Thursday, July 21, 2011

Insider trading unavoidable?

By Jithendra Antonio

Almost all  investing in the Colombo Stock Market could be insider Sri Lanka as a small country with a growing small-scaled stock market, compared to the big capital markets in US, a top corporate figure and investor Nimal Perera said speaking at a Forum organized by Sri Lanka Institute of Directors on ‘Insider Trading’.

“Out of the 250 shares, only about 100 companies are traded on a daily basis, and many of the Directors, CEOs of these companies are either related or very good friends. So information could move fast in this small community” Perera pointed out.

He went on to say that, given Sri Lanka’s geographical distribution of stock market traders, investors and executives of listed companies, there could be a fast movement of information which could be termed as ‘Material Information’ by regulators or any other regulatory body.

“We are all insiders, including the regulators, as we are a close-knit society.  So it is not entirely right to say that one person or a few individuals are trading on inside information,” he said.

He also noted that many listed company chairmen, directors and even regulators are in a closed community that share lots of corporate information knowingly or unknowingly, when they meet each other on a daily basis at informal and formal events including corporate launches, official functions or even funeral houses, private parties etc.

“For an example, I meet my aunt at a funeral where she asks about Royal Ceramics. I casually tell her the company is doing great and will be making a Rs.1 billion profit for this year. She goes and tells this to her boy friend and you suddenly see the RCL share rise. This is how material information gets disseminated in Sri Lanka,” Perera explained using an anecdote.

He further said, if he mentions about his company’s financials to a relative, it will be on a friendly basis. “My intention was pure and clean” Perera noted.

Perera also noted that it is surprising to see how the whole broker and investment community follow the trading patterns or become aware when high net worth individuals trade on a particular stock.

As means to counter insider trading, Perera said Sri Lanka should not adopt the regulatory methods practiced in Europe or US, but to find unique solutions for a small market like Sri Lanka.

“For example, by broad basing the retail activities, we might be able to counter insider trading to some extent, as it will not allow certain individuals or small groups to manipulate, as it happens now.”

“Whatever the regulators do, those should not hurt who make money on proper valuations and information in the market” he added.

Perera noted that it is among the top day traders in the country contributing a lot of money to the day’s market turnover while his trades directly compensate the government and the regulators, paying brokerage, SEC Cess, CSE fees, CDS fees…etc.

“Instead of being skeptical of us, regulators should send us ‘letters of appreciation’ admiring our contribution to the market performance. Regulators should definitely take measures to curb insider trading, and over-regulation is not the way forward” he said.

Making his remarks on ‘Insider Trading’, SEC Director General Malik Cader went on to say that it is vital for the Colombo Stock Market to reach its next level by creating a level playing field for investors. He said that there are two set of ‘insiders’ in a stock market.

“Markets are driven on information, and proving the intention of a trader is not a very easy task. Primary Insiders are people who have access to information on listed securities, including directors, employees, public servants while Secondary insiders are people who get information from these primary insiders,” Cader explained.

Cader stressed that preventing the market from insiders is vital in the perspective of good governance.
“The whole idea of this is to inculcate a culture of good governance. Fear has inbuilt and we need to have proper laws” Cader said adding that rules, regulations and laws cannot be implemented overnight and it will take years. 

Sharing his perspective on the capital market, Asanga Senviratne said that regulators need to understand the trading mentality before implementing rules and regulations to the market.

“We certainly are overregulated, is that the way forward?” Seneviratne said adding Colombo Stock market is one of the top markets in the world that has no history of a broker default, and SEC has to think how they could take the market to the next level.

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