Amidst the rumpus at the crisis-hit Securities and Exchange (SEC) and its Chairman Thilak Karunaratne’s resignation on Friday, Sanjay Kulatunga, one of the commissioners stepped down on the same day after a losing battle against alleged market manipulators and political pressure. Mr. Kulatunga, a director at Amba Research told the Business Times that he resigned on principle.
This came as the 75-strong staff at the SEC wrote to President Mahinda Rajapaksa urging him not to accept Mr. Karunaratne’s resignation letter which was to be sent on Friday. “All staff queued up to sign the letter and before doing so they came and implored the Chairman not to resign,” a SEC staff member told the Business Times on conditions of anonymity. He said that the staff wasn’t forced to sign this letter. “This letter was a letter which was kept at the reception and any SEC employee could sign it. They had absolutely no pressure at all,” he said.
There has been a chorus of protests and concern including from the Ceylon Chamber of Commerce over the developments at the SEC and Mr. Karunaratne’s decision to step down in the wake of rising powerful investor and political pressure, after getting tough against alleged manipulators and insider traders.
The Sri Lanka Institute of Directors (SLID) also expressed concern over the events saying the independence of regulatory bodies is an important contributing factor towards entrenching confidence in a country’s capital market and economy. “any attempts to negatively interfere with the professionalism and independence of a regulatory body such as the SEC will only lead to widespread indiscipline and a break down in law and order and the resultant negative impact on the workings of the capital market. We urge the Governing Authorities to take the immediate necessary steps in redressing the current situation at the SEC and ensure that regulatory bodies are given the freedom to manage independently,” it said in a statement.
Some of the high net-worth traders are now ‘negative net-worth’, markets sources said. “However they are not under water because they are still holding on to their margin calls/positions because of their asset value,” a market analyst said. “But these values are also fast declining as their liabilities are rising due to rising interest rates, which is worrying them,” he said. He said that this coupled with the SEC probes against them were distressing them and leading to desperate moves to boost the market in whatever form.
Capital Alliance Ltd, which was a member of the Colombo Stock Brokers Association, resigned two weeks ago from the association joining four others – CT Smith Securities, JB Stockbrokers, Somerville and IIFL who quit earlier. A source close to the company said that they were dismayed at the way the regulator was treated and challenged by some high-net investors at the meeting that all stakeholders had with the President in July.
Analysts say that bull markets are seven year cycles (1993-4, 2002-3 and 2009-11) with the next one still far away. “As such there will be no rising tide to lift the stocks,” the analyst said, adding that the equity market is in its consolidation phase. While there was a high growth in the Colombo stock market seen in 2009, 2010 and in the first quarter of 2011, it also caused a high degree of price volatility and it also created many regulatory and supervisory issues. “This was the reason that the regulator was forced to step in and take several – perhaps not very popular – measures to restrain the volatility and to lessen the systemic risk in the market,” a stockbroker who was present at the meeting with the President told the Business Times.
He said that the market will be erratic for the remainder of this year. “Nevertheless, a sideways (erratic) market offers many opportunities to invest in undervalued securities as the potential for mispricing is larger.” Analysts say that low, free-float large market cap stocks in the indices are masking the true extent of the fall in the market with many stocks down 50-60% in value from their peak. They point out that the free float is further constrained since there will be reluctance to sell at a loss especially amongst state controlled institutions holding shares.
But they reiterate that value is returning to the market – some stocks are now trading below their intrinsic values. “Trying to time the market is futile – jumping on the band wagon when it’s moving is a losing proposition,” another analyst said.