Former SEC Chief Tilak insists no overregulation

By Devin Jayasundera

Former Securities Exchange Commission (SEC) Chief Tilak Karunaratne on Tuesday rebuked allegations of over regulation and ad hoc measures as having impacted the stock market during his tenure and noted that the SEC Act should be strengthened further to punish manipulators.

“What some of the crony brokers and dishonest investors try to project in the media is that over regulation, ad hoc controls, sudden restrictions affected the growth of the market, which is not true,” claimed Karunaratne delivering a presentation titled ‘Current status of the Stock Market: What ails and what is the cure’ at the Annual General Meeting of the International Chamber of Commerce (ICC) Sri Lanka.

Karunaratne explained that even when the market was being regulated the market was moving upward and when the market was going down, the SEC relaxed the regulations but it did not make a difference – dispelling the myth that the market of being over regulated.

The former chief also recalled how some shares were manipulated to record abnormal price movements in his presentation. Dankotuwa Porcelain had a percentage increase in price of 226% and Blue Diamonds 270%, Asian Alliance Insurance PLC 204%, Lanka Hospitals 177% and some of these shares projected negative in the ESP.

With regard to a special case of HVA Foods, Karunaratne pointed out that there was an increase of 394% with the EPS at nine cents and with a high free float. He remarked that it’s unbelievable for a company that has no intrinsic value but only brand value to record such an increase.  

Karunaratne noted that the post-war boom in the stock market which led the ASPI index to 7800 points was mainly a result of artificial manipulation. “It is true that the euphoria after the war influenced the confidence of the investors but the major contribution came from people who used unfair means in pumping up the market which made it reach to extreme high levels.”

He also indicated that currently the market is at a healthy state with P/E of 10.59 which is only higher than Vietnam in developing nations in the Asian region and noted that the in the first eight months of the year the SEC was able to attract net foreign inflow of Rs. 27 billion.

Even with such highlights Karunaratne was sceptical saying that there’s a disturbing factor emerging. “Yesterday there was net foreign outflow and I presume that the market was being manipulated where the P/E increased to 13. This makes it less appealing for the investors and it’s important that we maintain the foreign exchange well to sustain the market.”

Highlighting the reasons for the downfalls in the stock market, Karunaratne emphasised that the cause was not regulation but the manipulation of the stock market adding another major reason was the trade balance deterioration which eventually became currency depreciation stating, “The Central Bank had spent $ 4 billion in order to support the rupee.  This was done for nothing.”

Karunaratne stressed the importance of amending the SEC act which has been only amended only three time of its twenty five year existence. “The market has not been developed with the rest of the world and has been backward therefore it high time the act gets amended for better market performance.”

He also pointed out the high importance of the independence of SEC referencing to some examples in world financial markets.  “The US SEC chief Mary Schapiro was appointed by Regan and she continued to serve under four different US presidents. This shows the zero political interference. Even in Malaysia with one of the most developed markets in the region the independence of the commission is maintained.”

In response to the criticism that SEC is over regulated, Karunaratne professed that the Sri Lankan stock market is one of the least regulated stock markets in the region. He claimed that not a single person has been jailed for any wrongdoing in the 25 year of SEC history this shows how relaxed the SEC has been towards the culprits during the past years. The maximum penalty that could be given is Rs 3.5 million and restrictions in holding official positions. When compared to other countries such as US where you get a long prison sentence for financial malpractice such as for Raj Rajaratnam, the SEC is extremely lenient in punishing stock market culprits. This should be changed.”