By Shamindra Kulamannage
It’s encouraging, despite the challenges besieging it, that the SEC has not lost its sense of humor. On the home page of its website against an orderly school of fish framed against turquoise water it claims to be "regulating with a firm hand and reinforcing investor confidence, we have led the way in creating and maintaining a disciplined and orderly securities market." Anyone who had an eye on the unfolding drama in the last two years, when two SEC chairpersons had to leave office, may be excused for their hysterical fits of laughter. That and other statements exemplifying the agency’s high calling like, "We protect investors, offer security and operate a securities market based on fairness to facilitate a level playing field to all stakeholders," just goes to demonstrate the disconnect between the securities regulator’s perceived role and reality.
In the whole mêlée that undermined the securities regulator a number of well connected individuals intent in bending the stock market to their will and their crummy stockbroker friends established an unholy primacy with the SEC.
So when the regulator unveiled a 10 point plan to develop capital markets, the ambivalence of serious market participants to the rhetoric shouldn’t come as a surprise. There are two reasons for skepticism. Firstly the market has seen too many of these plans and no action whatsoever in over a decade for one to be taken seriously now. Secondly the challenge facing Sri Lanka’s capital markets are far more serious and of a more fundamental nature than can be addressed by the proposed plan.
For almost a century since the Colombo Brokers Association started trading shares in companies with limited liability, investment success was more about knowing someone privy to inside information than it was about a process of rigorous analysis. Some analysts point out that not much has changed despite the setting up of a regulator whose sole purpose is to ensure ‘that securities can be issued and traded in a fair manner’. None other than the former SEC Chairman Tilak Karunaratne, who had a front row seat to the on goings in Sri Lanka’s tiny capital market, described it as a ‘den of thieves’.
In a plan unveiled in partnership with the Colombo Stock Exchange, the securities regulator has undertaken afresh to implement pretty much every single policy that’s evaded action so far like amending its act – hopefully allowing it to impose sanctions commensurate with the seriousness of the crimes committed -, strengthen risk management at brokerages and such like proposals. However this comes in the backdrop of the agency having given in to demands by some brokers for easing rules allowing a freer flow of credit.
To regain lost confidence the regulator however should urgently turn its attention to its core challenges. One former SEC Chairman has clearly articulated the scale of that challenge. It needs to demonstrate the agency’s independence by perusing with rigour investigations against market manipulators. It would indeed turn to pulp its existing act and slide the agency in to further ridicule if investigations draw a blank or drag on any longer than they already have.
The prosperity of stockholders is beyond the regulators ability to ensure. If listed companies thrive because the economy grows, the country is well governed, and laws and regulations are respected, then stock holders will thrive because higher profits may push up share prices. Often this basic logic is forgotten when regulators and brokers promote the market as some get rich quick scheme.
In its 10 point plan SEC proposes encouraging more listings, attracting new funds, developing the corporate debt market, encouraging mutual funds as a conduit for mobilizing savings of less sophisticated investors and developing new products. Many of these will be contingent on a level playing field being available. Otherwise no local investor will feel safe in the market and no foreign portfolio fund will care to even look at it.
Instead of enduring the ignominies of the population, the SEC Chairman, its commissioners and senior staff should urgently address the fundamental challenges it faces. Or else the statements on the SEC website articulating its high calling, will remain comic relief in a market left ravaged by crooks.
(Courtesy: Echelon, Sri Lanka’s latest business magazine available for sale at Keells Supermarkets and bookshops. Echelon, published monthly, covers in-depth Sri Lanka’s most successful businesses, examining their winning strategies and profiling their leaders. It aims to set the benchmark for business reporting among magazines.)