECURITIES & EXCHANGE COMMISSION OF SRI LANKA NOTES TO THE FINANCIAL STATEMENTS (Contd.)

3.1.2 DEFINED CONTRIBUTION PLANS 4. INCOME & EXPENDITURE All permanent employees who are 4.1 REVENUE RECOGNITION eligible for Employees’ Provident Fund Revenue principally is recognized on accrual Contributions and Employees’ Trust basis in terms of Sri Lanka Accounting Fund Contributions are covered by Standards 29. relevant contributory funds.

4.2 EXPENDITURE RECOGNITION 3.2 EVENTS OCCURRING AFTER THE BALANCE SHEET DATE All expenditure incurred in maintaining the All material events occurring after the Balance Commission has been charged to revenue in Sheet Date are considered and appropriate arriving at the income over expenditure. adjustments or disclosures are made in the 4.3 CASH FLOW STATEMENT Financial Statements, where necessary. The Cash Flow Statement has been prepared 3.3 ACCOUNTS PAYABLE using the Indirect Method. Liabilities for Accounts Payable are carried at the amount of Cash and Cash Equivalents expected to be paid.

3.4 TAXATION The income of the Commission is not liable to tax in terms of the Inland Revenue Act No. 28 of 1979 as amended by Act No. 24 of 1997.

SECURITIES & EXCHANGE COMMISSION OF SRI LANKA Annual Report 2003 49 NOTES TO THE FINANCIAL STATEMENTS (Contd.) (16,800) (2,800,000) (2,816,800) Fittings Motor Vehicles 9,075,000 3,858,633 10,633,7082,950,000 1,193,527 1,755,900 6,224,324 7,000,00012,830,276 1,400,000.00 1,062,425 32,323,241 & Bicycles Fixtures & (EDP & Others) Equipment Finance Lease Total Motor Vehicles Furniture, Office Equipment Training Assets on roperty, Plant & Equipment roperty, ACCUMULATED DEPRECIATION ACCUMULATED Balance as at 01/01/2003Depreciation Charge for the YearAccumulated Depreciation on Disposal of AssetsBalance as at 31/12/2003 31/12/2003 AS AT WRITTEN DOWN VALUE 31/12/2002 AS AT WRITTEN DOWN VALUE 1,600,000 6,125,000 1,350,000 455,355 1,350,000 2,665,106 738,172 2,652,146 2,336,011 4,409,384 3,620,528 (48,350) 4,506,570 438,975 693,475 623,450 1,925,000.00 706,450 5,600,000 7,071,476 8,400,000.00 19,492,965 - 17,299,032 (525,000) 6,332,150 (573,350) FOR THE YEAR ENDED 31ST DECEMBER 2003 1P COST Balance as at 01/01/2003Additions during the YearDisposals during the year Balance as at 31/12/2003 2,700,000 6,375,000 3,074,183 784,450 8,127,098 2,523,411 1,329,900 426,000 8,400,000 1,400,000 23,631,181 11,508,860

50 Annual Report 2003 SECURITIES & EXCHANGE COMMISSION OF SRI LANKA NOTES TO THE FINANCIAL STATEMENTS (Contd.)

FOR THE YEAR ENDED 31ST DECEMBER 2003 2003 2002 Rs. Rs.

2 CESS INVESTMENT AND OTHERS ASSETS Staff Loans 5,405,144 5,649,318 Rent Deposits 7,342,440 7,342,440 Withholding Tax Receivables 420,277 410,771 Investment in Treasury Bills 389,181,078 277,041,358 Investment in Call Deposits 4,800,000 4,061,524 Interest Receivable on Treasury Bills 14,871,766 11,691,084 Other Receivables 1,887,810 4,346,929 Balance at Bank ** (4,598,960) 303,565 419,309,555 310,846,989

** Current account is linked to an Overnight Repo account and the balance as per the bank statement as at 31/12/2003 amounts to Rs. 52,255.12 LIABILITIES Other Payables - 173,938 - 173,938 419,309,555 310,673,051

3 COMPENSATION INVESTMENT AND OTHERS ASSETS Investment in Treasury Bills 27,905,440 24,699,716 Investment in Call Deposits 57,154 51,651 Withholding Tax Receivable on Call Deposit 72,445 72,445 Interest Receivable on Treasury Bills 1,432,225 1,977,889 Balance at Bank (15,167) 6,909 29,452,097 26,808,610 LIABILITIES - 29,452,097 26,808,610

Note : Compensation Fund is created in terms of the Securities and Exchange Commission of Sri Lanka Act No.36 of 1987 as amended. This Fund consist of funds transferred from the Consolidated Fund and from compounding offenses in terms of Section 51A of the SEC Act. The purpose of this Fund is to compensate an investor who suffers a pecuniary loss resulting from the failure of a licensed stock broker or licensed stock dealer to meet his contractual obligations (this is interpreted to mean a situation where a broker is declared bankrupt).

4 INVENTORIES Stock of Publications 238,533 300,519 Stock of Stationery 129,830 129,075 368,363 429,594

SECURITIES & EXCHANGE COMMISSION OF SRI LANKA Annual Report 2003 51 NOTES TO THE FINANCIAL STATEMENTS (Contd.)

FOR THE YEAR ENDED 31ST DECEMBER 2003 2003 2002 Rs. Rs.

5 RECEIVABLES Sundry Debtors Including Debit Notes 20,479 96,852 With holding Tax Receivable 5,399 5,399 Staff Recoveries 118,838 53,379 Festival Advances 281,250 278,750 Insurance claim receivable 98,710 - Insurance Board of Sri Lanka 20,906 844,148 545,582 1,278,528

6 DEPOSITS, ADVANCES & PRE-PAYMENTS Safe Vault Deposit - Bank of Ceylon 20,000 20,000 Deposit for Cellular 40,000 40,000 Fuel Deposit and Advances for Vehicle Maintenance 55,500 25,500 Deposits with Telecom 43,925 33,125 Other Deposits 165,887 205,790 Advances to Suppliers 767,901 635,907 1,093,213 960,322

7 CASH & CASH EQUIVALENTS Cash at Bank 2,522,778 469,258 Cash in Hand 10,000 10,000 2,532,778 479,258

8 RESERVES REVALUATION SURPLUS Balance at the beginning of the period 2,861,009 2,929,077 Add: Revaluation Surplus - 2,861,009 2,929,077 Less: Disposal of Assets (68,068) Balance at the end of the period 2,861,009 2,861,009

9 ACCUMULATED FUND Balance at the beginning of the period (4,306,945) (7,121,785) Add: Prior Period Adjustment - - Decrease due to Revaluation - - Decrease due to Disposal of Assets 68,068 Add: Net Surplus/(Deficit) for the period 299,330 2,746,772 Balance at the end of the period (4,007,615) (4,306,945)

52 Annual Report 2003 SECURITIES & EXCHANGE COMMISSION OF SRI LANKA NOTES TO THE FINANCIAL STATEMENTS (Contd.)

FOR THE YEAR ENDED 31ST DECEMBER 2003 2003 2002 Rs. Rs.

10 CESS FUND Balance as at 01/01/2003 310,673,051 273,343,446 Add: Cess Received during the year 146,601,211 60,430,761 Interest on Investment 33,852,675 33,416,086 Reimbursement of Y2K expenses - 2,439,060

491,126,936 369,629,353

Less: Transfers to Operational & Capital Expenditure 71,425,000 56,560,000 Bank Charges 20,169 8,124 Custodian Fees 240,817 206,470 Debit Tax 131,394 120,118 50% Grant on Investor Services Centre (ISC) Matara - 2,061,591

71,817,380 58,956,302

Balance as at 31/12/2003 419,309,556 310,673,051

11 COMPENSATION FUND Balance as at 01/01/2003 26,808,610 23,477,842 Compounding fees received during the year 0 100,000 Add: Interest on Investment - Call Deposits 0 1,411 - Treasury Bills 2,664,621 3,248,426 29,473,231 26,827,679 Less: Custodian Fees 20,773 19,030 Bank Charges 361 39 21,134 19,069 Balance as at 31/12/2003 29,452,097 26,808,610

12 FINANCE LEASE LIABILITY Gross Lease Liabilities 6,262,427 9,827,496 Interest in Suspense (1,402,165) (2,178,031) 4,860,261 7,649,465 Less: Payable within one year (2,137,158) (1,750,684) Payable after one year 2,723,103 5,898,781

SECURITIES & EXCHANGE COMMISSION OF SRI LANKA Annual Report 2003 53 NOTES TO THE FINANCIAL STATEMENTS (Contd.)

FOR THE YEAR ENDED 31ST DECEMBER 2003 2003 2002 Note Rs. Rs.

13 DEFERRED INCOME Capital Grants - Treasury 13.1 1,238,750 2,477,000 Equipment Grant World Bank Project on Y2k 13.2 - 389,805 Capital Grants - USAID 13.3 - 1,837 Capital Transfers from Cess Fund 13.4 11,378,531 5,777,826 12,617,281 8,646,468

13.1 CAPITAL GRANTS - TREASURY Balance Brought Forward 2,477,000 3,715,250 Recognition of Grants during the year (1,238,250) (1,238,250) Balance Carried Forward 1,238,750 2,477,000

13.2 EQUIPMENT GRANTS - WORLD BANK PROJECT ON Y2K Balance Brought Forward 389,805 779,610 Recognition of Grants during the year (389,805) (389,805) Balance Carried Forward - 389,805

13.3 CAPITAL GRANTS -USAID Balance Brought Forward 1,837 3,675 Recognition of Grants during the year (1,837) (1,838) - 1,837

13.4 CAPITAL TRANSFERS FROM CESS FUND Balance Brought Forward 5,777,826 6,967,484 Transfers During the Year 10,108,860 1,804,513 Less: Transferred to Income for Assets Depreciation (4,508,155) (2,994,171) 11,378,531 5,777,826

Notes Amortisation of Grants Grants received have been amortised in accordance with the SLAS 24 at the following rates. 13.1 Capital Grants - Treasury 25.00% 13.2 Equipment Grant - World Bank project on Y2k 25.00% 13.3 Capital Grants - USAID 25.00% 13.4 Capital Transfers from Cess Fund - Motor Vehicles 25.00% Office Equipment - Others & EDP 25.00% Furniture, Fixtures & Fittings 12.50% Training Equipment 25.00%

54 Annual Report 2003 SECURITIES & EXCHANGE COMMISSION OF SRI LANKA NOTES TO THE FINANCIAL STATEMENTS (Contd.)

FOR THE YEAR ENDED 31ST DECEMBER 2003 2003 2002 Rs. Rs.

14 RETIREMENT BENEFIT OBLIGATION Provision for Retirement Gratuity

Balance Brought Forward 2,464,546 2,068,494 Charge for the Year 1,184,120 641,302 Gratuity Paid During the Year (401,836) (245,250) 3,246,830 2,464,546

15 CREDITORS AND ACCRUALS PAYE Tax 139,778 151,559 E.P.F. Payable 232,704 228,373 E.T.F. Payable 36,217 35,568 VAT Payable 15,796 - WHT Payable 750 - Telephone Expenses 273,957 230,819 Security Charges 16,800 16,800 Office Upkeep 11,626 10,521 Electricity 70,000 120,000 Fuel Expenses 10,880 10,000 Staff Welfare 31,291 111,494 Public Awareness Expenses - 244,988 Staff Medical Reimbursements 244,322 75,000 Leave Encashment 187,230 162,089 Internal Audit Fees 224,000 480,000 External Audit Fees 100,000 250,000 Annual Report Printing 1,022,200 763,377 Professional Charges 1,103,613 - Newspapers & Periodicals 3,961 - Members Fees 7,000 - O/E Maintenance 32,160 - Legal Expenses 27,000 - Foreign Travel 137,694 - Interest Subsidy 12,153 Other Payables 213,067 29,193 4,154,198 2,919,781

16 PERSONNEL COSTS Staff Salaries and Allowance 15,695,862 14,975,156 Chairman's Allowances 305,045 - Overtime 504,150 216,622 EPF & ETF 2,270,411 2,131,735 Staff Medical Expenses & Insurance 1,513,206 1,104,471 Ex-Gratia Payment 493,112 475,082 Staff Gratuity 1,184,120 641,302 Leave Encashment 237,273 166,774 Staff Housing Loan Interest Subsidy 357,970 311,551 Staff Welfare 676,659 523,447 Staff Travelling Allowance 513,987 576,146 Fuel Allowance to Managers 411,184 382,047 Foreign Travel Expenses 6,212,766 6,242,115 Staff Training 411,145 661,663 30,786,890 28,408,111

SECURITIES & EXCHANGE COMMISSION OF SRI LANKA Annual Report 2003 55 NOTES TO THE FINANCIAL STATEMENTS (Contd.)

FOR THE YEAR ENDED 31ST DECEMBER 2003 2003 2002 Note Rs. Rs.

17 ADMINISTRATION & ESTABLISHMENT EXPENSES Board Meeting Expenses 160,098 100,627 Entertainment 73,770 96,194 Rent & Car Park Rental 11,237,545 11,237,537 Electricity Charges 995,911 1,097,916 Telephone, Internet, E- mail & Web 2,040,179 2,161,254 Motor Vehicle Maintenance & Insurance 923,499 483,669 Legal Expenses 292,765 248,780 Professional Fees 2,317,128 971,752 International Membership Fees 655,455 633,920 Depreciation 1 7,071,476 3,309,881 Cost of Publication 16,996 26,493 Advertising 505,847 115,074 Market Surveillance Cost 994,227 858,234 Security Charges 201,600 203,602 Library Books 17,368 343,473 Printing & Stationery 1,759,760 1,487,835 Travelling-local 83,893 44,723 Office Equipment Maintenance & Insurance 596,907 574,303 Insurance (Others) 522,593 409,220 Newspapers & Periodicals 76,383 69,920 Rental on Lanka On-Line -- Office Upkeep 190,017 121,859 Investigation Expenses 27,475 29,392 Postage 90,830 51,379 Courier Charges 27,850 187,253 Audit Fees -Internal 204,024 480,000 Audit Fees -External 72,035 45,638 Finance Charges 662,684 477,355 General Expenses 1,180 29,858 Bank Charges 71,114 43,552 Debit Tax 388,736 21,528 Trade Tax 15,000 - 32,294,345 25,962,221

56 Annual Report 2003 SECURITIES & EXCHANGE COMMISSION OF SRI LANKA NOTES TO THE FINANCIAL STATEMENTS (Contd.)

18 RELATED PARTIES Member for a period of two years commencing 20/12/03 by The Chairman of the SEC Mr. Michael Mack resigned virtue of him holding office of the President, Institute of with effect from 28/01/03. On 05/03/2003 Lt. Gen. J E D Chartered Accountants of Sri Lanka established by the Perera was appointed to the post of Chairman of the SEC. Chartered Accountants Act, No 23 of 1959.

The following members of the SEC were also members of the The Staff of the SEC were appointed on a temporary Insurance Board of Sri Lanka (IBSL) except Mr. Palitha Silva basis to the IBSL and they received a honorarium of Rs. Gunawardene who is the Director General of the SEC. 3,405,629 during the period 01/01/03 to 31/12/03. The SEC granted loans amounting to Rs. 1,359,148 to IBSL at the IBSL prevailing Treasury Bill rate and the interest income Lt.Gen. J E D Perera Member/Chairman amounted to Rs. 29,765. Temporary fund transfers amounting to Rs. 3,589,517 were made during the year for Dr. Nihal Jinasena Member operational expenses to IBSL free of charge due to delay in Mr. P M Nagahawatte Member receiving money from Treasury.

Mr. F Mohideen Member The Director General and the Chairman of the

Mr. W Unamboowe Member Securities & Exchange Commission of Sri Lanka (SEC) are also the trustees of the Settlement & Guarantee Fund (SGF). Mr. Palitha Silva Gunawardene Member The following table depicts the Directorships held by Commission Member Mr. Hemaka Amarasuriya the Members of the Board as at 31/12/03. Except for the resigned with effect from 28/01/2003 and Mr. Asitha current account maintained at Bank of Ceylon there were no Talwatte’s term as a Member expired on 20/12/2003. Mr. A transactions recorded with the said institutions during the I Fernando was appointed to the Commission as Ex officio year.

NAME DIRECTORSHIPS HOLD DURING THE YEAR POSITION OF THE COMPANY

Lt.Gen Denis Perera • Directories Lanka (Pvt) Ltd. Chairman

• ‘E’ Point - do -

• Insurance Board of Sri Lanka - do -

Dr. Nihal Jinasena • Jinasena Engineering Holdings (Pvt) Ltd. Chairman

• Jinasena New Technology Holdings (Pvt) Ltd. - do -

• Jinasena Industrial Appliances (Pvt) Ltd. - do -

• Jinasena Management Services (Pvt) Ltd - do -

• Jinasena Exports (Pvt) Ltd. - do -

• Almeco (Pvt) Ltd - do -

• Trakstar (Pvt) Ltd - do -

• Loadstar (Pvt) Ltd. - do -

• Hessing Garments Ltd. - do -

• Sea & Land Foods (Pvt) Ltd. - do -

• Royal Lotus Hotel (Pvt) Ltd. - do -

• Jinasena Ltd. Managing Director

SECURITIES & EXCHANGE COMMISSION OF SRI LANKA Annual Report 2003 57 NOTES TO THE FINANCIAL STATEMENTS (Contd.)

• Jinasena Castings Ltd. Managing Director

• Jinasena Electric Motors Ltd. - do -

• Jinasena Pumps (Pvt) Ltd. - do -

• Jinasena Industrial Parks (Pvt) Ltd. - do -

• Jinasena Engineering & Technology (Pvt) Ltd. - do -

• Deer Park Hotel (Pvt) Ltd. - do -

• Jinasena Seals Ltd. Director

• Jinasena Agricultural Machinery (Pvt) Ltd. - do -

• Jinasena Appliances (Pvt) Ltd. - do -

• Coral Sands Hotel Ltd. - do -

• Oceanic Travels Ltd. - do -

• Insurance Board of Sri Lanka Member

D K Hettiarachchi - -

P M Nagahawatta • Credit Information Bureau of Sri Lanka Chairman

• Insurance Board of Sri Lanka Member

Faiz Mohideen • Bank of Ceylon Director

• Insurance Board of Sri Lanka. Member

L C R De C Wijetunge • Lion Brewery Ceylon Ltd. Chairman

• Ceylon Brewery Ltd. - do -

• Union Residencies (Private) Ltd. - do -

• Council of Employers Federation of Ceylon Member

• Nestle Lanka Limited. Executive Director

• Eastern Food Specialities (Private) Limited. - do -

• Janashakthi Insurance Co.Ltd. Director

• National Insurance Corporation Ltd. - do -

• Hunter & Co. Ltd. - do -

• Joseph Frazer Hospital Trustee

• Belvoir Foundation Education - do -

G C B Wijeyesinghe • Singer (Sri Lanka) Ltd. Director

• Regnis Lanka Ltd. - do -

• Singer Industries Ltd. - do -

• National Development Bank - do -

• NDB Bank Ltd. - do -

58 Annual Report 2003 SECURITIES & EXCHANGE COMMISSION OF SRI LANKA NOTES TO THE FINANCIAL STATEMENTS (Contd.)

• Ayojana Fund (Private ) Ltd. Director

• NDB Venture Investments (Private) Limited. - do -

• Finlays Travels Ltd. - do -

• Central Finance Co Ltd. - do -

• Ceylon Trading Co Ltd. - do -

• Maersk Sealand ( Pvt) Ltd. - do -

• Ceylon Petroleum Corporation - do -

Johnson Peiris • Corporate Innovestments Pvt Ltd. Director

• A M D G International Pvt Ltd. - do -

• Sypro International Pvt Ltd. - do -

W Unamboowe • Insurance Board of Ceylon Member

A I Fernando • Forbes & Walker Ltd. Director

• Forbes & Walker Tea Brokers (Pvt) Ltd. - do -

• Forbes & Walker Commodity Brokers (Pvt) Ltd. - do -

• Forbes Services (Pvt) Ltd. - do -

• Sungold Confectioneries (Pvt) Ltd. - do -

19 CAPITAL COMMITMENTS 21 EVENTS OCCURRING AFTER THE BALANCE SHEET DATE There were no capital commitments as at 31st December 2003 No material events have occurred after the Balance Sheet date necessitating any adjustments or disclosure in the 20 CONTINGENT LIABILITIES Financial Statements. There were no contingent liabilities as at 31st December 22 COMPARATIVE FIGURES 2003 Comparative figures have been adjusted to conform to the changes in presentation in the current financial year.

SECURITIES & EXCHANGE COMMISSION OF SRI LANKA Annual Report 2003 59 REPORT OF THE AUDITORS

The Chairman, 2.2 Financial Results Securities and Exchange Commission of Sri Lanka. According to the accounts presented, the operation of the Commission for the year ended 31 December 2003 Report of the Auditor General on the accounts of the Securities had resulted in a deficit of Rs. 61,016,810 before taking and Exchange Commission of Sri Lanka for the year ended 31 into account the transfers from Cess Fund for December 2003 in terms of Section 14(2)(c) of the Finance Act operational expenses as compared with the No. 38 of 1971. corresponding deficit amounting to Rs. 52,008,715 The audit of accounts of the Securities and Exchange before taking into account the transfers from Cess Fund Commission of Sri Lanka (SEC) for the year ended 31 for the preceeding year. The operating surplus for the December 2003 was carried out under my direction in year under review after taking into accounts the pursuance of provisions in Article 154(1) of the transfers from the Cess Fund for operational expenses Constitution of the Democratic Socialist Republic of Sri for the year, amounted to Rs. 299,330 as compared to the Lanka read in conjunction with Section 13(1) of the corresponding surplus of Rs. 2,746,772 in the Finance Act No.38 of 1971 and Section 37(2) of the preceeding year. Securities and Exchange Commission Act No.36 of 1987. My observations, which I consider should be 2.3 Comments on Accounts published with the annual report of the Commission in 2.3.1 Accounting Deficiencies terms of Section 14(2)( c) of the Finance Act, appear in Two leasehold vehicles obtained in 2002 had been this report. disposed during of the year under review and interest in suspense, amounting to Rs.239,189 relating to one 1.2 Scope of Audit vehicle was erroneously debited to leasehold liability Audit opinion, comments and findings in this report account, resulting in an understating the leasehold are based on a review of the financial statements liability account by that amount. Interest in suspense of presented to audit and substantive tests of samples of Rs.212,255 pertaining to the other vehicle had not been transactions. The scope and the extent of such review transferred to disposal account, hence the balance of and tests were such as to enable as wide an audit the interest in suspense account had been overstated by coverage as possible within the limitations of staff, that amount and surplus - termination of leases other resources and time available to me. The audit was appearing in the account overstated by Rs.451,444. carried out in accordance with Sri Lanka Auditing Standards, methods and practices to obtain reasonable 2.3.2 Non-compliance with Laws, Rules, Regulations and assurance as to whether the financial statements are Management Decisions free of material misstatements. The audit included Instances of non-compliance observed in audit are examination of evidence supporting the amounts and given below. disclosures in financial statements and assessments of accounting principles and significant estimates and Reference to Laws, Rules, Particulars judgments made in the preparation of financial Regulations etc. statements, evaluation of their overall presentation and a) Securities and Exchange determining whether accounting policies adopted were Commission Act No.36 of appropriate, consistently applied and adequately 1987 (As amended by Act No disclosed. Sub-sections (3) and (4) of Section 13 of the 26 of 1991 and Act No.18 of Finance Act No.38 of 1971 give discretionary powers to 2003) the Auditor General to determine the scope and extent of the audit. Part ii Section 13(m) In terms of the provision of this section, the Commission is 2. Accounts required to request the Registrar 2.1 Audit Opinion of Companies to call upon Except for the effects on the financial statements of the private limited liability matters referred to in para 2.3 of my report, I am of the companies to become public opinion so far as appears from my examination, and to limited companies. But it was the best of my information, and according to the revealed in the audit that the explanations given to me, the financial statements have Commission had not made any been prepared and presented in accordance with Sri such request to the Registrar of Lanka Accounting Standards and the stated accounting Companies from its inception. In policies as set out in Notes 01 to 4.3 to the financial addition, the Commission had not statements and give a true and fair view of the financial developed criteria or standards to position of the Commission as at 31 December 2003 call upon private limited liability and the financial results and cash flow for the year then companies to become public ended. limited companies.

60 Annual Report 2003 SECURITIES & EXCHANGE COMMISSION OF SRI LANKA REPORT OF THE AUDITORS (Contd.)

2.3.3 Transactions not Supported by Adequate Authority Profit/(Loss) on disposal of fixed assets 60,285 The following observations are made. Transfer from Cess Fund 6,560,653 Decrease in Financial Results (2,447,442) (a) The Commission has reimbursed the PAYE Tax of its employees in contravention of the provision in Public 3.2 Apparent Irregularities Finance Circular No. PF/PE 6 of 31 January 2000. In The supervision of real time computer assisted this connection the Director General informed me on surveillance monitored trading on the Colombo Stock 03 February 2003 as follows, Exchange for detection and prevention of market “In terms of the SEC Act No.36 of 1987 as amended by abuses had not functioned properly up to October 2003 Act No.26 of 1991; and Act 18 of 2003 Section 42 and due to the absence of facilities to record the names of 43, the Commission is empowered to decide on all buyers or sellers for the detection of abuses. In view of administrative matters including remuneration to staff. this position, the alleged abuses during the period up to the installation of required facilities in October 2003 (b) During the year under review six vehicles had been could not be detected for remedial action. supplied to six Directors by SEC on a lease basis at a total cost of Rs. 11,475,360, which consist of Rs. 3.3 Activity of the Commission 8,400,000 and Rs. 3,075,360 as original cost and Some of the activities conducted by the Commission interest respectively. After four years, ownership of during the year under review are shown below. these vehicles will be transferred to the directors charging only a sum of Rs.1,440,000 and the balance (i) The Commission published 01 publication on “An sum of Rs. 10,035,360 will be borne by SEC. The Introduction to the Stock Market.” approval of the Treasury in terms of the Public (ii) 15 Seminars and Training Programmes had been Enterprises Department Circular No.95 of 14 June 1994 conducted. had not been obtained for this new scheme introduced (iii)19 complaints had been resolved out of the 22 by the Commission. complaints received during the year, 3 complaints were pending as at 31.12.2003. 3. Financial and Operating Review 3.1 Financial Results (iv) 110 Annual Reports and Accounts of listed Companies The operation of the Commission during the year had been reviewed and communicated, with 20 under review had resulted in a surplus of Rs.299,330 companies on matters relating to non-compliances. after taking into account the transfer of Rs.61,316,140 (v) 16 investigations had been conducted during the year from Cess Fund as compared with the surplus of 2003 and out of which 09 had been completed. Rs.2,746,772 after taking into account the transfer of Rs.54,755,487 from Cess Fund for the preceeding year 3.4 Uneconomic Transaction thus showing a decrease in financial results by Rs. A sum of Rs.27,716 had been paid as surcharge by the 2,447,442 which can be analysed as shown below. Commission during the year under review due to delay Variances in payment of contribution to the Employee Provident Favourable Adverse Fund relating to the year 1997. Rs. Rs. Rs. Income 3.5 Budgetary Control Unit Trust license fees - 212,500 It was observed that the annual budget of the Broker license fees 4,513 - Commission had not been used as a tool of Surplus - Termination of Leases 259,870 - management control. Major variances were observed Sale of publications - 825 between the actual and the budget. Sundry income - 31,356 Recognition of Grants 1,513,983 - 4. Systems and Controls 1,778,366 244,681 1,533,685 Special attention is needed in respect of the following Less: areas of control. Expenditure Board meeting fees and expenses - 59,471 I. Investment in Treasury Bills personnel costs - 2,408,128 II. Recruitment of Personnel Staff foreign travel expenses 29,349 - III. Monitoring Share Market Depreciation - 3,761,590 Rent and car park rental - 8 Capital market development expenses - 1,891,162 Other administrative and general expenses - 2,511,055 Total Expenditure 29,349 10,631,414 (10,602,065) S.C.MAYADUNNE Auditor General

SECURITIES & EXCHANGE COMMISSION OF SRI LANKA Annual Report 2003 61 RESPONSES OF THE COMMISSION TO THE MATTERS RAISED BY THE AUDITOR GENERAL IN HIS REPORT ISSUED IN TERMS OF SECTION 14(2) (C) OF THE FINANCE ACT ON THE ACCOUNTS OF THE COMMISSION FOR THE YEAR 2003

2.3.1 ACCOUNTING DEFICIENCIES Following deficiencies were observed: AUDITORS COMMENTS SEC RESPONSE 2.3.1 Accounting Deficiencies Two leasehold vehicles obtained in 2002 had been disposed The error in posting and the omission noted. Attached during the year under review and interest in suspense herewith the correcting journal entry for reference. amounting to Rs 239,189/- relating to one vehicle was erroneously debited to lease hold liability account resulting in an understating of the leasehold liability account by that amount, Interest in suspense of Rs 212,255/- pertaining to the other vehicle had not been transferred to disposal account hence the balance of the interest in suspense account had been overstated by that amount and surplus – termination of leases appearing in the account overstated by Rs 451,444.

2.3.2 Non-compliance with Laws Rules Regulations and Section 13 (m) of the SEC Act does indeed empower the Management Decisions Commission to exercise, perform and discharge the duty Instances of non-compliance observed in audit are given and function of requesting the Registrar of Companies in below. the exercise of the powers conferred on it by Section 227 of Reference to Laws, Rules, Regulations etc. the Companies Act No 17 of 1982, to call upon a private a) Securities and Exchange Commission Act No 36 of limited liability company to become a public limited 1987 (As amended by Act No 26 of 1991 and Act No liability Company. 18 of 2003) However, you would appreciate that in terms of Section 227 Part ii Section 13 (m) of the Companies Act, it is the Registrar of Companies who is called upon to satisfy himself that this is in the national In terms of the provision of this section, the Commission is interest or in the interest of the national economy. required to request the Registrar of Companies to call upon private limited liability companies to become public In the circumstances, it appears to us that formulation of limited companies. But it was revealed in the audit that the any criteria or standards in this respect would fall under the Commission had not made any such request to the Registrar purview of the Registrar of Companies. of Companies from its inception. In addition, the Accordingly, we have not developed any criteria or Commission had not developed criteria or standards to call standards in this respect nor had a basis to request the upon private limited liability companies to become public Registrar of Companies to develop criteria or standards to limited companies. call upon private limited liability companies to become public limited liability companies. However during the on going Strategic Review of the Commission, steps are being taken to identify corporate bodies suitable for such purposes as specified in Section 13 (m) of the Act.

2.3.3 Transactions not Supported by Adequate Authority In terms of the SEC Act No 36 of 1987 as amended by Act Following observations are made No 26 of 1991; and Act 18 of 2003 Section 42 and 43 the a) The Commission has reimbursed the PAYE Tax of its Commission is empowered to decide on all the employees in contravention of the provision in administrative matters such as salaries, terms and Public Finance Circular No PF/PE 6 of 31st January conditions etc. 2000. In this connection the Director General The then Secretary to the Ministry of Finance by letter informed me on 3rd February 2003 as follows. reference EA 04/21 dated 31st March 1992 instructed the

62 Annual Report 2003 SECURITIES & EXCHANGE COMMISSION OF SRI LANKA RESPONSES OF THE COMMISSION TO THE MATTERS RAISED BY THE AUDITOR GENERAL IN HIS REPORT ISSUED IN TERMS OF SECTION 14(2) (C) OF THE FINANCE ACT ON THE ACCOUNTS OF THE COMMISSION FOR THE YEAR 2003

“In terms of the SEC Act No 36 of 1987 as amended Securities and Exchange Commission (SEC) as follows. by Act No 26 of 1991, and Act No 18 of 2003 Section “The SEC is free to recruit personnel and to fix their salaries 42 and 43, the Commission is empowered to decide and emoluments without being subject to government on all administrative matters including regulations.” remuneration of staff. According to the above mentioned Act, the Members of the Commission, from the 138th to the 142nd Meeting during the year 1999 to beginning of 2000, had held discussions and decided that the employees of the SEC are liable for PAYE TAX and to gross up same to their salaries in form of tax adjustment allowance. The PAYE Tax component is imputed from the salaries of the employees and remitted to

b) During the year under review, six vehicles had been the Inland Revenue monthly. supplied to six Directors by SEC on a lease basis at a The Attorney General too had previously advised that the total cost of Rs 11,475,360/- which consists of Rs Commission has no authority to deviate from the conditions 8,400,000/- and Rs 3,075,360/- as original cost and in the Letter of Appointment. In any event, the payment interest respectively. After 4 years, ownership of referred to is not unusual for statutory bodies. these vehicles will be transferred to the Directors The Members of the Commission at its 170th meeting held charging only a sum of Rs 1,440,000/- and the on the 27th June 2002 approved this scheme in accordance balance sum of Rs 10, 035,360/- will be borne by with subsections 1 and 2 under Section 43 of the SEC Act SEC. The approval of the Treasury, in terms of the No 36 of 1987 as amended by Act No 26 of 1991 and No 18 Public Enterprises Department Circular No 95 of of 2003, which specifies the manner in which the staff 14th June 1994 had not been obtained for this new could be appointed and remunerated. This scheme was scheme introduced by the Commission. introduced mainly to offer a competitive remuneration package to retain skilled and experienced staff in the Commission. The necessity for Treasury approval had been dispensed with by letter reference EA 04/21 dated 31st March 1992, issued by the then Secretary to the Ministry of Finance. It states “The SEC is free to recruit personnel and to fix their salaries and emoluments without being subject to Government regulations” It is incorrect to say that the vehicles will be transferred at a sum of Rs 1,440,000/-, as the cost of maintenance of the vehicle, Comprehensive Insurance, License, Running Cost and any other related costs too have to be borne by the Directors during the lease period. Moreover the Commission will not be burdened by maintaining a fleet of vehicles.

3.2 Apparent Irregularities The supervision of real time computer assisted surveillance With the installation of the detailed monitoring screen on monitored trading on the Colombo Stock Exchange for 29th September 2003, quick decisions can be taken due to detection and prevention of market abuses had not the availability of data on line. However even in the past, functioned properly up to October 2003 due to the absence without a detailed screen, alleged insider dealings and of facilities to record the names of buyers or sellers for the market manipulations have been investigated based on detection of abuses. In view of this position, the alleged information, surveillance and tip offs received from public. abuses during the period up to the installation of required Further details had to be obtained in form of facilities in October 2003 could not be detected for remedial correspondence from the Colombo Stock Exchange and action. other relevant institutions.

SECURITIES & EXCHANGE COMMISSION OF SRI LANKA Annual Report 2003 63 RESPONSES OF THE COMMISSION TO THE MATTERS RAISED BY THE AUDITOR GENERAL IN HIS REPORT ISSUED IN TERMS OF SECTION 14(2) (C) OF THE FINANCE ACT ON THE ACCOUNTS OF THE COMMISSION FOR THE YEAR 2003

3.3 Activity of the Commission Some of the activities conducted by the Commission during the year under review are shown below.

(i) The Commission published 01 publication on “An We agree with your comment. Introduction to the Stock Market.”

(ii) 15 Seminars and Training Programmes had been -do- conducted. (iii) 19 Complaints had been resolved out of the 22 -do- complaints received during the year and 3 complaints were pending as at 31.12.2003. (iv) 110 Annual Report and Accounts of listed Companies had been reviewed and communicated -do- with 20 companies on matters relating to non- compliances.

(v) 16 investigations had been conducted during the -do- year 2003 and, of which 09 had been completed.

3.4 Uneconomic Transaction A sum of Rs 27,716/- had been paid as surcharge by the This occurred six years ago and your observation is noted. Commission during the year under review due to delay in payment of contribution to the Employees Provident Fund relating to year 1997.

The Commission always uses the budget as a management 3.5 Budgetary Control tool. The variances between actual and budgeted It was observed that the annual budget of the Commission expenditure occurred as the actual regulatory environment had not been used as a tool of management control. Major deferred from the expectations. This is not unusual for a variances were observed between the actual and the budget. fast evolving capital market like Sri Lanka. The Major deviations in the actual expenditure and the budget were observed and changes made between budget lines within the original approved limit. The Commission is proposing to prepare cost centre accounting in order to control costs and monitor same more effectively in the near future.

4. Systems and Controls We are examining what further improvements are necessary Special attention is needed in respect of the following areas if any. of control. i . Investment in Treasury Bills ii. Recruitment of Personnel iii. Monitoring Share Market

64 Annual Report 2003 SECURITIES & EXCHANGE COMMISSION OF SRI LANKA