Financial Times

SEC closing in on stock market manipulators
By Duruthu Edirimuni
The Securities and Exchange Commission (SEC) has zeroed in on three top listed companies for inquiries scheduled soon regarding unusual share price movements, and is gearing up for a public awareness campaign on possible overheating of the market.

"We expect the companies to co-operate with us fully, but if not there is a fallback mechanism, because the SEC has the power to inspect any company's books," Channa de Silva, Director General, SEC told The Sunday Times FT in an exclusive interview.

He said that the three companies are not aware of being investigated yet, but the SEC after concluding their studies on the share price movements of these three companies will call them for investigations in two weeks. "We are studying the chronological order of events in these companies to see whether they were involved in insider trading," he said, adding that SEC is also looking at the individuals behind these transactions, the quantities traded and the buying - selling patterns of their shares.

He said there has been a tremendous upsurge in some share prices and some movements have exceeded 100 percent per day in the recent past, while some shares have also seen excessive trading and large volumes as never before. "The internal surveillance system of the SEC and the investigative committee along with the Colombo Stock Exchange (CSE), highlighted these unusual movements," he said.

De Silva said that there has been a visible push and drop situation in some shares during the last few weeks where some investors will hold the stock and 'push' the share price up and ultimately 'drop' themselves out.

However, when asked about the stockbrokers' argument that speculation is driving the market forward, he said the SEC has no intention of curbing speculation in the market. "The SEC likes speculation and also understands that it is what drives the market forward. But we are against insider trading, which is daylight robbery and also price manipulation," he said.

Meanwhile, to interrupt the present 'push and drop' in low valued shares and to block a possible overheating of the market, while cautioning the investors about a probable crash if this activity continues, the regulator will launch a public awareness campaign this week.

"CSE has moved extremely rapidly and may be showing signs of a possible overheating and we don't want a crash like the one experienced by Pakistan a month ago," he said. SEC will be calling a meeting of all the CEOs of stockbrokers this week to discuss about the market overheating.

"It is healthy for all the stakeholders to launch an awareness campaign, because if a crash happens, all the money and the foreign funds will dry up and ultimately ruin the confidence in the market," De Silva said. In a bid to further strengthen the market and to build confidence, the regulator plans to introduce capital market regulations before the end of the year governing all stakeholders.

"The rules will govern capital market participants, stockbrokers, underwriters, margin providers, fund managers, rating agencies and the clearing house," De Silva said. The SEC will define liquid capital and will link all the above mentioned entities' capital to the risks they take.

"We will implement a minimum threshold of capital adequacy for all participants, depending on their risks," De Silva said, adding that SEC had discussions with industry participants last week about the new regulation.

He said that some had concerns on rules being too stringent and also about the liquid capital, but as a whole had welcomed the move. The SEC will also defined independent directors and their role in the capital market regulations.

In the same vein the SEC is planning to relax some rules to facilitate market development. "SEC relaxed the minimum issued share capital level of 25 percent to 15 percent for Lanka Indian Oil Company and if future issues are substantially large, we may relax this further," De Silva said.

He said the market is in need of a confidence building exercise. "Before coming in to any market, foreign investors check regulations, how the rules are enforced and how the regulators work," he said, adding that what they want is effective implementation of regulations, which in turn will build their confidence.

He said foreign funds such as CalPERS will look at the market actively, when the few large IPO applications are approved by the SEC commission. He said that the market capitalisation of the CSE, which is presently touching US$ 5 billion, will double to US$ 10 billion with these issues.

De Silva said that the regulator is actively considering an institution where company directors are taught best practices in corporate governance. "If the opportunity arises, the SEC will support such an institution together with the other regulators such as the Central Bank, because this training is mandatory for company directors in developed markets," he said.

He added that initially if the institution is put up, the local directors of companies will be asked to follow this course on a voluntary basis. He said that the regulator is supporting changes in the legislature to facilitate an active securitised market in the country.

He said SEC encourages the public to write to the Director General or meet him regarding any concerns on listed firms. "A new era has started and the regulator will act as a facilitator and a catalyst to develop the capital market," he added.

Back to Business