Sri Lanka’s capital markets is poised to perform extremely well with the economy slated to reach US$ 100 billion by 2016, opines Heraymila Securities CEO/ Director, Ravi Abeysuriya.
“Sri Lanka is a growing country which will grow between at least by six to seven per cent, even though according to government’s estimate it is eight per cent. Furthermore the Central Bank expects a 100 billion dollar economy in 2016. Even if we fail to reach that we will make around US$ 85 or 90 million economy. If so capital market has to be at least US$ 60 - one of the best our country could achieve while US$ 45 billion could be indicated as the worst case scenario. As Sri Lanka’s bourse is still at US$ 17.5 billion which means it has to at least triple, giving wider room to grow,” Ravi Abeysuriya said in an exclusive interview with Ceylon FT.
Here are excerpts of the interview.
Q: Why do you think investors disbelieve and mistrust the investment industry and financial advisors?
Nowadays people make it a point to join and invest in the Colombo Stock Exchange (CSE) without proper knowledge about investing. What happened in 2009 and 2010 with the economy enjoying the peace dividend, the market went up by 94% in 2009 and 130% in 2010. This is the best example to showcase as a huge number of ordinary people started investing merely to get huge profits without having proper knowledge about the risky side. Many were thinking only about the soaring market values despite the great possibility at the vicinity of the likelihood of the market plummeting down the other day.
The general public at large without comprehensive knowledge of investments was encouraged by a certain set of investment advisors to borrow and invest in the market without limits. It is good and intelligible to invest in a soaring market but still they must maintain the limits as it is usual that one must face the procedure of paying interest when you borrow.
The stock market that may skyrocket today has the tendency to plummet fast, as this is the way any bubble works all over the world. Possibility to experience a downturn in the stock market that is soaring high at a time is unavoidable. Unawareness amongst investors about investing made them face dreadful experiences in such a descend which they never expected before, with many losing millions and some even losing billions of rupees. Aiming for an enormous profit within short term was the objective of most of our investors and obviously that has become the noticeable reason for the aforesaid mistrust although they should have patiently looked forward for a better harvest in investing in the long term. Ultimately one cannot accuse only one party, but both parties; investors and investment advisers must take responsibility for the mistrust.
Q: What do you mean by a ‘false market’?
A market where prices are manipulated and impacted artificially is known as a ‘false market’. Most people make it a point to buy stocks without limitations when the market goes up with the intention of selling overnight. Even though buying is the most important thing in a stock market, some greedy and avaricious investors keep on buying stocks.
Sometimes the screen shows lot of buy orders that tends people to rush and keep on buying. According to my point of view this is against member regulations and what is drifting those people to do so is their unquenched thirst to make more money during a very short time period which is unsustainable. On the other hand professionals must not indicate huge buy orders when there are only small amounts of shares available, as that will result in making many excited and rush to buy. This always leads to the loss of long term sustainability.
Q: Can you explain the impact of a false market if it is allowed to continue?
I don’t think that they (the Regulator) will allow continuing this, as several investors have been already reprimanded. Actually what is more crucial is the consciousness of the public. What is badly required is that all must comprehend the ugly side of this and if not once in a way this should be injected into them. In reality investors have been warned. But to prove perpetrators guilty before courts, criminal action must be instituted which is very difficult and time-consuming in Sri Lanka and takes years to see an end. I know how difficult it is to prove such cases in courts as it takes a very long time to finish it. Yes we were able to finish such a case after undergoing so many difficulties as it is such an agonizing exercise. Also there is compounding for such offenders. Actually compounding means you are guilty: guilty as charged.
So at this moment people have been warned about the gravity of such deeds. However when the Securities Exchange Commission (SEC) Act introduces civil penalty, there is a clear financial consequence.
After the amendment is introduced whenever any wrongdoing is investigated that can result in making a conclusion easily and quickly. So according to my point of view most of the time false market won’t go on recurring once the new SEC Act is in place.
Q: Do you think the impact of a ‘false market’ is limited only to the stock market?
Definitely a false market has an impact on the whole economy because the role of the capital market is facilitating funds for productive investments. If you are having an efficient system which is fair to all, investors can come into the stock market, price the Initial Public Offerings (IPO) accurately, raise money and have a return. In situations of sell downs where private placements take place let us for example say at six rupees and the IPO at Rs 14, it is unreasonable as big investors who took part in the private placement make money while the retailers who invested during the Initial Public Offering (IPO) lose money. In such cases there’s no doubt investors lose confidence in the market.
The responsibility on one hand lies with the investment bank as they are the party that prices but certainly on the other hand investors also must be responsible as they are not going to read the prospectus but just invest in IPO’s with only one intention: selling. This must be restricted as it is something going to have an impact with retailers who invest later on will lose money. Both the investors and investment banks must maintain sound good self-control and to invest with an idea of long term perspective.
Q: What changes are needed to overcome the badly-grown mistrust in the minds’ of investors?
In my view, it is none other than but the industry itself which should regulate itself. Every profession needs to have a particular set of code of ethics in order to preserve sustainability within the industry. We should learn from our past mistakes and this has not happened which is why the public has lost confidence. Now it is time to regain lost confidence and trust of the public whereas financial advisors need to be truthful at the same time taking a longer term view.
Sequentially to rise above this present condition it is the responsibility of the industry to overcome the current crisis by being truthful and not look solely at short term profits which will end up with lot of devastations for both investors and investment advisors. On the other hand industry should have self – discipline and self-regulation. Of course, in addition to code of ethics and conduct, oversight of the SEC and CSE are required but over time if everybody realizes we need to protect the profession and get our act together for the betterment of the whole industry things can be easily addressed. So in this case the industry itself must be proactive because everybody suffers for just one person’s wrongdoing. This is not something that has happened only in Sri Lanka but also in several other countries such as Singapore, Hong Kong, US, and UK so on.
Q: How can the investment industry practically workout a set of code of ethics?
Although Code of Ethics would not help you need enforcement. However having a Code of Ethics per se is not going to help as the power of code of ethics lie on enforcement. Enforcement means there should be an independent body having the right to take people to task when a wrongdoing is committed. If so if you breach the code of ethics there is a process triggered which is clearly defined how you’re being taken to task and it will be done objectively by an independent body without having a conflict of interest. So enforcement plays a major part when it comes to practically experiencing the code of ethics allied with the major objective of investigating the particular investor accused.
Disallowing the right to be employed as a Registered Investment Advisor (RIA) – a qualification granted by SEC, that’s the worst case. Then we have private reprimands, public reprimands (‘naming and shaming’ publically) which is much severe than previous one, banning the particular advisors designation for a particular period and forbidding the licence (the most worst of all the aforesaid) This a process that can be done through an independent body set up by the CSBA (Colombo Stock Brokers’ Association) with the participation of the SEC and CSE.
It has to happen someday. Now in most other professions it is there but it is regrettable disciplinary processes don’t take place in most. In practically working out such code of ethics and conduct what is more important is to make people see that ‘justice should not only be done but seem to be done’ just as the oft-quoted aphorism states.
Hopefully CSBA will hopefully by end of this month come out Code of Conduct and also a procedure. However there should be a constant dialogue amongst all stakeholders and I think even pressure from the investors side. Everyone is always talking about the problem but not the solution so this is the solution.
Q: Why hasn’t the investment industry of Sri Lanka attempt to draft a Code of Ethics so far?
Unfortunately Sri Lanka did not have such initiatives unlike countries such as India, Australia, UK, US and New Zealand. I suppose if we are to follow any initiatives as a role model it is the New Zealand model that I would reccomend. Code of Conduct practiced by the investment industry of New Zealand as it is more effective, as the responsibility of regulation lies on the association. Then maturity of the industry must also come first and it is still not enough only to have just a set of code of ethics or conducts that is not going to practically use in front of the public. Enforcement is again the essential key not the code of ethics. Ultimately if the whole industry suffers, everybody lose their earning capacity which is really going to hurt and the association is the one who must be responsible for that.
Q: Observing all these aforesaid issues, wide-spread knowledge about investing is essential. Can you relate some of the tangible steps that can be taken to alleviate not only lack of knowledge but also any fear psychosis that may be present among the general public?
Commencing initiatives for the wide-spread of knowledge on this sector is undoubtedly vital as the knowledge among the public is highly inadequate, especially amongst adults; every adult has to have some knowledge about how to safeguard his or her capital. Investors especially in a country like Sri Lanka has a very poor knowledge and as a result are greatly vulnerable in getting caught in the hands of illegal investment companies. The other extreme is that they try to protect it so much but lose the purchasing power due to inflation. Whatever little bit of money one has, you have to build it up so that when you retire your money is always protected and is available for you.
What is more effective is to enhance knowledge on capital markets commencing educational programmes at academic level even just after O/L s because it is the foundation that will remain throughout your life.
Apart from this actually it is very commendable that the SEC in collaboration with Sirasa TV has already commenced to telecast a live television series named ‘Warana’ on every Sunday from 10 a.m. to 11 a.m. from 27 January 2013 onwards focusing on this basic foundation on how to invest in the capital market including unit trusts. Accordingly it is far better as media is the best way to reach people and “Warana” is going to impart proper knowledge and awareness on capital market across all sections of society as it is going to assist not only existing investors, but also potential investors, university students as well as school children.
Q: How do you see the future of Sri Lanka’s capital market?
Sri Lanka’s capital markets will do extremely well. Sri Lanka is a growing country which will grow between at least by six to seven per cent, even though according to government’s estimate it is eight per cent. Furthermore the Central Bank expects a 100 billion dollar economy in 2016. Even if we fail to reach that we will make around US$ 85 or 90 million economy. If so capital market has to be at least US$ 60 - one of the best our country could achieve while US$ 45 billion could be indicated as the worst case scenario. As Sri Lanka’s bourse is still at US$ 17.5 billion which means it has to at least triple, giving wider room to grow.
What is prominent is to sustain a successful growing rate is to have ‘demand’ and ‘supply’. We need to have more companies listed and sustain a higher market capitalization while those two has to happen hand in hand. If Sri Lanka’s corporate sector is to grow you will need more finance and there are two types; equity (shareholding of the company) and debt so both these two sectors will grow. That is why I strongly believe that there’s a lot of room to grow and lot of space for investors to make money in the capital markets provided they do it cautiously and with right advice in the long term not short term.
Q: What is your opinion of State-Owned Enterprises (SOEs) being listed? Will this help the market capitalization targets set by the government and lead to proper and a better management of these entities?
State entities being listed is not something related with the government policy in anyway. People have a wrong notion in their minds that if you list 10 to 20% of an SOE it is privatization. Actually this is something that the general public should get rid of. Privatization means selling a government entity or a state asset to someone.
Listing is more or less broadening the ownership to a wider set of the public and this will lead to bring in professionalism, governance and transparency to a public entity.
For example we can take Sri Lanka Telecom. Government still owns 50% or more so it doesn’t mean it is ‘privatized’ . But this change has helped in creating more efficiency and corporate governance. Trade unions were not at all happy. But the fact is that a Telecom user those days to get a telephone had to wait years or bribe somebody.
Imaging if SLT was still publicly owned and you have to wait one year to get a phone in such a case nobody will buy a phone, but since there is competition and there are alternatives SLT has become more efficient.
So it is high time that we should change. So what I am to say is listing is not privatization, it is always broad-basing the ownership. Meanwhile government should think also think of listing at least a part of People’s Bank, Bank of Ceylon, NSB so that they become better managed SOEs. May be in time to come restructure and list SOEs like CEB, CPC, SriLankan Airlines.
Q: How do you deal with the problem of liquidity on one hand while retailers might not be attracted to invest in high-priced shares on the other hand?
Yes that is another major issue because they can easily buy a decent number of shares and diversify if there are lot of low value shares. But the bigger problem here is the liquidity per se because number of shares available in the market is very low.
In fact in my budget proposals I have indicated this liquidity issue where I proposed that the companies that maintained excluding related parties about 20% should be given a special incentive. However the government came out a slightly different incentive where if you list the company would entitled for tax incentives. I wanted this liquidity addressed so we want more shares in the bourse excluding related parties. Now what has happened is if you take even the listed number of shares, most of it is held by related parties where it is the company’s public float which is non-related is very low.
So this doesn’t help in price discovery which means that there are enough buyers and sellers and there’s a free exchange of shares. So then the price will reflect the true value of the company. All this talk of market manipulation will be out and nothing called ‘false market’ can happen when there are sufficient quantities of shares. So the fundamental issue can be addressed by ensuring sufficient liquidity. The problem when we do that is we may lose certain listed companies if you try to enforce that. That is if we bring that rule some may decide to delist. That is the problem and that’s why I brought the tax issue where if you maintain more than 20% holding outside related parties you are given special tax incentives.
Q: How do you encourage companies to become more liquid?
We have been telling companies particularly that which have high value shares to split. I think Richard Peiris did but there they over did it. You should be having the right balance rather than do something too much. If those companies really have right-priced shares, this will lead to more trading and I said lead to more liquidity and price discovery. Both these will happen and that is something which can be encouraged by CSE, to have right-priced shares. Actually this is a simple thing called stock split and doesn’t affect the shareholding at all.
Q: What would be your message to the investors and to stakeholders associated with the industry?
Investors get carried away with short term returns and investment advisors are also not necessarily saints. Their remuneration is based on commissions as you know. What happens in most places is that when investors come saying they want to buy most investment advisors and stockbroking companies say buy and buy more.
Now if you come and ask us we will not advise you to buy when the market is overbought. When we say wait that means no business for me. But many others are not going to do that because of commission. So the incentive structures are also leading to unethical practices. In other words the system is such that it’s not really helping the person to get the right advice.
However, for us due to our reputation and upbringing, we don’t want to give the wrong advice. You need lot of disciplined for that. Lot of people may not be that disciplined and investors too get carried away because they always buy when the market going up. When we advise them based on fundamentals to buy they don’t want to do so because the market is crashing and coming down.
So this is a major issue which is again called ‘behavioral finance’. It’s all to do with human behavior. You as an individual will always like to see it going up before you make that call. But as professionals we are different as we only tell you to buy when the market is low.
Some smarter investors who bought before the war ended in 2009 and exited before end 2010 enjoyed over 30% return. What is prominent in such case is to make sure that you are disciplined, self-controlled and not too greedy. Same time you have to have holding power and be willing to wait a long time.
Our investors in Sri Lanka are unfortunately very much short term-minded expecting higher returns. So as a result if you ask for more as investment advisor you have no choice but to get you to invest in not so good shares because those are volatile, they fluctuates. So sometimes if you buy such a share you may make a 10% gain by next day. But if you invest for example in John Keells instead at Rs 180 which is a fundamental share. Although many fundamentally-minded advisors encouraged no one bought JKH whereas biggest taker was a Malaysian sovereign fund which bought Rs 14 billion worth of John Keels shares and now it is around Rs 224. So my advice is - invest low when the market is down while waiting patiently for your opportunity and don’t get carried away.
What is ‘market liquidity’?
In business, economics or investment, market liquidity is an asset's ability to be sold without causing a significant movement in the price and with minimum loss of value. Money, or cash, is the most liquid asset, and can be used immediately to perform economic actions like buying, selling, or paying debt, meeting immediate wants and needs.
What is 'Compounding'?
To compound a capital market offence means is to settle a charge. Part IV and Part VI of the SEC Act currently provides for the imposition of fine and imprisonment for breaches of the Act. Section 51A empowers the SEC to exercise its discretion to compound an offence under the Act having regard to the circumstances in which the offence was committed. The maximum amount for compounding which may be offered is limited to one third of the amount of the maximum fine provided in the Act for the said offence. The sums of money received by the SEC from compounding an offence is credited to the Compensation Fund established under section 38 of the SEC Act. 2 The cancellation and suspension of a licence granted to a stockbroker or stock dealer is under section 21 as per the circumstances provided in paragraphs (a) - (d) of the said section. The cancellation or suspension of licence granted to a managing company operating a unit trust are under the circumstances provided for in section 31D (a) – (e). The SEC is also empowered under section 21A to suspend or cancel the certificate of registration granted to a market intermediary under section 19A of the SEC Act based on grounds similar to those provided under section 21(a) – (d) of the SEC Act.
The offence of market manipulation and front running are prohibited under Rule 11 – 14 of the Securities and Exchange Commission of Sri Lanka Rules Published in Gazette Extraordinary No 1215/2 of December 18 2001 (SEC Rules). Breach of a provision of these Rules is an offence under the Act by virtue of section 51(1) of the Act.
Section 33A of Part 4 currently deals specifically with the punishment for the offence of insider dealing. A person who is found guilty of insider trading and convicted may be liable to a fine of not less than one million rupees or to imprisonment for a term not less than 2 years but not exceeding 5 years or to both fine and imprisonment. There is currently no framework for civil enforcement.