Financial Times

SEC probes strange price hikes in low valued stocks
The Securities and Exchange Commission (SEC), has begun investigating the sharp stock price increases in recent weeks, carefully picking through the myriad transactions used to camouflage efforts by over zealous stockbrokers and retailers to manipulate the market to make a quick buck.

The regulator is believed to be poised to summon stock brokers involved in the unusual transactions, and perhaps even the investors, as speculation mounts that the bubble created by the artificial inflation of prices of mostly low valued, illiquid shares could burst anytime.

The Colombo Stock Exchange (CSE) has queried 25 companies, or over 10 percent of the 242 listed firms, about the strange movements in their share prices for no apparent reason. But none of them have been able to say why their share prices have increased in such bizarre fashion.

"We have queried about these price movements from 25 companies to ensure that equal information is given to the investor," Sureka Sellahewa, Senior Manager Listing and Surveillance at the CSE said. The SEC Act bans artificial price manipulation in share prices.

"It is largely local retail speculators who are playing the market," said one market watcher. "Hundreds of investors have been buying these shares at varying price levels. It's a bubble now and it's going to burst one of these days."

Some market analysts said that retailers are being manipulated, as stocks with no fundamental value have been palmed off on them, but others said that some of the retailers are in this together with the stockbrokers.

Neomal Gunewardene, Senior Partner, Nithya Partners said the market is definitely being manipulated, because there is hardly any value in the stocks that have moved up in price. "Ultimately, the unsophisticated investors, (investors from rural areas) will get caught at the top with the highest prices with these low valued stocks," he said.

Bogala Graphite, Asia Capital, Royal Ceramics, Nawaloka Hospitals, Asian Cotton Mills, Radiant Gems International, Touchwood, and Central Securities were some of the stocks whose prices went up in the most unusual manner in the past few weeks.

However, the CSE is mindful that the fundamentals of a company are not the only reason why stocks go up in price. "The CSE is a reflection of the future as well, other than the present," its Director General, Hiran Mendis said. He said that a company's stock price movements will also depend on how investors see that firm's future growth and expansion plans. He reiterated that the job of the CSE is to disseminate information equally to investors so that no one gets an undue advantage. "That is one of the main reasons why we inquire about irregular price movements in a firm, and to learn whether there has been any information a certain individual or group had been privy to that others had not known," he added.

Meanwhile, some stock analysts argue that some companies are unaware of the stock price movements, although happy about it, because a particular group or individuals are behind it.

Dimuthu Abeyesekera, CEO, Asha Phillip Securities Ltd., said that retailers should not invest in the market if they are not aware of what they are buying. "Retailers should know the potential, future prospects and the profitability of a particular firm when they buy its shares," he said.

However, some stock analysts said that the market can be manipulated and literally 'cooked up' easily, because there are so many low valued illiquid stocks.

Chinthaka Ranasinghe, Head of Research, John Keels Stockbrokers said that in principle a market where prices are driven by demand and supply cannot be manipulated. "The only way it can be done is when related parties buy and sell shares among themselves and create an artificial price," he said, adding that the CSE is far from perfect and there is room to manipulate the market.

"We can say manoeuvring of share prices has been there because the market has seen investors with two to three million rupees jacking up the prices on a limited number of shares," an analyst said.

Namal Kamalgoda, Chief Investment Officer, Eagle NDB Fund Management Company Ltd., said that sudden hikes in share prices of low cap stocks are not specifically seen as investing on fundamentals, but it cannot be helped in a developing market, such as the CSE. "This is not strictly 'investing' and not necessarily healthy in the long term for the market, but these trading patterns happen in the short term in a developing market," he said.

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