11749/Sec A/R Inner

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

SECURITIES & EXCHANGE COMMISSION OF SRI LANKA2 Annual Report 2003

MEMBERS OF THE COMMISSION

1 Lt. Gen. J.E. DENIS PERERA VSV.D Litt (Honoris Causa) FCMICHAIRMAN - (from March 2003)

Lt. Gen. Perera having had his professional training atprestigious institutes in Britain and India concluded asuccessful career of 32 years as a soldier reaching the rank ofCommander of the Sri Lanka Army and retiring after a periodof 4 years, at which point he was the first officer of the ArmedForces to be decorated by the President with the Vishista SevaVibushana (VSV) for his distinguished services.

He was then appointed High Commissioner for Sri Lanka toAustralia and the South Pacific States for four years and on hisreturn, was appointed Adviser to the President on ManpowerMobilization and headed the Reserve Affairs Council.

In 1989 he joined the private sector where he was a Directorand Chairman of six leading companies and Chief Executive ofone multinational company. He has been the President of manyServicemen's Associations and has been a Fellow of theInstitute of British Management (now known as the CharteredInstitute of Management) for 30 years and was awarded theHonorary Fellowship in 2003 by the Sri Lanka Institute ofManagement.

He has been conferred with the Honorary Degree of Doctor ofLetters by the General Sir. John Kotelawala Defence Academyfor his services towards National Security and for initiating andestablishing the said Academy in 1980 and is it's presentChancellor.

He brings with him over 50 years of management experience tothe SEC.

2 Dr. NIHAL JINASENACOMMISSION MEMBER

Dr.Nihal Jinasena is an eminent Industrialist and is theChairman/Managing Director of the Jinasena Group ofCompanies.

He has a B.Tech Degree in Mechanical Engineering and anHonorary Doctorate from Loughborough University, U.K. He is

also a Chartered Engineer and a Fellow of the Institution ofEngineers,Sri Lanka.

Dr.Jinasena was appointed as a Member of the Securities andExchange Commission of Sri Lanka in October 1995 and is theSenior Most Member of the Commission.

Dr.Jinasena is a Board Member of DFCC Bank since December1991.He is also a member of the Presidential Task Force onScience and Technology and a Member of the PresidentialCommission on Trade and Tariffs.

3 MR. D. K. HETTIARACHCHICOMMISSION MEMBER

An Attorney at Law by profession, he joined the Department ofRegistrar of Companies in 1986 as an Assistant Registrar andwas promoted to the position of the Registrar of Companies in1997.

He is also an Ex-officio member of the Sri Lanka Accountingand Auditing Standards Monitoring Board.

Mr. Hettiarachchi has many years of management experience.

4 MR. MANIK NAGAHAWATTECOMMISSION MEMBER

Holds a Bachelor of Laws Honours degree and a Master of Lawsdegree.Since joining the Central Bank in 1966 he held thepositions of Controller of Exchange, Superintendent of the EPF,Additional Chief Accountant and Executive Director till 1999,when he was appointed to his present position as DeputyGovernor.

He served in several government institutions and has been aDirector of the National Development Bank and of the PrivateSector Infrastructure Development Company.

Presently, he serves as a member of the Insurance Board of SriLanka and Chairman of the Credit Information Bureau of SriLanka.

He brings over 48 years of management experience.

1 2 3 4 5

6 7 8 9 10

SECURITIES & EXCHANGE COMMISSION OF SRI LANKA Annual Report 2003 3

5 MR. FAIZ MOHIDEENCOMMISSION MEMBER

Presently, holds a prestigious position as Deputy Secretary tothe Treasury. Mr. Mohideen holds a B.Sc in Mathematics fromthe University of London and a M.Sc in Econometrics from theLondon School of Economics.

6 MR. CUBBY WIJETUNGECOMMISSION MEMBER

Holds the prestigious position as Executive Vice President,Corporate Affairs and Executive Director of Nestle, Sri Lankaand is the Chairman of The Industrial Association of Sri Lanka,Ceylon Breweries Ltd. , Lion Breweries Ceylon Ltd. and UnionResidencies (Pvt) Ltd. (Jaic Hilton).

He is also a Director on the board of four leading Organizationsand is a Committee Member of the Ceylon Chamber ofCommerce and also the Ministry of Agriculture & LivestockDevelopment, as well as a Trustee of Joseph Fraser MemorialHospital.

Mr. Wijetunge has several years of management experience.

7 MR. G. C. B. WIJEYESINGHECOMMISSION MEMBER

Mr Wijeyesinghe is a Past President of the Institute of CharteredAccountants of Sri Lanka and the Organisation of ProfessionalAssociations of Sri Lanka and former Precedent Partner ofKPMG Ford Rhodes, Thornton & Co. He also served on theKPMG Asia Pacific Board of Study, Post Graduate Institute ofManagement the Accounting & Auditing Standards MonitoringBoard and a Council member of the CommonwealthAssociation of Corporate Governance. He is a Fellow of theInstitute of Chartered Accountants of Sri Lanka and a Fellow ofthe Association of Authorized Public Accountants-UK

8 MR. W. R. JOHNSON PEIRISCOMMISSION MEMBER

Holds the position of Deputy Secretary General of the NationalCommission of Sri Lanka (UNESCO). He is also a member of the

council of the University of Kelaniya. He Counts over 26 yearsof experience with the Merchant & Investment Banking andBusiness Consulting.

Mr. Peiris is an Attorney – at – Law holding a BSc in Economicsand Law and a MBA from Post Graduate Institute ofManagement, University of Sri Jayawardenapura.

9 MR. W. UNAMBOOWACOMMISSION MEMBER

A distinguished planter for 17 years before joining CarsonCumberbatch & Co.Ltd. and elected to the Board of Directorswithin 5 years. He was appointed as Acting Chairman in 1987and was confirmed as Chairman in 1988 and continued in thiscapacity for a period of 5 years. After retiring in 1993 he remainedas Non-executive Chairman and Consultant to the Company's OilPalm plantations in Malaysia and Indonesia till 2003.

He was also appointed to the Board of Directors of UnionAssurance Ltd. in 1988 and was elected Chairman 1991 –1993.

Mr. Unamboowa has over 50 years of management experience.

10 MR. A. I. FERNANDOCOMMISSION MEMBER

A Chartered Accountant by profession he currently holds theposition of Director / Chief Financial Officer of Forbes & WalkerGroup. He is also the Director of F&W Tea Brokers (pvt)Limited., F&W Commodity Brokers (pvt) Ltd., and ForbesServices (pvt) Ltd.

Currently the President of the Institute of CharteredAccountants of Sri Lanka (ICASL), he has been a CouncilMember and the Vice-President of the organization and haschaired several committees.

He is a Fellow of the Institute of Chartered Accountants of SriLanka (FCA), the Chartered Institute of ManagementAccountants United Kingdom (FCMA) and was a Director ofthe National Investment of Business Management and PostGraduate Institute of Management.

Mr. Fernando has many years of experience to his credit.


PRINCIPAL OFFICERS OF THE SECRETARIAT

1 Ianthie JayaratneDirector Finance & Administration

2 Palitha Silva GunawardeneDirector General

3 Lasinee SeresinheDirector Corporate Affairs

4 Marina L FernandoDirector Legal & Enforcement

5 Benny TisseraDirector Supervision

6 Malik CaderDirector Public Relations & Market Development

7 Dhammika PereraDirector Investigations

1

2

3 4

56

7


CHAIRMAN’S REVIEW

Macro Economic OverviewThe year under review can be deemed as one of pragmatism

and renaissance with the economy showing signs of further

resurgence, closing on a growth of 5.5% compared to 4% in

2002, despite the political uncertainty generated in

November 2003. Sagacious growth policies saw an

improvement of macro-economic conditions, the

continuation of the Ceasefire Agreement, which also

heralded an absence of conflict and a furtherance of the

peace initiative, declining interest rates, increased capital

flows, foreign donor support, decreasing inflation and a

stable foreign exchange market had a positive impact on

overall economic growth.

Performance of the service sector especially the banking,

insurance and real estate areas, saw an impressive growth

of 79%, while the industry and agriculture sectors

contributed 14% and 7% respectively.

Overview of the SECI took over the reins as Chairman only in late March 2003

and the new Director General who came into office only in

July 2003 has ably assisted me since then. The Members of

the Commission and the staff of the SEC had not only

diligently overlooked the work of the Commission during

the change of stewardship, but also supported me and the

new Director General after we assumed duty. Within this

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

environment for us to function in.

Concurrently, the SEC nominated an expert panel to

conduct a Human Resources Review, which will carve the

path of our human resources, their career aspirations and

future development as well as compatibility and

convergence to our corporate goals and vision. This will

correspond to the findings of the Strategic Review and will

focus on total Human Resource Development concentrating

on creating a culture of continuous improvement,

motivation, loyalty and excellence. Further, continuing the

premise of transparency, which we are trying to impel

across the corporate sector, we also introduced an in-house

Audit Committee to monitor and audit our own operations,

setting an example on self-governance to other companies

and related organizations.

The role and performance of Unit Trusts’ has been reviewed

with the Chairmen and Chief Executive Officers of Unit

Trusts with a view to improving their activity, particularly

with the non-urban sector of society.

Perceiving the futureWe are now in the process of streamlining arrangements as

host for the most impressive and biggest event in the

calendar of global SECs, that of the International

Conference of Securities Exchange Commissions to be held


CHAIRMAN'S REVIEW (Contd.)

in Colombo in 2005. We have already had the Deputy

Secretary General of the International Organisation of

Securities Commissions (IOSCO) here in Sri Lanka, whose

confidence in our abilities to host this large gathering of 700

for the four day conference at the BMICH has been

categorical. We aim to make this event a platform for not

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

performance was probably one of the best in the world, post

November 2003 given the political uncertainties, the

market displayed its tendency to be erratic, perceiving an

indecisive trend towards the early part of 2004. I do hope

that stability on all fronts will return as the encouraging

performance of the market this year exhibited the promise

and potential that Sri Lanka has and that the SEC, in this

light, will have the ability to provide the necessary thrust to

the economy and development of the nation.

Lt. Gen. Denis Perera VSV

Chairman

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

3.9 % in 2002 despite the uncertainty generated by the

political events that took place in November 2003.

Improved macro-economic conditions, continuation of the

cease-fire and the peace initiative, declining interest rates,

increased capital flows, foreign donor support, falling

inflation, favourable weather conditions and a stable

foreign exchange market impacted positively on the overall

economic growth. The third quarter growth performance

indicates that the Services sector contributed to 79% of the

overall growth benefiting mainly from the banking,

insurance and real estate sector. The Industry sector

contributed to 14% and the contribution of the Agriculture

sector was 7%. This trend continued to prevail in the fourth

quarter as well, bringing about a higher economic

performance in the whole of 2003.

On the expenditure side, consumption expenditure grew

faster than investment raising the share of consumption in

total expenditure to 85.1% in 2003 from 80.1% in 2002.

This was entirely due to an increase in private

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

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

2002. Meanwhile, the Gross Domestic Investment rose to

22.2% of GDP in 2003 from 21.3% in 2002 reflecting the

slack in private investment and a shortfall in government

investment under severe budgetary constraints.

The prudent monetary policy implemented by the Central

Bank was supported by an improved agricultural

production, lower import prices, the containment of wage

increase and a relatively stable exchange rate leading to a

decline in the rate of inflation to a single digit by the middle

of 2003.Inflation as measured by Colombo Consumer Price

Index (CCPI) took a downward trend in 2002 to

approximately 9.6% and further declined to 6.3 % in 2003.

The Sri Lankan Consumer Price Index (SLCPI) which is a

more representative inflation indicator, declined shortly

from 10.2% in 2002 to 2.6% in 2003. Declining inflation

rates over an extended period will gave rise to investor

confidence and improved investment by enabling investors

to take a longer term view of the economy.

Although the budget aimed at reducing the fiscal deficit to

7.5% a shortfall in revenue collection resulted in an

upward revision of the overall budget deficit to 7.8% of

GDP, but this is still an improvement compared to the

overall deficit of 8.9% of GDP in 2002.The major cause for

this is the shortfall in government revenue, particularly tax

receipts. Lower government expenditure has been due to

savings on interest payments and strict controls on

recurrent expenditure as well as restrictions on the release

of funding for low priority capital expenditure.

The decline in interest rates enabled the issue of Treasury

Bonds with longer-term maturities i.e 10, 15 and 20 years

treasury bonds. This extended the benchmark yield curve

and provided a benchmark for pricing long-term debt

securities in the market. Thus the debt market improved

due to lower interest rates, improved market liquidity and

the implementation of the settlements systems.

Sri Lanka's external payment position improved during

2003. Higher growth in exports than imports, improved

utilization of foreign aid, higher inflows in foreign

investment, strong growth in tourism and port services

were contributory factors. The increasing surplus in the

GDP GROWTH

% G

row

th

Year

1998

1999

2000

2001

2002

2003

-2

0

2

4

6

8

BUDGET DEFICIT AS A PERCENTAGE OF GDP

% G

row

th

Year

1998

1999

2000

2001

2002

2003

-15

-10

-5

0


AN OVERVIEW OF THE PERFORMANCE OF THE SRI LANKAN ECONOMY (Contd.)

capital account of US dollars 61 million and financial

account of US dollars 746 million was more than sufficient

to offset the current account deficit of US dollars 130

million (0.7% of GDP) and record an overall balance of

payments surplus of US dollars 501 million. Total external

assets of the country are estimated to increase to US dollars

2,920 million in 2003 thus raising the import coverage to

5.8 months as at the end of the year.

The growth achieved can be sustained only with improved

macro-economic management, political stability, peace

initiatives, greater fiscal disciplined continued economic

reforms.

BALANCE OF PAYMENT

Ove

rall

Def

icit

(U

S$

Mn

.)

Year

1998

1999

2000

2001

2002

2003

-600

-400

-200

0

200

400


EQUITY MARKET – 2003

The Sri Lankan securities market ended the year with an

excellent performance with the key market indicators

showing record performances in 2003. At the year-end, the

Colombo Bourse, All Share Price Index (ASPI) appreciated

by 30 per cent mainly influenced by the peace process and

subsequent peace talks between the Government and the

LTTE in the country.

During the year under review the All Share Price Index

(ASPI) gained 247 points i.e. 30.3% to close the year at

1,062.1 while the more sensitive MILANKA Price Index

(MPI) appreciated 523.2 points i.e. 38% to close the year at

1,897.8 points. In 2003 both indices, ASPI and MPI reached

their highest-ever point which surpassed a level supported

by the fundamentals. The ASPI broke through the

psychological important 1400 level and reached its all time

high 1,423.5 points on 23rd October 2003. The previous all

time high of 1,378.8 point was recorded 9 years ago on 1st

March 1994. Following the same pattern, the MPI too

registered its highest-ever point 2,584.2 on 31st October

2003 which was introduced in 1999. The ASPI recorded an

unprecedented growth of 73.77% and MPI recorded a

significant growth of 88% for this year upto October 2003.

The peace process helping towards a stable political

environment, successful donor conference, tax amnesty,

low interest scenario, economic development followed by

strong corporate earnings were attributed to the improved

fundamental outlook of the Colombo bourse, indicating that

aggressive investment opportunities were available in the

securities market in Sri Lanka.

However, during the last two months of this year, the ASPI

reacted negatively, attributable to the prevailing political

uncertainties in the country, which moved down by 25%

i.e.354.3 points from November to December and ASPI

recorded the steepest drop within a day on 5th November

2003 i.e.173.1 (12.9%). The 2004 Budget announced a 15%

tax on profits earned from the sale of shares, which was to

be implemented from April 2004.

ASPI 2003

1/2/

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

5/8/

03

5/22

/03

6/5/

03

6/19

/03

7/3/

03

7/17

/03

7/31

/03

8/14

/03

8/28

/03

9/11

/03

9/25

/03

10/9

/03

10/2

3/03

11/6

/03

11/2

0/03

12/4

/03

12/1

8/03

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

ASPI GROWTH (%)

Year

-40

-30

-20

-10

0

10

20

30

40

50

60

70

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Index performance

Year ASPI Growth (%)

1993 979.3 61.7

1994 986.7 0.8

1995 663.7 (32.7)

1996 603.0 (9.1)

1997 702.2 16.4

1998 597.3 (14.9)

1999 572.5 (4.2)

2000 447.6 (21.8)

2001 621.0 38.7

2002 815.1 31.2

2003 1,062.1 30.3


EQUITY MARKET – 2003 (Contd.)

Trading activities in the Colombo Stock Exchange (CSE)

saw peak performances with the annual turnover achieving

SLR 73.8 bn in 2003, registering the highest annual turnover

in CSE’s history and erasing the previous record on SLR

34.5 bn in 1994. The average daily turnover SLR 307.6 mn

was recorded this year, 140% up when compared to the

SLR 128 mn in 2002. The highest-ever turnover for a single

month amounting to SLR 16.5 billion was registered in

September this year, surpassing the SLR 10.5 bn recorded in

June of the same year. Also the highest-ever daily turnover

in CSE’s history amounting to SLR 4.8 bn was registered on

19th September this year. A total of 482,954 trades were

executed in 2003 compared to 283,126 trades recorded in

2002. The domestic investors, contributed 81% of the total

market turnover whilst foreign participation was 19%, in

2003. The market capitalisation was registered as SLR

262.8 bn on the last day of this year against SLR 162.5 bn in

2002, whilst the Market Price Earnings Ratio was 11.1 in

this year compared to 12.1 in the previous year. The

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.

Foreign investors continued to be net buyers in the market

for the second consecutive year with net foreign inflow of

SLR 209.3 Mn in 2003. Foreign purchases amounted to SLR

13,943.9 Mn while foreign sales amounted to SLR 13,734.6

Mn. Foreign direct and portfolio investments are likely to

increase, reflecting the impact of improving investor

confidence.

Primary Market Nine companies obtained listings on the CSE namely Sri

Lanka Telecom Ltd; The Lanka Hospital Corp. Ltd; Land &

Building Ltd; Hayleys-MGT Knitting Mills Ltd; Ceylon

Leather Products Ltd; Hemas Holdings Ltd; Housing

Development & Finance Corp. Ltd; Ceylon Hospitals Ltd;

and HNB Assurance Ltd. It is anticipated that this could

increase the market capitalization at the CSE to SLR 262.8

bn in 2003 from SLR 162.5 bn in 2002 (i.e. 61%). This

increased the ability of the CSE to absorb new investments

and thereby attract further foreign investment inflows into

the country.

SL

R M

n

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

0

50

100

150

200

250

300

350

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003Total Turnover

MARKET PERFORMANCE

SL

R M

n

Average Daily Turnover


REVIEW OF THE DIRECTOR GENERAL

While we weathered several changes at top management

level during the year we also ensured, that every initiative

was taken towards a the twin approach of effective market

regulation and facilitation of market development. We also

conducted a strategic review and a human resources review

in relation to formulating an effective strategic plan for the

institution and strengthening the human resource

development of its staff respectively.

Looking back at 2003 it is best described as a year of

transition and transformation for both the SEC and the

Capital Market. It has been essentially one of charting a

three pronged approach based on the SEC’s unwavering

commitment to facilitate the development of the capital

market whilst maintaining a prudent regulatory stance in

keeping with Government policy as well as actively

participating in and benefiting from international

experience and deliberations in this area.

As detailed earlier in this report the Colombo Stock

Exchange ranked amongst the best performing stock

markets across the world, during 2003. The significant

feature on this occasion was that local investors largely

spearheaded this. The SEC was pleased to contribute to the

CSE’s efforts to expand its reach with the co-financing of its

Kandy branch, which turned profitable during a short pace

of time.

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

the Multilateral Memorandum of Understanding (MMOU)

of IOSCO, thus becoming one of the first countries from the

emerging markets to sign up to this MMOU signifying both

our commitment to and benefit from international co-

operation.

We also successfully hosted the Asia Pacific Regional

Committee (APRC) of IOSCO for its meeting in January

2003 in Colombo. 50 delegates representing 14 countries

from the region attended this Conference. We have also

commenced preparations to host the IOSCO Annual

Conference in Colombo during April 2005. These efforts

included selection of a professional convention’s organiser

as well as promoting Sri Lanka at the 2003 IOSCO Annual

Conference held in Seoul, South Korea during October

2003.

We serve as a member of the Financial Sector Reform

Committee (FSRC) the apex body, which brings together

senior officials from both the public and private sectors

under the chair of the Governor of the Central Bank of Sri

Lanka to facilitate financial sector reforms. In this, we

actively contributed to financial sector reform in the Capital

Markets. This included chairing the Task Force, which

studied and developed a matrix for the establishment of an

Exchange Traded Corporate Debt Market as well as

implementing Capital Market reforms already adopted. It is


REVIEW OF THE DIRECTOR GENERAL (Contd.)

imperative that we develop an exchange traded corporate

debt market, which the experience obtained in other

countries has shown to boost as well as create alternate

sources of medium to long term funding.

The SEC also initiated a dialogue with the Unit Trust

Industry with a view to facilitating greater market access,

particularly in the rural areas through Unit Trusts. The SEC

recognizes several impediments which faultered previous

efforts to facilitate the development of the Unit Trusts. This

includes issues of perception on risk in comparison to

alternate forms of investment. This requires sustained and

often grass root level investor awareness programmes.

Efforts are under way to implement such programmes.

Towards the facilitation of the development of the Capital

Market the SEC identified impediments and proposed

amendments to the Companies Act as an immediate

measure, pending the complete revision of the Companies

Act.

The SEC successfully brokered a reduction in the brokerage

commission and the fees levied by the CSE. We also

reduced our own levy on share transactions. We recognise

that such fees could be further revised downwards and

have requested the CSE to work in consultation with the

Stock Brokers to move towards negotiable commissions

during 2004.

The SEC identified Stakeholder Committees and

Consultations as a key method to drive policy and

regulatory development in the Capital Market. In this

context the SEC appointed three such Committees to

deliberate on Corporate Governance, Skills Development

and to review the Takeovers and Mergers Code whilst the

existing stakeholder committee pursued in earnest the

development of guidelines for auditing listed companies.

Corporate Governance initiatives were based on the Code

developed by the Institute of Chartered Accountants of Sri

Lanka, which was compared with similar codes developed

in the US, UK, Europe and by OECD for further refinement.

It is expected that with refinements, this code will be

published initially for voluntary adoption. Based on the

experience, it is expected that some of the provisions would

be mandated through its incorporation in the rules

applicable to listed Companies. It is indeed pertinent to

note that Sri Lanka’s efforts in this area commenced before

the much publicized scandals in the West. The drafts

developed are in line with efforts of other jurisdictions.

The SEC recognizes the importance of a minimum skill

base for the sustainable development of the Capital Market.

Hence it is imperative that there is both rigorous training

and formal evaluation of such skills spanning the current

expanse of Stock Broker examinations conducted by the

CSE and the Chartered Financial Analyst examinations. It is

our considered opinion that such institutional framework is

fast developed through regional co-operation. For this

purpose the Skills Development Committee has both

invited bids for a consultancy as well as sought assistance

from both the Bombay Stock Exchange & the Securities

Commission Malaysia with request for assistance to set up

a Capital Markets Training Institute.

With fluctuations in the Capital Market, take overs and

mergers have gained increased significance. In this context,

the present Code which was primarily based on the

voluntary UK Code, has outlived its usefulness. Hence

efforts were initiated to review the Code based inconclusive

efforts few years ago and on Codes of other jurisdictions.

This is expected to address areas in the present Code which

appears ambiguous or has gaps.

Efforts to issue guidelines for auditing of listed companies

was also continued with vigour. In this instance extensive

consultations were held to collate an useful and effective

code whilst not impeding entrepreneurial flair. Such

efforts have since been concluded. A working document is

now before the listed companies with a request for

implementation.

2003 also witnessed the enactment of amendments to the

SEC Act, which was deliberated and formulated over a long

period. Such amendments sought to enhance SEC’s

investigative powers as well as bring several new market

intermediaries under its regulation. This included Credit

Rating agencies, thus becoming one of the few jurisdictions,

which regulate such intermediaries. With the assistance of

an International Consultant, through a consultation process

the SEC formulated criteria for registering and supervising

such new market intermediaries. Following this enactment

with the approval of the Hon. Attorney General, the SEC

also formulated an investigation procedure, which is now

in place. The SEC also strengthened its working relations

with the Attorney General’s Department with the

appointment of a Senior State Counsel as a Legal

Consultant, in addition to the Solicitor General.

During the year, the SEC implemented several measures to

strengthen its market surveillance and supervisory


REVIEW OF THE DIRECTOR GENERAL (Contd.)

capabilities. Such efforts would continue in earnest during

2004. These efforts will revamping procedures, increasing

electronic links, further automating such surveillance,

enhancing skills and closer monitoring. It is our intention

that such efforts act as an effective detterent to market

abuse whilst not curbing the entrepreneurism of the

investors.

Towards increasing its own efficiencies, the SEC launched

its own local area network, providing electronic

communication both internally and externally. Such 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 2004We expect to continue our multi faceted efforts to

strengthen regulation whilst facilitating market

development. In addition, the SEC endeavours to increase

its active participation in international efforts to deliberate

issues of mutual interests. The development of the market

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.

We will endeavour to continuously strengthen both our

skills as well as resources to effectively and dynamically

regulate the market in a manner to both enhance investor

confidence as well as to facilitate market development.

I take this opportunity to express my gratitude to the

Chairman and Members of the Commission for their

guidance and support in such efforts. I also take this

opportunity to congratulate the Directors and Staff for their

commitment and excellent efforts. I also acknowledge the

co-operation of all market intermediaries in our efforts.

Palitha Silva Gunawardene

Director General

Securities & Exchange Commission of Sri Lanka


OFFICE OF THE DIRECTOR GENERAL

1 Carmen de Silva Executive Secretary

2 Sharon PereraCo-ordinating Secretary

3 Palitha Silva GunawardeneDirector General

4 Sajeevani BakmedeniyaExecutive

5 Sharmila PanditaratneExecutive

6 Ruwanganie GooneratneExecutive Secretary

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CORPORATE AFFAIRS DIVISION

CORE FUNCTIONS

• Examine financial statements of companies with

reference to compliance with relevant laws and

regulations on "true and fair" disclosure.

• Monitor market activity to detect and prevent

market abuse.

• Promote Corporate Governance Practices.

• Inquire into and resolve complaints of markets,

intermediaries and investors.

• Verify the accuracy of the notices/announcements

published by issuers and listed companies.

• Monitor compliance with the Companies' Takeovers

and Mergers Code 1995.

• Process and approve off-the-floor share transactions

• Respond to surveys conducted by IOSCO.

• Process and approve the Delisting applications.

• The Unit on Information Technology was

amalgamated with the Corporate Affairs Division

and is responsible for the development and

management of the SEC's information technology

infrastructure

KEY ACTIVITIES

Review of Annual Reports

The SEC places great emphasis on protecting the interest of

investors and all its stakeholders, as the capital market

depends on timely and accurate information to function

efficiently and fairly. It is important, that the disclosures

released to the securities market are true, fair and timely.

All listed Companies are required to submit annual reports

within six months of the end of the financial year to their

shareholders and the Colombo Stock Exchange, and must

comply with the relevant legal provision. The audited

accounts should be prepared and presented in accordance

with the Sri Lanka Accounting Standards.

The Corporate Affairs Division reviews Annual Reports of

Listed Companies to ascertain the degree of compliance

with the SEC Act, CSE Rules, Sri Lanka Accounting

Standards (SLAS) and relevant provisions of the

Companies Act. The objective of this exercise is to enhance

the quality of Annual Reports and Accounts submitted by

Listed Companies and facilitate the Commission in

researching the degree of comparability of financial

statements produced by Listed Companies. Listed

Companies are required to disseminate material

1 Manjula Chandraratne - Officer2 Christobel Silva - Conf. Secretary3 Sheena Hewagama - Executive4 Lasinee Seresinhe - Director Corporate Affairs5 D.M.G. Priyantha - Officer6 Thamari Senanayake - Legal Executive7 Sharmalene Alles - Executive8 Dinesha Perera - Audit Officer9 Ranmini Jayathilake - Executive Information Systems

1 62

3

4

5 7

8 9


CORPORATE AFFAIRS DIVISION (Contd.)

information promptly in order to establish transparency

and accountability in the Securities Market and ensure that

professional standards are maintained.

We also reviewed interim accounts, market disclosures and

other information that Listed Companies are required to

disseminate to the public as a part of their continuing

listing obligations to reduce asymmetry of information.

In reviewing the Annual Reports the Divisionfocused on the following areas:

• Compliance with Colombo Stock Exchange (CSE)

Rules

• Compliance with Sri Lanka Accounting Standards

(SLAS)

• 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 thebasis 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 PlansRetirement Benefit Costs

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

SLAS 30 Elements of related party transactionsRelated Party Transaction

SLAS 28 Financial Information by segmentsReporting Financial Information by Segment

SLAS 22 Fair value of Investment PropertiesAccounting 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



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

• Corporate Governance Practices

• Shareholder and Investor Information

• Financial Summary

• Chairman's Report

• Report of the Auditors

• Financial Highlights

• Corporate Information

• Management Discussion and Analysis

We reviewed approximately 110 Annual Reports and

Accounts of Listed Companies and communicated with

twenty companies on matters relating to non-compliances

considering the nature and the materiality of the issues. The

responses of Listed Companies were extremely positive to

this endeavour. In most instances, the SEC cautioned the

companies to ensure that such deviations were not repeated

in future submissions. This process has contributed to

improving the level of awareness of companies and

auditors regarding the obligations placed upon them in the

preparation and presentation of Annual Reports and

Accounts.

Takeovers and Mergers

The Takeovers and Mergers Code was formulated in 1995

and has not undergone a comprehensive review and

revision. A committee therefore, comprising of

stakeholders was formed in August 2003 to formulate

revisions to the Code. The committee sought the

views/comments of public market participants on all

aspects of the working of the Code for this purpose. The

committee decided to study the applicability of laws of

specific countries in order to make the necessary revisions.

There were nine mandatory offers and two voluntary offers

during the year under review, and we ensured that there

was due compliance with the Takeovers and Mergers Code

by those concerned. Details of these Takeovers and Mergers

are set out in Table A.

Approval of Off-the -Floor Share Transactions

We approved 398 exceptional transfers. These transfers

were in order to facilitate margin trading, fund

management, delisting and restructuring where beneficial

ownership would not change.

Before the amendments effected to the SEC Act, the practice

was that the SEC approves the transfer of shares pertaining

to conveyance. However with the SEC amendment Act of

2003 coming into force, this process has been deemed

unnecessary and thus the application form for the transfer

of securities was reformatted.

Handling of Complaints

The Division received 27 complaints from shareholders of

Listed Companies out of which one complaint was referred

to the Investigations Division.

The details of the complaints and their status as at 31

December 2003 are given in Table B



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 -

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.

Market Monitoring

The Corporate Affairs Division, via a real time computer

assisted surveillance system, conducts continuous

monitoring of market activities of Listed Entities in order to

detect unfair transactions that may violate laws and

regulations. These include market manipulation, insider

dealing, wash sales, front running, short selling, cherry

picking etc.

Subsequent to the detection of any market irregularities, the

Division proceeds to analyse all material information and

will conduct a preliminary inquiry to determine whether a

fully-fledged investigation into the issue is warranted. It

also scrutinizes various news sources including newspaper

articles, advertisements, rumours, information on the

internet to verify any irregularities caused by misconduct.

In addition, individual files for information collation on

corporate behaviour, profiles and disclosures are

maintained for Listed Companies.

During the year, the surveillance staff examined the

following issues listed in Table C.

To strengthen market surveillance, technical assistance has

been requested for the following:

• Review current market surveillance methodologies

and procedures and advise on its adequacy

• Provide a detailed report of the recommended

system and procedures, bearing in mind

compatibility issues with the ATS, CDS and

Registrar of Companies and the Central Bank

• Draft specifications for an affordable system-based

solution, which automates or partly automates the

processing of key information



• Provide advice during the system's development

and implementation

• Provide training

Issues pertaining to Information Technology

• Administrate the SEC Local Area Network and

ensure the integrity of the system

• Administrate the SEC Website

• Administrate and maintain SEC mail and database

servers efficiently and effectively with minimum

down time

• System backups - Accounting information on a daily

basis

• Monitor the capacity usage of access and time

• Develop policies and Guidelines

• Update workstations regularly to ensure that all

systems are protected against harmful common

computer viruses

• Administrate the other computerised systems

• Accpac- Accounting package

• Paypac- Employees Salaries

• Hexagon- HSBC

• Cheque outsourcing [COS] - HSBC

Other Matters

In terms of the prevalent rules, during the year under

review, we reviewed one de-listing application.

Approvals under Section 28A of the SEC Act

In terms of Section 28A of the SEC Act, if a public company

wishes to allot shares or any securities convertible to shares

to any person prior to its listing on the Stock Exchange with

an intention of obtaining a listing within a period of one

year of such allotment, prior approval of the SEC is

required. The intention of the legislature for inclusion of

this section was to avoid a situation where a company

could place shares at a discount to the public issue price

with selected individuals and institutions prior to

obtaining a listing on the Stock Exchange and trade in the

market an undue price advantage subsequently.

According to the said Section, approvals were granted to

six entities, of which two companies have already obtained

listings on the Colombo Stock Exchange.

Types of allotments that took place were:

Private placements

Bonus shares

Conversion of preference shares

Employee Share Option Plans (ESOP)

Shares issued in lieu of advances received


INVESTIGATIONS DIVISION

Core Functions• Deal with complaints that appear to require the

institution of legal or other proceedings or the

imposition of sanctions;

• Conduct investigations into fraudulent activities in

the securities market and violations of securities

laws and regulations;

• Conduct inquiries with regard to proposed

takeovers and mergers where it is alleged that the

mandatory offer provisions contained in the

Takeovers & Mergers Code have been triggered; and

• Conduct training programmes on securities related

investigations.

Key ActivitiesIn the year under review, the Investigations Division

conducted a total of sixteen investigations, of which nine

were completed during the year. The details and a brief

description of the action taken/current status of the said

investigations are given on page 22.

We obtained the services of a Senior State Counsel with

extensive expertise to facilitate the investigations.

Although the SEC did not institute any legal proceedings in

relation to the matters investigated during the year, the

Division participated in the on-going litigation relating to

non-disclosure of material information by a Listed

Company, a case which was filed by the SEC based on

findings of a previous investigation.

Probably the most significant regulatory step for the SEC is

the acquisition of vital long overdue investigative powers

through the amendments to the SEC Act which came into

operation on 29 April 2003. Previous investigative powers

vested in the SEC proved to be highly inadequate with the

SEC being able to call for information only by way of

written notice, an impediment to conducting investigations

effectively. The augmented investigative powers

empowered the SEC to summon witnesses, record

statements, visit premises, inspect and take copies of

records etc. which will no doubt contribute immensely

towards building a stronger regulatory framework.

Further, a formal procedure in conducting investigations by

the SEC was introduced in conformity with the statutory

provisions contained in the SEC Act, which was duly

documented and approved by the Commission and the

Hon. Attorney General.

Necessary steps were also taken during the year to

strengthen the ability of the Investigations Division to

conduct investigations in a more effective manner by

recruiting additional staff with adequate qualifications and

experience.

1 Madhugayanie Balapitiya - Legal Executive

2 Dhammika Perera - Director Investigations

3 Shalini Perera - Conf. Secretary

4 Dulanga Perera - Executive

12

3 4


INVESTIGATIONS DIVISION (Contd.)

1 Insider Dealing

Trading in the shares of a listed company whilst in the

possession of unpublished price sensitive information in

respect of the securities of the said Company.

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.

3 Front Running

Execution of trades whilst having the knowledge of the orders

to be executed, with the intent of making available the shares

to the prospective investors at a profit.

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.


LEGAL AND ENFORCEMENT DIVISION

Core Functions• Provide legal support and advice to the Commission

and its various Divisions.

• Review and develop the framework of laws within

which the Securities and Exchange Commission

functions, with a view to ensuring that such laws

optimally reflect better developed and more

appropriate policies

• Review, suggest and draft amendments to the

Securities and Exchange Commission of Sri Lanka

Act and subordinate legislation made thereunder.

• Review and approve rules of the Colombo Stock

Exchange.

• Process and approve applications for the issue and

renewal of licenses to Stock Exchanges, Stock

Brokers, Stock Dealers and Managing Companies of

Unit Trusts.

• Process and approve applications for the grant and

renewal of registration to Underwriters, Margin

Providers, Investment Managers, Credit Rating

Agencies and Clearing Houses.

• Instruct the Attorney - General in the prosecution of

persons charged with the violation of the provisions

of the SEC Act, and subordinate legislation made

thereunder.

• Process and approve applications by foreign funds

to invest in the Sri Lankan securities market.

• Present matters at inquiries before the Commission.

Key Activities

A LitigationCases Filed by the SEC

1. SEC vs. Magpek Exports Ltd. and its Directors

The SEC filed charges against this Company and its

Directors for not immediately disclosing to the market,

material information that would prevent the creation of a

false market for shares of Magpek Exports Ltd., as required

by the SEC Rules.

1 Nihara Mallawa - Executive

2 Hasini Amaratunga - Conf. Secretary

3 Marina L Fernando - Director Legal & Enforcement

4 Damayanthi Fernando - Executive

1

2

3 4


LEGAL AND ENFORCEMENT DIVISION (Contd.)

Charges against three of the defendants were compounded

on an application being made in that respect.

As at 31st December 2003, the trial against the remaining

defendants is continuing in the Magistrates Court. The case

for the prosecution has been concluded. Evidence in

support of the defence is scheduled to commence.

Cases Filed Against the SEC

2. Michael Mack (Petitioner) vs. SEC and the

Commission Members (Respondents)

The Commission’s decision to prosecute Michael Mack on

charges of insider dealing in violation of Section 32 of the

SEC Act (as amended) was not proceeded with in view of an

application being made by the Petitioner to the Court of

Appeal of Sri Lanka, for the issue of Writs of Certiorari and

Prohibition. A Writ of Certiorari is sought to quash the

decision of the SEC to commence proceedings to prosecute

the Petitioner and a Writ of Prohibition is sought to prevent

the SEC from taking any further steps in that respect.

The SEC has filed their objections to the Application.

Hearing of the Application has been scheduled for

February 2004.

3. H. N. Gunewardena (Petitioner) vs. SEC and the

Commission Members (Respondents)

The Commission’s decision to prosecute H. N.

Gunewardena, on charges of insider dealing in violation of

Section 32 of the SEC Act (as amended) was not proceeded

with in view of an application being made by the Petitioner

to the Court of Appeal of Sri Lanka, for the issue of writs of

Certiorari and Prohibition. A Writ of Certiorari is sought to

quash the decision of the SEC to commence proceedings to

prosecute the Petitioner and a Writ of Prohibition is sought

to prevent the SEC from taking any further steps in that

respect.

The SEC has field their Objections to the Application.

Hearing of the Application has been scheduled for

February 2004.

B. Approval of Country and Regional Funds

Approval has been granted to thirty regional and country

funds in compliance with the criteria laid down in the

Gazette Extraordinary No. 720/12 of 24th June 1992 to

invest in listed companies incorporated in Sri Lanka.

Guidelines setting out the criteria, on the fulfillment of

which approval may be granted to regional and country

funds, have been formulated by the SEC and circulated.

These guidelines seek to prevent the entry of money

connected with illegal transactions into the country.

C. International Organization of SecuritiesCommissions (IOSCO) Multilateral MOU

The SEC has made an application seeking permission to

become a signatory to the IOSCO MOU, which constitutes

an understanding between signatories facilitating the

exchange of information. The SEC responded to queries

raised by the teams of the IOSCO, which were formed to

consider and approve the suitability of the SEC’s

application. The Screening Group accepted the application

and recommended that signatory status be granted. The

SEC is presently awaiting the decision of the three member

Committee and anticipates being granted signatory status

within the year 2004.

D. Takeovers and Mergers Code

Rule 31 of the Takeovers and Mergers Code 1995 was

amended to make provision that no person will incur a

liability to make an offer in terms of Rule 31 unless such

person has sufficient financial resources to implement the

offer in full to the shareholders, to whom such offer should

be extended.

A Committee was also set up to study and review the

efficacy of the Code against standards developed and

utilized by other jurisdictions and to recommend

amendments to the Code.

E. Revision of Transaction Fee Structure

The transaction costs for equity trading was reduced with

effect from 1st December 2003. The revised transaction fees

are as follows;

The CSE was requested to forward a proposal on negotiable

brokerage commission in consultation with the Colombo

< Rs.1 Mn. > Rs. 1 Mn.

(%) (%)

SEC Cess 0.090 0.090

CSE Fees 0.105 0.105

CDS Fees 0.030 0.030

Brokerage Commission 1.000 0.800

Total 1.225 1.025

Stock Brokers’ Association. The SEC proposes to consider

the suitability of introducing negotiable brokerage.

F. Introduction of Five New MarketIntermediaries

The Amendment No. 18 of 2003, to the SEC Act No. 36 of

1987, introduced five new market intermediaries subject to

regulation of the SEC. They are margin providers,

investment managers, underwriters, credit rating agencies

and clearing houses.

Additional requirements which ought to be fulfilled by

intermediaries to qualify for registration have been

introduced through ‘Terms and Conditions’ being

formulated by the SEC. These are additional to the terms

and conditions set out in the SEC Act.

Registrations of market intermediaries commence from the

26th of January 2004.

G. New Unit Trust Code

The new Unit Trust Code rescinding the Unit Trust Code of

1995 has been approved by the Legal Draftsman’s

Department. The Code will be gazetted shortly, and will be

applicable from that date.

H. Rules of the Colombo Stock Exchange

The SEC has examined and recommended the amendment

of the rules referred to below, in terms of Section 24 of the

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.

I. Renewal of License as a Stock Broker

Applications forwarded by 15 Stockbrokers for the renewal

of their license as Stock Brokers were processed and

approved.

J. Registration as a Stock Broker and a StockDealer

The application forwarded by Seylan Merchant Bank to be

licensed as a Stock Broker and a Stock Dealer was processed

and approved.

K. Memorandum and Understanding (MOU) forAssistance and Mutual Co-Operation

The SEC signed a MOU with the Securities and Exchange

Board of India (SEBI) and the SEC Pakistan, with a view to

facilitating the exchange of information and to further

bilateral ties between the two countries.

L. Miscellaneous

The SEC proposed amendments to the Companies Act

No.17 of 1982 to enable:

the issue of shares, below par value without Court

sanction; and the issue of commercial papers

without fulfilling the currently prevalent

requirement to publish a prospectus.

These matters are under consideration by the

Registrar of Companies.


LEGAL AND ENFORCEMENT DIVISION (Contd.)


SUPERVISION DIVISION

Core Functions• Monitor the financial and operational performance

of licensed Stockbrokers and Management

Companies of Unit Trusts by conducting on-site and

off-site inspections of Stock Broking Companies and

Management Companies of Unit Trusts in order to

ensure that adequate capital is maintained and these

Companies are financially stable.

• Ensure that Stockbrokers employ competent staff to

conduct business.

• Ensure that laws and regulations of the SEC are duly

complied with by Stockbrokers and Management

Companies of Unit Trusts.

Key Activities

Broking Companies

Supervision of Stock Broking Companies

The Securities and Exchange Commission of Sri Lanka Act,

No.36 of 1987 As Amended By Act, No. 26 of 1991 & Act,

No.18 of 2003, requires all Stock Broking firms to obtain a

license annually and to be members of a licensed Stock

Exchange. The license is granted on assessing the financial

position of the Company, Compliance to the Colombo Stock

Exchange member regulations, Circulars pertaining to

liquidity and net capital requirements and any violation to

the SEC Act. In addition, on-site supervision is conducted

annually to check the financial stability of the Stock

Broking Companies. During the year, there were fifteen

Stock Broking Companies, which number has remained

unchanged since 1994.

The SEC in order to implement the objective of monitoring

the financial and operational performance and financial

stability of licensed Stock Broking Companies, requires

Stock Broking firms to maintain a minimum net capital

requirement* which was increased from Rs. 5 million to Rs.

11 million effective from 01st October 2003, due to the

bullish market sentiment that prevailed. In addition to the

minimum net capital requirement, Stock Broking firms are

required to maintain a specified liquidity requirement,

appoint competent compliance officers capable of

overseeing regulatory compliance procedures, maintain

separate client accounts and follow an established Central

Order Desk (COD) Procedure pertaining to the receipt,

execution and allocation of orders. The Stock Broking

companies are required to submit monthly unaudited

accounts and compliance reports to the Commission. These

reports are reviewed by the officers of the Supervision

Division to ensure that compliance procedures are adhered

to. Unaudited accounts are used to monitor and compare

the performance of the broking industry.

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

1 Harshana Wanniarachchi - Officer

2 Chamari Ekanayake - Executive

3 Himani Kotagama - Executive

4 Krishanthi Muthuthanthrige - Conf. Secretary

5 Benny Tissera - Director Supervision

6 Saumi Kodippily - Executive

7 Viraj Rajapakse - Executive

16

2 3

4

5 7


SUPERVISION DIVISION (Contd.)

The Supervision staff monitor the Stock Broking companies

off-site, by reviewing the returns and documents submitted

viz., monthly unaudited accounts, net capital statements,

debtors and creditors age analysis, liquidity position, and

assessing financial stability of the company. The division

also reviews the Compliance Reports to ensure compliance

with procedures adopted by the CSE. All fifteen Stock

Broking firms were visited at least once during the year, to

ensure that the companies are operating according to the

SEC Act and rules of the CSE. During December 2001, the

SEC and CSE reached an understanding that the COD

Procedure during on-site inspection would only be verified

if an investor lodged a complaint. This decision was based

on the representations made by the Stock Brokers through

the Stock Brokers’ Association due to the practical

difficulties in adhering to the current COD procedure which

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

The overall brokerage income earned by broking companies

during the year was approximately Rs. 1.4 bn (approx.), an

increase of Rs. 856 Mn (approx.) compared to the year 2002.

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:

It is evident that during the year 2003, brokerage income

improved significantly from Rs. 595 Mn (approx.) to Rs. 1.4

bn (approx.) respectively, in line with the bullish market

trend.

Unit Trust FundsThere were twelve Unit Trust Funds managed by five

management companies as at 31st December 2003. Namal

Optima Fund was in operation for 18 months and expired

on 18th March 2003.

The market share of each Unit Trust Management Company

as at 31st December 2003 is reflected in the following chart:

BROKERAGE INCOME OFSTOCK BROKING COMPANIES

Rs.

(M

n.)

Year

0

200

400

600

800

1,000

1,200

1,400

1,600

2002 2003

MARKET SHARE OF UNIT TRUSTMANAGEMENT COMPANIES

NAMAL UTMC Eagle

Commercial Vanik

36.71% 40.83%

8.99%

0.43%

13.05%



Supervision of Unit Trust ManagementCompanies

The Supervision Division visited each Management

Company once during the year under review. The

inspections were carried out in accordance with the Audit

Programme developed by the Supervision Division of the

SEC in order to verify whether the investment parameters

for Unit Trust Funds were maintained as set out in the Unit

Trust Code and relevant Trust Deeds and whether the

Management Companies are financially stable. A few

discrepancies were noted and included incomplete

application forms for registration as a unit holder, non-

maintenance of an investment register and cheque

payments to unit holders being delayed for more than seven

days for unit redemptions. The Management Companies

were informed thereof and the companies have agreed to

rectify these discrepancies.

The SEC reviewed the monthly accounts and returns

submitted to the Commission in respect of the twelve Unit

Trust Funds. Unit Trust Management Companies are

required to maintain a minimum net capital whilst the Unit

Trust Code 1995 stipulates that the Company maintains a

minimum liquidity position, and investments in

government securities and in licensed commercial banks do

not exceed a maximum level. One Company was found to

have fallen short of the minimum net capital requirement

and was provided a time period to correct this position. In

addition, the Supervision Division also monitors exposure

levels of the unit trusts according to investment limitations

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

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

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:



exceeded the levels and not maintained the liquidity

requirements stipulated in the Unit Trust Code and Trust

Deeds. The SEC requested the Management Companies

concerned to correct the situation. The Management

Companies concerned corrected the funds that exceeded

the limits, except for one fund, that could not rectify the

position. The Management Company requested time to

correct the position to be able to sell the securities at a

favorable price.

Furthermore, the SEC approved advertising material, press

releases, interim reports and annual financial statements.

The documents submitted were reviewed and necessary

amendments recommended by the SEC. It was also noted

that one Company published an advertisement without the

prior approval of the SEC. This Company was issued a letter

of show cause and warned.

Performance of the Unit Trusts

The Unit Trust Industry recorded a negative growth of 4.7%

in terms of unit holders and 31% in units issued, while the

fund value recorded a positive growth of 19.4% when

compared to the previous year.

Details of the funds with regard to number of units, number

of unit holders and value are as follows:

At the end of 2003, 12 unit trust funds recorded 317 Mn

units in circulation, compared to 458 Mn at the end of 2002.

The number of unit holders had decreased from 25,252 as at

31st December 2002 to 24,066 as at 31st December 2003.

The overall Net Asset Value of funds decreased by Rs. 0.9

bn (approx.) from Rs. 4.4 bn to Rs. 3.6 bn compared to the

previous year. The main reason for the decrease was due to

Namal Optima Fund (NOF) ceasing operation in March

2003. This accounted for 161 unit holders, 85 Mn (approx.)

units in circulation and a NAV of Rs. 989 Mn.

Approximately 67% of the Unit Trust Funds (excluding

Income Funds) were invested in the equity market. Income

Funds invested on an average more than 25% of their funds

in Treasury Bills. Due to the improved market conditions,

the Net Asset Value of the funds showed an increase of Rs.

134 Mn (approx.) during the year under review (excluding

Namal Optima Fund in the comparison) compared to the

previous year. This can be mainly attributed to the increase

in the Net Asset Values of Balanced Funds, Growth Funds,

Index Funds and Income Funds. The primary reason for the

improvement in the Net Asset Values of Balanced Funds,

Growth Funds, Index Funds was due to the Bullish Market

conditions which prevailed at the Colombo Stock

Exchange.

THE OVERALL POSITION OF UNIT TRUST FUNDS AS AT

31ST DECEMBER 2003 AND 31ST DECEMBER 2002:

The SEC during the latter part of 2003 and early 2004

commenced a series of meetings with the five management

companies in order to chart a course for the development of

the Unit Trust industry. One of the main concerns addressed

at the meetings was the need to create investor awareness

amongst prospective small and medium scale investors in

rural areas. The SEC requested the Companies to submit a

projected plan during February 2004 to develop the market

and increase unit holders in greater geographical areas, with

the prime focus on small and medium scale investors.

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)


PUBLIC RELATIONS AND MARKET DEVELOPMENT DIVISION

Core Functions• Handle International Relations

• Handle publications

• Develop and conduct training programmes on

Capital Market, Securities Law and related subjects.

• Conduct training programmes for SEC Staff

• Coordinate the development of the SEC library

Key Activities

International Relations

• International Organization of SecuritiesCommissions (IOSCO)

Having competed with Spain, Sri Lanka won the bid to host

the 30th Annual Conference of IOSCO from 4 - 7 April 2005

in Colombo. The IOSCO which was created in 1983,

comprises more than 100 securities market regulators and

affiliated organizations including International Stock

Exchanges, Fund Managers and relevant NGOs. Over 750

high profile delegates representing the international

financial sector are expected to participate at this

conference.

The SEC awarded the tender to the Professional Conference

Organizing - John Keells Conventions as event managers.

The Asia Pacific Regional Committee (APRC) and

Enforcement Directors' meetings - 2003 in Colombo

In January 2003, Sri Lanka hosted approximately 50

delegates from Australia, New Zealand, China, Hong Kong,

Japan, Singapore, Korea, Malaysia, India and Pakistan

where all regulators reinforced the need for and

commitment towards regional co-operation and effective

supervision of markets to enhance investor confidence.

Publications

The following were published during the year:

• Annual Report 2002 of the Securities and Exchange

Commission of Sri Lanka

• Publication on "An Introduction to the Stock Market"

in Sinhala by Y W Gunawardane, a former civil

servant, mainly targeted at investors, highlighting the

practical aspects of share trading in Sri Lanka.

1 Sanali Weerasekera - Executive

2 Juliet Allegakoen - Conf. Secretary

3 Malik Cader - Director Public Relations & Market Development

4 Kumari Siriwardena - Sinhala Typist

5 Suneth Perera - Executive

1

2

3

4

5


PUBLIC RELATIONS AND MARKET DEVELOPMENT DIVISION (Contd.)

Training

Teacher training on Capital Markets

The SEC in association with the National Institute of

Education (NIE) organized six comprehensive training

programmes, three programmes each in Sinhala and Tamil,

to educate regional teachers on the subject of capital

markets and current developments. One such programme

was organized for the first time for the North and East

teachers, where participants from Jaffna, Chavakachcheri,

Mannar, Trincomalee, Vavuniya and Batticaloa attended the

seminar. The three day residential programmes were held at

the NIE auditorium, Maharagama, with field visits to the

Colombo Stock Exchange and the SEC.

The SEC was instrumental in introducing the subject of

capital markets to the Advanced Level curriculum in the

early 1990s. Annually about 60,000 Advanced Level

commerce students offer the subject at the examination. The

subject of Capital Markets has also been included in the

Ordinary Level Curriculum, exposing the subject to over

500,000 students.

• Other seminars and programmes

• SEC Consultation on the Role of Auditors

• We organized a half day consultation on the "Role of

Auditors" on 26 September 2003 for 73 participants,

who included auditors, representatives of listed

companies, law firms, stockbrokers and Unit Trust

companies. The objective was to discuss the

proposed guidelines for the role of auditors and to

review observations received from the public. The

comments made at the consultation and the relevant

observations were incorporated in the guidelines.

Seminar on the Amendment to the SEC Act

We also co-ordinated the arrangements of the SEC

sponsored seminar on the amendments to the SEC Act on

24 June 2003. A total of 190 participants attended the

seminar with Kithsiri Gunawardane, Director Legal and

Enforcement of the SEC making the main presentation.

In addition to the above the division conducted the

following seminars:

• A Programme on Capital Markets for the students of

the Sabaragamuwa University

• Seminar on the "Role and Functions of the SEC and

new amendments to the SEC Act" for the students of

the University of Colombo.

• Programme on Capital Markets for the students of

the University of Colombo

• Programme on Capital Markets for the new recruits

to the Sri Lanka Foreign Service - 2003

• Presentation on the "Role and Functions of the SEC

and Take Overs and Mergers Code" at the Investment

Advisors Training Programme

• Seminars were conducted on the "Capital Market of

Sri Lanka and current developments" to the

Advanced Level students of two outstation schools.

“Yuga Dekma” Industrial Exhibition in Matara

Organised by the Ministry of Industries from 5 - 11

September 2003, the SEC, the CSE and the Unit Trust

Association participated and educated thousands of

students, investors, potential investors and the general

visiting public on the Securities Market and the Regulation

of the Securities Industry.

Training Programmes for the SEC Staff

Several training programmes were conducted in-house for

the staff on technical issues and subjects of general interest,

covering :

• New Amendments to the SEC Act

• Futures and Options

• Money Laundering

• Day Trading

• New Market Intermediaries

• Corporate Governance - Current Issues

TV Quiz Programme - Sinhala Medium 2003

The division conducted a Do-You-Know Contest on

National Television for Advanced Level students with the

intention of creating awareness to the public and educating

students on the subject of Capital Markets. Each school,

which offers Advanced Level Commerce, was requested to

nominate one student to take part in the contest. An

Examination was held in seven provinces to select six

participants from each province to take part in the semi-

finals of the TV Do-You-Know contest. Each winner of the

semi-finals proceeded to the finals. Each student was given

an opportunity to answer eight questions within a period of

two minutes. All semi-final contests and the finals were

televised over Rupavahini on a weekly basis.


PUBLIC RELATIONS AND MARKET DEVELOPMENT DIVISION (Contd.)

The programme was conducted in association with the

National Institute of Education, Maharagama. Similar

programmes were conducted by the division in 1997, 1998

and 1999.

TV Quiz Programme - Tamil Medium 2003

An all island Do-You-Know Contest for Advanced Level

Tamil students was conducted for the first time in the year

2003. All Tamil medium schools which offer Commerce for

the Advanced Level examination were requested to

nominate one student each for the contest. An examination

was held in all provinces to select students for the semi-

final stage. However, provinces were merged for the semi-

final contest based on the number of schools in each

province. Accordingly five semi-finals and the final were

televised of over the Rupavahini and Eye Channels on a

weekly basis.

SEC Stakeholder Committee on "Skills Development"

Recognizing the importance of attracting, training and

retaining a skilled human resources pool for capital market

development, the SEC set up a stakeholder committee to

draw up an action plan to develop skills of persons in the

securities industry. The ultimate objective is to set up a

Capital Market Training Institute, which will help the

industry to source and train industry personnel. The SEC

expects to retain the services of a consultant and has sought

international assistance for this purpose.

Library Development

The division made arrangements to add new publications to

the library. The library was re-arranged for easy access and

details of books are now available on a computerized

database. Arrangements have also been made to obtain the

British Council Library membership for staff members.

Core Functions• Financial control and budgeting including

preparation of monthly, quarterly and annual

accounts.

• Managing the Cess Fund, Compensation Fund and

Settlement Guarantee Fund.

• Personnel Management

• Supervising general maintenance and upkeep of the

Secretariat

• Procurement of Supplies

• Handling publication of reports and submission of

the Annual Report to Parliament.

Key Activities

StaffingFrom the inception of the SEC, emphasis was placed on

recruiting suitably qualified personnel with relevant and

recognized experience to the Commission. Accordingly, the

only appointment made during the year under review was

that of the Director General. Three members of the staff

resigned - the Director General, Director Legal and

Enforcement and the Receptionist.

As at 31st December 2003 the SEC had 47 staff members

serving the Commission as against an approved Cadre of 55.

47 staff members comprise 17 males and 30 females.

The approved Cadre and the Human Resource strength of

the Commission as at 31.12 2003 are depicted below.

TrainingTraining and Development forms an integral core in

personnel development to allow staff to discharge the

mandate entrusted to the Commission effectively and

efficiently. Foreign training provided during the year

included the Cambridge International Symposium on

Economic Crime, APEC Financial Regulators Training

Initiative, Capital Market Promotion Policy, Tokyo

Enforcement Seminar and Emerging Markets Programme.

Some staff also had the opportunity of visiting the Thai

Information Centre. Additionally, wherever applicable, the

SEC enabled its personnel to attend training courses that

would further enhance their capabilities.

Post Approved Cadre In Employment

Director General 01 01

Directors 08 05

Executives 22 20

Staff 17 14

Office Aide 07 07

Total 55 47


FINANCE AND ADMINISTRATION DIVISION

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

Standing - Left to rightW. Ariyaratne-Driver, Chandran Nagendran-Office Aide, Pathum Niroshana-Office Aide, S.D. Dharmasiri-Driver, AnuraPerera-Driver, Lakshman Piyatissa-Office Aide, M Jayasekera-Driver.


FINANCE AND ADMINISTRATION DIVISION (Contd.)

The following table depicts the number of staff at all levels,

who received local and foreign training.

The Cess FundThe SEC pursuant to an administrative arrangement with

the Colombo Stock Exchange, levies a Cess on share trading

transactions of the Colombo Stock Exchange in order to

enable the Commission to reduce its dependence on the

Treasury for funds to finance its market, regulatory and

development functions and administrative expenses. The

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

transaction. The Cess charged by the SEC was reduced to

0.09% with effect from 1/12/03. The balance lying to the

credit of the Fund as at 31.12.2003 amounted to Rs 419 Mn.

The growth of the fund during the period 1995-2003 is

depicted below:

The Settlement Guarantee Fund (SGF)Launched on 22 May 1998, the Fund was established for the

purpose of guaranteeing the settlement of trades between

participants of the Central Depository System of the

Colombo Stock Exchange. The operation of the SGF is as

follows:

• The settlement cycle presently followed in CSE is of

a two-tiered nature.

Ownership of shares traded is transferred no sooner

a trade is executed. The buyer is required to pay on

T+5 i.e. the 5th day following the day of trading and

the seller is settled on T+6 i.e the 6th day following

the trade. This relatively long interval between

transfer of ownership and receipt of proceeds which

gave rise to an unsecured settlement risk

necessitated the establishment of SGF.

• The Trustees of the Fund hold office ex-officio and

comprises the Chairman of SEC, the Chairman of

CSE, the Deputy Secretary to the Treasury, the

Director General of SEC and the Director General of

CSE.

• The Government of Sri Lanka has contributed a sum

of Rs 50 Mn to the said Fund. This money has been

invested in Government securities in terms of the

Trust Deed. SGF can also receive donations, gifts

and endowments as replenishments.

Broker/custodian banks are presently not required to

contribute to the Fund.

• The balance lying to the credit of the Fund as at

31.12.2003 amounted to Rs 87 Mn. The growth of

the Fund between 1998 and 2003 is depicted in the

following graph.

The Compensation Fund (CF)The Compensation Fund came into operation along with

the establishment of the SEC in 1987. The Securities and

Exchange Commission Act No 36 of 1987 as amended states

as follows:

SETTLEMENT GUARANTEE FUND (SGF)

Rs.

Mn

Year

1998

1999

2000

2001

2002

2003

0

20

40

60

80

100

Number of staff Number of staff

Posts who received who received

Local Training Foreign Training

Director General Nil 01

Directors 03 06

Executives 17 09

Staff 15 04

Office Aides 07 -

Total 42 20

CESS FUND 1995-2003

Rs.

Mn

0

100

200

300

400

500

Year

1995

1996

1997

1998

1999

2000

2001

2002

2003

• “A Compensation Fund shall be established for the

purpose of granting compensation to any investor

who suffers pecuniary loss resulting from the failure

of a licensed stock broker or licensed stock dealer to

meet his contractual obligations.”

The Compensation Fund shall consist of such sums of

money as may be voted upon by Parliament for the purpose

of the Fund.

Such sums of money may be credited to the Fund under

Section 51A;

• “The Minister shall appoint from among the Members of

the Commission, three Members who shall comprise the

Compensation Committee. The Committee shall be

responsible for assessing and awarding compensation in

respect of any application made, and the decision of such

Committee on any such assessment or award shall be final

and conclusive”.

• The Act also provides the procedure for applying for

compensation. According to the Act, the Committee

may, after examination of the documents and other

evidence produced in support of the claim by an

applicant, or in any case where an inquiry was held

on the conclusion of such inquiry, allow or disallow

such claim for compensation. Up-to-date no claims

have been recorded from the Fund.

The balance lying to the credit of the Fund as at 31.12.2003

amounted to Rs 29 Mn. The growth of the Fund is depicted

below:


FINANCE AND ADMINISTRATION DIVISION (Contd.)R

s. M

n

0

10

20

30

1995 1996 1997 1998 1999 2000 2001 2002 2003Year

COMPENSATION FUND 1995-2003


UNIT ON POLICY DEVELOPMENT

Core Functions• Receive input on policy developments and

undertake comparative surveys in order to ascertain

shortcomings.

• Policy analysis, formulation and recommendation.

• Monitoring of policy implementations.

• Providing information backstopping services to

other Divisions with regard to regional and

international trends and developments

Research on Financial Sector Statutes and KeyFunctional AreasThe Unit researched on a function-wise analysis of

Financial Sector Laws, identified at a Consultation on

Future Financial Markets, initiated by the Securities and

Exchange Commission of Sri Lanka. The research

concentrated on recommendations and revision to

Financial Sector Acts, Ordinances and Statutes in addition

to problem areas perceived by practitioners. An attempt was

initiated to analyse the financial sector statutes in relation

to seven key functional areas, namely:

(a) Mobilizing funds

(b) Procedural aspects

(c) Regulatory aspects

(d) Establishment of institutions, corporate bodies or

schemes

(e) Dispute resolution

(f) Facilitate finance and financial transactions

(g) National policy facilitation and development

As per these key areas, the Unit researched on the feasibility

of developing and/or revising and/or amending a majority

of these financial sector laws in order to achieve an

investor-friendly framework with attractive fiscal and other

incentives.

Auditor GuidelinesThe Unit reconvened the SEC Committee on the “Role of

Auditors” in August 2003 to finalize the draft proposal,

which would supplement existing legislation, rules and

guidelines followed by the Listed Companies of the

Colombo Stock Exchange. The objective of this exercise was

to strengthen the effectiveness of the auditors and the audit

process in listed companies and pave the way for greater

self-regulation in addition to strengthening investor

confidence in such processes as well as safeguarding their

interests.

The Unit coordinated a workshop for the public in order to

conclude this process of deliberations and conducted a

consultation on 26th September 2003. Pursuant to the

workshop/consultation, the Unit amended as appropriate

the Guidelines incorporating public views. The Committee,

during the year 2004 will revise & finalize the Guidelines

for Best Practice on the “Role of Auditors.”

Currently the Guidelines have been forwarded to the

Director General, Sri Lanka Accounting & Auditing

Standards Monitoring Board for re-wording of selected

areas.

The Guidelines are expected to be finalized by April 2004

in consultation with the Central Bank of Sri Lanka, Ceylon

Chamber Commerce, Sri Lanka Institute of Directors and the

Institute of Chartered Accountants of Sri Lanka.

In addition to the above the SEC is also examining the

feasibility of incorporating certain provisions outlined in

the Guidelines in the Listing Rules of the CSE for

mandatory compliance.

Corporate Governance and Related IssuesPresently, the corporate sector is following a Corporate

Governance Code issued by the Institute of Chartered

Accountants of Sri Lanka (ICASL) adopted voluntary.

During the year, the Unit initiated a Consultation relating to

Corporate Governance issues with Mr. Ajith Nivard Cabraal

in order to assess the necessity to develop and facilitate

good Corporate Governance practices within the corporate

sector.

Additionally, the SEC appointed a “Committee on

Corporate Governance” with Members being key

stakeholders of the Corporate Sector to contribute in terms

of knowledge and interest in promoting good governance

practices in Sri Lanka. The Unit is entirely responsible for

assisting and coordinating the Committee.

The Unit is currently coordinating two surveys – one in

consultation with the Colombo Stock Exchange (CSE) and

the other with the Consultant, in order to collate

information to revise (where necessary), the existing

Institute of Chartered Accountants of Sri Lanka (ICASL)

Code on Corporate Governance and to mandate selected

areas.


UNIT ON POLICY DEVELOPMENT (Contd.)

Formation of the Financial Services AuthorityThe Unit Coordinated three consecutive meetings during

the months of November and December with representative

officials of the World Bank, the Central Bank, the

International Monitory Fund, the Ministry of Finance, the

Sri Lanka Accounting and Auditing Standards Monitoring

Board, the SEC, the Insurance Board of Sri Lanka (IBSL) and

a rating agency. Discussions were based on the formation of

a Financial Services Authority in Sri Lanka.

Task Force on Corporate Bond MarketThe Unit coordinated a Committee Meeting for the above

Task Force comprising officials of the Ministry of Finance

(MOF), the Central Bank, the SEC, Sampath Bank and a

rating agency, Chaired by the Director General of the SEC in

October 2003. The Meeting was convened to discuss Traded

Corporate Bond Market development action matrix

compiled by the Unit, and to set timelines for

implementation of same.

The Matrix identifies the action that is required to facilitate

the expeditious development of an Exchange Traded

Corporate Bond Market and was approved by the Financial

Sector Reforms Committee (FSRC), in November 2003. It

was decided that the time frames for implementation could

be fixed in consultation with the relevant institutions.

Takeovers and Mergers CodeThe Unit coordinated several meetings with Members of the

Committee, Who were appointed by the SEC to formulate

the revisions to the Takeovers and Mergers Code. The

revisions would be based on the comments/views of the

public.

IOSCO - APRC Enforcement Directors’ MeetingThe Unit coordinated the International Organization of

Securities Commissions (IOSCO) – Asia Pacific Regional

Committee (APRC) Enforcement Directors’ Meeting which

was held from 23rd – 26th January 2003.

Additionally, the Unit also coordinated a separate

programme for the “spouses” of the officials attending the

said Meeting.

The Stock Brokers’ AssociationThe Unit coordinated a meeting with representatives from

the Stock Brokers’ Association at the Secretariat on 12th

December 2003 to discuss issues pertaining to the

development of the Capital Market.

Publications• Annual Report -The Unit reviewed the internal

divisional reports of the Annual Report in additionto revising the final draft version. Additionally, theUnit coordinated and edited the Report in order torelease it concurrently with the InternationalOrganization of Securities Commissions (IOSCO),Asia Pacific Regional Committee (APRC) &Enforcement Directors’ Meeting.

• The Unit compiled the following reports/publications:

• Ministry reports – The Unit compiled, edited andfinalized reports for the four quarters.

• Brochures – The Unit coordinated the compilation,editing and finalization of InternationalOrganization of Securities Commissions (IOSCO),Asia Pacific Regional Committee (APRC) &Enforcement Directors’ Meeting brochure.

Strategic ReviewThe Unit coordinated the Strategic Review Process for the

SEC with the assistance of Mr. Ranel Wijesinha as the

consultant.

The objective of the assignment are to enhance the

effectiveness of the Commission in regulation and

facilitation of market development and to address in detail

plans for April 2004 to June 2005 and a general plan till

December 2006.

In order to facilitate the assignment the following activities

will be undertaken by the Consultant:

• Study identified regulatory agencies and regulatoryenvironments in two countries to draw lessons forSri Lanka.

• Study the available material on proposals for marketdevelopment/ regulatory reforms and governmentpolicies.

• Assess the adequacy, effectiveness or shortcomingsof internal systems and processes for regulation andmarket development and reasons therefore.

• Identify focus areas, specific action and time boundplans to increase effectiveness of regulatory andmarket development initiatives.

• Identify the required resources and skills.

• Develop forecast financial statements and identifythe expected surplus or deficit and means ofrecouping same.

• Prepare a comprehensive strategic plan, whichincorporates the above-referred information.


CALENDAR OF EVENTS FOR 2003

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.



Institute of Education, Maharagama

Presentation on "Money Laundering" by an IMF Consultant.

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".


CALENDAR OF EVENTS FOR 2003 (Contd.)

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.

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.

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.



Institute of Education, Maharagama

Presentations for the SEC staff on

• Day Trading

• New Market Intermediaries

• Corporate Governance - Current Issues


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.

P E R F O R M A N C E I N F I N A N C E

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




ECURITIES &


ECURITIES


ECURITIES &





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



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



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


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

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

ECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES &


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






ECURITIES &



ECURITI



ECURITI



ECURITI



ECURITI



ECURITI



ECURITI

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

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

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

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



ECURITI

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

ECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHAN

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


ECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHAN


ECURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES

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

ECURITIES & EXCHANGE COMMISSION OF SRI LANK


ECURITIES & EXCHAN


ECURITIES & EXCHANGE COMMISSION OF S

NKA • SECURITIES & EXCHANGE COMMISSION OF SRI LANKA • S


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

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

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

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

CURITIES & EXCHANGE COMMISSION OF SRI LANKA • SECURITIES & EXCHAN

MMISSION OF SRI LANKA • SECURITIES & EXCHANGE COMMISSION

LANKA •• SECURITIES & EXCHANGE COMMISSION OF S

NKA • SECURITIES & EXCHANGE COMMISSION OF S

NKA •

SECURITIES &

EXCHAN

MMISSION OF SRI LANKA

CURITIES & EXCHAN

MMISSION


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 GunawardeneChairman Director General


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



STATEMENT OF CHANGES IN NET ASSETS


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)



CASH FLOW STATEMENT


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



CESS FUND - CASH FLOW STATEMENT


2003 2002

Rs. Rs.


Net Increase of Cess Fund 108,636,505 37,329,604

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


(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



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 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



COMPENSATION FUND - CASH FLOW STATEMENT


2003 2002

Rs. Rs.


Net Increase of Compensation Fund 2,643,487 3,330,768

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


(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)



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 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


amounts to Rs.21,000/-



NOTES TO THE FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES

1. GENERAL ACCOUNTING POLICIES

1.1 BASIS OF PREPARATION

The Financial Statements of the Commission

are prepared under the historical cost

convention in conformity with Generally

Accepted Accounting Principles and

Accounting Standards laid down by the

Institute of Chartered Accountants of Sri

Lanka (ICASL). No adjustments have been

made for inflationary factors affecting the

financial statements. The accounting

principles are applied consistently with due

regard to prudence, materiality and substance

over form criteria as explained in the

framework of Sri Lanka Accounting

Standards. Where appropriate, accounting

policies are disclosed in succeeding notes.

1.2 CONVERSION OF FOREIGN CURRENCIES

All foreign exchange transactions are

converted to Sri Lanka Rupees, which is the

reporting currency, at the rates of exchange

prevailing at the time the transactions were

effected.

2. ASSETS & BASES OF VALUATION

2.1 INVENTORIES

Inventories are valued at lower of cost and net

realisable value. The cost of inventories are

arrived at by using the first-in, first-out (FIFO)

basis.

2.2 RECEIVABLES

Receivables are stated at the estimated

realizable value.

2.3 CASH AND CASH EQUIVALENTS

Cash and Cash Equivalents are defined as cash

in hand, demand deposits and short-term

liquid investments, readily convertible to

known amounts of cash and subject to

insignificant risk of changes in value.

For the purpose of the Cash Flow Statement,

Cash and Cash Equivalents consist of cash and

call deposits at banks.

2.4 PROPERTY, PLANT AND EQUIPMENT

Property, Plant & Equipment together with

any incidental expenses thereon were

revalued as at 31.12.2001 and depreciated at

their respective useful lives. Equipment

received as grant from institutions are brought

to account at their fair value and depreciation

thereof is charged against respective reserve

account. Depreciation is provided on the

straight-line basis applying following rates:

Motor Vehicles 25.00%

Furniture, Fixtures and Fittings 12.50%

Office Equipment &

EDP Equipment 25.00%

Training Equipment 25.00%

Full year depreciation is provided for all

assets purchased during the first half of the

financial year and no depreciation is provided

on assets purchased during the second half of

the year.

2.5 LEASING OF MOTOR VEHICLES

The assets on finance leases are capitalized at

cash cost. Depreciation and finance charges

arising out of such leasehold assets are

charged to the Income & Expenditure

account, whilst the payments of lease rentals

are recognized to reduce the lease liability.

3. LIABILITIES & PROVISIONS

3.1 RETIREMENT BENEFITS

3.1.1 DEFINED BENEFIT PLANS

Gratuity liability is computed in terms

of the Payment of the Gratuity Act No.

12 of 1983. The liability is provided in

the accounts as stipulated by the Sri

Lanka Accounting Standard No. 16

irrespective of whether or not the

employee has completed 5 year’s

service.


NOTES TO THE FINANCIAL STATEMENTS (Contd.)

3.1.2 DEFINED CONTRIBUTION PLANS

All permanent employees who are

eligible for Employees’ Provident Fund

Contributions and Employees’ Trust

Fund Contributions are covered by

relevant contributory funds.

3.2 EVENTS OCCURRING AFTER THEBALANCE SHEET DATE

All material events occurring after the Balance

Sheet Date are considered and appropriate

adjustments or disclosures are made in the

Financial Statements, where necessary.

3.3 ACCOUNTS PAYABLE

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.

4. INCOME & EXPENDITURE

4.1 REVENUE RECOGNITION

Revenue principally is recognized on accrual

basis in terms of Sri Lanka Accounting

Standards 29.

4.2 EXPENDITURE RECOGNITION

All expenditure incurred in maintaining the

Commission has been charged to revenue in

arriving at the income over expenditure.

4.3 CASH FLOW STATEMENT

The Cash Flow Statement has been prepared

using the Indirect Method.


NOTES TO THE FINANCIAL STATEMENTS (Contd.)F

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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


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




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)




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




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%




2003 2002

Rs. Rs.

14 RETIREMENT BENEFIT OBLIGATION

Provision for Retirement Gratuity

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

3,246,830 2,464,546

15 CREDITORS AND ACCRUALS

PAYE Tax 139,778 151,559E.P.F. Payable 232,704 228,373E.T.F. Payable 36,217 35,568VAT Payable 15,796 -WHT Payable 750 -Telephone Expenses 273,957 230,819Security Charges 16,800 16,800Office Upkeep 11,626 10,521Electricity 70,000 120,000Fuel Expenses 10,880 10,000Staff Welfare 31,291 111,494Public Awareness Expenses - 244,988Staff Medical Reimbursements 244,322 75,000Leave Encashment 187,230 162,089Internal Audit Fees 224,000 480,000External Audit Fees 100,000 250,000Annual Report Printing 1,022,200 763,377Professional 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 12,153Other Payables 213,067 29,193

4,154,198 2,919,781

16 PERSONNEL COSTS

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

30,786,890 28,408,111




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



18 RELATED PARTIES

The Chairman of the SEC Mr. Michael Mack resigned

with effect from 28/01/03. On 05/03/2003 Lt. Gen. J E D

Perera was appointed to the post of Chairman of the SEC.

The following members of the SEC were also members of the

Insurance Board of Sri Lanka (IBSL) except Mr. Palitha Silva

Gunawardene who is the Director General of the SEC.

IBSL

Lt.Gen. J E D Perera Member/Chairman

Dr. Nihal Jinasena Member

Mr. P M Nagahawatte Member

Mr. F Mohideen Member

Mr. W Unamboowe Member

Mr. Palitha Silva Gunawardene Member

Commission Member Mr. Hemaka Amarasuriya

resigned with effect from 28/01/2003 and Mr. Asitha

Talwatte’s term as a Member expired on 20/12/2003. Mr. A

I Fernando was appointed to the Commission as Ex officio

Member for a period of two years commencing 20/12/03 by

virtue of him holding office of the President, Institute of

Chartered Accountants of Sri Lanka established by the

Chartered Accountants Act, No 23 of 1959.

The Staff of the SEC were appointed on a temporary

basis to the IBSL and they received a honorarium of Rs.

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

prevailing Treasury Bill rate and the interest income

amounted to Rs. 29,765. Temporary fund transfers

amounting to Rs. 3,589,517 were made during the year for

operational expenses to IBSL free of charge due to delay in

receiving money from Treasury.

The Director General and the Chairman of the

Securities & Exchange Commission of Sri Lanka (SEC) are

also the trustees of the Settlement & Guarantee Fund (SGF).

The following table depicts the Directorships held by

the Members of the Board as at 31/12/03. Except for the

current account maintained at Bank of Ceylon there were no

transactions recorded with the said institutions during the

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



• 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 -



19 CAPITAL COMMITMENTS

There were no capital commitments as at 31st December

2003

20 CONTINGENT LIABILITIES

There were no contingent liabilities as at 31st December

2003

21 EVENTS OCCURRING AFTER THE BALANCE SHEETDATE

No material events have occurred after the Balance Sheet

date necessitating any adjustments or disclosure in the

Financial Statements.

22 COMPARATIVE FIGURES

Comparative figures have been adjusted to conform to the

changes in presentation in the current financial year.

• 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 -


REPORT OF THE AUDITORS

The Chairman,

Securities and Exchange Commission of Sri Lanka.

Report of the Auditor General on the accounts of the Securitiesand Exchange Commission of Sri Lanka for the year ended 31December 2003 in terms of Section 14(2)(c) of the Finance ActNo. 38 of 1971.

The audit of accounts of the Securities and ExchangeCommission of Sri Lanka (SEC) for the year ended 31December 2003 was carried out under my direction inpursuance of provisions in Article 154(1) of theConstitution of the Democratic Socialist Republic of SriLanka read in conjunction with Section 13(1) of theFinance Act No.38 of 1971 and Section 37(2) of theSecurities and Exchange Commission Act No.36 of1987. My observations, which I consider should bepublished with the annual report of the Commission interms of Section 14(2)( c) of the Finance Act, appear inthis report.

1.2 Scope of Audit

Audit opinion, comments and findings in this reportare based on a review of the financial statementspresented to audit and substantive tests of samples oftransactions. The scope and the extent of such reviewand tests were such as to enable as wide an auditcoverage as possible within the limitations of staff,other resources and time available to me. The audit wascarried out in accordance with Sri Lanka AuditingStandards, methods and practices to obtain reasonableassurance as to whether the financial statements arefree of material misstatements. The audit includedexamination of evidence supporting the amounts anddisclosures in financial statements and assessments ofaccounting principles and significant estimates andjudgments made in the preparation of financialstatements, evaluation of their overall presentation anddetermining whether accounting policies adopted wereappropriate, consistently applied and adequatelydisclosed. Sub-sections (3) and (4) of Section 13 of theFinance Act No.38 of 1971 give discretionary powers tothe Auditor General to determine the scope and extentof the audit.

2. Accounts2.1 Audit Opinion

Except for the effects on the financial statements of thematters referred to in para 2.3 of my report, I am of theopinion so far as appears from my examination, and tothe best of my information, and according to theexplanations given to me, the financial statements havebeen prepared and presented in accordance with SriLanka Accounting Standards and the stated accountingpolicies as set out in Notes 01 to 4.3 to the financialstatements and give a true and fair view of the financialposition of the Commission as at 31 December 2003and the financial results and cash flow for the year thenended.

2.2 Financial Results

According to the accounts presented, the operation ofthe Commission for the year ended 31 December 2003had resulted in a deficit of Rs. 61,016,810 before takinginto account the transfers from Cess Fund foroperational expenses as compared with thecorresponding deficit amounting to Rs. 52,008,715before taking into account the transfers from Cess Fundfor the preceeding year. The operating surplus for theyear under review after taking into accounts thetransfers from the Cess Fund for operational expensesfor the year, amounted to Rs. 299,330 as compared to thecorresponding surplus of Rs. 2,746,772 in thepreceeding year.

2.3 Comments on Accounts2.3.1 Accounting Deficiencies

Two leasehold vehicles obtained in 2002 had beendisposed during of the year under review and interestin suspense, amounting to Rs.239,189 relating to onevehicle was erroneously debited to leasehold liabilityaccount, resulting in an understating the leaseholdliability account by that amount. Interest in suspense ofRs.212,255 pertaining to the other vehicle had not beentransferred to disposal account, hence the balance ofthe interest in suspense account had been overstated bythat amount and surplus - termination of leasesappearing in the account overstated by Rs.451,444.

2.3.2 Non-compliance with Laws, Rules, Regulations andManagement Decisions

Instances of non-compliance observed in audit aregiven below.

Reference to Laws, Rules, ParticularsRegulations etc.

a) Securities and ExchangeCommission Act No.36 of1987 (As amended by Act No26 of 1991 and Act No.18 of2003)

Part ii Section 13(m) In terms of the provision of thissection, the Commission isrequired to request the Registrarof Companies to call uponprivate limited liabilitycompanies to become publiclimited companies. But it wasrevealed in the audit that theCommission had not made anysuch request to the Registrar ofCompanies from its inception. Inaddition, the Commission had notdeveloped criteria or standards tocall upon private limited liabilitycompanies to become publiclimited companies.


REPORT OF THE AUDITORS (Contd.)

2.3.3 Transactions not Supported by Adequate Authority

The following observations are made.

(a) The Commission has reimbursed the PAYE Tax of itsemployees in contravention of the provision in PublicFinance Circular No. PF/PE 6 of 31 January 2000. Inthis connection the Director General informed me on03 February 2003 as follows,

“In terms of the SEC Act No.36 of 1987 as amended byAct No.26 of 1991; and Act 18 of 2003 Section 42 and43, the Commission is empowered to decide on alladministrative matters including remuneration to staff.

(b) During the year under review six vehicles had beensupplied to six Directors by SEC on a lease basis at atotal cost of Rs. 11,475,360, which consist of Rs.8,400,000 and Rs. 3,075,360 as original cost andinterest respectively. After four years, ownership ofthese vehicles will be transferred to the directorscharging only a sum of Rs.1,440,000 and the balancesum of Rs. 10,035,360 will be borne by SEC. Theapproval of the Treasury in terms of the PublicEnterprises Department Circular No.95 of 14 June 1994had not been obtained for this new scheme introducedby the Commission.

3. Financial and Operating Review3.1 Financial Results

The operation of the Commission during the yearunder review had resulted in a surplus of Rs.299,330after taking into account the transfer of Rs.61,316,140from Cess Fund as compared with the surplus ofRs.2,746,772 after taking into account the transfer ofRs.54,755,487 from Cess Fund for the preceeding yearthus showing a decrease in financial results by Rs.2,447,442 which can be analysed as shown below.

VariancesFavourable Adverse

Rs. Rs. Rs.IncomeUnit Trust license fees - 212,500 Broker license fees 4,513 - Surplus - Termination of Leases 259,870 - Sale of publications - 825 Sundry income - 31,356 Recognition of Grants 1,513,983 -

1,778,366 244,681 1,533,685

Less:ExpenditureBoard meeting fees and expenses - 59,471 personnel costs - 2,408,128 Staff foreign travel expenses 29,349 - 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)

Profit/(Loss) on disposal of fixed assets 60,285Transfer from Cess Fund 6,560,653 Decrease in Financial Results (2,447,442)

3.2 Apparent Irregularities

The supervision of real time computer assistedsurveillance monitored trading on the Colombo StockExchange for detection and prevention of marketabuses had not functioned properly up to October 2003due to the absence of facilities to record the names ofbuyers or sellers for the detection of abuses. In view ofthis position, the alleged abuses during the period up tothe installation of required facilities in October 2003could not be detected for remedial action.

3.3 Activity of the Commission

Some of the activities conducted by the Commissionduring the year under review are shown below.

(i) The Commission published 01 publication on “AnIntroduction to the Stock Market.”

(ii) 15 Seminars and Training Programmes had beenconducted.

(iii)19 complaints had been resolved out of the 22complaints received during the year, 3 complaints werepending as at 31.12.2003.

(iv) 110 Annual Reports and Accounts of listed Companieshad been reviewed and communicated, with 20companies on matters relating to non-compliances.

(v) 16 investigations had been conducted during the year2003 and out of which 09 had been completed.

3.4 Uneconomic Transaction

A sum of Rs.27,716 had been paid as surcharge by theCommission during the year under review due to delayin payment of contribution to the Employee ProvidentFund relating to the year 1997.

3.5 Budgetary Control

It was observed that the annual budget of theCommission had not been used as a tool ofmanagement control. Major variances were observedbetween the actual and the budget.

4. Systems and Controls

Special attention is needed in respect of the followingareas of control.

I. Investment in Treasury BillsII. Recruitment of PersonnelIII. Monitoring Share Market

S.C.MAYADUNNEAuditor General


RESPONSES OF THE COMMISSION TO THE MATTERS RAISED BY THE AUDITOR GENERAL INHIS REPORT ISSUED IN TERMS OF SECTION 14(2) (C) OF THE FINANCE ACT ON THEACCOUNTS OF THE COMMISSION FOR THE YEAR 2003

2.3.1 ACCOUNTING DEFICIENCIESFollowing deficiencies were observed:

AUDITORS COMMENTS

2.3.1 Accounting Deficiencies

Two leasehold vehicles obtained in 2002 had been disposed

during the year under review and interest in suspense

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

Management Decisions

Instances of non-compliance observed in audit are given

below.

Reference to Laws, Rules, Regulations etc.

a) Securities and Exchange Commission Act No 36 of

1987 (As amended by Act No 26 of 1991 and Act No

18 of 2003)

Part ii Section 13 (m)

In terms of the provision of this section, the Commission is

required to request the Registrar of Companies to call upon

private limited liability companies to become public

limited companies. But it was revealed in the audit that the

Commission had not made any such request to the Registrar

of Companies from its inception. In addition, the

Commission had not developed criteria or standards to call

upon private limited liability companies to become public

limited companies.

2.3.3 Transactions not Supported by Adequate Authority

Following observations are made

a) The Commission has reimbursed the PAYE Tax of its

employees in contravention of the provision in

Public Finance Circular No PF/PE 6 of 31st January

2000. In this connection the Director General

informed me on 3rd February 2003 as follows.

SEC RESPONSE

The error in posting and the omission noted. Attached

herewith the correcting journal entry for reference.

Section 13 (m) of the SEC Act does indeed empower the

Commission to exercise, perform and discharge the duty

and function of requesting the Registrar of Companies in

the exercise of the powers conferred on it by Section 227 of

the Companies Act No 17 of 1982, to call upon a private

limited liability company to become a public limited

liability Company.

However, you would appreciate that in terms of Section 227

of the Companies Act, it is the Registrar of Companies who

is called upon to satisfy himself that this is in the national

interest or in the interest of the national economy.

In the circumstances, it appears to us that formulation of

any criteria or standards in this respect would fall under the

purview of the Registrar of Companies.

Accordingly, we have not developed any criteria or

standards in this respect nor had a basis to request the

Registrar of Companies to develop criteria or standards to

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.

In terms of the SEC Act No 36 of 1987 as amended by Act

No 26 of 1991; and Act 18 of 2003 Section 42 and 43 the

Commission is empowered to decide on all the

administrative matters such as salaries, terms and

conditions etc.

The then Secretary to the Ministry of Finance by letter

reference EA 04/21 dated 31st March 1992 instructed the


RESPONSES OF THE COMMISSION TO THE MATTERS RAISED BY THE AUDITOR GENERAL IN HIS REPORTISSUED IN TERMS OF SECTION 14(2) (C) OF THE FINANCE ACT ON THE ACCOUNTS OF THE COMMISSIONFOR THE YEAR 2003

“In terms of the SEC Act No 36 of 1987 as amended

by Act No 26 of 1991, and Act No 18 of 2003 Section

42 and 43, the Commission is empowered to decide

on all administrative matters including

remuneration of staff.

b) During the year under review, six vehicles had been

supplied to six Directors by SEC on a lease basis at a

total cost of Rs 11,475,360/- which consists of Rs

8,400,000/- and Rs 3,075,360/- as original cost and

interest respectively. After 4 years, ownership of

these vehicles will be transferred to the Directors

charging only a sum of Rs 1,440,000/- and the

balance sum of Rs 10, 035,360/- will be borne by

SEC. The approval of the Treasury, in terms of the

Public Enterprises Department Circular No 95 of

14th June 1994 had not been obtained for this new

scheme introduced by the Commission.

3.2 Apparent Irregularities

The supervision of real time computer assisted surveillance

monitored trading on the Colombo Stock Exchange for

detection and prevention of market abuses had not

functioned properly up to October 2003 due to the absence

of facilities to record the names of buyers or sellers for the

detection of abuses. In view of this position, the alleged

abuses during the period up to the installation of required

facilities in October 2003 could not be detected for remedial

action.

Securities and Exchange Commission (SEC) as follows.

“The SEC is free to recruit personnel and to fix their salaries

and emoluments without being subject to government

regulations.”

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

the Inland Revenue monthly.

The Attorney General too had previously advised that the

Commission has no authority to deviate from the conditions

in the Letter of Appointment. In any event, the payment

referred to is not unusual for statutory bodies.

The Members of the Commission at its 170th meeting held

on the 27th June 2002 approved this scheme in accordance

with subsections 1 and 2 under Section 43 of the SEC Act

No 36 of 1987 as amended by Act No 26 of 1991 and No 18

of 2003, which specifies the manner in which the staff

could be appointed and remunerated. This scheme was

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.

With the installation of the detailed monitoring screen on

29th September 2003, quick decisions can be taken due to

the availability of data on line. However even in the past,

without a detailed screen, alleged insider dealings and

market manipulations have been investigated based on

information, surveillance and tip offs received from public.

Further details had to be obtained in form of

correspondence from the Colombo Stock Exchange and

other relevant institutions.


RESPONSES OF THE COMMISSION TO THE MATTERS RAISED BY THE AUDITOR GENERAL INHIS REPORT ISSUED IN TERMS OF SECTION 14(2) (C) OF THE FINANCE ACT ON THEACCOUNTS 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

Introduction to the Stock Market.”

(ii) 15 Seminars and Training Programmes had been

conducted.

(iii) 19 Complaints had been resolved out of the 22

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

with 20 companies on matters relating to non-

compliances.

(v) 16 investigations had been conducted during the

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

Commission during the year under review due to delay in

payment of contribution to the Employees Provident Fund

relating to year 1997.

3.5 Budgetary Control

It was observed that the annual budget of the Commission

had not been used as a tool of management control. Major

variances were observed between the actual and the budget.

4. Systems and Controls

Special attention is needed in respect of the following areas

of control.

i . Investment in Treasury Bills

ii. Recruitment of Personnel

iii. Monitoring Share Market

We agree with your comment.

-do-

-do-

-do-

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This occurred six years ago and your observation is noted.

The Commission always uses the budget as a management

tool. The variances between actual and budgeted

expenditure occurred as the actual regulatory environment

deferred from the expectations. This is not unusual for a

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.

We are examining what further improvements are necessary

if any.

11749/Sec A/R Inner

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