Aug 01, 2011 (LBO) - Sri Lanka's securities watchdog 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, an official said.
"It is receiving the attention of the secretariat," Securities and Exchange Commission director general Malik Cader said.
Colombo Stock Brokers Association had in a letter to the SEC asked to be allowed to give credit up to twice their net capital (leveraged once from the brokers side) or at least up to their net capital with no leveraging on the part of the broker.
They also asked a rule on force selling of stock portfolios five days after purchase to be lifted if the total portfolio is within the credit limit allowed.
The Colombo Brokers Association originally submitted the letter to SEC chairperson Indrani Sugathadasa on Wednesday, but she had been abroad. A second letter had then been given to director general Malik Cader on Friday.
Brokers said in the letter that Colombo's benchmark All Share Index had fallen 16.8 percent from February 12, while the Milanka Index of liquid stocks fell 24.3 percent from October 01, 2010.
From January 01, 2010 foreigners had sold 34.6 billion rupees of stocks and rights issues and private placements have absorbed over 50 billion rupees.
"These are the natural mechanisms by which an expensive market becomes an in-expensive market, thereby, eliminating the need for any regulatory restrictions," the Brokers Association said in their letter.
Local individual contribution to the market had increased from 22 percent in 2008 to 44 percent in 2010 and large numbers of local individual investors with portfolios of less than a million rupees have since left the market, the letter said.
Analysts say the request to be allowed to provide credit at least up to the net capital of brokers appears reasonable, though credit cannot fundamentally drive a market.
The letter did not mention any suggestions on the margin to be provided by clients. In the US a margin of 50 percent has been required following a stock market bubble which collapsed in 1929 triggering the great depression.
Some analysts have said that persistent foreign sales in Sri Lanka seem to be triggered by relative valuations across the region, which means either prices have to fall or earnings have to improve.
Sri Lanka's regulators clamped down on credit sales late last year to prevent the creation of a bigger stock bubble which would have crashed down harder.
source - www.lbo.lk
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