You are on page 1of 12


Introduction Generally a regulation is the process of making rules that

govern behaviour. Accordingly the government will introduce regulations on businesses to control their behaviour. The regulations that are imposed by the government on businesses are the statutory intervention by the on government behalf of on the businesses. government, The rules and regulations may be imposed by government authorities

government. In most cases government imposes regulations on businesses on followings. aiming to prevent business failure, to create conducive legal environment for conducting businesses to assure that businesses are running efficiently and provide better service to customers to ensure that business organizations are full filling their social responsibilities. to collect due share to the government as taxes and other levies.


Aiming to prevent business failure Government intervention through regulations is often

seen as a way in which risk to society in a market driven economy could be minimised. According to Nelson (1987) sometimes regulating to minimise risk will cost to the governments more than the problems arising from that risk. For example, a regulation to prevent people obtained housing loans that are too big them and will find it difficult to pay back;

government will impose a condition that all housing loans seekers should initially deposit 50 percent of the loan. Though this will prevent people getting much big loans but due to this regulation some people will not be able to get a lone to own their own house. Government interventions through regulations to prevent market failure occur in following situations (Anderton, 2005). Markets producing too much or too little of certain products Failure to produce or distribute goods or services efficiently Instances where market forces do not allocate resources towards their highest valued use Not enough information to encourage transactions between buyers and sellers Imperfect competition (e.g. monopolies, market dominance) Instances where prices do not reflect the full costs to society of certain goods or services (e.g. the cost of pollution emitted in production of those goods or services) Market operations producing socially undesirable results Markets failing to produce public goods (e.g. armed forces, police force)


Create conducive legal environment for conducting businesses In any economy businesses to operate efficiently and

people to trust businesses there should be recognition for businesses that are operating in any given economy. In Sri Lanka all the businesses are subject to some sort of legal implications. For example, sole trading businesses have to register with local authority etc. In case limited liability

companies it should be created in accordance with companies act of Sri Lanka.


Social responsibilities of Businesses According to Carroll (1979), social responsibilities of

businesses are four fold namely, 1) economic, 2) legal, 3) ethical, and 4) discretionary. responsibilities include the According to Qu(2007), economic obligations for businesses to

maintain economic wealth and to meet consumption needs. Under the legal responsibility businesses must fulfil their economic mission within the existing legal framework. Qu (2007) has further stated that ethical responsibilities require that businesses abide by the moral rules defining appropriate behaviours in society. Discretionary responsibilities are tantamount to philanthropic responsibilities and reflect society's desire to see businesses contributing to its development (Qu,2007). According to Pujitha (2009), in a broader perspective corporate social responsibility(CSR) refers to a concept which aligns a companys strategy, culture, value system and ethical framework with the needs of a given society enabling the company to be operated in a manner desirable to its stakeholders. Puthitha (2009) has further stated that some companies have failed to recognize the broader perspective of CSR and its contribution in developing a sustainable business. For most companies social responsibility means an occasional donation to a charity or sponsoring a public event. Environmental regulations levy against the pollution of air,

mobile phones, emission of gas that are imposed on businesses in Sri Lanka is the best example for governm ent intervention in fulfilling social responsibilities by the businesses.


Businesses affected by Government Regulations Businesses are affected by Government regulations in

numerous ways in positively and negatively as mention below. 5.1 Curtailing Business Activities In certain occasions there are situations, which business will have limitation of their business activities due to government regulations. There are two examples in Sri Lanka where two businesses have to limit their business as a result of government regulation imposed to these two industries. These two businesses are the tobacco and alcohol industry. Ceylon tobacco Company plc (CTC) is the only business organization that produces and distributes tobacco products. There are number of businesses manufacture and distribute alcohol product in Sri Lanka. These businesses have affected their manufacturing and selling activities from the regulation imposed on them from the government of Sri Lanka. These regulations are known as National Authority on Tobacco and Alcohol Act of 2006 (Government of Sri Lanka,2006). According to these regulations CTC and other alcohol manufacturers have to curtail business activities as mention below. Unable sell their products to persons under twenty one years of age,








dispensing their product. They should not produce or distribute or sale of tobacco and alcohol products which are prescribed. They should not sell tobacco products without health warning and the tar, nicotine content in each of their product. Prohibited to advertise tobacco or alcohol advertisements. 5.2 Threat to Small Businesses Government of Sri Lanka introduced Billing and

Settlement Plan regulation to Air industry in 2005. These regulations do a way with the traditional print ticketing system and payment settlement methods. According to Shirajiv(2004), there will be serious negative impact on the outbound travel industry operators as most of the travel agents are not International Association of Travel Agents. Shirajiv (2004) further says that it will create more unemployment and closure of several travel agencies. 5.3 Creating New Businesses As a result of introducing new vehicle emission act which came into effect since 15th July 2008(Indeewara, 2008), new business that of setting capacities to test and issue emission certificate to vehicle owners were created.


Levying Additional Expenses to Businesses

Government of Sri Lanka through the annual budget proposal levied additional chargers on the Television operators who aired imported films and drams. Accordingly channels have to pay 10,000 rupees for every half hour of entertainment programs aired by them and pay a similar penalty for repeat telecasts (Lanka Business On line, 2009). Further all TV stations have to bear the additional costs of Rs. 25,000 for a English film that they televised and Rs. 200,000 on Hindi films. According to Lanka Business On line, (2009), The industry was also hit by a 500,000 rupee tax on imported television commercials with a large number of advertisers leaving the television industry altogether. 5.5 Imposing Additional Tasks on Businesses In certain occasions some businesses have to carry out additional tasks to honour government regulations imposed on the. When businesses have to fulfil these additional tasks they will have spend additional time and recourses to comply with those regulations. The end result of these compilations will have direct burden to their treasury and some time it may have a direct impact of their profit as well. The best examples are the Prevention of Money Laundering Act 2006 (PMLA-Government of Sri Lanka) and the Financial Transactions Reporting Act 2006 (FTRA-government of Sri Lanka) came into effect in Sri Lanka in March 2006. The FTRA requires financial institutions to identify their customers and to maintain records of customer identification and transactions together with related documents for six years.

It is also required to conduct ongoing due diligence and to report transactions and fund transfers above Rs500, 000 to the FIU, as well as any suspicious transactions. This places a significant responsibility on the financial sector. Banks have expressed concern about the cost of compliance with such legislative requirements. Persons making reports under the Act are protected from criminal and civil liability. As matter of practice all banks are now verifying the identity of each and every customers with independent verifiable sources and also identification of each beneficial owner, and control structure. The know you including ownership

customer (KYC) is used to get exhaustive information about customers such as physical address, phone number, place of work, monthly salary and other additional incomes, status, photocopy of passport or identity cards, a letter of introduction from their employer, existing accounts held, etc. All commercial banks and Financial institutions are required under Central Bank of Sri Lanka (2006) guidelines to keep customer identification records, such as passports, identity cards, driving licences, or similar documents, such as account files and business correspondence. These records should be made available to the law enforcement authorities in the event of any criminal investigation and prosecution. It is mandatory to Banks; financial Institutions should identify each customer and verify their customer identification data or information relating to a customer as is reasonably capable of identifying a customer on the basis of any official document or other reliable and independent source document verifying the identity of the customer (paragraph 2:2- FTRA). Also according

to the paragraph 3(a) banks and financial Institutions should identify document or documents, or the reliable and independent source documents, data or information or other evidence that is required for identification or verification of any particular customer or class of customers. 5.6 Consumer Protection act of Sri Lanka (CPA) According to Wijesinghe (2009), policy of the

government is to safeguard the consumers through the regulation of trade and the prices of goods and services and to protect traders and manufacturers against unfair trade practices and restrictive trade practices. He has further clarifies that CPA is helpless before a number of multinational and company giants. Wijesinghe (2009) further says that many companies stand firm against the regulatory powers of CAA by ignoring the decisions of the authority and dishonest traders have a field day due to the lacuna in the implementation process of the instrument. Wijesinghe further insist that the government alone will not be in a position to deliver the goods. It will only act as a catalyst as provided in the Act which encourages formation of consumer organizations. 5.7 Corporate Governance According to Organisation for Economic Corporation and Development (2004), corporate governance involves a set of relationships between a companys management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives

and monitoring performance are determined." The Central Bank of Sri Lanka and Sri Lanka Accounting Standards put forward regulations for companies to deal with the relevant corporate governance practices to see that shareholders rights are considered at highest level by the corporate entities. The Principles (OECD, 2004) are intended to assist OECD and non-OECD governments in their efforts to evaluate and improve the legal, institutional and regulatory framework for corporate governance in their countries and to provide guidance and suggestions for stock exchanges, investors, corporations, and other parties that have a role in the process of developing good corporate governance. These principles are applicable to public companies, both financial and non-financial. However, to the extent they are deemed applicable, they might also be a useful tool to improve corporate governance in nontraded companies, for example, privately held and state owned enterprises (OECD, 2004). According to the OECD (2004) under the corporate governance system, corporate entities have to protect and facilitate the exercise it of is shareholders expected that rrights the and all shareholders should be treated equally. governance governance system framework should Under the corporate corporate and transparent


efficient markets, be consistent with the rule of law and clearly articulate the division of responsibilities 2004). The corporate governance framework was developed with a view to its impact on overall economic performance, market among different supervisory, regulatory and enforcement authorities (OECD,

integrity and the incentives it creates for market participants and the promotion of transparent and efficient markets. The legal and regulatory requirements that affect corporate governance practices in a jurisdiction should be consistent with the rule of law, transparent and enforceable (OECD, 2004). According to OECD(2004) the division of responsibilities among different authorities in a jurisdiction should be clearly articulated and ensure that the public interest is served. Further OECD(2004) has pointed out that the supervisory, regulatory and enforcement authorities should have the authority, integrity and resources to fulfil their duties in a professional and objective manner. Moreover, their rulings should be timely, transparent and fully explained (OECD, 2004). OECD (2004) further elaborated that the corporate governance is affected by the relationships among participants in the governance system. Controlling shareholders, which may be individuals, family holdings, bloc alliances, or other corporations acting through a holding company or cross shareholdings, can significantly influence corporate behaviour (OECD, 2004). Shareholders and institutional investors are increasingly demanding a voice in corporate governance in some markets. Individual shareholders normally do not expect governance rights but may be highly concerned about obtaining fair treatment from controlling shareholders and management. According to OECD (2004) creditors play an important role in a number of governance systems and can serve as external monitors over corporate performance. Stakeholders including employees play an important role in contributing to the long-

term success and performance of the organisation, while governments establish the overall institutional and legal framework for corporate governance. The role of each of these participants and their interactions vary widely among all over the countries as a result of applying International Accounting Standards. 5.8 Conclusion Management of business is not just trying to grow fast and make more profit through various business segments and strategies of the ideology of some people. It involves managing risks to maintain a sustainable growth with prudent level of profit/loss. Short-term profit maximization objective leads to mismanagement. Fraudulent management is the result of disintegrity of business managers. The risks mainly arise from the manner how the funds raised from the investors are utilized by the managers and investors do not have information regarding this. If the business managers are not of high integrity, such funds will be fraudulently utilized for their satisfaction of their desires which results in default of repayment to investors. Therefore, all parties such as investors, business managers and regulators have roles to play in risk management, but there is no algebra for getting the desired results. The businesses will fail due to lapses in the business risk management. However, the best practices in risk management are well known. Involvement in unauthorized deposit-taking and savings mobilization business conducted under the disguise of innovative investment products and

unregulated businesses is risky because such businesses do not have incentives or systems to adopt best practices in risk management. Therefore, governments have to impose regulations on businesses and businesses are required to operate within a regulatory framework set by the government.