Several factors, including most of all optimism about the country realizing its full economic potential with the ending of the war, fuelled the post-war share market boom that made the Colombo Stock Exchange one of the best performers in the world. But that bubble has now been pricked with two well known personalities who headed the Securities and Exchange Commission (SEC) quitting within the space of one year. First Ms. Indrani Sugathadasa, wife of Mr. Lalith Weeratunga, Secretary to the President, quit refusing to compromise her principles and now Mr. Tilak Karunaratne, a former MP and a successful entrepreneur, has left the agency saying he was under intense pressure over several on-going investigations of various violations. Neither Ms. Sugathadasa nor Mr. Karunaratne published their letters of resignation where they are believed to have set out their reasons for throwing in the towel. It is unlikely that the appointing authority, now looking for a successor to Karunaratne, would look up and spit by bringing the matters they have raised into the public domain.
The blaze of publicity surrounding Karunaratne’s departure drew public attention to the reality that the regulator was not being left alone to properly do his work. It has been obvious over a long period of time that there was manipulation of the market with so-called penny stocks driven way above their fundamental values. Profiting from the herd instinct, some manipulators earned big bucks. The stock market boom attracted many small and unsophisticated players to trade in shares, many of them with borrowed capital. They have been severely burnt when the market plunged. Big players allegedly employing a `pump and dump’ strategy, are also reportedly holding large portfolios of shares with relatively weak fundamentals now trading way below the levels at which they were acquired. A strong regulator is anathema to wrong-doers and these are the people now accused of baying for Karunaratne’s blood.
It is unfortunate that President Mahinda Rajapaksa was drawn into this controversy. The president is also the finance minister and the SEC is part of his turf. He would naturally be concerned at the slump in the market for several good reasons. A share market that is doing well sends out positive signals on a country’s economic health. If there was more to the slump than the play of market forces, intervention at a high level may well be necessary. Small people getting hurt as a result of under-regulation or over-regulation, as the case may be is also a matter that would have obviously bothered the president. But any perception, right or wrong, that he was backing this side or that must be avoided. Some wrong signals seem to have gone out on this score and that is to be highly deplored.
Mr. Charitha. P. de Silva, who was Chairman of Aitken Spence and Co. for many years, has said in an article published in this issue that the decline in the share market is largely attributable to a market correction from the unrealistically high levels to which it had been pushed up. De Silva accuses manipulators of taking the market up there, making fortunes for themselves in the process. That is something that must be subject to investigation which in this day and age is less complicated than earlier due to easy tracking of all trades and those engaging in them. There are reports of 17 ongoing investigations and allegations that there has been pressure to abandon them. Both Sugathadasa and Karunaratne have been considered upright regulators and it is essential that whoever is appointed to succeed Karunaratne is seen as independent and impartial. The last Chairman of the SEC was known to have won both the cooperation and respect of the vast majority of the staff of the agency which is funded by a levy imposed on every transaction that takes place on the Colombo Stock Exchange. So it is those who buy and sell shares that pay to ensure that the integrity of the market is maintained and the rules are followed.
Baron Rothschild, an 18th century British nobleman and a member of the well known Rothschild banking family, is credited with saying that ``The time to buy is when there is blood on the street.’’ That may be the reason that stock market participants are taking comfort from the fact that there has been a foreign inflow into the market this year despite the sharp tumble. Obviously investors would not buy over-priced shares and the sharp market correction have made some stocks with sound fundamentals attractive to foreign players as well as many high net worth local investors. These are segments that can ride out slumps and depressions, and are not looking for an immediate return. But dividends too are important and Mr. C.P. de Silva whom we have quoted earlier in this comment has once again advocated an all-round increase of dividend payouts. Some companies, notably those like Ceylon Tobacco, Nestle and Chevron that are foreign controlled, distribute very high dividends. That is something their foreign shareholders would naturally desire especially in the context of the weakening rupee we have seen recently. Such policies naturally benefit local shareholders who are a small minority interest.
Sophisticated investors know that an investment in shares has three components – dividends, capital appreciation and the right to express their opinions at annual general meetings of quoted companies. The last of these is not a matter of great interest where a company is well managed and is fair to its various stakeholders. While dividends are important, capital appreciation is what can provide the best returns. Traders look for this, many in the short term and others in the medium and longer term. A poorly regulated market where malfeasance such as manipulation, insider dealings and other violations abound will quickly lose its vitality. Many of these ills are believed to have infected the Colombo Stock Exchange and it is important that the regulatory process is strengthened and is seen to be strong for the much needed recovery to happen.