Business Times

Insider trading? ‘Nothing wrong - we all do it’-top investor says

By Quintus Perera

Insider trading is inevitable in a market like Sri Lanka and for this reason regulators should not apply rules pertaining to insider dealing to the letter, a powerful and influential investor in the marketplace has urged.

The CSE trading floor

Nimal Perera, Deputy Chairman, Vallibel One Ltd - who along with another influential business personality Dhammika Perera, currently Secretary, Ministry of Transport are powerful investors, individually and jointly in the stockmarket -, told a panel discussion on ‘Insider Trading in the Capital Market” that the market here operated almost entirely (including themselves) on insider dealings.
He valiantly defended his actions, sounding at times (to the audience) as a threat that if such investors pull out of the market the entire system in Sri Lanka is likely to fail.

His main assertion was that insider trading should be seen in the context of ‘intent (whether someone intends to pass information for profit)” or ‘non-intent (just discussing information in good faith without intending to profit from it)”.

Mr Perera’s controversial remarks justifying insider trading (the way he saw it) drew a lot of comment and discussion at the event in Colombo this week organized by the Sri Lanka Institute of Directors (SLID).

On regulations and how they should be applied, he said that whatever said and done insider dealings would be irreversible as it is the force behind the Sri Lankan market. He said that most of these investors used to meet each other in funerals and parties, etc and when they meet they would also discuss about business and spontaneously speak of the performances of their corporate achievements that would sometimes form ‘inside information’ which is genuine and spoken with ‘good-faith’.

As an example he said when he goes to a funeral he would meet an ‘aunty’ and casually speak to her of the excellent achievements of his company and the discussion might slip to what is called ‘inside information’ and that information this ‘aunty’ might pass on to her ‘boyfriend.’ Asanga Seneviratna, Director, Nations Lanka Finance, another panelist, acknowledged some of the sentiments expressed by Mr Perera.

The other panellists were Murtaza Jafferjee, Managing Director, JB Securities (Pvt) Ltd and Malik Cader, Director General, Securities and Exchange Commission (SEC) of Sri Lanka. The moderator was Aritha Wickramanayake, Senior Partner, Nithya Partners. The discussion to some extent appeared to be a dialogue between the ‘angels and devils’, with capital market traders despising the regulations and justifying insider dealings. There were accusations that information is leaked allegedly by some SEC officials and this fact could be proved if their telephone conversations are intercepted.

Mr Cader and Mr Wickramanayake insisted that rules and regulations should be in place for the sake of equality and to create a level playing field. Mr Cader said that most people do not know the provisions regarding insider dealings and they plead ignorance, but cautioned that ignorance is not acceptable under the law. He said that a well regulated market does not harm the capital market. The markets have recognized that information is very important. He said that the company directors have to be mindful of their shareholders and directors.

He said that there are two forms of insider operations viz legal and illegal. The legal form is where the ‘insiders’ should make proper disclosures to the public and to the market and the illegal way is that one deals with securities with no disclosure to the public and market. He said that some insiders pass the unpublished information to selected dealers informally in buying or selling which constitutes an offence.
He said that there should be a certain amount of transparency and integrity in these dealings and there should be a level playing field. He said that there are investors who have privileged information and there are investors who do not have such access and those with privileged information have an edge over the others.

Such offenses in Sri Lanka under Section 33A of the SEC Act are subject to penalties of upto Rs 2 million and/or two years’ imprisonment, probably the highest in the world. Such laws are also available elsewhere in the world. He said that they are striving to bench-mark the Sri Lankan capital market industry by adhering to ISO International Standards and if not they would be left out as international traders are here to see whether ISO is in place and said that they need also to look at corporate governance.

Mr Jafferjee based his presentation on a paper “Standard II: Integrity of Capital Markets” and said that those with inside information and special access can take unfair advantage of the general investing public. Though it would lead to short term profits, in the long run individuals and the professionals will suffer from such trading.

He said that it would cause investors to avoid the capital market as they would perceive the markets are ‘rigged’ in favour of the knowledgeable insider. Mr Perera, who was in a challenging mood, castigated the regulatory network as ‘chit’ and said that as the Sri Lankan market is so small the regulator network would not work and without inside information they would not be able to continue. He said that regulations and monitoring the insider dealings would kill the market indicating that if he receives a letter from SEC on account of insider dealings he would be reluctant to go before SEC and make a statement. He said that rather than facing such embarrassment, he might as well, pull out of the market.

He said that many people in this country are ‘Kuhakaya’ (hypocrite) and ‘kuhakayo (hypocrites)’ are found only in Sri Lanka as there is no parallel word for it in the English language. At the outset of his comments he pleaded that he was not so conversant with the English Language as he was from Pinnawela Central (College). (Reporter’s note: He was wrong – the English word for Kuhakaya is hypocrite – page 694 in the ‘Malalasekera English-Sinhala Dictionary.)

He said that ‘kuhakayo’ are those who complain of purported mistakes of others and enjoy when the so-called offenders are punished, but the complainant does not gain anything by the punishment to others, suggesting regulators too are in this category.

He explained the depth of ‘kuhakakama (hypocrisy)’ in Sri Lanka by saying that President Mahinda Rajapaksa is the saviour of this nation and they (he) expected 98% of votes at the presidential elections, but the President polled only 52%. Mr Perera castigated all others who voted against President Rajapaksa as ‘kuhakayo’.

The moderator, Mr Wickramanayake said that though there are stringent laws in the statute books and though the law pertaining to insider dealings is very clear, it is difficult to apply them and thus punishment is rare. He said that it is wrong for the traders to plead ignorance to the provisions of the law pertaining to insider dealings as he said that the capital market is 20 years old in Sri Lanka and it is time for the market to be matured.

Corporate Governance: Urgent Action Imperative
By K.C. Vignarajah

A seminar on “Insider Trading” organized by the Sri Lanka Institute of Directors (SLID), reminded me of an old film, “Set a Thief to catch a Thief”. The proceedings were such that the identification parade was not necessary! The challenge now is in the nature of “Catch me if you can”. Is the Securities & Exchange Commission (SEC) prepared to take up the challenge and effectively protect innocent, decent investors?

There was another humorous instance when a panellist (Nimal Perera) stated that when he was attending a funeral “my aunty inquired as to how my company was doing and I told her happily that it had made more than a billion rupee net profit. The following day my aunty’s boy friend bought the company shares and made a huge profit”. The panellist then said that this was not insider trading. I told him that he could give his aunty this information, provided that he told the aunty at the CSE much earlier! I also pointed out that there was a picture showing more than a thousand potential investors, mostly youth, attending a promotion in Galle organized to expand the investor base.

I commented that it was like herding the lambs towards the wolves, unless the SEC and the CSE took effective action to curb the predators. I am also encouraged by the excellent sentiments expressed by Krishan Balendra, the new Chairman of the CSE (who is also its youngest ever) in the previous SLID seminar on corporate governance in July 2011. It seems to be that he is following in the footsteps of his illustrious father, who set such great standards in corporate governance, dividend payouts and shareholder friendliness at JKH.

From the audience, Khalil Masood, a former Chairman of the Pakistani Stock Exchange and an investor here, said US regulators last year collected US$2 billion in fines for insider trading and distributed that among the victims of insider trading as compensation payments. This is a good move to emulate here.
The SEC must be heartily commended, inter alia, under the determined and honest leadership of Ms. Indrani Sugathadasa and the dynamic executive ability of Mr. Malik Cader for:

1) Introducing the price band as a speed breaker to reduce the impact of “pump and dump” groups. This would have been more effective if the Board of Directors (BOD) were required to declare the current and forecast Earnings Per Share (EPS) and all other factors that would significantly impact on the price changes. This could be augmented by a circuit breaker system for a couple of hours, if an unusual pattern of trade emerges, until the management clarifies, and the reasons posted on the CSE web site.

2) Requiring that private placement investors hold their shares for at least one year in their own name.

3) Requiring an equitable allocation of shares under IPOs. However, the decision on a minimum public float has still not been enforced, although we made representations on this October last year. The earlier requirement of a minimum public float of 30% should be continued as that was fair, and a constituted a compact with the investing public.

4) Our understanding is that violations are being noted, companies required to correct, and the investing public advised in a mild manner. However, stern action on abuse of the breach of trust perpetrated on investors is now required, considering the state of the market.

Steep Decline in the Share Market-Some Causes:

  • Forced selling by brokers due to curtailment of credit imposed by the SEC. The initial act was required until the errant brokers who misused the facility were detected.
  • Lack of broker credit and funds.
  • Blanket restrictions on broker credit: Now there is no justification for such restrictions, as the culprits have been identified. Normal business should be restored. Prudent credit to known customers is the essence of any business.
  • The new process of getting credit through new margin traders is difficult, cumbersome and costly for the investing public.
  • Lineup of too many IPOs and ‘Introductions’ capturing investors funds. The great worry of the investing public is that the public float is very low; in fact perilously close to the percentage where the Controlling Interests (CIs) could apply for delisting at their will. (The optimistic inference on the part of the investing public is that the SEC and the CSE have realised that “Delisting” is a fraud perpetrated on them ; in fact a heinous crime of breach of trust after unjustly enriching the promoters/CIs.)
  • External Factors: Instability in the US and EU, political upheavals in the Middle East and problems in the Japan, following the tsunami, earthquake and nuclear disaster.
    Some glaring instances of bad Corporate Governance.
  • Rampant insider trading.
  • Lack of transparency, suppression/delay of material information affecting informed investment decisions, resulting in Independent and Minority Shareholders (IMS) losing out hugely to those with inside information.
  • (CIs) creating “shareholder fatigue” through:

Very low dividend payout or sometimes no dividends at all. w Suppression/non disclosure of true asset values. The delay in the implementation of the International Financial Reporting Standards (IFRS) in Sri Lanka, despite their having been adopted in 112 countries, most of whom do not have the accounting talent that Sri Lanka possesses.

  • Sudden restructuring, very often involving related party transactions, affecting shareholder and/or asset structure of subsidiary/associate companies to enrich the controlling interest and related parties, while depriving IMS of great values.
  • Lack of independence of the “Independent Directors”, the external auditors and even the company secretaries (who write minutes to suit the controlling interest dictates).
  • Lack of the minimum ‘Public float’ of 30% affecting the liquidity and marketability of shares.
  • Subtle threats or Hints to ‘Delist’-This is a vast subject linked to creating ‘shareholder fatigue’, suppression of material information, and ‘insider trading’ etc to reduce the public float. Such moves should be countered by the SEC, conducting investigations for the past five years to ascertain as to how the CI increased its shareholding at the expense of the public float. Those directors and CIs voting for delisting, from now on, should not be permitted to be directors of PLCs, in addition to being subject to other financial penalties and punitive measures.

(The writer is a former chairman of Ceylon National Chamber of Industries and a veteran investor in the market who often stands up for the rights of minority shareholders, small investors and governance in the marketplace.)

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