As one of our columnists writes, the President was not given the full picture of the goings-on in the Colombo bourse and even though his comments, at the meeting with brokers, suggested he was aware of what was going on – the brokers had their day and say.
Respected SEC chairperson Indrani Sugathadasa has quit and despite a last-ditch effort by a group of respected investors to retain her, Rajapaksa’s new appointee, Thilak Karunaratne, a former parliamentarian and businessman, took over the reins of regulating a fragile stock market.
Like all new brooms, Karunaratne has expressed interest in continuing the ‘good’ work of his predecessor – a hard act to follow. This is in fact the second time she has quit on a matter of principle, the earlier time being as a board member at the Export Development Board (during the tenure of former President Chandrika Kumaratunga). Though an able public servant, she was a novice on stock market affairs but a willing learner, picking up the rudimentary fundamentals and later the more technical aspects.
Can Karunaratne bell the cat? Ms Sugathadasa’s tenure has been among the most strenuous years of the market particularly after trading hit dizzy heights at the end of bloody separatist conflict in May 2009. Like a caged animal being released after many years, the pent up emotions of brokers and investors alike exploded and trading, the indices and turnovers hit record levels.
With many local retail investors jumping into the fray joined by a new group of investors – pensioners whose return from low-interest bank deposits saw them switch to the stock market aimed at quick gains – the market took off faster than the regulator could get its act together. As this column has stated earlier, the role of the regulator as a ‘policeman’ and promoter needs to be examined closely. While encouraging new investors in the market, its messages to the public of also being cautious and not too hasty, was a little too late. By that time, small investors, unable to read between the lines and small print in new issues of stock and IPOs were trapped in a world where the price at which IPOs were marketed, fell within a few days after trading opened in these stocks, wiping out values in days.
Given the potential in which this market will start developing, it’s imperative that the chairperson and commissioners are above board and its not a bad idea for a declaration of their assets – like parliamentarians – and take an oath of allegiance not to trade in shares. There have been some examples in the past few years of public servants or political appointees in top positions being in conflict with their other positions. Government appointees must clearly renounce any positions that come into conflict with their new appointments and the SEC chairperson and the commissioners could set an example here.
That’s the first step towards ensuring their interests won’t interfere with the smooth running of the SEC. The same should apply to the Colombo Stock Exchange (CSE) – if not already practiced - because both these institutions have access to market-moving information that the public and shareholders don’t have. The CSE is informed in advance, through regulation, on new developments in companies and anyone with access to this information can trade in a particular stock or through a third party account. No one is saying this is happening now but in the larger context of transparency and accountability, a clean slate and an above-board team at the SEC and CSE will be stronger, much more effective and not able to swing to the tune of a few powerful brokers.
Strong mechanisms, effective techniques and constant monitoring to nab insider trading and market manipulation would help much better than placing restrictions in the market, the worry of many traders and investors. Insider traders and market manipulators, who are just a handful but a powerful handful, should be nabbed while on the go, not by placing new regulations which then affects the entire market and all stakeholders.
While on market issues, the SEC would do well to also look into another critical aspect that is raising issues of governance: the role of auditors. Though auditors are appointed by the shareholders, it’s those who hold the majority stake that prevails and the auditors are paid by the companies. In today’s world rarely are auditors prepared to be critical and, if ever, mild is what you get these days, for who would want to lose a lucrative contract! Furthermore audit firms have branched out into different areas of activity including executive recruitment and feed the very same companies where audits are carried out. If this is not conflict of interest, what is?
Some veteran auditors have suggested that maybe the auditors should be paid by the SEC or some non-conflict process of payment should be devised, so that auditors are no longer beholden to their ‘masters’.
The other issue is the role of independent directors and their appointment, an issue that we have commented often in the past. How could directors be ‘truly’ independent if appointed by the company? Should such provisions be looked at once again given the giant strides the stock market would be heading for in coming months as economic activity intensifies?
Finally a new chairman has taken over and the Business Times wishes him well in handling a very arduous task where powerful interests play a key role in how the market should operate. The non appointment of a director general is also delaying any progress, if ever, being made in the investigations that began against certain brokers and big time investors. |
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