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Shareholder Wealth

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1Shareholder Wealth Empty Shareholder Wealth Sun Mar 06, 2011 1:08 pm


Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics

Can the regulator determine a price band on quoted stocks held under lien by banks to ensure that in the event they are disposed of due to debtor default that the market equilibrium is not disturbed?
Not so, according to Securities and Exchange Commission (SEC) Director General Malik Cader, who told reporters that the regulator cannot determine the prices of stocks and shares, but they may however only insist on disclosures (see last week’s The Sunday Leader).
But, if that is so, ipso facto why then does the regulator have price bands? Is that also not a way of determining the share price of a stock to ensure that it does not go up or down as the case may be in an inconsistent or irregular manner so as not to harm bona fide investors?
The SEC based on a secret formula has introduced or applied price bands on certain stocks. Prices of stocks captured in such price bands may vary within a range of plus or minus10% of its value for a maximum of 10 days and not more nor less than that range. The imposition of such price bands per se is a way or a mechanism that the SEC has adopted or introduced to regulate the “wayward” or “manipulated” movements of stocks captured by such a formula to prevent distortions in the market.
When considering the operation of SEC’s price band formula, it, may however not be correct for Cader to say that the SEC has no jurisdiction in determining the values of equities even though the price movement of such stocks may only be restricted to “manipulated” stocks captured by such price bands formula and that too limited to within a certain range, which, by itself is an indicator that the SEC has determined within which parameters the prices of such stocks should operate, contrary to what Cader has said.
The price band formula may also be identified as a mechanism introduced by the SEC to protect equity holders’ wealth.
Likewise cannot SEC also introduce similar “price bands” in the event of forced sales, or bank sales of stocks and shares that take place in order to either conform to SEC’s “T + 5” tenure formula as mandated by the regulator in respect of broker credit governing the former, and in the case of banks which operate on a different plane, when they sell such stocks and shares held under lien to recover their dues in the event of debtor default, thereby ensuring that the prices of such stocks subjected to forced sales do not disturb market equilibrium?
Cannot the regulator, in order to ensure that shareholder wealth is protected in the event there is a threat of such stocks taking a tumble in both of those instances, also introduce price bands within which range such forced sales should take place in order to nullify that threat and thereby ensure stability and protection of shareholder wealth?
According to Cader, the SEC wants to introduce a Central Counter Party Fund (CCPF) by the year end to ensure stability and thus avoid wild fluctuations of prices taking place as a result of such forced sales. However another source said that such a Fund would cover only broker credit and not bank credit (given by keeping stocks under lien), thereby reverting back to square one.
Cader also alleged that in international best practice such bank credit, by keeping stocks under lien, is not extended.
But in the same vein he told this reporter that rules cannot be changed.
If something is taking place which is against international best practice, isn’t it then the duty of the SEC to ensure that such a thing does not take place or is not repeated?
Bank regulators are there to ensure the safety of depositors’ money, likewise insurance regulators are there to protect insurees’ money, in a similar vein the SEC and the Colombo Stock Exchange (CSE), the market regulators are there to safeguard shareholder money, which is also public money.
But if SEC allows certain dubious practices to go unchecked which may jeopardize shareholder wealth, then it may need to revisit its mandate.
The specific case brought before Cader by The Sunday Leader in relation to this matter was the sale of a parcel of 458,000 shares of Lanka Ashok Leyland held under lien by a certain bank at a discounted price of Rs. 1,000 a share; when the same was being traded on the floor of the bourse at between Rs. 2,000-2,500 a share.
Cader said that this was the problem with illiquid shares, inferring that on the basis of the “supply and demand” theory, poorer the supply, dearer the price. If that be so, in order to arrest that distortion, the regulator should also give directions to listed entities to enhance their public float and to ensure its continuous maintenance, a move which this reporter understands, that the regulators are planning to do.

Courtesy - Sunday Leader

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