Should the Empower Board be limited to qualified investors?

Thursday, 20 May 2021 02:45 - - {{hitsCtrl.values.hits}}

By Rohan Senanayake

The trading day today at the Colombo Stock Exchange was interesting, and rather surprising. A stock rising over 200% of its IPO price while a possibility, is a matter that should be of concern if there’s a great amount of volatility in such stock.

The most fundamental principle of investing of all time is “never invest in something you don’t understand”. However, how many of the retail investors in the Colombo Stock Exchange internalizes this concept is a question mark to-date.

A share market while allowing the free exchange of securities between the market players to facilitate price discovery, also need to be a secure and managed environment that protects market players from any possible corruption, fraud and malpractices.

The Empower Board being introduced to the Colombo Stock Exchange was a brilliant and commendable move made by the authorities. An increased access to capital for Small and Medium Enterprises is a much needed element for conducive economic growth in a country. However, the investors who invest in such entities need to be afforded adequate protection as well.

One issue that arises to a retail investor when investing in a stock listed on the Empower Board is the lack of information and track record to make an ‘informed investment decision’. The basic requirement of having a low threshold requirement of two years of operational history in one reason for such a paucity of information.

What’s interesting is, an ideal solution to such an issue has been already found by the CSE, when issuing and allotting BASEL III Compliant Debt Securities only to a limited audience, namely a set of people called “qualified investors”. The qualified investor will not be the retailer who is trading on the CSE with his pension money or his gratuity trying to make a living out of it.

Now if such an issue or possible threat of a retail investor losing out on their hard earned money exists by investing in a stock that they don’t have enough information about, isn’t it the ideal solution to limit such stock to the qualified investors too? Open to discussion!