Wed, 2011-08-10 12:11 — editor
Business & Finance
By J.A. Fernando in Colombo
Colombo, 10 August, (Asiantribune.com): Thousands of Sri Lankan retail and foreign investors, who invest in Colombo Stock Exchange (CSE), are awaiting for Sri Lanka’s regulator to consider on revising certain regulatory measures that resulted in stock market crash.
But it is learned from industry sources that Former CSE Chairman Nihal Fonseka of DFCC bank and recently appointed CSE Chairman Krishan Balendra of John Keells Capital and Vajira Kulatilake, CEO of the NDB Bank's Capital Markets Cluster are in a move to reduce retailers participation in Colombo Stock Exchange by appealing to regulator not to revise rules on facilitating broker provided credit for retailers.
“They want to reduce the retail participation which is the major market force in the island nation’s only capital market by asking the regulator to not to revise rules,” a top investment banking industry’s Chief Executive and a member of Colombo Stock Brokers association said.
“Nihal Fonseka, Krishan Balendra and Vajira Kulatilake are in a move to approach regulator before the commission meeting that would conclude the revision of rules related to broker provided credit” he said.
Subsequently, 24 stock brokers among 28 functioning stock brokers in the country except John Keells group led John Keells Stock brokers (JKSB), Cargills group led CT Smith Stock Brokers and three non members of Colombo Stockbrokers Association including Murtaza Jafferjee led J.B. Securities, Claridge Stockbrokers and Somerville Stockbrokers had not agreed to facilitate broker provided credit to Sri Lankan retailers who has been representing 44% of active contribution to the daily market turnover in the country at a recently concluded meeting of the brokers.
“There is a last minute attempt by Fonseka, Krishan and Vajira to stop regulator revising the rule on broker provided credit. These few individuals believes in a Sri Lankan capital market where rich get richer and general public continue deposit their savings in banks where banks can make money through public funds,” another Chief Executive from a brokering house said.
Early August this year, the Colombo stock market started to fluctuate due to poor communication that was believed to have taken between the stock brokers and the regulators in the country. It was later learnt that the Securities and Exchange Commission (SEC) Director General Malik Cader received a letter from brokers appealing on facilitating broker provided credit for retailers much later on 1 August 2011, whilst brokers confirmed it was delivered to Cader on Friday the 29 July 2011.
Reports that time said that despite the sudden 6.8% rise in Colombo stock indices last week in July that aroused positive investing sentiments in Colombo retail traders on brokers’ re-appealing to regulator on facilitating credit, later the first week of August market tumbled again after a news statement that quoted SEC Director General Malik Cader as saying that he had not received any letter from stock brokers. However later Malik Cader had told reporters that regulator is considering a request to relax credit rules by stockbrokers who have asked to be allowed to provide credit to customers, at least up to their net capital. "It has received the attention of the Secretariat," Malik Cader had told reporters later. Brokers said they have sent a letter on July 27, addressed to the Chairperson - SEC and acknowledging receipt was obtained.
Accordingly, the letter by Colombo Stock Brokers Association stressed that large numbers of local individual investors with share portfolios of less than Rs.1 million who were unable to obtain Margin Trading facilities have been forced to sell or have left the equity market in recent times. And from 1 January 2010 to date there had been a net foreign outflow of Rs.34.6 billion and from 1 January 2011 IPOs, Rights Issues and Private Placements have absorbed over Rs. 50 billion from the Colombo Stock Exchange. “These are the natural mechanisms by which an expensive market becomes an in-expensive market, thereby, eliminating the need for any regulatory restrictions,” brokers noted in their letter to regulator
In the letter it explains that the local individual investor contribution to market turnover increased from 22% in 2008 to 44% in 2010; and that the All Share Index (ASPI) has declined by 16.8% from 14th February 2011 while the Milanka Price Index (MPI) has declined by 24.3% from 1 October 2010. Brokers in their letter points out that each market day has become a T+5 force selling day for all Stock Broking firms which has led to a large number of clients’ shares been forced to sell daily on to the buying quotations which in turn is moving lower and lower, and thereby precipitating a continues drop in the market prices.
According to the letter the main reasons for the market to drop are non voluntary sales which result in prices going down, cascading margin calls and more forced selling and the letter proposed three main proposals that were received an overwhelming ‘Yes’ vote from the majority of Colombo Stock broker membership during the meeting held on July 25.
Subsequently, in its first request, brokers had requested to allow all brokers to lend their net capital which is in excess of minimum net capital requirement of Rs. 35 million. “Therefore, the compulsory force selling on T+5 rule also will have to be removed as the broking firms can gradually force sell when it is fully utilizing its excess funds” brokers noted adding that this is because broking firms in any case can take their excess funds out of the company in the form of dividends and do anything they wish to. Secondly, brokers have also demanded that all brokers should be allowed to transfer the excess net capital in the broking company to the wholly owned margin trading company licensed and regulated by the SEC, without deducting from the net capital. Brokers had further requested that to the best of their knowledge, most broking firms presently have proper systems and procedures in place to monitor debtors and had expressed glimpse of hope for a favorable decision speedily, to avert a continuous decline in the market.
Industry sources outline that twice best performed Second best capital market in the world Colombo Stock Exchange started to collapse since August 2010 when former fund manager of DFCCC and Namal Asset Management, Chandu Epitawala who is the present Director Surveillance of Securities and Exchange Commission submitted a paper considering to put a price for rising Colombo Stocks and when Sri Lanka’s tall thin accountant type Sujeewa Mudalige of Pricewaterhouse Coopers (PWC) provided his expertise to hamper the broker provided credit for retailers.
On the contrary, Sri Lanka’s Colombo Stock Market performance had been tumbling faster according to industry analysts since 15 June 2011, when Sri Lankan authorities appointed Krishan Balendra of John Keells Capital who facilitated two overpriced initial public offerings deals-Expolanka Holdings (EXPO) and Softlogic Holdings (SOFT) that made a few rich individuals and families and institutions in the island nation taking higher capital gains at the expense of retailers and share investing general public.
Appointed as the CSE Chairman from 14 June 2011, Krishan Balendra is responsible for JKH Group’s Retail sector, Corporate Finance and Strategy function as well as stock broking operations at John Keells Stock Brokers and the son of former John keels Chairman Kandia (Ken) Balendra. It was said that Krishan Balendra was appointed at the Annual General meeting of CSE on 14 June this yearwithout contest or another nominee for the post of CSE Chairman and the appointment was unanimous. Krishan is said to be the the senior most member of the CSE Board (appointed in March 2008) whilst at 38 years of age he is the youngest Chairman of Capital market which is now low performing due to lack of interest by retailers.
Krishan is the President and member of the Group Executive Committee of John Keells Holdings (JKH) and is also a Director of Union Assurance and Nations Trust Bank. He started his career in investment banking at UBS Warburg Hong Kong and was at Aitken Spence and Co PLC., in corporate finance prior to joining JKH. He holds an LLB (University of London) and an MBA (INSEAD). However, top market analyst in United States and Sri Lanka notes that Krishan Balendra ‘at one stage was associated and managed Lankan investments of Galleon Fund led by alleged US Hedge Fund inside trader Raj Rajaratnam who found guilty on 14 counts on May 2011 in what was called to be America’s largest inside trading case that made Raj gaining over US $ 60 million profits according to reports. Raj Rajaratnam, was the biggest investor in Sri Lanka’s stock market at a time when country was fighting against LTTE Tamil tiger terrorists’, and Raj started exiting from his Sri Lankan investments slowly in late 2009 and 2010. That time Rajaratnam had 8% of John KeellsHoldings PLC (JKH), and a 20% in stock brokering firm Lanka Orix Securities Ltd, now known as Capital Trust Securities Ltd. The investments of Rajaratnam and Galleon funds in Sri Lankan shares were valued at about Rs.13.3 billion ($115 million) as of 19 October 2008 in 12 listed companies, according to estimates. That time Galleon had a stake of about 8% in DFCC Bank Ltd., where Nihal Fonseka was the Chief Executive Officer and 6.1% percent in National Development Bank Ltd. (NDB) where Vajira Kulatilake is the CEO of the Capital Markets Cluster and 2.8% Chemical Industries (Colombo) PLC (CIC); 3.4% of Commercial Bank of Ceylon PLC (COMB); and 13.5% in Touchwood Investment Ltd.(TOUCH).
In another development Nihal Fonseka who is the former Chairman of CSE and CEO of DFCC Bank had said in an annual review of last year’s Colombo Stock Exchange annual report that from a national perspective, over dependence on the banking system for credit is not desirable, and a larger corporate debt market will provide strong support to the ambitious national development agenda of the government, Former Chairman of Colombo Stock Exchange (CSE), Nihal Fonseka pointed out.
Fonseka had further stressed that in the latest annual report of CSE says that in the euphoria surrounding the performance of the equity market, the corporate debt market in the country has received very little attention. He goes on to explain that the high level of liquidity that prevailed in the banking system and the relative ease with which good quality borrowers can still access bank credit have made it difficult for the Lankan debt market to take its wings. “A large and liquid corporate debt market is an essential component of a capital market.” Fonseka says adding that the situation in Sri Lanka is in stark contrast to other markets where the value of listed debt is significantly higher, sometimes being twice or thrice the value of the equity markets.