By Shivanthi Ranasinghe Courtesy Ceylon Today
The Stock Market boomed into life, with the successful conclusion of the war, in May 2009. After stagnating for years, the rising activities were the barometric readings of the fast reviving economy. Yet, despite the massive development projects and investments taking place, the market was slowing by 2011. Investor confidence began to erode and by 2012, the market was crashing.
Stock Market mafia was pumping and dumping and 17 cases to be investigated screamed headlines. By 2013, the market revived and by 2014 was yielding the investors 23 per cent return when banks were only giving nine. In 2015 January, the Security and Exchange Commission (SEC) unveiled their year 2020 plan, promising a market capitalization of US$ 100 billion. However, the market plunged that year and is yet to recover.
Stocks and shares
When the Colombo Stock Market commenced in 1985, it was technically one of the most advanced in the region. When others were still with manual systems, we went for automated trading. Stock Market is the place where entrepreneurs could raise funds from the public. The other options to raise funds are to either borrow or put one’s own money. However, with terrorism gripping the country, development was at low ebb. Thus, the Stock Market was stagnant as there was too much uncertainty and promise of destruction to attract investors. When the war ended, the All Share Price Index (ASPI) was only 1400 points.
With the successful annihilation of terrorism coupled with a pro-development administration, investors enthusiastically rushed to the Stock Market. As market activities increased, so did the daily turnovers. This attracted the attention of all – including the media and inexperienced investors. All some understood of the Stock Market was that it was a gamble, and not much else. Still, it did not deter these investors, for the returns were increasingly promising.
The significance of this changing phenomenon was not immediately understood by the then powers. This was evident by the appointment of Indrani Sugathadasa – a retired public administrator as the SEC Chairperson.
Shortly after retiring from her post of Secretary at the Plantation Industries Ministry and the Children’s Development and Women’s Empowerment Ministry, in May, 2010 she was appointed as the Chairperson of the SEC. This post was traditionally coupled with the Chairmanship of the Insurance Board of Sri Lanka (IBSL). When the then President, Mahinda Rajapaksa, thus appointed her, he obviously felt her experience as a public administrator was sufficient to manage the SEC and IBSL. He failed to note that she was a total stranger to the dynamics of the capital market.
It further escaped him that the Stock Market was no longer a sleepy joint. It was evolving fast. The experienced investors on the other hand, quick to realize the full potential of the capital market growth were enthusiastically trading. By February, 2011, the ASPI had rapidly risen to 7800. This attracted the inexperienced as well. This unchecked growth of a bullish market however presented the danger of a free fall.
Thus, Sugathadasa as SEC Chairperson faced fresh challenges not experienced by her predecessors. Lacking an overall vision for the capital market, she failed to be proactive. Instead, she, reacting to the market dynamics, issued directive after directive. Most of these regulatory interferences were ad-hoc, resulting in investors losing confidence in the system. Two instances that severely affected investor confidence and motivation were when restrictions were imposed on broker credit to investors and when a ‘price band’ was introduced.
It has been a standard practice for investors to get credit from their brokers. These, called margin accounts, let investors trade for a higher value than the actual value he had paid for his portfolio. For example, the actual value of an investor’s portfolio may be at Rs. 1mn. The broker may give further credit – say 50per cent of the paid value, so the investor has Rs 500,000 credit that he has to pay back with interest. Now the investor can buy stocks of value up to Rs 1.5mn and settle the debt by selling these when the market price goes up.
When regulations were suddenly brought in, limiting the amount of credit brokers can give, the investor holding high stocks was forced to sell at the existing market price, even if the prevailing prices were low. Many investors incurred heavy losses due to this sudden rule.
Price bands, was another failed regulation that was introduced. Here, an external limit was put on the value of stock that can rise for a day. This artificial control of price escalations disappointed the investors. In turn, this affected the market that is deeply sensitive to investor sentiment. Price bands were withdrawn subsequently due to industry protest.
Overall, these directives confused the investors, resulting in the market downturn. The ASPI thus began to slide from February to December 2011. The entire industry blamed Sugathadasa, accusing her for over-regulating.
The SEC under her was so intent on regulating the market, they failed to realize that to regulate there must be a market. Our market was still very small. Thus, it first had to be widened. Especially, when it is being regulated, it must be done in a manner to develop it. This part was completely ignored. Therefore, investors felt that the SEC was policing them, instead of introducing the much needed laws to prevent the market from been mismanaged or exploited and to ensure transparency.
By end 2011, the ASPI had fallen to 6100 from almost 7800, in just 12 months. The Stock Market is usually considered the barometer of the economic healthof a country. Thus, when the indices started to fall, it reflected badly on the government’s economic performances. The Opposition quickly capitalized that the Stock Market was in a crisis.
It was in this climate that Sugathadasa resigned. She claimed that she could not function according to her principles. Insiders claim that she was given the opportunity to honourably resign from the SEC for non-performance. She however remained as the IBSL Chairperson – a position usually held by the SEC Chairperson. Many felt it was a balancing act, for she was the wife of the then President’s loyal secretary, Lalith Weeratunga.
If she had actually resigned on principles, as she claims, then it is questionable how she retained part of the portfolio that is under the same Minister. Interestingly, with the change of the government in January 2015, many administrators of the previous government, suspected to be Rajapaksa loyalists, including Weeratunga, have come under intense FCID investigations.Sugathadasa, however, has been reappointed as the IBSL Chairperson since early 2015.
Though she insinuated misuse of powers at the highest levels, the then government never challenged her statements. This was a mistake that administration made with all allegations against them. Whatever their reasons for ignoring these allegations, their silence simply created more space for more allegations. Eventually, the voter lost all confidence in that government, but the lesson came too late for them.
Thilak Karunaratne took over from Sugathadasa, a chemist and entrepreneur, with some dabbling in politics; he too did not have the required background to address the challenges faced by the SEC.
In the background, the sensation at the Stock Market caught media attention. Not understanding the implications, the media closely followed the big players and reported their trading activities. Suddenly, these key players were treated as celebrities. The new comers, without the experience or knowledge to make suitable decisions, blindly followed these celebrities. The shares these key players bought made following day’s newspaper headlines. This created a rush to buy these stocks, which naturally raised its price. When stock is fetching a good price, the celebrity would sell it, earning a good profit and exit. Prices then start falling, often proving too late for the followers.
Instead of educating the media of the consequences of such reporting, Karunaratne claimed the market was dominated by a mafia. Elements against the Rajapaksa administration too fuelled the situation by calling this trend as pumping and dumping. Karunaratne repeated these, making fresh headlines.
In reality, pumping and dumping occurs when a number of parties together deliberately manipulate the market by artificially driving the price up and then dumping the stock. In this case, the prices were driven up because of media hype. Hence, it was not possible to legally punish the big players, who anyway had not technically committed any wrong. From Karunaratne’s public statements, it is obvious that he had not understood this reality.
As media attention increased, Karunaratne promised that the culprits would be punished. In fact, he actually sent a notice to a large number of investors, questioning their regular trades. These headlines created negative publicity, and his actions made investors uncomfortable. As a result, in 2012, the market continued to crash and during the next nine months the ASPI plunged to 4900 points.
In comes Dr. Godahewa
This time the investors sought the President’s intervention. They wanted someone with proven expertise to take over such as Dr. Nalaka Godahewa, a person qualified in multiple disciplines coupled with an engineering and finance background, who had also turned around Sri Lanka Insurance Corporation. An active investor, who was a chairman in a listed company and on board of several listed companies, Dr. Godahewa had the right knowledge to address the challenges SEC faced.
Karunaratne was thus pressurized to leave. He insinuated that it was because he had commenced investigations on 17 companies, without naming any. Indika Sakalasooriya reports in the Daily Mirror, in January 2016, that Karunaratne was breathing fire when he first interviewed him in 2011. “But this time we found the man mellower, more focussed and determined to complete a mission – making Sri Lanka’s capital market a fair place for everybody. Interestingly, during the interview, he never uttered ‘stock market mafia’, a phrase he coined to identify some of the high-net-worth investors and influential stockbrokers in the country.”
Indeed, it is almost two and half years since then, and now he is once more the SEC Chairman, reinstated by the incumbent government. Yet, the 17 pending investigations he alluded to, seems buried with time.
Certain media entities were against Dr. Godahewa even before he assumed the SEC Chairmanship. Though a company headed by him, Colombo Land & Development was said to be under a ‘cloud of share manipulation’, two years of investigations by the FCID and nothing was found. It thus appears that certain newspapers were getting information from corrupt sources. Despite the negative portrait, under him, the Stock Market recovered within 30 months and by 2014 was recognized as the most sustainable in Asia.
By December 2014,
– the main price index ASPI had increased by 255 per cent
– Market Capitalization increased by 535 per cent
– Rs 97 Billion net foreign inflow in 3 years
– The average daily turnover increased by 205 per cent
– Corporate Debt market had appreciated by 6,390 per cent
– The market capitalization to GDP has increased from 11 per cent to 36 per cent
– Capital raised during his tenure, Rs 178 Billion
For the first time since establishing the SEC, the following three-year, 10-project plan was unveiled in late 2012:
1. SEC Act amendments
2. Increase corporate listings (public and private) to increase liquidity and the market capitalization
3. Attract new funds (foreign and local) to broad base the market
4. Develop trading Infrastructure to facilitate product innovation and to improve efficiency
5. Develop the corporate debt market
6. Intensify education and awareness in order to have an educated investor base and to enhance investor confidence
7. Develop Unit Trusts industry as a conduit to mobilize savings of the less sophisticated small investors
8. Strengthen risk management systems
9. Develop new products to broad base the market
10. Demutualize the Colombo Stock Exchange
Most of these projects were in progress when the government changed in January 2015. Since then the master plan is languishing.
As a nation, we are abysmally weak in analyzing facts. We run with the headlines than peruse the details. The Stock Market is a game of numbers. Thus, its story is written on the walls. One only needs to study the numbers without prejudice to understand whether it is corruption or non-performance that almost derailed our Stock Market. Unfortunately, the best of us choose to side with insinuation, because it is more interesting than studying numbers.
ranasingheshivanthi@gmail.com
