the stock market
The annual report of the Colombo Stock Exchange released recently
makes some interesting points about the current state of the share
market. It is somewhat critical of the attitude of stock brokers
who apparently have not diversified their business to the desired
extent to bring about greater activity in the market. Certain market
players also seem unable to accept the intervention of regulators
in instances of alleged irregularities.
exchange is rightly proud of the fact that the Colombo bourse remains
one of the best performing markets in the world and that it is a
source of cheap funds for corporates and brings good returns to
investors starved of investment opportunities in a climate where
inflation is running ahead of interest rates.
doubt the brokers themselves have their own criticisms of the CSE
such as the lengthy delays in long-announced plans to develop the
market. For instance, the CSE has been talking of demutualising
the exchange for years. Likewise, it has been talking of introducing
new instruments. Now it turns out that legislative changes are required
for some of the contemplated changes. The present SEC Act does not
permit shareholder owned exchanges while there are restrictions
in the Companies Act that prevent companies limited by guarantee
and operated on a not-for-profit basis (such as the CSE), being
converted into companies limited by shares.
CSE acknowledges that criticisms have been levelled against the
Exchange for not taking the initiative to introduce new products.
However, it points out that member firms are allowed to deal in
their own account, extend margin lending facilities and trade in
the beneficial interest of government securities. The CSE says that
market development and regulation should be seen as the different
faces of the same coin.
regulation is required to enable the more efficient transfer of
resources between companies and investors or borrowers and lenders,
and to minimize the asymmetry of information and opportunistic behaviour
on the one hand and promote competition and reduce excessive risk-taking
by financial intermediaries, reduce systemic risk and thereby ensure
that costs are minimized on the other.
CSE says that there are many instances where it has been misunderstood
by various stakeholders and it makes an effort to clarify some of
One is the recent development where share prices of certain listed
companies increased substantially in a relatively short period of
time for no identifiable reason, prompting the CSE to call for explanations.
CSE refers to concerns of certain stakeholders who have alleged
that the CSE, by calling for information from companies and disseminating
the same to the market, could destroy investor sentiment. The CSE
points out that while a certain amount of speculation is important
to create liquidity, from a policy perspective a stock exchange
cannot encourage speculation. There have been many instances where
speculative bubbles have destroyed markets with dire consequences
being unleashed on investors. “Such a happening in an emerging
market such as ours would destroy the market development initiatives
that have been undertaken by all concerned.” This is something
this newspaper itself has commented upon in the past when we called
for stern action against those who are manipulating the share market.
it appears that brokers are reluctant to diversify and are stuck
with a strategy based purely on price. The CSE is trying to nudge
stockbrokers into becoming investment bankers and engaging in an
array of capital market related activities rather than only providing
agency broking services.
It would indeed be ironic if those who are at the heart of a market-based
economy for which competition is fundamental are seen trying to