Slow and steady wins the race. That appears to be the formula, with fresh winds blowing, at Sri Lanka’s watchdog stock market regulator, the Securities and Exchange Commission (SEC). Slow, it seems, is the way it is progressing in investigations that were shelved by the former administration. To add to the woes, still around at [...]

The Sunday Times Sri Lanka

Parliamentary probe on stock market ‘pump and dump’


Slow and steady wins the race. That appears to be the formula, with fresh winds blowing, at Sri Lanka’s watchdog stock market regulator, the Securities and Exchange Commission (SEC).

Slow, it seems, is the way it is progressing in investigations that were shelved by the former administration. To add to the woes, still around at the SEC are a few senior officials who went beyond their brief to woo the earlier powers-that-be. To the new administration’s dismay they continue to hold office and either block or slow the process of vigorously re-starting investigations against corporate fraudsters and white collar criminals who greedily resorted to ‘pump and dump’ in the market some years back.

This scenario is similar to what is happening at the Foreign Ministry where officials, who were at the beck and call of the former regime and did their biding, continue to hold positions. ‘Yahapalanaya’ means one is not guilty until decided by the law and thus these once arrogant and corrupt officers continue to hold sway. Action needs to be swift otherwise the public is losing patience with an administration that is only seen as talking, and not acting speedily against the enormous corruption that occurred during the last regime.

Pressure on the Government to deliver on what was promised may also be the reason why Prime Minister Ranil Wickremasinghe assured Parliament this week that a Parliamentary Select Committee (PSC) would be appointed to probe serious violations in the past few years in the stock market.

Thank heavens … he didn’t appoint a (in-house) committee – like the 3-member committee probing the allegedly, tainted Treasury bond issue – to oversee the manipulations of the stock market mafia.

The Prime Minister, in attacking mode in parliament, named and shamed prominent corporate personalities and professionals like Nimal Perera, Ranee Jayamaha, Ajith Devasurendera, Dinal Wijemanne, Dilith Jayaweera, Scott Newman and Kosala Heengama in driving home the corruption that prevailed in the past.

Conflict of interest questions have also been raised, in the past, over the appointment of retired Central Banker Dharma Dheerasinghe to the board of the Commercial Bank after heavy EPF investments in the banking sector. Along with him the appointment of Preethi Jayawardene was also questioned at that time. There are many others connected, directly and indirectly to the stock market whose names have figured in dubious transactions. All these need not only a proper but also a transparent investigation. Naming and shaming the earlier individuals seems unfair (furthermore protected by parliamentary privilege) if the due process of the law isn’t followed where they are able to clear their name if there is no evidence to prove they were guilty. On the other hand, finding hard evidence is what is grappling the Government at the moment as in many instances the culprits have left no paper trail or vanished with the files or hard disks!

PM Wickremasinghe has taken the right step in recommending a parliamentary-led probe which is as independent as it can get to investigate the stock market.

While a parliamentary committee could also include MPs who backed corrupt individuals who are being probed, this is still a welcome and transparent move unlike the step taken by former President Mahinda Rajapaksa to force the removal of Thilak Karunaratne (a few years after his predecessor Indrani Sugathadasa resigned in disgust over pressure from the ‘mafia’) at the behest of a group of powerful players in the market, who had the gumption to advise Rajapaksa that the SEC’s strict regime of rules was killing the market. The real reason for enforcing the rules was massive pump and dump trades in which small investors lost badly while other tainted deals like the NSB purchase of shares in The Finance Co (TFC) meant the SEC had to crack the whip. The NSB deal linked to insider dealing was subsequently reversed and is an example that is increasingly being suggested in the latest case of the Treasury bond issue (ie. cancel the February 27 bond issue). If matters are clean as the Government attempts to infer in the controversial bond issue, the Central Bank should have – as reported in the Sunday Times a few weeks back – officially informed market dealers on February 26 (when the Government decided to urgently raise Rs. 15 billion in bonds) that they plan to increase the accepted offer and submit fresh bids by the next day, February 27 when the auction was closing.

Meanwhile another step towards ensuring governance and ethics in the stock market is the formation of a body to protect small shareholders, primarily those who have invested their hard-earned retirement funds in multiple stocks in small quantities starting as low at 200-500 shares.
Such investor protection bodies are active in the West and parts of Asia and work closely with the regulator, while maintaining their independence. During a symposium in Colombo this week on protecting small investors, SEC Chairman Thilak Karunaratne referred to the emergence of such a small investors group mooted by the Business Times which however didn’t succeed due to infiltration by elements connected to the mafia.

Small investors fall into two categories – investors (who have assets and wealth) but belong to a minority in the overall shareholdings of a company and middle-class investors who buy a few shares in companies. Noted Good Governance activist K. C. Vignarajah, driver of the proposed small investors association, refers to both categories of investors as independent minority shareholders (IMS), a term he coined himself that has come to stay and accepted in the market.

The forum to create awareness about protection mechanisms while being a laudable idea didn’t appear to address the people who actually deserve to be protected. Small, middle-class investors cannot afford even a Rs. 1,000 fee to attend an event like this. In hindsight the SEC should have picked up the tab for this event and offered a free invitation to all – including for example members of the path-breaking Kurunegala Small Investors Association – to attend the event, which should also have had a Sinhala translation (or even presentations). That is if the motive and objective of the organisers of the event was to reach out to the majority of investors who are small, middle class individuals.

The forum was dominated by corporate lawyers (many who are like the metaphor “a double-edged sword”) spoke on the rights of small investors and providing them clues to assert their rights against the big corporates. In the presentations, there should have been a balance of both corporate lawyers and others who understand the simple needs of small investors like for example the inability to read annual reports (also in English) and now to challenge high profile board directors surrounded by corporate secretaries and powerful lawyers – and in quite a few cases where company employees have been donated shares to make up the numbers and shout down ‘troublesome’ small shareholders at AGMs!
In today’s world, money talks! Given a choice between being hired by a board of directors (read: fat fee) or a group of small investors, seeking justice and able to pay a small fee, to which side will a corporate lawyer eventually turn to? Your guess is as good as mine.

Here is a suggestion: The SEC needs to make small investors welcome to seek advise or make complaints at its head office. An environment must be created at the office where small investors are not only welcome but seen as being welcome (the front desk needs to be polite, warm and welcome to everyone irrespective of their status), and a special unit set up to meet investors and process their complaints, concerns and even suggestions.

Bringing sanity to the stock market and ensuring a level playing field for all investors – big or small – is a tall order for the new administration which many hope will succeed.

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