UNP Economic Spokesman Dr. Harsha De Silva MP yesterday said the government has failed the country’s financial system by allowing regulatory capture to engulf the Securities and Exchange Commission of Sri Lanka, which would bring down the stock exchange in the long run.
An economic theory put forward by Nobel laureate Joseph Stiglitz, regulatory capture occurs when an influential group is allowed to undermine the regulator and manipulate the market. Dr. De Silva said that this was what had befallen the country’s capital market regulator the Securities and Exchange Commission of Sri Lanka, with its Chairman Thilak Karunaratne planning to resign by the end of this week because market manipulators the SEC was investigating were too powerful and wielded influence, or found favour, with the state.
"According to the SEC Act, insider trading and market manipulations are offences for which those found guilty could be sentenced to serve not more than 5 years in jail. Who is trying to take away this power from the SEC?" Dr. De Silva asked.
"Today the stock exchange has become a casino. But we should not look down on the stock exchange. It has the potential for becoming a significant contributor to economic growth. This is because the primary market is where companies raise equity capital. The secondary market is where stocks are traded. We need a credible secondary market to enhance the primary market. Investor confidence is boosted by a stable primary market. This is why governments establish regulatory bodies to ensure equity, justice and fair play to all stakeholders.
"The failure of the SEC to crack down on market offences is not a result of a flawed market, but the result of a failed government. The government has failed the financial system. Government failure is what is driving down the stock exchange and keeping away investors. Now, the Chairman of the SEC is resigning because the government is not supporting the SEC to crack down on market malpractices. Colombo Stock Exchange, Rest in Peace," the outspoken lawmaker said.
Shady investors and their crony brokers have accused the SEC of leaking information on ongoing investigations, which they said drove away potential investors.
"As far as I know, the SEC has not divulged any information on who or what is being investigated. Since the Environment Resources Investments fiasco almost a year ago (where three directors compounded their offences for Rs. 3.3 million each), there has been nothing on the ongoing investigations. There are attempts to keep information from the public. Thilak Karunaratne did not fall from the skies. He is well respected. So when he told COPE that a mafia was running the stock exchange he knew what he was talking about, and this the government chooses to ignore," Dr. De Silva said.