Old habits die hard? SEC resumes investigation

Old habits die hard they say, as inner circles of stock market were rocked yesterday by the news of SEC resuming its investigations causing mixed reactions.

The Daily FT learns that following their meeting on Monday, a few SEC Commissioners had been insistent that once ruled out or closed investigations must be resumed.

The end result much to the charging of some, was SEC had fired letters to at least four brokers and eight investors asking them to come for an initial questioning.

Sources said at least one of the Commissioners who incidentally wears several private sector hats, thus exposing a possible conflict of interest and perhaps a witch hunt, had been adamant that SEC must re-exhume closed files.  This was after the alleged rescinding of SEC minutes.



Other sources however said that wasn’t the case but rather resumption of investigations, which understandably was stopped until there was a sense of stability at the SEC. This was in relation to the appointment of a Chairman, which was resolved last month with the selection of Tilak Karunaratne.

SEC is yet to appoint a new Director General, the post which fell vacant on 3 November, and important for any serious investigation.

Be that as it may, the SEC terms issuance of letters as a standard practice to seek clarification but for the market and especially for those suspected of perceived malpractices it is investigation.  This latest development was flagged off as the main cause for the steep fall in indices yesterday with ASI down 78 points or 1.32% and MPI by 83 points or 1.66%.

Some observers questioned the timing of fresh moves by the SEC especially in the context that only a few days ago it gave a fillip to investor sentiments by relaxing broker credit rules. The theory is that SEC needs to let market recover itself.

However by issuing letters to brokers and investors, SEC has fired afresh unsettling yet again a market that was trying to recover from abyss. A previous Daily FT report on SEC summoning/issuing letters to brokers and investors saw the market take a step fall as well.

On the grounds that investors and brokers were being unnecessarily harassed due to regulator’s lack of understanding of how markets operate, this move sparked a huge fireball against the SEC leading to the exit of Director General Malik Cader first followed by Chairperson Indrani Sugathadasa.

The two were hailed for their actions though market still remains divided with regard to the contentious issue of whether the SEC overregulated the market or not.

Last year the Colombo Bourse suffered its first ever dip in three years, down by 8.5% after bull runs of 96% growth in 2010 and 125% in 2009. A segment of the market viewed the dip as a welcome correction (in SEC there are Commissioners who think Colombo is still overvalued), whilst the other blamed it to SEC’s indecisive, experimental and over regulation.

Whilst the issue of credit was resolved beyond the original request of brokers, the 10% price band remains. During the past two days the market has failed to close on the up though some have taken strength from the fact that SEC support to start with has boosted activity level as confirmed by over Rs. 1 billion turnover for two consecutive days.

As per most independent analysts Colombo Bourse is yet not out of the woods and fresh bout of investigations whether justifiable or not, timely or not, witch-hunt or not is likely to further fester the market’s wounds largely out of extreme actions by stakeholders.