A total of 20 cases of suspected market malpractices which included two insider dealing, two front-running, one circular trading and 15 price manipulations were referred to the Securities and Exchange Commission for further investigations and necessary action last year, according to the Colombo Stock Exchange (CSE) annual report for 2011 says.
The CSE's Regulatory Affairs Division resolved 44 investor complaints during last year. "These included mainly purchasing and selling shares without client consent and churning which is excessive trading in client accounts and credit extension in client accounts without their approval," Surekha Sellahewa, CEO CSE told the Business Times.
She noted that, enhancing size and liquidity have always been concerns and that fundamental transformation with emphasis on engaging both the state and private sectors in the capital market is necessary in order to strengthen CSE's position as an attractive venue for investment and raising capital. Some 112,473 new accounts were opened during the year and Ms. Sellahewa said that this growth in deposits and accounts was due to the mandating of dematerialization by the SEC for new listings of securities with effect from 1st January 2011.
The relevant SEC directive also mandated that all shares of listed entities be dematerialized by 1st January 2012 with a further extension granted to 30th June 2012. Explaining CSE's transformational plans, Krishan Balendra, Chairman CSE in his statement has said that laying in place a cohesive risk infrastructure, implementing state of the art technologies, enhancing CSE's products, optimizing attractiveness as a vehicle that meets domestic demand for investment and capital raising, enhancing Sri Lanka's position as an attractive destination for foreign investment, restructuring CSE's processes and improving governance stand as priority.
He has highlighted that CSE has already earmarked better risk management as a critical and urgent need. "The implementation of the Risk Management System (RMS) was commenced in November 2011.
Having completed system development and back testing activities with the assistance of the National Stock Exchange of India, this margin based RMS has been deployed at the CSE," he has said in his statement. Ms. Sellahewa added that the deployment of the RMS at the CSE for testing by internal users has been completed and that all the broker firms have access to their exposure and margin figures through this system.
"Our debt platform remains an area which needs pressing reform and where the engagement of the state and private sector is paramount. In 2011 at Rs. 2.7 billion, the corporate debt market reported an improvement in total turnover supported by growth in corporate debt from a low base of Rs. 72.3 million in the previous year," Ms Sellahewa has said, separately, in her report, adding that last year's Urban Development Authority (UDA) debenture accounted for 99% of corporate debt market turnover and was the only instrument available for foreign trading. In 2011, equity turnover remained over the Rs. 500 billion mark first reached in 2010, sustained mainly by domestic trading. "Contribution to turnover through domestic trading increased to 90% of the total from 81% recorded in the previous year. We have prioritized the implementation of certain structural changes to attract portfolio investment flows as this skewed investor mix is not optimal for the long term development of the exchange," she has said. Last year the benchmark All Share Price Index (ASPI) closed the year down 8.5% whilst the Milanka Price Index (MPI) fell 25.9% year on year and the market capitalization was preserved at just above Rs. 2.2 trillion reflecting minimal change from the previous year.
The market was dominated by domestic investors during 2011 according to the CSE report which also said that foreign investors remained net sellers during the year, recording net outflows of Rs. 19,039.2 million. Domestic participation sustained the turnover for the year at Rs. 546.3 billion where total turnover for the year reflected a drop of 4.2% from 2010. The report also said that the market capitalization remained steady at Rs. 2.21 billion as at year end as against Rs. 2, 2105 billion in 2010. However, in US dollar terms, the CSE's market capitalization recorded a decrease of 2.4% Ms. Sellahewa has said that 13 new companies listed through Initial Public Offerings (IPO) during 2011 raising Rs.19.2 billion in initial capital in comparison to Rs. 4.3 billion raised in 2010.
"In total, 16 companies listed equity by way of introduction during the year, collectively, the 29 equity listing added 13.9 billion shares to the quantity indexed," she added, noting that 2011 marked a five year record in initial listings on the CSE. She has also said that through the debt market Rs. 1 billion was raised through one IPO whilst four debt issuers were listed through introduction.