Did brokers explain remedies to regulator?

By Jithendra Antonio

The Colombo stock market once again started to dip due to poor communication that was believed to have taken between the stock brokers and the regulators.

It has been learnt that the Securities and Exchange Commission (SEC) Director General Malik Cader received a letter from brokers appealing on facilitating broker provided credit for retailers Monday morning, in addition to the letter was sent to him on Friday.

Despite the sudden 6.8% rise in Colombo stock indices last week amid reports that said brokers have re-appealed to regulator on facilitating credit for retailers, this week the market tumbled again after a statement that quoted SEC Director General Malik Cader as saying that he had not received any letter from stock brokers.

However later on Monday noon, Director General Malik Cader said the regulator is considering a request to relax credit rules by stockbrokers who have asked to be allowed to provide credit to customers, at least up to their net capital. "It has received the attention of the Secretariat," Malik Cader  had told reporters.

But brokers say they have sent a letter on July 27, addressed to the Chairperson - SEC and acknowledging receipt was obtained. However on Friday, they were made to understand by SEC Director General that he had not received it.

“And at the very same time, a copy of the same letter was delivered to him as well on July 29,” an official from Stock Brokers Association said. When Mirror Business tried to contact Cader on the issue, he was not available for comments.

 Mirror Business on July 28 exclusively reported that the Colombo Stock Brokers Association convened an emergency meeting on July 25, and discussed simple inexpensive remedies to the present grave situation of the Colombo Stock Exchange.

And later brokers sent a letter explaining their grievances to regulator addressed to the Chairperson of Securities and Exchange Commission, Indrani Sugathadasa.

 Subsequently, the letter by Colombo Stock Brokers Association stressed that large numbers of local individual investors with share portfolios of less than Rs.1 million who were unable to obtain Margin Trading facilities have been forced to sell or have left the equity market in recent times.

 Further the letter also noted that, to add to the problem, from 1 January 2010 to date there had been a net foreign outflow of Rs.34.6 billion and from 1 January 2011 IPOs, Rights Issues and Private Placements have absorbed over Rs. 50 billion from the Colombo Stock Exchange.

 “These are the natural mechanisms by which an expensive market becomes an in-expensive market, thereby, eliminating the need for any regulatory restrictions,” brokers noted.

 As the local individual investor contribution to market turnover increased from 22% in 2008 to 44% in 2010; the letter further sated that the All Share Index has declined by 16.8% from 14th February 2011 while the Milanka Index has declined by 24.3% from 1 October 2010.

 “Each market day has become a T+5 force selling day for all Stock Broking firms which has led to a large number of clients’ shares been forced to sell daily on to the buying quotations which in turn is moving lower and lower, and thereby precipitating a continues drop in the market prices.”

 “The main reasons for the market to drop in our opinion are non voluntary sales which result in prices going down, cascading margin calls and more forced selling,” the letter noted.

 In its letter to regulator, brokers had submitted three main proposals that were received an overwhelming ‘Yes’ vote from the majority of membership during the meeting held on July 25.

 Accordingly, in its first request, brokers had requested to allow all brokers to lend their net capital which is in excess of minimum net capital requirement of Rs. 35 million.

“Therefore, the compulsory force selling on T+5 rule also will have to be removed as the broking firms can gradually force sell when it is fully utilizing its excess funds” brokers noted adding that this is because broking firms in any case can take their excess funds out of the company in the form of dividends and do anything they wish to.

Brokers have also demanded that all brokers should be allowed to transfer the excess net capital in the broking company to the wholly owned margin trading company licensed and regulated by the SEC, without deducting from the net capital.

Brokers further noted that to the best of their knowledge, most broking firms presently have proper systems and procedures in place to monitor debtors and had expressed glimpse of hope for a favorable decision speedily, to avert a continuous decline in the market.

source - www.dailymirror.lk