Nishan moots setting up circuit breaker to prevent CSE indices dropping below last traded prices

• Says move will help safeguard banks and financial institutes

Attorney-at-Law Nishan Sydney Premathiratne is of the view that the effect of the CSE collapsing would be disastrous to the banking and financial sector of Sri Lanka as most banks and financial institutions have provided margin trading facilities to investors. 

The security for such lending has been assessed on the particular market price of a share. It is estimated that over Rs. 20 billion is owed to margin trading providers such as banks and financial institutes.

Premathiratne states that most margin trading facilities do not have any other method of recovering as the only security on the lending is the market value of shares. Some margin agreements do not empower financial institutes to recover against any other assets of a borrower. Even if such is envisaged, such would entail litigation and a judgment by a court of law which will take close to 7-8 years.

Premathiratne states that this serious issue which needs to be addressed as the impact would be catastrophic on the banking and financial sector owing to serious volatility and uncertainty in the country. 

The Securities and Commission of Sri Lanka Act No. 19 of 2021 grants wide powers to the SEC to take steps towards safeguarding all stakeholders involved, i.e., inter alia, the shareholders/investors, the stock brokers, the listed companies and the financial institutes (margin trading facility providers) involved.

The CSE has been unfairly and adversely affected due to the prevailing political and economic instability. The share prices of traded companies have decreased drastically, completely independent of the performance of such companies, whereby margin facility providers have commenced forced selling of shares and have commenced notifying traders to reduce exposure to shares. 

This situation continued throughout March and April this year. After much consideration and deliberation, the Securities and Exchange Commission of Sri Lanka (SEC), acting in terms of the provisions of the SEC Act No. 19 of 2021, decided to temporarily close the CSE from 18 April, citing the present situation in the country.

Premathiratne states that given the prevailing political and economic instability, the regulators and all stakeholders could use such wide powers to introduce ‘circuit breakers’ immediately to prevent trading of shares below the last traded price as at 8 April to safeguard all stakeholders at least for a limited period of time (30 days).

“This mechanism would ensure that the value of the share portfolio of any investor would be temporarily stabilised, thereby making sure that financial institutions which granted margin facilities to investors would have a degree of consolation and certainty and not to force sell shares to recover borrowings. 

“A moratorium of sorts with a degree of stability. The situation is unfortunate that force selling would not ensure recovery of borrowings and thus such is not an option. Hence a temporary mechanism to safeguard the interests of all of the stakeholders of the CSE is needed.”

Premathiratne is an Attorney-at-Law who is primarily engaged in Civil and Commercial law. Premathiratne holds LLMs in International Commercial and Corporate Law from Kings College, London and an LLM in Law from the Colombo University. He also holds a postgraduate diploma in Intellectual Property Law (IALS) and an LL.B. Hons Degree from the University of London and a BSc (Hons) degree in Human Genetics from the University of Nottingham.