Thursday, May 10, 2012

SEC considers 10% minimum float rule

Reuters: Sri Lanka’s Securities and Exchange Commission (SEC) wants listed companies to have a free float of at least 10 per cent to increase market liquidity and could make a decision on the matter this month, the Head of the regulator said on Tuesday.

Foreign investors have long been reluctant to invest in the country’s Rs. 1.97 trillion ($ 15.42 billion) stock market, complaining of a lack of free floating shares along with market manipulations and insider trading.

 The 10 per cent minimum public float rule, which requires the shares to be held by investors independent of a company and its management, applies to companies when they get listed.

 However, once listed, a company’s management and its related interests can buy shares from the market, resulting in some big firms having only about five per cent of their shares public, though the market has an overall 30 per cent free float.

“We are looking to increase liquidity seriously for a minimum of 10 per cent float,” SEC Chairman Thilak Karunaratne told Reuters in an interview. “A final decision will be taken as soon as possible, hopefully before June.”

Karunaratne said there was a risk a minimum float requirement could be counter-productive as some big firms may decide to delist, and he would consult with the market before finalising the regulation.

“We don’t want anybody to get delisted. Perhaps we will talk to big companies and multi-nationals and ask their view on the minimum float,” he said.

 In 2009 and 2010, after Sri Lanka’s long civil war ended, the Colombo Bourse was a star performer. It rose 125 per cent in 2009 and another 96 per cent in 2010.

 But last year, when there were both economic and market problems, Colombo’s benchmark All Share Price Index fell 8.5 per cent. And so far in 2012 – a year when Asian markets have rallied – it has slumped 12.8 per cent in spite of eased restrictions on broker credit and margin trading.

 Foreign investors have been net sellers for the past three years with the country seeing a net outflow of Rs. 19 billion last year, 26.3 billion in 2010 and 789 million rupees in 2009. But they have been net buyers for Rs. 21.5 billion worth of shares so far this year.

 Past attempts by officials to tighten the regulation of stock trading in Sri Lanka met stiff resistance from some traders and brokers.

 Karunaratne’s predecessor, Indrani Sugathadasa, quit in December saying she did so “to uphold her principles,” after starting probes on several cases of share-price manipulation.

“We do have the teeth to bite, but we were not biting enough. Even though the regulations were there, we were not strictly enforcing the regulations to control or regulate the market,” Karunaratne said.

“Even investigations were slowed down to some extent. So people were of the impression that the SEC is a toothless tiger. Still we are trying to change that perception among the retail investors.”

Karunaratne, however, said a lot of investigations are still going on and the SEC is strengthening the investigation side. “What I would like to see is a well-regulated market. It should be an impetus and incentive for not only local investors but even for the foreigners to come and invest.”

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