Pumping and dumping, price-bands and margin trading thrashed out at weekend forum
The Securities and Exchange Commission of Sri Lanka (SEC) held a two-day workshop over the weekend at Jetwing Blue Negombo where Chairperson Ms. Indrani Sugathadasa and Director General Malik Cader issued a bold invitation to leading stock brokers and other industry stakeholders in attendance to "take stock, identify gaps, freely discuss and debate as openly as possible, and without fear", the issues confronting the capital market with the intension of drawing up a policy paper on the way forward.The forum titled "The Right Moves: Capital Market Development Workshop" was jointly organised by the Colombo Stock Brokers’ Association and Unit Trust Association of Sri Lanka and one of the major breakthroughs resulting from the sessions was the consensus established between the regulator and industry that a consultative committee had to be formed with wider representation and involvement in the formulation and implementation of regulations.
There was debate on whether Sri Lanka’s capital market was overregulated or not. The debate was extensive with some suggesting overregulation. Former Director General of the SEC Arittha Wickramanayake said the capital market was by and large "not overregulated" but stressed on several issues that caused dissent to fester in "cocktail circles".
He said he was concerned by that fairness and transparency of the SEC varied with some brokers complaining of being hauled up while others were openly flouting SEC rules and regulations. He also stressed the tendency of the SEC to pull up market players for the slightest reason, especially on the internal affairs of companies. But he urged the SEC to be more forceful and strict. "There are two approaches to regulation. The carrot and the stick and the carrot will not work in this capital market," he said.
Pumping and dumping was a term that came up over and over again at the two day forum. This is where investors, known to be in connivance with their brokers, buy stocks of companies not fundamentally sound, termed penny stocks, and creating an elusion that something positive was about to happen thus luring ‘foolish and gullible’ retail investors who are relatively unsophisticated and prefer to follow the rest (of the herd). These miscreants make money as the foolish drive up demand and prices, the "innocent"victims lose out when the bubble bursts.
The SEC took several steps to prevent this widespread disease but came under criticism even at the workshop for its measures. The price band introduced to capture errant price behaviour of stocks and the limiting of broker credit were the controversial steps taken by the SEC as far as the brokers were concerned.
Wickramanayake urged the SEC to indentify and penalise those engaged in pumping and dumping but Dhammika Perera, Director Investigations said although the IT system helps indentify irregular transactions (of individuals and groups working together, and the history of such transactions) it was not always easy to obtain necessary evidence to resume criminal charges. But the SEC Director General Malik Cader said there was an attitude of ‘catch me if you can’. "Several instances have been brought to our notice and we can only warn them to be careful of us," he said.
Colombo Stock Exchange CEO Surekha Sellahewa said the regulator was stunned by the complexity of market manipulations.
Acuity Partners CEO Ray Abeywardena said the capital market was not overregulated. "Regulations need to be strengthened to create a fair market, ensuring balanced exponential growth," he said adding however that it was crucial for the regulator to constantly consult the industry. Talaal Maruzook, Manager Research CT Smith Stockbrokers, hit the nail on the head when he said it was not a question of the market being overregulated but that the market was not regulated efficiently enough.
The SEC has also given until the end of this year for brokering houses to clear their credit lines offered to clients and will be able to offer credit through margin trading instead. Brokers complained that extending credit was crucial for business and that the cost to transfer to margin trading was significant but the SEC said brokers were not legally supposed to extend credit, and that lending heavily resulted in exposing the industry to systemic risk and created artificial demand for so called ‘penny stocks’.
Heraymila Director/ CEO Ravi Abeysuriya told the forum that he understood why the SEC had to limit credit creation but said brokers should be allowed to assume risk depending on the financial strength of each brokering firm. He urged the SEC to "build its capacity and invest in technology so that perpetrators would be taken to task.
The workshop also discussed the role of unit trusts in promoting the capital market amongst unsophisticated investors, with expertise and experience of India’s Securities and Exchange Board Chairman U. K. Sinha enlightening the participants.
Developing primary and secondary markets in corporate debt enjoyed a dedicated session as well.
World Bank, India assist capital market development
A World Bank team is here to assist the country’s capital market regulator, the Securities and Exchange Commission, to amend the SEC Act and demutualization of the Colombo Stock Exchange.
SEC Director General Malik Cader said the amendments had been drafted and would be gazetted shortly. Demutualisation would create a profit making entity out of the CSE and Cader said it was proposed to give the government a stake in the commercialised exchange.
He also said a high-level legal and technical delegation would visit the Securities and Exchange Board of India (SBI) to understand and study the central counter party system in India. The SBI had also assisted the SEC in setting up an exchange traded fund, currently with the legal draftsman.
source - www.island.lk
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