The All Share Price Index is a market capitalization weighted Price Index. The Market Capitalization is multiplied by the Price Relative which is the price for the day divided by the price during the base year. Generally the base year is 1985.But when there is a new listing such a base year price is not available to determine the base price? The Stock Exchange takes into account the Reference price. But what if the opening price is not the reference price? Using a low Reference price will exaggerate the price changes for the day. This I suspect is what happens when the new companies are listed through an ‘Introduction’. If so the Index will not reflect the true state of the market.
Although the reference price was given by the Company as Rs 5.00, the trading did not show any bid or asking price at Rs 5.00.Why? According to the Asian Tribune the company had sold its shares after a 2 for one split at Rs 5.00 after first making a Rights Issue at Rs 10. It says the share now costs the LOLC only 0.70 cents. Were all this disclosed to the investors in the introductory document? The Document said “There are no shares being sold privately or in conjunction with this Introduction” after the issue of 100 million in October 2010, to Lanka ORIX Leasing Company PLC, by way of a Rights Issue. There is no reference to a share split after that.
Why did the company give such a low reference price? On what basis were the reference price determined and what its relationship to the valuation is either on earnings basis (0.63) or net asset value? The share has traded even at Rs 22 which is several times the reference price. But the price has dropped now to Rs 12 or so, causing enormous capital losses to retail investors. Who decides the reference price? Is it based on an independent valuation as is required for listings via an Initial Public Issue? Should there not be an inquiry by the authorities regarding the adequacy of the disclosure and the reference price?
I think it is better to exclude the shares of the Diri Savi Board from the computation of the All Share Price Index. Perhaps a separate Diri Savi Board Index should be prepared and published.
The market must be made more attractive to long term investors by making the market more transparent. As for speculators they must know that they run big risks in a bear market when they speculate. Speculation itself is not necessarily a vice, but its participants must be absolutely willing to accept the fact that they are risking their principal.
The writer is an economist and is the General Manager of a Colombo based stock brokering firm. You can reach him via email@example.com