Business Times

SEC: Changing the goalposts

Across the countryside, now, including Jaffna small investors are being wooed through seminars and workshops to invest in the Colombo stock market. Encouraging new avenues of investment is necessary for investors looking for ways of maximising their savings beyond banks or finance companies where interest payments are low.

While the focus of these seminars by the Securities & Exchange Commission (SEC), the Colombo Stock Exchange (CSE) and private organisations are to show the benefits and advantages of investing in the stock markets, there is little or no cautionary note about what one should not do, the risks – speculating on stocks, taking unlimited credit and asking for more (credit).

And look how many have burnt their fingers, taking unlimited credit and finding their stock values falling.
Is the SEC effective? Is it strict, too strict or ineffective? The SEC Chairperson Indrani Sugathadasa was quoted in the media as saying that they are prepared to jail anyone guilty of violating the laws. But is the SEC ‘courageous’ enough to do so in the midst of powerful investors who have connections to the top? Or, like the SEC says, taking action against violations like insider trading is difficult to prove due to lack of evidence? These are questions being persistently asked in the market.

The latest furore over the credit squeeze has thrown up all kinds of views and theories with December 31, 2011 being the final date for debtors to settle (all) their dues with brokers. Currently investors have up to three days after trading in a stock to settle payments while for those who have utilized part of their portfolio as broker credit must settle this by December. Under current rules no credit is permitted, a rule which some investors are urging should be revoked. One of the problems in the market is that either way the SEC is criticised for enforcing or not enforcing the rules.

This week some small investors were complaining that some ‘nice’ brokers are lenient in the T+3 rule which stretches to T-5 where payments must be made within this period of a trade, if not the broker has to sell the stock. There are other complaints that some brokers are selling the stock even before the T+3 period ends. On both counts, brokers and investors are breaking the rules.

Investors like K.C. Vignarajah, a former Chairman of the Ceylon National Chamber of Industries and vociferous proponent of the rights of small and independent investors (not linked to any group), argue for the restoration of credit saying that it’s not fair to penalize the entire segment of small investors because a few have resorted to buying beyond their means.

The latest problems appear to have arisen with the changing of the goalposts on the deadline for settlement of debt which was first planned for December 2010. After a few ‘false’ (planned dates) starts which created havoc in the market, the deadline now is December 2011. The ‘stop-start’ approach by the SEC and the last deadline extension saw a broker commenting, “Not to worry, they’ll change it next week,” reflecting the credibility and doubt about SEC decisions.

In today’s context with an active, often-frenzied market where many of the small investors are not clued into fundamentals and understanding of finance and balance sheets, any decision taken and deferred can ruin one’s investment. That is clearly seen in the shifting of the goalpost (deadline). Furthermore the same is seen happening in the flow of IPOs that have private placements or private sales where the price is lower than the IPO price. In most cases, small investors were unaware of the existence of an earlier placement, in some cases clearly indicated in the prospectus available on the CSE web, which some investors may not have access to or be ‘savvy’ enough to check out. Thus when such stocks open for trading, they are traded lower than the IPO price but much higher than the placement price.

With the Colombo market place drawing all kinds of bouquets (best performing market) and brickbats (speculation, front running, insider deals), the bourse is moving out from a comfort zone to something like a risky venture – invest at your risk as small investors have discovered, partly due to their own fault.
Speculative trading and deliberately driving the market up or down is a serious issue resorted to some investors. Recently a director in a listed firm died of a heart attack from shock after a particular stock he held was pushed down sharply in value (by some investors) resulting him losing millions of rupees since he had borrowed three times the original value of the stock.

Rumours are afloat that some big investors and brokers are opposed to the call for broker credit to be restored as the current squeeze helps these investors immensely. Some brokers and investors believe the SEC went the right way in restricting credit in an effort to prevent a bubble but managed it badly thereafter by changing the dates. “Rightly or wrongly the SEC must stand by its decisions,” one broker argued. The wayward policy and to-and-fro decision-making find small investors buying on speculation on what the SEC’s next move is or what the CSE is doing, rather that looking at the progress of the company. For example, the market surged on Thursday, a day after the SEC had dispassionately discussed at a meeting the credit issue and was rumoured to be favourable to relaxing the restrictions. What transpired at the meeting was totally different as the commissioners wanted more time to discuss this issue.

Companies are showing good results in this quarter but these fundamentals are not taken into account in trades. Rather it’s the erratic– illiquid and low priced – stocks that are being actively traded. Trading unfortunately is not governed today by how well a company is doing or not doing but following a herd mentality. For this both the regulator and the investor must share the blame for the lack of awareness of the risks, and investing while knowing the risks. The large mass of small investors must be guided in making investments based on ‘informed’ decisions, not on speculation.

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