Zero tolerance for offenders in the stock market, urges SC Judge
View(s):Sri Lanka’s capital markets must be well regulated with regulators being independent, firm, consistent, and uncompromising, a senior Supreme Court Judge said recently.
“The Securities and Exchange Commission of Sri Lanka together with the Colombo Stock Exchange, must maintain zero tolerance for violations of market rules and committing of offences,” noted. Justice Yasantha Kodagoda, speaking as the chief guest of at the National Capital Markers Symposium organised by the Bar Association of Sri Lanka and held in Colombo on February 26.
Here are excerpts of the speech made by Justice Kodagoda, who in recent times has emerged as a well-sought-after speaker at various fora where he deals with governance, transparency and accountability issues:
“Capital markets are often described as the lifeblood of modern economies. Possibly, most in Sri Lanka may not sufficiently appreciate that. It is the primary mechanism through which capital flows into corporate enterprises from both within and outside the country. Such inflow of capital enables the organized, corporate private sector to initiate new enterprises, expand, energize, and invigorate its business objectives.
When more and more companies list on the Colombo Stock Exchange, they too open themselves to investment from a wide range of shareholders. This infusion of capital allows them to modernise their operations, enter new markets, and strengthen their efficiency and competitiveness. It is the growth of corporates that significantly contribute towards the Gross Domestic Product. This, generates employment opportunities for our people, contributes towards efficient delivery of goods and services, and encourages the net inflow of much needed foreign currency, and provide enhanced revenue to the State through the payment of taxes.
Vibrant capital markets which are properly regulated ensuring fairness, efficiency and transparency, are essential for any developing country. It is a market place and a level playing field regulated by the law, to achieve sustainable economic development and secure prosperity for the people.
The true strength of the capital markets lies not only in its size or turnover activity, but in the trust it commands. Investors, whether local or foreign, place their money in capital markets, because they believe it is fair, transparent, well‑regulated and functions ethically. Therefore, good governance is the foundation of this trust.
Regulation must ensure that boards of directors, principal executive officers, accountants and auditors act responsibly and ethically, corporates balance shareholder interests with their business objectives and that capital invested in companies do not leak out through fraudulent activities.
Without proper ethical governance, capital markets risk becoming arenas of manipulation, rather than platforms for sustainable growth. Without effective governance, investors would withdraw, companies would hesitate to be listed, the country itself would earn a bad reputation, and honest investors would suffer, resulting in a gradual demise of the capital markets. The end result would be suffering inflicted on the nation’s economy.
Insider trading, market manipulation, and unfair practices cannot be treated lightly. We must keep in mind that insider dealing and market manipulation are deemed to be predicate offences, and therefore dealing with the proceeds of such criminal activity amounts to money laundering. Furthermore, particularly, white collar criminals may use the capital market place as a forum to conceal proceeds of crime such as proceeds of corruption, by engaging in a series of transactions using multiple friendly hands, and changing from one stock to another.
In the guise of protecting the market, offenders should not be shielded, however powerful or influential they may be. Incidents of law enforcement inaction would corrode confidence, distort fairness, and damage the reputation of the market.
Furthermore, such violations of the law, enables unscrupulous people to unethically earn profits causing harm to others. An unethical win for a person who has acted unlawfully, is an unfair loss to an innocent investor, resulting in injustice.
Surveillance of the market place aimed at prevention is even more important than punitive investigations and prosecution. Zero tolerance of market wrongdoing should not be viewed as harshness in the style of policing; it is simply enforcing the rules and securing a fair market place. It ensures that every participant — whether a large institutional investor or a small individual shareholder — competes on equal terms and engages in share transactions in an ethical manner. Proper regulation and law enforcement ensures that the market remains a place of opportunity, not a place for exploitation.
In this journey towards the development of the capital markets… we must never forget the need to protect minority shareholders. They are often the most vulnerable participants in the market. They lack the influence of controlling majority shareholders and do not yield control over Board decisions. They have no control of key management decisions taken by the top management of corporates. Yet they place their trust — and invest their savings in the shares of major companies. Ensuring that minority shareholders are treated fairly, is not only a matter of law; it is a matter of ethics and justice.
There is also a need to recognise the grave consequences of listed companies collapsing. Such failures cause intolerable damage to shareholders, including funds that were invested in the market such as private pension funds, retirement savings, and collective investments that represent the future of ordinary citizens. The overnight or sudden collapse of a listed company, would cause irreparable loss and damage to the entire market place. The collapse of a public listed company is not merely a corporate failure. It is a governance and regulatory failure as well. It undermines trust and confidence, erodes savings, and damages the credibility of the entire market.
Preventing corporate collapse is not only about protecting investors; it is about protecting the entire business environment, and the social fabric of our nation, particularly since investments and employment are at stake.
It is heartening to note that the new Securities and Exchange Act has addressed many of the deficits in the previous law. The SEC is now properly armed to perform its task. And it is equally encouraging to see that public confidence in the market has increased.
Earning profits must be through business acumen and efficiency, while not overlooking ethical conduct, discipline and compliance with the law.
The capital market is a mirror of our economy. If it is well-developed, vibrant, transparent, and fair, it reflects a nation that is confident, innovative, and just. If it is weak, opaque, or manipulated, it reflects a nation that struggles with a trust and credibility deficit. Then, no one with well-earned profits either from within or outside the country would want to invest in the capital markets.
“We must develop the capital markets by strengthening governance. We must support regulatory enforcement. We must maintain zero tolerance of violations of the law. We must protect minority shareholders and investors. We must safeguard against corporate collapses. And we must prepare our young lawyers to be fully equipped to service the requirements of the multiple stakeholders of the capital markets.”
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