The controversial deal was aborted on the instructions of Sri Lankan President Mahinda Rajapakse, after the state-bank’s unions brought it to his attention.
NSB also fell foul with the securities market, after failing to cancel the deal within the mandatory three day period and later defaulting on payment.
"NSB defaulted on the payment. It has a serious implication on the credibility of the settlement system,” said Arittha Wikramanayake, a former tough talking Securities and Exchange Commission (SEC) chief.
By defaulting, Wikramanayake said NSB, which looks after the majority savings of Sri Lanka’s 20 million people, had “tarnished” its image and solid reputation.
"The directors of NSB are not fit and proper to hold directorship of any institution," Wikramanayake said addressing a public gathering on insider dealing on Wednesday that was organised by Transparency International Sri Lanka chapter.As pressure mounted from the regulators, the media and opposition legislators led by Harsha de Silva, NSB’s chairman, Pradeep Kariyawasam and a working director, astrologer Sumanadasa Abeygunawardena quit this month.
The SEC suspended Dinal Wijemanne, the chief executive of Taprobane Securities Limited, who acted on behalf of the buyers and sellers. Wijemanne, who was among the key sellers, was also an alternate director on The Finance Company (TFC) board.
"Directors of Taprobane clearly acted in a conflict of interest,” said Wikramanayake who is a partner at the law firm, Nithya Partners.
“Some of them (Taprobane Securities) held position of TFC. They (Taprobane directors) are not fit and proper to hold position in financial services companies,” Wikramanayake said.
“Prosecuting will take time, so they should be stripped off their position,” he said.
Wikramanayake commended the SEC for its flurry of recent directives to restore market confidence.
The regulator reversed the transaction and ruled that large transactions of 20 percent and above need stock exchange approval
The regulator also issued a directive limiting short term trading of stockbrokers. The new rules come into effect from June 1.
"It’s a good sign that we finally have a regulator that has woken up and sending a strong message to the market,” Wikramanayake said urging the SEC to be firm and objective.
Since the SEC regulation, Colombo’s main index has fallen, with brokers blaming the drop on excessive regulation.
In the past when a tough directive was issued, Wikramanayake said the market fell. But the government caved into certain market players pressures and unravelled the SEC’s directives to push up the bourse.
"Insider dealing hurts everyone in the market," said Wikramanayake, who also blamed state-run institutions like NSB, pension funds (the Employees Provident Fund and Employees Trust Fund) of being gullible to market manipulators.
"It raises questions about their competence of the management. Raises concern in the future that people can use this as an excuse to make money on unsound stocks. Market players who dump stocks on EPF, affects the returns of our pension funds," he said.
The opposition Marxist JVP parliamentarian Sunil Handunetti, blamed the government for the crisis on the capital markets and turning a blind eye on pension funds investing in stocks that give a poor return.
"The main problem here is the ethics. It’s not practiced by people in higher echelons," Handunetti said.
United National Party legislator, Eran Wickramaratne noted that insider trading was "not a Colombo 7 problem. It affects the whole country."
He said pension funds are crucial to millions of private sector workers who retire in the hope of building a house or paying for their children’s education.
"We have to name and shame perpetrators," said Wickramaratne, a banker by profession.
However, the former head of Transparency International Sri Lanka chapter, J C Weliamuna, a lawyer, disagreed with the panellists views on naming and shaming culprits.
"Shaming and naming won’t help for shameless people," said Weliamunna.