Business Times

SEC crisis: ‘Judge not lest you be judged’

The latest developments in the Colombo stockmarkets have opened a can of worms with allegations and counter allegations flying sky high among stakeholders. While the market is on a downward spiral and most brokers, in it for the money, are calling for the dismissal of Securities & Exchange Commission (SEC) Director-General Malik Cader, some real issues are either ignored or kept on the backburner, particularly insider trading.

SEC Chairperson Indrani Sugathadasa is standing by her man, determined to ride off the criticism and pressure. Though she says there is no pressure, powerful investors particularly those whose names have figured prominently in trading deals in recent times – have ganged up, met higher-ups and pushing for Cader’s removal.

How well Cader and Sugathadasa will take the pressure remains to be seen. But it’s unlikely that the SEC DG could last for more than a few months given sharply falling turnovers, to some extent deliberately instigated by these market-moving investors.

On the flip side, Cader is no angel either drawing allegations from irate investors, causing one independent analyst to comment from the sidelines: “There is no smoke without fire.”
Powerful elements are preparing a dossier on the DG to back their call for the authorities to fire him, a move, if it succeeds, will backfire on the whole market.

Whatever the accusations, the authorities need to treat these issues separately – the current investigations against some investors and brokers and whatever allegations levelled against officials.
Both need to be probed; separately, and independently. The SEC cannot be browbeaten into submission by a powerful group of investors who think the world is at their feet. The SEC is there for the very purpose of ensuring the market is well, regulated, transparent and properly run. It cannot be run at the whims and fancies of powerful investors who are politically connected. Read convicted stockmarket fund manager Raj Rajaratnam’s words: “In Sri Lanka I would have given the judge 50,000 rupees and he'd be sitting having dinner at my house. Here, I got my shot. The American justice system is by and large fair."

One may disagree with the tone and tenor of this statement but cannot ignore the lack of credibility, transparency and governance in the Sri Lankan state which has led to those who call for true transparency now being among the ‘voiceless masses’ (the small minority of people concerned about the affairs of state but whose pleas fall on deaf ears, because their votes don’t matter in an election).
The moment that happens (SEC is controlled by political meddling), anarchy takes over (in the marketplace) and the law of the jungle wins. Ms Sugathadasa should be provided all the strength and power at her disposal to keep these elements at bay for the benefit of all stakeholders. But also without much ado, she should open a probe into the allegations levelled against some of her own officers – and clear their names, if they are indeed innocent. It should be an independent probe and should not have the slightest element of doubt in this process.

Investors complain that the current problems were caused by the credit squeeze that led to forced selling, resulting in big and small investors losing millions of rupees in the process. The chaos in the market came amidst probes against some small and bigtime brokers and investors some of whom are among those calling for Cader’s ouster.

The SEC on its part has also faulted in changing the goalposts in its decision-making over the past year on key issues, and, fair enough, drawn a lot of flak. A group of unnamed investors in a letter supposedly addressed to President Mahinda Rajapaksa and copied to newspapers, says something interesting. It said when the market crashed the SEC summoned 100s of investor/brokers to the head office and asked them why they were not buying blue chip shares and warned that any deviation would attract punishments.

“The SEC has been established mainly for regulatory functions and not to instruct broker/investors to advise what shares to buy. No regulator in any stockmarket in the world has done this,” it said.
They have a valid point. The Business Times did a cursory check of the role of stockmarket regulators in the world and this is what we found. Except for India and Malaysia whose role also permits ‘developing the markets’, regulators in Australia, Bangladesh, China, the UK and the US are essentially there to protect investors, and maintain fair, orderly, and efficient markets.

Sri Lanka’s SEC engages in promoting and developing markets but by over-enthusiastically encouraging Sri Lankans to invest in the markets, strays into a conflict of interest area between promotion and regulation. Promotion often leads to partying with the stakeholders. The other two regulators, the Central Bank and the Insurance Board strictly stick to the boundaries of regulation and protection of the investors/customers.

Over the years, the SEC has been able – or tried to, to a point-, to maintain that delicate balance of promotion and regulation. But this equilibrium has been unsettled in recent times, triggering the claims and counter-accusations. There is also a lot of hype over the ‘surge’ in the number of investigations by the SEC but the actual fact is that there are much more referrals (suspicious deals) handed down by the Colombo Stock Exchange for investigation than what is being probed today.

It is a ‘judge not lest you be judged’ scenario that has unfolded at the Colombo bourse. The only way out for the authorities is to firmly continue with the investigations at hand and not be coerced into quitting, while at the same time, probing the allegations of the SEC’s own officials. If governance, transparency, ethics and values is what the regulator and the Government is striving to do – and making such calls in the corridors of power, then this is the only way to be fair by all concerned. Let justice prevail; not personal agendas.

Undoing foreign investor interest
Every time the Government goes back on an agreement with a foreign investor, it sets a tremor amongst those promoting investment, including those at the Board of Investment. The issues surrounding the China National Aero-Technology Import and Export Corporation (CATIC) deal at Galle Face is a classic case of how not to do business, or for that matter how to unnerve foreign investors.

A World Bank study in May 2003 titled “What International Investors Look For When Investing In Developing Countries - Results from a Survey of International Investors in the Power Sector” concluded that many investors are guardedly interested in developing countries.

“The conditions they seek are those that reform-minded governments have within their mandate to ensure—the rule of law, respect for the rights of investors, and a judicial and regulatory process free of arbitrary government interference. They require stability and enforceability of laws and contracts. A clear and enforceable legal framework is also among the top priorities for investors. They want the ‘rules of the game’ to remain credible and enforceable—not altered at the government’s convenience once they have made investment decisions based on those rules. A government’s willingness and ability to honour its commitments are key (crucial),” it said.

The last recommendation is the key to attracting foreign investment – ‘a government’s willingness and ability to honour its commitments are crucial,’ - and the government going backwards on its promise and agreement of selling the land outright to CATIC is not only the kind of wavering decision-making and lack of accountability that we are seeing more often than not, but also smacks of discrimination.

From all available accounts, CATIC is furious over the turn of events and may sue the authorities for violation of fundamental rights and discrimination, citing the case of Shangri-La (hotel group) which secured the land on outright sale basis. While all recent land deals lack transparency and public accountability, the CATIC case leaves a bad taste in the minds of those eyeing Sri Lanka as a investment base. Lack of transparency and not sticking by the rules is what led to the reversal of the privatization of LMS, Water’s Edge and Sri Lanka Insurance. Now concern that the CATIC deal would similarly land politicians in the same soup, has led to a re-think on the deal.

The government’s initial plan to sell land on an outright basis has stopped halfway (after the Shangri-La sale and the reversal of the CATIC deal) and all land deals will henceforth be on lease terms, similar to the past practice.

The government is on a sound footing after winning, what many thought, an unwinnable war. They could have gone one step, nay many steps forward. Instead, in a frenzy to raise cash for development and recurrent expenditure, hurried decisions are made without any rational thought.

Bad or ad-hoc decision-making has been the hall-mark of the government, which was totally absent when it was taking the fight to the Liberation Tigers. Then there was no turning back or dilly-dallying on decisions.

Another area which it has stumbled on is the online visa and the exorbitant US$50 processing fee which saw the tourism industry, earlier told of a charge of some $10, protesting. Now the Government is re-considering this charge. Another ill-thought decision –not a good signal for foreign investors.
Though the Government’s front-line politicians would reject this argument, the fact remains that more than two years after the war ended, the only investment that is visible is in the tourism sector, and a few projects where Government ministers are personally involved. No one is rushing to invest in Sri Lanka – and it’s not difficult to find out why.

This column has acknowledged in the past that to attract the big, international investors like the Sheraton’s, Toyota’s, Microsoft’s, BMW’s, etc then some kind of special concessions may have to be offered, similar to what was offered to international chains like the Taj, Oberoi, Galadari and the Hilton to open hotels here. That’s not an issue. The problem is in the consistency when providing such concessions and the ad-hoc decision making that goes with that.

If CATIC takes the authorities to court, after a formal agreement was entered in and some $54 million paid, complaining of discrimination vis-à-vis Shangri-La, the government would have no leg to stand on other than undoing the Shangri-La deal. That again is unthinkable.

Such is the mess these deals portend. Further there are reservations in some government circles that crown land cannot be sold other than leased, another reason probably for the sudden nervousness of the Government to revert back to leases against outright sale. In fact work on a draft bill to allow for outright sale of crown land has been stopped at the Attorney General’s Department.

Whether China will use its political clout to ‘persuade’ Colombo to go ahead with the Galle Face deal is now the question – with India also being a factor. On top of these issues, a bill to take over ‘under-performing enterprises and underutilised assets’ has sent shivers across the corporate sector and, again raised the issue of transparency and questions of; ‘is this the right thing to do’.

There were worries that the bill would be more draconian than when Sirima Bandaranaike nationalized the estates and limited individual property to 50 acres. In the absence of a clear government statement (a perennial problem when decisions such as this appear in the media in which the public has a right to be part of the decision-making process), all kinds of speculation and fears emerged over the week.
Clearly statements on important public issues are not only necessary but a matter of public accountability in a properly-governed society.

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