Governing capital markets
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Two days of rain had ended and this Thursday morning was bright and sunny. As I sipped my first mug of tea, absorbing the sunshine and pondering on the topic of the day, I was drawn by a commotion at the gate where the trio had gathered round ‘choon-paan karaya’ Aldoris’s tuk-tuk.Apparently, Aldoris had two packets of milk powder, a scarce item these days (the Government said on Wednesday that stocks of milk powder were being cleared from the Colombo Port after the Central Bank released a sum of dollars to pay the long-delayed letters of credit), in the tuk-tuk which was visible among the patties, cutlets, maalu-paan and other food. He had done a poor job in hiding it and was being teased by the trio.
“Ah, den oya kiri-pitith wikunana-wada. Eih, bakery deval walin laabayak nedda (Ah, you are now selling milk powder. Why are bakery items not profitable?),” asked Kussi Amma Sera. “Aiyo Miss, mama peya thunakata wediya hitiya polime me kiri piti ganna mage pavulata (Aiyo Miss, I waited for more than three hours in the queue to purchase this milk powder for the family),” said a hapless Aldoris.
“Mama oyata salli dunnoth, oya polime indala mata kiri-piti genath denavada (If I give the money, will you stand in the queue and get me milk powder),” asked Serapina, while Mabel Rasthiyadu chided her two friends telling them not to annoy Aldoris.
“Kiri-piti hingaya barapathala prashnayak me davas wala. Aanduwata beri wela wage janathavata aththiyawashya ahara laba-denna (The scarcity of milk powder is a serious issue these days and the Government seems unable to provide essential food to the people),” said Mabel Rasthiyadu, adding that TV news channels over the past few days have shown long queues outside shops to purchase milk powder.
At that point, milk powder seemed to be a good topic to write about and as I returned to the office room, the phone rang.
It was ‘Koththamalli’ Fernando, the ‘Kokatath Thailaya’ (oil for any ailments) expert who has a remedy for any issue, on the line. We had a long conversation on the promotion of organic fertiliser, which he said was a good move by the Government. Acknowledging his view, I said it would have been better if the decision to convert to organic from chemical fertiliser was phased out over 3-4 years to help the soil adjust to an ‘alien’ nutrient.
On that note, we ended the conversation. At the same time the phone rang again and this time it was ‘Kalabala’ Silva, the often-agitated academic.
“Hello…hello,” I said, preparing to write my column on milk powder. “I say, I was listening to a webinar on the new Securities and Exchange (SEC) Act and it seems to be a very comprehensive law that has been approved by Parliament,” he said.
“Yes the framers of the legislation have built on previous drafts and come up with a decent law though there could be teething problems but which I am sure could be resolved,” I said.
“Yes, I heard that there were some reservations in legal circles that there could be over-regulation of the stock market through this piece of legislation, while another bit of criticism is that the SEC has too much discretionary power,” he said.
“I too heard about critics of the new legislation raising these points. However, in the larger context of ensuring a smooth market which strikes a balance between investors and market operators, I think this new law is a good one,” I said, realising at this stage that today’s column should be on the new SEC Act.
Thanking him for raising these points and stimulating my thought process towards this new legislation, we ended the conversation.
While the new legislation is progressive, it is the culmination of an effort that started as a first draft (to replace the then SEC Act) in 2007. According to SEC Chairman Viraj Dayaratne, the first draft had been completed in 2013 and approved by the Commission at the time. “Since that had not been proceeded with, improvements had been made to that draft by the subsequent Commission and having received Cabinet approval, the Bill had been tabled in Parliament in 2018 but was not taken up for debate,” he said. Thereafter, when the new 10-member Commission was formed under President Gotabaya Rajapaksa’s post-2019 administration headed by Mr. Dayaratne, PC, the Commission started working on the previous drafts and reached finality on a new law.
Mr. Dayaratne’s predecessor in particular Ms. Indrani Sugathadasa (even though she was well connected to the then Government) quit in December 2011 saying she was resigning on a matter of principle rather than bow to pressure from powerful market manipulators. She was replaced by former parliamentarian Tilak Karunaratne who also quit, again under pressure from powerful business interests who were furious and claimed the market was being over-regulated. Both appointments were made during President Mahinda Rajapaksa’s tenure.
However, Mr. Dayaratne hasn’t faced those ‘customary’ protests although the current SEC has also been tough in the market, ensuring limited malpractices. There are issues in the market but not to the extent faced in 2011. In Mr. Dayaratne’s case, he has the tacit approval of the political hierarchy and this has led to the new SEC Act being promulgated without much of a fuss from powerful market players.
Here are a few salient features of the new Act, according to a recent presentation by Mr. Dayaratne:
*Auditors of listed companies, market institutions and market intermediaries have been obligated to report certain irregularities that they becomes aware of ‘during the ordinary course of the performance of his duties’.
* Under ‘Prohibited Conduct’, five different offences have been identified. They are ‘false trading and market rigging’, ‘stock market manipulations’, ‘making false or misleading statements’, ‘fraudulently inducing persons to deal in securities’ and ‘use of manipulative and deceptive devices’. The most significant introduction to this category of offences which is commonly known as market manipulation is the two offences found in Sections 130 and 131 respectively. Whilst Section 130 precludes a person from making a statement or disseminating information that is false or misleading and which is likely to have an effect of raising or lowering the market price or volume of securities, Section 131 precludes a person from inducing or attempting to induce another person to trade by making or publishing any statement or by making a forecast that is misleading, false or deceptive. Fines and jail terms under the new Act have also been enhanced.
These sections address social media platforms where market intermediaries and some big-time investors have in a subtle manner sought to promote certain counters in the stock market which saw some stocks rise to phenomenal highs earlier this year before settling down.
As I wound up the column sipping my second mug of tea, I reflected on the stock market today with some market malpractices comparing it to exactly a decade ago when market manipulators called the shots, forcing two respected chairpersons to quit.