The Securities & Exchange Commission (SEC), some brokers would say, let down the stock market this week.
Expected to make a decision on abandoning the controversial price bands, the SEC took no such decision at the meeting of the commissioners on Wednesday, contrary to expectation that the bands would be lifted.
While the price bands initially rocked the market, hitting sharp lows in turnover levels and the index, there was a recovery which has been sustained with index and turnover levels returning to normalcy.
If that is the case, is there a reason to return to the statesquo of a market sans price bands? There have been many arguments for and against the bands. However what cannot be disputed is that the SEC was compelled to enforce this rule due to casino-tye trading in the market where investors bought in the morning and sold or exited as the price rose or fell during the day.
While the trading became like a casino, investors to a point cannot be faulted because new rules encouraging day-trading were introduced by the Colombo Stock Exchange which in fact saw a surge in trades to never-before levels, partly also due to the buoyancy after the war ended.
But what became worrying to the regulators was that the bubble was going to burst at any time because many investors were buying and selling without any cash at hand. How? Obtain unlimited credit from brokers which is legitimate; buy a stock; sell it before the day is over, and make a cool profit without spending a cent! That’s like living in Disneyland!
It’s fine if everything works out that way. But if investors end up with huge losses, the losses pile up, debts pile up and chaos follows. There were times when some stocks traded on a single day were close to or higher than the total stocks available in the market which has happened before.
This plus market manipulation was what concerned regulators and – in the absence of tighter regulations to nab market manipulators or curb excessive trading in some stocks – the price bands were imposed.
That sequence of events is however now water under the bridge but the issues remain. Some concerned investors like K. Viknarajah, a veteran investor and long-time campaigner for good governance and ethics in the market, praised the 10% price bands, saying some steps had to be taken to control casino-type trading in a market where there is large-scale insider trading.
Viknarajah also raised the long-time issue of insider trading which continues despite close regulatory control. Insider trading is a huge problem, he argued, saying directors, auditors and some other influential stakeholders have access to inside information and some of them – not all - trade through related parties, a new way to circumvent the rules.
“Small, innocent shareholders don’t have such access and there’s no level playing field. Insider trading has been going on for a long time,” he told the Business Times.
In the hot seat at the SEC is Indrani Sugathadasa, a respected public servant, who has since her recent appointment, stood firm to ensure fairplay in the markets. Her determination to stick to the rules is bolstered by the fact that she is the wife of Presidential Secretary Lalith Weeratunga, another respected public servant, providing added advantage is rejecting any attempt to influence decisions, a usual trait in many institutions – even the SEC - where name-throwing to get things done is commonplace.
Sri Lanka has all the laws to tackle crime – whether blue or white collar -, ensure good governance and create a decent, law-abiding society. But given the way our politicians behave or civil society and business leaders fail to raise their voice against discrimination and rights (perhaps for fear of offending the powers-that-be), full implementation of the law has always been an issue.
In this context, while we ‘doff our hat (in praise)’ to Ms Sugathadasa and her team for their initial efforts to bring sanity, decorum and governance to the markets, we hope the SEC would be courageous enough in cleaning up the stable before more funds start flowing into post-war Sri Lanka. The biggest challenge however is not in too much regulation which could scare off investors but in the right mix of being alert, free-market trades and tossing regulations when needed to ensure the markets are secure for everyone. |
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