Indrani Sugathadasa, chairperson of the Securities & Exchange Commission (SEC) has finally buckled under pressure after a bruising battle with powerful brokers and investor interests, an issue that was watched with interest in Sri Lanka and abroad over the past few months.
Ms Sugathadasa, an able public servant inexperienced however in the affairs and ‘ways’ of the stock market but appointed to the position by virtue of being the wife of Lalith Weeratunga, influential Secretary to the President, threw in the towel, resigning, just weeks after Malik Cader, SEC Director-General was eased out and given a ‘promotion’ at the Ministry of Finance.
However that influence (with the President) was nothing compared to the authority of a few but far more powerful market operators whose constant needling of the regulator and other pressures led to the fall of the two top officials at the SEC. This newspaper has focussed on these issues over the past few months constantly suggesting that interference in the regulatory mechanism was not the right way to go.
Foreign investors have already been complaining about governance and fundamental issues, and now a new issue has emerged: the independence (and credibility) of the regulator.
As K.C. Vignarajah, a former chairman of a top Colombo chamber and now, a one-man demolition squad of the wrongdoing in the market who has steadfastedly criticised irregular happenings in a sea of corruption, says: “Our image has been sullied. Crony capitalists and greedy investors have succeeding in ousting an honest and upright official (Ms Sugathadasa) who was not prepared to bow to their threats, and even after Malik Cader was eased out, had insisted that investigations (against market manipulators) should continue. These investors will now overwhelm the market at the expense of a large segment of small and minority shareholders.”
Jokingly he suggested, “I recently saw this advertisement for the vacant SEC Director General’s position and to the qualifications that were called for, we must also add ‘ability NOT to regulate’.”
He also described efforts to hold roadshows across the country to entice, innocent investors to put their money in the market, “like lambs being taken to the wolves,” and agrees that the SEC shouldn’t have been involved in promoting the market – although there is provision in the law to do so.
Regulating and promoting can be a contradiction of the SEC role and counter-productive, and was proved in this particular case. Pronouncements by a few investors to pull out their huge investments in the market (in a veiled threat to force it to collapse) if investigations were pursued, led to concern and uneasiness in SEC circles. While rules and regulations shouldn’t dampen enthusiasm or stiffle the market, regulators must not be dictated to by the market.
Some investors and brokers - not in the elite, influential list -, argue that the SEC has been slow in moving on many issues like for example permitting margin trading for foreign brokers, a request delayed for many years. Other complaints is that the price bands and credit limits were constraints, arguing that the SEC should have gone after individuals (price manipulation) rather than allow everyone to suffer. The same applied in the case of credit where some brokers advanced credit which was 300 times their portfolio worth. “What do you do if the regulator is stiffling the market? There is no choice other than seeking relief from elsewhere,” argued one broker.
However seeking ‘relief’ elsewhere and getting redress like in the present case results in the credibility and authority of the regulator being questioned. Furthermore what is the confidence level, here and abroad, when decisions taken by a regulator can be reversed by another administrative or political authority?
The same applies in the case of the Central Bank (notwithstanding the recent decision by the Ministry of Finance to devalue the rupee which proponents claim was necessary because vested interests were keeping the dollar value down). What happens if banks, unhappy with Central Bank decision-making, seek relief from elsewhere (other than the judiciary)? These precedents are not a healthy sign in a functioning democracy and in the larger context, a departure from the proven, and tested practice should be avoided. The moment the independence of the regulator is called to question, confidence and accountability becomes a problem.
On the other hand, the wrong people in high positions can also give negative signals to the market or create havoc. What is required is for honest, credible and upright people to be appointed to regulatory bodies and other state agencies and due recognition given – by the highest authority in the land - towards exercising their rights and obligations. |
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