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Buyer beware!

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1Buyer beware! Empty Buyer beware! Sat Oct 12, 2013 8:34 pm



The Colombo Stock Exchange, with the cooperation of the Securities and Exchange Commission, Friday hosted an event to encourage more listings on the CSE. This has been an ongoing effort over a long period of time with market booms encouraging listings and the reverse holding true when times were bad on the stock market. While there are many good reasons for encouraging capital market development, questions on both the efficacy and the efficiency of the regulatory framework has surfaced time and again. The Golden Key mess has still not been sorted out and unfortunate depositors who are yet in the company’s books can hope only for the refund of part of their capital swallowed by that company. As for the interest on their money, the best thing that those who have been burned can do is to bear the pain and forget their dues. They don’t have a hope in hell of recovering that component. Despite the blaze of publicity about what happened at Golden Key, there are still people who will trust less than reputable deposit takers with their money. The fact that other finance companies are in trouble post-Golden Key is evidence of that reality. It is an economic maxim that reward follows risk and there will be those willing to risk their savings for high interest offered by dubious entities. Whoever said that a sucker is born every minute certainly got it right.

Touchwood is another case in point. Punters on the Colombo Stock Market are putting their money into that company’s share and by all accounts are taking trading profits despite the very funny goings on in that quoted entity. The last few weeks have seen directors come and go from that company at a speed that boggles the imagination. Some of them, including a controversial Member of Parliament, remained on the board for only a few days. Chairmen and chief executives have been coming and going in the fashion of clients entering and departing bordellos, but the Touchwood share remains one of the most traded in the CSE. The Chairman of the company and his wife who was once its CEO has left the country and did not show up at its recent annual general meeting. But a video featuring them was played to those shareholders who attended the AGM assuring that new investors were coming in and new money was being infused. A winding-up application is before court, the SEC which says it is investigating the company suspended trading of its shares for a few days, but trading has resumed. The public has not been told what the result of the investigation is.

Many traders on the CSE have made money on the Touchwood share. That company’s business plan of growing high value timber like teak, mahogany and sandalwood utilizing depositors’ funds and rewarding them richly post-harvest caught the public imagination. Growing timber trees is a long gestation project as it will take many years for the trees to reach maturity. It is unlikely that many investors have actually visited such plantations and seen their rupees at work. But many of those who put their money into the company would have been reassured when its share price gained and the lucky among them would have taken trading profits as many hundreds are doing today. Those who waited (or are waiting) for the trees grown with their funds to be harvested and the timber sold will, we suspect, be less lucky. But where do the regulators come in? It is the business of the SEC and the CSE to ensure a disciplined and orderly market that complies with listing rules and other laws. We do not think that the regulators’ remit extends as far as checking whether listed companies are doing what they have told their shareholders they would do, for example plant and properly maintain high value forestry plantations. That, we believer is the business of the shareholders.

Unfortunately, few company shareholders take the trouble to diligently follow the affairs of the companies in whose shares they have invested. They are quite content if a good dividend is paid and the share is doing well on the stock market enabling a capital profit if they choose to exit. Today there are some relatively small shareholders who attend annual general meeting of their companies and raise questions, some pertinent and others less so, and get answers. In fact Mr. Harry Jayawardena, the well known business leader, praised the high attendance of shareholders of the Distilleries Company of Sri Lanka of which he is Chairman at its recent AGM. Some shareholders are attracted to these meetings by the small gifts that are sometimes distributed and the refreshments that are served. As we reported in our business pages on that occasion, Distilleries shareholders got a pack of Uva tea, produced by its subsidiary, Balangoda Plantations, although some of those present would have preferred a bottle of arrack and said as much requesting a hamper to celebrate the company’s centenary! However that be, shareholder presence and questions serve the salutary purpose of keeping management on their toes.

We do not know whether the shenanigans at Touchwood, including the breathtaking ins and outs of members of its board of directors, are part of the regulatory remit. We would suspect not. But common sense makes clear that there is obviously something wrong in a company where such things happen. While some profit is possible, and indeed many small traders are now making such profits in the context of the vigorous trading of its share, the wiser among them would be conscious of the fact that they may well be left holding a can of worms if or when the bubble bursts. They would therefore not invest in companies with dicey track records run by people whose reputations are not the best, however alluring instant trading profits in their shares may be. Many blamed the Central Bank for the Golden Key failure, forgetting altogether that it was not a licensed deposit taker regulated by the bank. Human nature is such that they would not blame themselves for not smelling a rat when unrealistically high interest rates were offered.

2Buyer beware! Empty Re: Buyer beware! Sun Oct 13, 2013 6:29 am


Manager - Equity Analytics
Manager - Equity Analytics

Well balanced article and sound advice to the small time investor to protect his meagre earnings thanks once again

3Buyer beware! Empty Re: Buyer beware! Mon Oct 14, 2013 9:08 pm


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics

Fantastic article. Only miising factor CIFL fiasco.

Crapwood is a can of worms which would eventually rest in the hands of smallholders.

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