Colombo’s stockmarket may have exploded in six months time if not for this week’s intervention by the Securities Exchange Commission (SEC) and the Colombo Stock Exchange (CSE) after the market went into a tailspin with frenzied and casino-type activity, an issue that has worried foreign investors for many months.
An SEC official said the net outflow of foreign funds over the past few months was due to concern the way the market is operating with stock prices rising not due to fundamentals but on speculation and overheating the market.
On Tuesday, the uneasiness in the market as prices surged was nipped in the bud when the CSE imposed trading halts on eight securities which saw unprecedented price hikes. The following day, the SEC imposed price bands –for the first time in the market – restricting the price of any stock or security from changing either way (up or down) by 10%. The ‘suspect’ securities were four warrants of Environmental Resources and Investments (ERI) and stocks of Touchwood, Dankotuwa Porcelain and Blue Diamond (voting and non-voting).
“The market will not be sustained with such manipulation as what was seen during the past month (of unrealistic prices) would have continued. It was too artificially propped up and a ‘natural’ correction would’ve come too late,” an analyst said.
Six brokers- Asia Securities, Asha Phillip Securities, Acuity Stockbrokers, Capital Alliance, Capital Trust and Bartleet Mallory Stockbrokers – were summoned by the SEC on Wednesday and warned as their exposure to the stocks in question was too high.
The SEC official said the brokers were advised to ‘get such orders from clients in writing’. “When some brokers brought this issue up (of being compelled to execute orders), SEC officials asked them to do so only if they had a letter from the client which would then protect them against the consequences,” he said, noting that one of the main reasons for a net foreign outflow in recent months is mainly due to highly speculative trading. “They (foreigners) think that this market is crazy,” he added.
Surekha Sellahewa, CEO at the CSE told the Business Times that the price bands had been considered for some time (before Wednesday) as some stocks have seen wild fluctuations over a considerable period of time and when it was verified that some investors were pushing some shares, the regulators had to step in.“Many stockbrokers reacted positively to this,” she said.
However some brokers are strongly opposing intervention by the regulator saying they are acting like schoolmasters with canes. “There’s no rule against making a fast buck (in the market). There’s no rule saying not to buy speculative shares. If a firm comes up with a rights issue or posts good results, etc, its share will increase by more than 20% (and that’s usual market dynamics not manipulation),” Sarath Rajapakse, Director Capital Trust Securities said.
He said that the ‘price band rule’ is ridiculous and Sri Lanka is a case study in over regulation and bureaucratic bungling. He attributed what happened to the market as the result of a conspiracy by parties unhappy with the sudden rise in stature of the ERI group of companies. “There are people who missed the bus on these high performers because they were too conservative to try out these shares. Yet again there are some brokers who have got big foreign orders to buy provided the stocks they are targeting are available at fairly low prices. They wanted to bring the market down somehow to execute these orders. Therefore it is clear that it was not the price rise that was manipulated but it was bringing down of the market that was deliberately and cleverly engineered,” he said.
He alleged that regulators who are itching to flex their muscles and assert their authority walked into a trap set by vested interests with malefic intentions. “Shares go up and shares come down according to the demand and supply in the market. Regulators do not have to do anything about it and should not try to interfere with markets. Nobody forced anybody to buy any particular share. Investors and speculators buy and sell shares on their own free will and guided by their own perception. As we saw very vividly on Thursday (when the market fell) any attempts to interfere with the free operation of markets results in disaster. The SEC is there to act as watchdogs to ensure that no irregularities take place in the markets and not to unnecessarily interfere with the market,” he said.
Mr Rajapaksa said that Tuesday’s trading halt and Wednesday’s band fixing was a blatant violation of all norms of free market operation. “The result (on Thursday) was a disastrous market collapse which can easily be described as 'economic sabotage'.
In defence, the SEC official pointed out that the Commission's objectives include the creation and maintenance of a market in which securities can be issued and traded in an orderly and fair manner and the protection of the interest of investors. “The SEC has every right to do what it did. Trading halts and price bands are imposed to protect the investors,” he added.
Other brokers too don’t subscribe to the view that regulation and intervention is unnecessary and counter-productive. “ The regulator stepping in has brought some sanity into the market. It was ‘absolutely necessary’,” said Mano Nanayakkara, Group Chairman Asia Capital which owns brokerage Asia Securities, among those warned by the SEC.
“If the SEC wishes to regulate the market in the first instance to protect the unsophisticated investors, we have no objections. It’ll protect those who’re most vulnerable,” he added.
Other says that they are compelled to buy stocks on client demands on the phone.
“We’re only data entry operators. When clients want us to buy we do so,” a stockbroker lamented.
Some brokers on the other hand noted that SEC intervention this should have happened a long ago. “Were they sleeping all this time?” a broker asked.
Another analyst said the SEC and CSE stepped in at the ‘nick of time’. “When a share appreciates there needs to be sufficient cause (for it to do so),” he said, adding that attributing sheer (high) investor sentiment to a ‘crazy’ rise in fundamentally weak stocks reflects negatively on the market.
He also added that in terms of foreign investor participation it paints a negative picture. |
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