SEC shows optimistic way forward but challenges remain

Capital markets regulator, the Securities and Exchange Commission (SEC) on Friday held a first-of-its-kind – hence welcome – forum with stakeholders.

A formal and a widespread engagement with stakeholders of the capital markets was also felt necessary for both positive and negative developments.

The fact that the Colombo stock market has been the world’s second best performing for two consecutive years as well Asia’s best for an equal period has certainly not only empowered the SEC but also put it in the spotlight.

The forum was well attended by senior officials from the CSE, representatives of stock broking firms, unit trusts, listed companies, minority shareholder lobby groups and the media.

The Colombo bourse’s market capitalisation rose by 102% to Rs. 2.2 trillion in 2010 whilst a high Rs. 5 billion had been raised via Initial Public Offerings. These and several other impressive achievements certainly warranted a showcasing of some of the contributory factors.

However, the meteoritic rise of the Colombo Stock Exchange (CSE) wasn’t devoid of controversies and measures which remain contentious. In that context, the SEC perhaps wanted to put in proper perspective some of the regulatory measures it implemented in 2010 and announced for 2011.

In a direct reference to market players’ criticism when the bourse dips, to SEC’s alleged overregulation, the Chairperson and Commissioners present at the Forum were quick to note that the regulator did not get credit nor were its measures commended when the bourse booms or on account of a host of healthy developments which Colombo has achieved in recent times.

“Like you say that overregulation is hurting the market, why don’t you say good regulations are boosting the market?” was the query from SEC Chairperson Indrani Sugathadasa to the financial press present at the forum.

Kicking off the forum, the SEC Chief – perhaps encouraged by the 96% return offered in 2010 on top of 125% in the previous year – confidently expressed that the regulator was keen to ensure the Colombo stock market becomes the world’s number one this year.

However, to most analysts, Colombo by far is the world’s best considering the fact that 2009’s number one Russia didn’t figure in the top 10 in 2010 (it was ranked 20th) whilst last year’s number one Mongolia was unheard of in 2009. Russia’s and Mongolia’s achievements in that sense could be described as one-offs, whereas Colombo has been consistent.

But more than wanting to make Colombo the best performer in 2011, the roadmap for 2011 and 2013 announced by the SEC on Friday had greater substance from a macroeconomics perspective. Though Colombo is the best performer, it remains tiny in global and regional context. The SEC is aware of this anomaly; hence the roadmap envisages around 50 to 60 new listings and a market capitalisation of Rs. 3 trillion by end 2011.

The country’s capital market’s contribution to GDP is only 40%, which is low in comparison to over 100% in developed nations. “By attracting more companies to list on the stock market, we can increase this contribution,” Sugathadasa said, adding that by doing so the bourse would serve as a positive indicator of the growth momentum of an economy.

The rise in market capitalisation is expected to be achieved due to several factors. One is within a macroeconomic environment of high GDP growth and low inflation supported by fiscal discipline and political stability in Sri Lanka, more companies and infrastructure projects will consider financing their projects through the equity market.

At the forum, which was over breakfast, Sugathadasa also listed SEC’s five strategic goals towards achieving the broader agenda. One is facilitating improvements in the capital market infrastructure and the other is facilitating improvements in liquidity and introduction of new products in the capital market.

The SEC will also encourage and facilitate the widening and broadening of the issuer base in addition to facilitating the widening and broadening of the investor base. Internally, SEC will also enhance its own performance through effective alignment and management of human, information and financial capital.

“Successful implementation of all these initiatives can only be achieved through extensive support from the stakeholders,” the SEC Chairperson said, adding that the Commissioners look forward to continued cooperation from all.

Sugathadasa also reiterated that Sri Lanka is “undoubtedly poised to take off in 2011”. She pointed out that the stock exchange, as an indicator, speaks for the economy’s health and prospects for the local and foreign investors.

“President Mahinda Rajapaksa has opened the door for foreign investors to invest in Sri Lanka and the political stability of the country provides immense confidence to both local and foreign investors. Let me reiterate our resolve to build our capital market and set it on a strong foundation over the next few years and to contribute towards the President’s efforts of placing Sri Lanka as ‘the emerging wonder of Asia’. Let us work together as an industry to achieve this,” she told the well-attended stakeholders’ forum.

Market has disciplined itself but no decision yet to remove price band – SEC

Securities and Exchange Commission (SEC) Director General Malik Cader told the stakeholders’ forum on Friday that the price band, which remains contentious, has been successful in disciplining the market thus far though no decision has been made yet on its removal.

“The price band has had a positive impact with no wild fluctuations,” Cader said in response to a journalist’s question as to its progress since implementation four months ago.

Cader said that none of the stocks which prior to the band were identified as volatile had come under the band. “This means the respective market players have disciplined themselves,” he added.

Since mid-September SEC monitors price movements of all counters on a daily rollover basis for the preceding review period of five days and tracks the unusual price movements through a formula based on price volatility and volume traded adjusted to public holding.

Once a stock gets captured under this formula, it is slapped with a price band of 10% high or low for 15 market days. Around a dozen stocks had come under the price band since its introduction and at present three stocks are trading within the band.

Cader said that formula adopted by the SEC about which stocks must be slapped with the price band incorporated international best practices.

With regard to a question about whether the SEC plans to revise or remove the price band as a reward to a now-disciplined market, the officials said the matter was constantly reviewed but no firm decision had been made yet.

“We don’t intend to have the price band forever,” Chairperson Sugathadasa replied in response to a poser that its continuity also reflected badly on the regulator.

Though all the Commissioners have unanimously backed the move, SEC has been under flak for the price band with suggestions being it should be removed in its entirety and replaced by circuit breakers, whilst others want the duration of the price band reduced to five or 10 market days. Some investors and brokers have welcomed it as well.

K. Vignarajah, an investor in the stock market, told the forum that until listed companies improve the practice of timely disclosure of price sensitive information, the price band was a necessary step.

However, he urged more flexibility in terms of credit rules with the broker given a degree of discretion based on the relationship with clients. In response to the issue of enhancing liquidity, he suggested higher public float of listed companies both by listed companies and those planning to via IPOs.

JB Stockbrokers CEO Murtaza Jafferjee warned the SEC that amidst growing number of brokers, its regulatory measures with regard to the price band and credit rules would not help in achieving the desired objectives of market development.

“The policy response of the SEC to deal with systemic risk in the market cannot be achieved via its present measures,” he opined.

Commissioner Sujeewa Mudalige said that the SEC had assumed a dynamic role with progressive regulations, noting that the Commissioners now meet every two weeks as opposed to once a month in the past. Via his comments, he suggested that the focus was on better regulations and not overregulation.

SKM Lanka Holding Chairman, the Pakistani-born Khalil Masood, also made several useful comments in support of further development of the market. He opined that the massive oversubscription of recent IPOs mostly on account of applications via bank guarantees as well as the smaller size of some of the IPOs posed some problems with regard to true price discovery.

The minority shareholder interest lobbyist group City Lights representative recommended a monthly stakeholders’ forum where timely issues could be sorted effectively and immediately. He also urged the SEC to set up a proper public gallery or ensure all brokers have their presence on the trading floor of the CSE.

In response to a journalist’s question that despite the sweeping powers SEC has to deal with capital markets crime, none have been sent to jail and that offences had only been compounded, officials responded saying that some cases with jail terms were ongoing. “If you want us to put offenders to jail, we will – if necessary. However, we are keen to address the root causes,” SEC Chairperson Sugathadasa added.

The SEC also downplayed the negativities of massive net foreign outflow in the Colombo stock market. In 2010 net foreign selling amounted to Rs. 26.4 billion whilst year to date in 2011 it is nearly Rs. 2 billion.

“Yes, there has been an outflow but domestic investors have remained very active. We are confident that foreign investors will play an active role in tandem with the higher number of listings and entry of select large State institutions,” SEC officials added.