Some big investors got it wrong – SEC’s Godahewa
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By Duruthu Edirimuni Chandrasekera
The Securities and Exchange Commission (SEC) follows a strict rule where a member of the commission doesn’t get involved in an investigation if the parties involved are connected to the commissioner, says the SEC chief.
Nalaka Godahewa reflects on six months in the job. Pix by Mangala Weerasekara
“… Of the nine investigations that have been competed, on at least two or three occasions I stayed away from the deliberations because the parties could be linked to me. The reports (on this) are well documented,” Nalaka Godahewa told the Business Times (BT). In this interview, he discusses a range of issues including the alleged mafia that manipulated the market. Excerpts:
On the performance of the Colombo stock market during his performed in the past six months (during the time he has been the chairman)
The best reflection is the market. The market has gone up by more than 1,000 points and when I came in, it had a continuous decline for the last 18 months. It has reverted to its steady growth phase now. Now there’s no major volatility. It’s seeing natural ups and downs and it’ll be on a steady growth from now onwards.
On plans for the future
What I noticed when I came into the market was that the challenges at the time were different where we had to bring in stability to a highly volatile market which was crashing.
After regaining that stability, we assessed how the Sri Lanka market compared with the overall government vision. What we found was that capital market development had a lot more to be done. For an example our market capitalization is only about 30 per cent of our GDP whereas we aim to be in the range of 50 to 60 per cent in the next four years. The number of listed companies is nowhere near the amount that we want. The retail investors are less than one per cent of the population and less than 5 per cent of the adult population. This 5 per cent has to grow at least to 10 or 15 per cent. So there’s a lot more to be done. What we have come up with is a clear action plan, the 10 point action plan that we have strategised.
BT- But this action plan has been there and it was discussed in so many ways before.
It’s always the case. Each time you try to do something, people say it was already there. Then one has to ask the question, then why didn’t anything happen. Always good ideas are there, but they weren’t implemented in a focused manner. We haven’t come up with any new magic. What we have done is summarized all the ideas and put together an action plan and we’ll implement.
We have a clear strategy. We identified people who’ll lead those projects, teams are in place, targets are set, timelines are agreed and some of the tasks identified under each project are already achieved. So this time it’s a focused approach. That’s the only difference.
On tasks that have been completed
For an example we were already aware that we had to improve the corporate debt market. It’s not magic. After the 10 point plan was agreed, one of the first things we did was to submit proposals to give some good concessions for the corporate debt market. Already some companies are working on it. So this is how the ideas can be actionable. In our road-shows which we will be doing with the Colombo Stock Exchange (CSE), we’ll start bringing in corporate debt promotional aspect.
On the introduction of new instruments
There’s a separate team working in product development. The first two priorities will be getting the debt market on track. Beyond that there’re many others. For example whether there should be a commodity market coming in or whether derivatives should be introduced or should we wait. At times in our market, terms such as ‘hedging’ and ‘warrants’ have become bad words. Because when they were introduced, they didn’t work out well. If you try to introduce them immediately, people might be resistant. So you have to 
wait for the right time to introduce them. So those are the things being discussed.
On the draft rules of the SEC Act
When I came in, it was more or less done. This change of legislation which is happening after 25 years is very important for the market, because it can address many weaknesses of the current Act and prepare the market to cater to the modern day requirements. This is a World Bank (WB) project and we were awaiting the WB team’s final recommendation which was done in December. The next step is for it to go to the Legal Draftsman. Usually it can take two to three six months.
We’d love to see that Act being presented to parliament during the year. So let’s see how it goes.
On whether there are any major changes in the Act
One of the major changes would be the introduction of civil sanctions. The only way now for action against market offenders is through criminal sanctions. The problem with the criminal sanctions is that it has to be proven beyond doubt. Sometimes you see something (wrong) and even if it’s obvious to all, proving it becomes a lengthy and tiresome process.
So most other countries have opted for civil sanctions where a judge can make a call based on the probability of the facts available. We’re very late in that.
On his thoughts as to whether the SEC is a friendly regulator
It’s how you define friendliness. Do you become a friend or an enemy of the market?
The SEC Chairman’s role is clearly defined by the SEC Act.
If you do that right the market and the investors benefit. They gain confidence, they feel protected.
So naturally they feel that the regulator is friendly, because the regulator is doing what’s right. The perception of friendliness is a reflection that we’re going by the Act.
On his statement, on appointment, that all investigations would be completed in three months
The task given to them was to complete the probes within three months, but we couldn’t as the type of decisions (due to the criminal sanctions) took time more than what I anticipated. After six months, about nine investigation reports have gone to the commission and the commission has made decisions. Also another five to six probes are completed and they’ll also be presented at the next commission meeting which will be held by second week of February. That means by this time, at least 15 investigations will be decided by the commission. When I came in, I was told there’re about 20 (probes). So that means there’re about five more left and we’ll finish as fast as possible.
On whether those investigated are guilty
We’ve found people guilty. The SEC deliberates and at the 10 member commission it’s decided. If there’s a single member connected to the parties that are being investigated, they disclose (their interest) and stay away from the deliberations. For an example I said that nine finished and at least on two or three occasions I stayed away from the deliberations because the parties could be linked to me. The reports are well documented.
Some investigations are interrelated. It’s the same group of people with several investigations.
When friends are being probed …
I won’t get involved. The friends also can’t blame me, because I was not part of that (SEC) decision.
On accusations that he got the position because he had close links with the government
I am a person known in the private sector and I have friends everywhere. So it’s difficult for me to find a situation that I am not known to people. When it comes to decisions how I handle it is disclosure and non involvement.
It’s like being a judge. As long as I hold this position I have to minimize my relationships.
On being the chairman of a listed company and also the head of the SEC and whether there is a conflict
I was a chairman of a listed company and I didn’t ask for SEC Chairmanship. I was requested to take up this position at that time because there was a necessity. Before the appointment we sat and went through the SEC Act and we didn’t find anything which said that you cannot be the chairman or a director of a listed company. But the Act clearly says if you have a link to a decision that’s taken, you have to disclose. This conflict story is only an opinion. You have to go by the Act.
BT- When you are a chairman of a listed company, you dictate policies to that company. Also being the Chairman SEC don’t you see an element of conflict interest?
When I’m at SEC, I’ll use all my knowledge at SEC to govern it (the company) properly.
On facing possible negative sentiments at the CSE-led roadshow in Mumbai in February
When the country has a problem, it becomes that much more our responsibility to handle that. If people out there are trying to tarnish the image of the country, we can’t sit and wait. We need to make an extra effort to correct it.
During the war the Western world was always attacking this country, but we fought in the international media to correct that perception. It’s similar. Now we’re in a situation where the economic recovery is like war. These are those trying to abstract us. So we got to fight our war and send our message across and bring investors.
On how to handle this negative perception
We identified possibly four roadshows this year. That’ll be organised by the CSE who has been requested to take the lead and we’ll facilitate. Starting with India, Hong Kong, Singapore, Middle East and next year we’ll go to London, New York and Australia.
On transfers of people at SEC being politically motivated
In the last 21 years of my career, each time I go to a new place, the first thing I do is change the structure to the way I think should be done. Then I change the people. It happened at SLIC (Insurance Corp) and SLTB (Tourism). People need to finally manage. The same thing happened here. This is nothing unusual, but because the SEC was in the spotlight people though it was unusual, but it wasn’t so.
On whether there are enemies or (his) favourites at the SEC
To me there’re no friends or enemies in an organization. All are team members. I haven’t favoured or harmed anyone.
On criticising the media for the use of the word mafia
The media publishes what they’re told. So if a wrong message goes to the media, you have to blame those who gave that message.
I’m not concerned (about this word). However the correct word to use is ‘trend’. I disagree to the use of the word mafia to what happened. I’ll explain what happenned. This is my opinion.
At the time many rushed to the CSE. Some didn’t have any experience. Some of these people who did big in the CSE also didn’t have an understanding of the market.
The market was seen as a place where you can make money quickly (at the time) which is totally wrong in theory as it’s a place to make long term money and not short term. Many came to this place like a casino to make quick money. At a casino you go to the tables which make money. Similarly at the CSE, people latched onto those (people) who were making money. In the morning they were checking to see what those people were buying. All bought the same stocks that they (the big investars) were buying. Then the market went up.
That was completely the wrong approach. And the so called biggies weren’t also experienced and did a lot of wrong things in their decision making. So when they were investing in the wrong stocks, the majority followed and rightfully the CSE crashed. All those people lost money along with the leaders. So can you blame the leaders? That’s a trend. It’s not a mafia.
When we investigate, the investigators tell us (the commission) that they were evaluating these four to five people, (allegedly manipulating stocks), but there are thousands who did the same thing. They say we feel it’s not fair to punish these people
(brokers or whoever), because only those were picked by the surveillance, but when doing the investigations, there were many others who did that (the same trading patterns).
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