Backlash at Bourse: Rs. 40 b in value lost after SEC new rules

The besieged Colombo stock market yesterday was inflicted with fresh wounds as it saw Rs. 40 billion in value wiped off, with analysts pinning it to contentious new rules announced by the Securities and Exchange Commission on Tuesday.

The ASI dipped 107.50 points or over 2% to close at 5,048.1 points, the lowest level in four months. Market capitalisation dipped by Rs. 40 billion to Rs. 1.88 trillion whilst ASI’s year to date negative return worsened to 16.9% and that of MPI was 12.6%.

Widespread selling boosted turnover to Rs. 818 million as blue chips and fundamentally-sound second tier stocks were dumped.

Whilst good governance activists and some investors welcomed SEC’s latest measures, brokers and analysts blamed the mini-crash to what they described as “irrational and short-sighted” new rules by the SEC following the NSB-TFC deal.

“To treat a wound, the SEC has cut a hand,” was the comment from an analyst who noted that SEC by trying to address NSB-TFC transaction specific issues had in turn come up with an across the board-type rule.



Some described SEC’s new rules as “bad in law,” suggesting they could impede encroaching

One specific new rule was inclusion of directors (apart from employees) of market participants from trading (buying shares and selling within six months of buying) except in the case of IPO purchases. Investments (over 6 months) are allowed.  “SEC referred to ‘directors’ in general without specifying whether executive or non-executive. This triggered selling out of panic and fear,” a broker said.

The duration of six months was another thorn, which some viewed as very rigid.

Banking sector analysts also questioned whether the SECF has the jurisdiction to set rules on NSB, a Licensed Specialised Bank regulated by the Central Bank, with regard to its investment strategies.

SEC in its new rules said all large (defined as transactions with a total value of Rs. 20 m and over)NSB orders to have a certified Board resolution. “Setting these types of rules is the prerogative of the Treasury or Central Bank,” analysts claimed.

Despite flack on some, a few other rules however have been welcomed as progressive. The Colombo Stock Exchange is awaiting the new rules as Directive from the SEC as well as clarifications. The Colombo Stock Brokers Association is also scheduled to meet today to discuss the new SEC rules as well.

In its press statement issued on Tuesday, the SEC said Commissioners at their 301st Meeting, deliberating at length the transaction of The Finance PLC shares by National Savings Bank (NSB) through the stockbroker firm Taprobane Securities (Pvt) Ltd.

SEC said in the aftermath of this transaction, the commission explored the ways and means of enhancing the smooth functioning of the payment and settlement cycle of the capital market of Sri Lanka.

The SEC is of the view that the Settlement Risk which currently exists between T (Trade Day) and T+3 (Settlement Day) will be fully eliminated only after Central Counter Party (CCP) is in place. Therefore the SEC will intensify its efforts to implement the CCP for all transactions at the Colombo Stock Exchange (CSE) to eliminate this risk of settlement failure.

Having duly considered and discussed, the commission has decided to implement the following interim remedies until CCP settlement regime is in place. Further steps may be taken as appropriate in the coming weeks.

1. General rule changes:

· Prohibit employees and directors of all market intermediaries to trade (buy shares and sell within six months of buying) except in the case of IPO purchases. Investments (over six months) are allowed.

· Crossings transactions to have 20% upper limit unless exceptionally allowed by the CSE on a case by case basis. Clarification in this regard to be communicated to the CSE.

· Current 15% margin before trade execution to be strictly enforced including for NSB.

· To have a more robust enforcement mechanism with clearly defined punitive measures for violations of rules by stockbroker firms, CEOs, directors and investment advisors. Clarification in this regard to be communicated to the market shortly.

2. On future transactions where NSB is a party:

· All large (defined as transactions with a total value of Rs. 20 m and over) NSB orders to have a certified Board resolution.

· NSB to use a third party custodian bank.

A separate communiqué will follow on the interim actions to be taken on the other parties of this transaction.