Regulators Role
Regulators main role and responsibility is to regulate and create an orderly market to provide a level playing field to all investors. One cannot blame or applaud Securities and Exchange Commission (SEC) or Colombo Stock Exchange (CSE) for the negative or positive movement of the stock market. It is the market forces such as demand and supply that determine direction of a market. The outcome of many variable factors affects the creation of these negative and positive market forces. Some factors are internal others are external. Some may be controlled and some may not. If any individual or institution tries to interfere with these free market forces, it will eventually result in dire consequence similarly to what was witnessed previously. Therefore I think SEC or CSE should not be blamed for the current crisis.
It is not proper for us to expect regulators to promote the stock market, value companies or speculate with regard to the direction of the market. Recently I have noticed some regulators stating that market is overvalued and fundamentally good stock are still cheap etc.. I think these types of statements are inappropriate and should be discouraged, as it will only send the wrong signal to the investor community. Stock valuations and analysis should be entrusted to experts of the relevant industry that posses required knowledge and expertise.
Way Forward
Currently the Colombo Stock Market going through a phase of market correction. This is a natural phenomenon to all stock markets. Any immediate action without clear foresight would only result in short term result with no long-term sustainability or benefit. What is required right now is to have a uniform set of regulation that is conducive to the market, which will remain in force for reasonable period of time. Frequent changes to regulation will only result in uncertainty in the minds of the investors and uncertainty is one of the greatest enemies of an active market. Therefore it is important for SEC & CSE to take the Right Decisions instead of Quick Decisions. Time is not a critical factor or of an essence.
Whatever decision taken by the SEC that affect the overall sentiment of the market should be taken with considerable duty of care and responsibility. It is important to consult all stakeholders of the industry such as Stock Brokers, Investors, financiers and policy makers before arriving at a decision. Currently we do not see much of involvement of the investors and financiers in this process. Therefore it may be good idea for SEC to encourage and develop these various interest groups so that the decisions taken by the SEC is not only widely accepted and also fall within the overall economic and development objectives of the country.
The general belief that the market is overregulated is a mere perception. I believe that there are certain rules and regulations that require be put under microscope in order to determine whether it has achieved the original objective. These may include Price Band, Credit Rules etc.. Market requires foolproof regulations and only such regulation can create level playing field for investors, which will be conducive to the overall development of the market. Market without regulation would be like a car driven on the Southern Highway without Brakes.
Apart from regulations, I also believe it is very important for SEC to educate the investors. One of the main reasons for anxiety of investors is the lack of proper understanding and knowledge of the risk return co-relation and inherent risk factors affecting equity markets. Any high return that can be achieved from investment in equity market comes with the greater risks. Particularly retail investors and new entrants to the stock market, which represent significant segment of the market, should be made aware of these inherent risks. This process should begin at School level.
I also believe that SEC should place a considerable importance in the area of Equity Research. Currently we notice that various Research Companies and Stock Brokering companies without proper diligence release research report and recommendation with regard to the direction of the market without proper analysis or basis. It may be important to regulate these areas by issue license confirming the competency.
Credit Rule
Credit is an important aspect of any growing economy. Credit will provide many opportunities to businesses and contribute to the betterment of the society in general. Likewise over extension of credit could lead to many serious crises such as subprime mortgage crisis, credit default etc, which some countries witnessed during recent past. Therefore credit to any industry should also be provided with certain set of rules and guideline. Best example is how Central Bank regulates Bank and Non Bank Financial institutions. We do not see any depositors blaming Central Bank for low interest rates or Banks complaining about statutory ratios and credit rules. But we have recently noticed many stock brokering companies and investors talking about credit rules and blaming SEC. My belief is that credit should be based on Net Asset Value and liquid assets of the brokering companies and SEC and CSE should monitor these ratios at Macro Level instead of Micro Managing Broker Credit.
How to Promote the Stock Market
As we are all aware the current inflow of investment to the country is not at desired levels. Our FDI to Debt is close to 2% of the GDP. There are many reasons for this, some are beyond our control, but what is in our favor is the positive outlook of the country and the fact that we have peace today after 25 years of civil war. As a result country’s economy has been growing at a steady pace of 8% opening many investment opportunities. It is important that as responsible investment bankers that we take the responsibility to promote the country and the stock market outside Sri Lanka. This will not only increase the inflow of the inbound investment but will also help the country to strengthen the rupee against the other currencies.
It is quite noticeable that upsurge of the market beyond the benchmark valuations was as a result of local buying and selling in anticipation of large-scale inflow of foreign investment to the country. This scenario could result in a stock market bubble & crash unless carefully addressed. It is interesting to see how pension and other large-scale local fund intend to exit from their current investments. It may be a wise decision to set up an investment promotion arm with required market expertise in investments and marketing to promote these investment opportunities outside Sri Lanka, which would certainly help the stock market and the country to move further towards positive direction.
Cause of manipulation and how to avoid it
Firstly I would like to avoid the use of the word manipulation. No person is manipulator or involved in manipulation until such time the person is found guilty of an offence. One cannot blame investors for making use of the available opportunities to enrich themselves. This is a natural human behavior. In the past we have noticed collection of shares in the backdrop of bad news such as bombs, Tsunamis etc.. Therefore it is the responsibility and the task of the regulator to ensure that they remedy and rectify these loopholes instead of blaming the investors.
http://www.lbt.lk/views-and-opinions/opinions/1013-way-forward