Sunday Times Business 15.09.12
Sound fundamentals, a runaway market or positive developments through the appointment of a ‘market-friendly’ regulator are the questions surfacing in the Colombo stock market these days. Another sticky issue is labelling of media as pro-market or anti-market.
The media is meant to report events as and when they unfold and analyse developments in an objective and unbiased way. Hence attaching labels by some high net-worth investors like this is not only unfair but just going after the messenger and allowing the crooks to have a field day.
The Colombo bourse has surged by an 800-point rise or 18 per cent increase in the key index since Nalaka Godahewa took over as chairman of the Securities and Exchange Commission (SEC). Sure, his appointment must be a positive development because of his ‘market-friendly’ or do we say ‘friends in the market’ attitude. The appointment itself was controversial, even before it was made. Godahewa is chairman of the Colombo Land and Development, a listed company, and chairman of Divasa Finance, but stepped down from the board and sold his shares in the latter firm, two days before he was appointed.
Both companies are controlled by powerful investor Dilith Jayaweera in addition to George Steuart Finance(formerly Divasa Finance) in which Godahewa has a five per cent stake. The latter company was doing well in the market this week.
Godahewa is also chairman of the Sri Lanka Tourism Development Authority, a role which is in conflict with his position at Colombo Land and Development Co (CLDC), as we clearly pointed out in a story on August 26, 2012. That story referred to an April 2012 communique to the Colombo Stock Exchange(CSE) by CLDC where it referred to the planned construction of a tourist hotel.
The Tourism Act says that any member of the Tourism Authority (referring mainly to the chairman) involved in a company that operates or provides tourist services of ‘any class or description” is disqualified from holding this position.
Economist and Opposition parliamentarian Harsha de Silva however says this issue is nothing compared to the multiple conflicts of interests created with Godahewa’s appointment “when he is directly involved with persons who are alleged to have committed securities fraud or the ‘mafia’ as described by the former SEC chairman”. He said there was manipulation to make the CSE the best performing market, adding that “in a country where there is absolutely no respect for law and order, where crime is committed with impunity and with the total backing and even public appreciation by the powers that be, where there is no morality or ethics and where crooks and thugs have become the custodians of the wealth of the nation and its people, what is to be expected? It will not be long before the people rise up against these criminals”.
The rise in shares in the Colombo market is a reminder of the 2010 scenario where prices surged to unbelievable levels, was labelled the best performer in the world and then crashed. Blame was directed at the regulator for certain rules that restricted trading. However the biggest problem was the interest in some junk stocks which saw a phenomenal and amazing rise though these companies were doing badly at the time. Similar scenario this time? The junk stocks are doing well again though one may argue that the heavy foreign investment is mainly in respected stocks, which is also responsible for the improved sentiment.
Aside the criticism, one must commend the SEC directive to Watawala Plantations to appoint new independent directors as the current ones don’t ‘fulfill the criteria” of the CSE.
The appointment of independent directors has always been an issue because they are picked by the controlling interests of a company.
This newspaper and K. Vignarajah, an investor who fights for the rights of minority investors, have constantly raised issue over these appointments. In the Watawala case, the independent directors are nominees of Indian-based Tata Group which has a stake in the plantation company. Vignarajah has been proposing for the election of independent directors to be made by independent minority shareholders so that they are ‘truly’ independent, a practice now adopted in the West. While money is flowing into the stock market, it is unclear as to its source and whether some or most is from credit.
A credit-based expansion of the market is not a good long-term development and can create a bubble that would eventually burst, a concern that confronted Indrani Sugathadasa when she was chairperson of the SEC in 2010/2011. Retailers and small investors generally follow the crowd and the herd instinct because they want to get out of the market with profit-taking the moment their stock price rises.
That kind of activity should not be construed as a buoyant market. However at the end of the day, perceptions matter and what is seen is a vibrant stock market though whether it is a long-term development is anybody’s guess.
As we have repeatedly stressed the rule of law must prevail at the bourse and the new, market-friendly SEC must engage all investors in developing the market without compromising on these rules and regulations.