“This job was not something I asked for. Given my track record, it came my way. So, I don’t have to do anything special to keep my job. I just try to execute the responsibilities vested upon me from the SEC Act. Since I accepted this job, I have been losing financially, as I no more can invest in stocks. So, earlier I get out, it’s better for me financially,” says Dr. Nalaka Godahewa, who was appointed Chairman, Securities and Exchange Commission (SEC) last August, following the very public and controversial resignation of Thilak Karunaratne.
Godahewa was a prominent figure in the country’s private sector, starting his career at MAS Holdings as a management trainee and then to become its youngest CEO later. His last private sector job was at Sri Lanka Insurance (SLI).
“I quit Sri Lanka Insurance to concentrate on my PhD. But after 18 months, SLI was taken over by the government and there was a lot of pandemonium. So, they wanted somebody who understood the business, to function as the competent authority. They found out that I was the last CEO at SLI and I was contacted and asked whether I could become the competent authority.”
According to Dr. Godahewa, it marked his entry to the public sector. Then the government offered him a top post in the tourism sector—which can again be viewed as a damage controlling job—as there were a number of individuals prior to him took short spells at it.
“I was quite happy there. But then as we all know, the SEC was going through a difficult time and because of that, the President asked me whether I could come in and assist to stabilize the situation. This was how I came to the SEC. All my public sector jobs came because there was a necessity and they felt I could step in. When I came, I found out that it was a very exciting job,” Godaheva reminisced.
Two sides of the coin
Although this was his side of the story- how he ended up in the high seat at the SEC- some were seen to be having a different story to tell altogether.
Allegations mounted that his powerful friends, some of them who were believed to have engineered the ousting of Thilak Karunaratne, were behind placing him in the top seat to safeguard their own interests and escape the high profile investigations the SEC was said to be conducting at the time.
“As I said, I didn’t ask for this job and therefore, I have no major desire to protect this seat. I don’t believe anyone asked the President to appoint me. I’m not here to safeguard anybody’s interest but to look after the development of the capital market, thereby supporting the country’s economy.”
“I was in the private sector for about 17 years and any Chairman or CEO in this country I can call by their first names. Very rarely you find a person who doesn’t know me. Is that a crime?” he queried.
Rush of adrenaline?
It was no secret that the mere speculation that Godahewa was going to be appointed the SEC Chairman pushed market indices up and after a few weeks of him assuming duties, the Colombo bourse, which was amongst the worst performing markets, became the third best performing market in the world, according to Bloomberg data.
According to some, this uptick in the market was an unsustainable demonstration- probably a temporary rush of adrenaline by those high net worth investors who wanted Karunaratne out. But for others, it reflected the return of positive sentiment into the market, following the appointment of Godahewa. Meanwhile, a word was coined to identify the new regulator as a market-friendly regulator.
“That’s the term they coined even before I assumed this post. I think they were looking for a market-friendly regulator because they would have had a feeling that the regulator was not market friendly.”
“I am a regulator and I have a role to play which is very clearly defined in the SEC Act. If we stick to that, we are friendly to the country, economy and the market. But that doesn’t mean, out of personal friendships we’d favour somebody. If we go by the Act, everybody—the economy, companies, brokers and investors will be benefited. So, what we are saying is, do the right thing and do it lawfully. If you work within the legal parameters, we will support you. And I’m very clear on one thing. This is where I think people have identified me as market friendly. I understand there are two roles regulators have to play. They are market development and regulation,” Godahewa explained.
Once bitten, twice shy!
As the new regulator, he said that he waited for the hype to subside and sanity returned to the market- but not the retailers. Once bitten, twice shy! Godahewa himself admits that he is yet to meet a retailer, who really made money during the infamous market rally prevailed from 2009 to 2011. Media reported that some investors- the anonymous retail investor- as one broker report put - lost their life’s savings, gambling on the stocks that they didn’t know anything about.
But again, the SEC, the Colombo Stock Exchange (CSE) and brokers are trying to bring back the people into the market. More lambs to slaughter? One cannot refrain from asking that question.
“I have a simple explanation for that. Even during 2009-2011, very few people were operating in our stock market. The number of people in the market is very small and most of them are playing without any understanding. And the market was performing in a very unusual manner, where huge growths couldn’t be justified by the asset values. In a scenario like this people burning their fingers is quite possible.”
“But the good news is everybody went through that learning cycle. The government, regulators, brokers, investors and all other market stakeholders realized that something seriously went wrong. Now everybody’s more cautious and vigilant. Under these circumstances, we can bring people to the market more carefully and that’s why we are giving this much emphasis on investor education,” Godahewa stressed.
He further noted that not only the small investors but several big investors also burnt their fingers during this market rally.
Where are the thieves?
When the regulator himself believes that something really went wrong during those two years and a lot of people lost a lot of money, what happened to the perpetrators? Mind you, we posed this question to Dr. Godahewa reminding him of a statement made by the previous regulator that ‘the market is full of crooks’.
“Whoever can be found and proven should be punished. You can’t punish anybody without proving. There’s a system and we have to go through it,” Godahewa said, pointing at certain limitations in the SEC Act.
“If you look at our Act, all our cases are criminal cases. It doesn’t have civil sanctions. Criminal cases have to be proven beyond doubt and therefore, they are difficult to be proven. That is why it takes time. Just because we suspect somebody doesn’t mean we can go and punish somebody. The SEC has to go to courts and prove beyond doubt that this offence has been committed. It is a lengthy and time consuming process. So, it’s disheartening for people who are waiting for a decision but the reality is that,” he explained.
The new amendments that are proposed to be included in the SEC Act contain proposals to impose civil sanctions, so that the regulator can act faster against market malpractices and punish the culprits. According to Godahewa, this will relieve the prosecutor, which is the SEC, with the burden of proving somebody is guilty beyond doubt at courts.
“After the new Act, we will be able to go to Civil Courts. In civil cases, the judge can take a decision based on probability. That is why all over the world, most of the regulators have now resorted to civil sanctions.”
Former SEC Chairman Thilak Karunaratne told media, just before his controversial resignation, that the SEC at that time was investigating 17 cases of market misconduct. The popular perception was that with Godahewa succeeding him, the investigations would be shut down, given his purported affiliations.
“The investigations are ongoing and some have already come before the SEC Commission and certain decisions have been taken. But the point is, by talking of 17, the expectation was given to the media and the general public that there were 17 culprits who need to be punished. Just because there are hundreds of cases before the courts, does that mean everybody’s wrong?
According to him, some of these investigations have come before the SEC Commission and different measures have been taken, where some have been reprimanded and warning letters issued with.
“Just because people want all 17 people to go to jail, it cannot happen. A road accident and killing a person are two different things,” Godahewa argued.
As he noted, several offenders have already been issued with warning letters and a compounding case is currently being discussed at Commission level.
An argument that was brought in by some of the large investors who invest in the CSE was that instead of the SEC sending warning letters to them, the regulator should commend them in maintaining the market at positive levels, even during the civil conflict.
“I don’t think it’s our job to commend anybody. Instead of sending commendations, we can stop sending warning letters to them, if they are doing their investments within the legal parameters,” Godahewa commented.
In his first press conference as the SEC Chairman, Godahewa presented a 10 point market development plan, adding another to the history of capital market development plans that were little materialized by the SEC and the CSE.
“Under this 10 point plan, we have clearly set out objectives. We know the country’s road map and the role of the capital market in it. Unlike earlier, we also have got everybody aligned. All the market stakeholders have been consulted and policymakers and the President briefed. That’s why Minister Sarath Amunugama himself presented this 20 point plan during an award ceremony recently held,” he stressed.
He also said that the SEC has identified key groups to implement each point and both the SEC and the CSE are monitoring the progress.
“We have very clear action plans and since we have told the public about them, they would also put pressure on us to deliver. Within the next three years, we will be able to accomplish most of these objectives and at least one or two in this year.”
Godahewa believes that the two key points, the SEC Act amendment and demutualization of the CSE, will take place by the end of 2013.
“That’s the expectation. If not for procedural delays, we believe that those two key points will be achieved during this year. Likewise, every point has an action plan and a time frame,” he noted.
During this press conference, the role of media contained a large part of his analysis for the market downfall. And quite interestingly, interest rates and other macroeconomic factors such as fiscal imbalances took a back seat. In fact, this view even led to a rather heated exchange of words between a journalist and Godahewa. Has this perception changed? We queried.
“What I said was media affected the market. But then, some of the journalists very correctly explained that media write what they have been told. So, what happened was what the media had been told by the higher ups at that time, which the media took to the public, damaged the market sentiment,” Godahewa said explaining stance on the matter.
“In comparison, if you now look back last two month since our press conference, the media have been absolutely responsible. I even mentioned this at one or two forums as well. Media will act responsibly, if the people who talk to media act responsibly.”
Soon after the assuming of duties by Godahewa, a major reshuffle was effected with the inter-exchange of responsibilities amongst several senior officials, fuelling the perception that heads would roll following the new regulator’s appointment. Subsequent to that, one director resigned from his post.
“Although some people will have various interpretations to this, what we did was an organisational restructure that happens in any institution. The management has the prerogative to put the right people in the right place and it has to be a continued process. In fact, currently, we are looking for suitable people to fill certain key positions in the SEC. The regulator should be strengthened in terms of human resources if we are to deliver what we have undertaken,” Godahewa noted.
He further said that he was sad that one director decided to leave the SEC due to personal reasons. “The director who resigned has very clearly written to us it was a personal decision.”