Serious decline of the stock market under the present SEC

Point of view

By a market participant

The investors were compelled to wait nearly 17 years to reap the benefit of a real bull run in 2009 after the elimination of the LTTE terrorism and how the SEC destroyed it within a one-and-a-half year period due to ill conceived, irresponsible decisions is well known and documented and need no further clarification. The forces who were keen to destroy the market and their motives and strategy is briefly set out below.

1. Nearly two million directly and indirectly benefited from the bull run and if this was permitted to expand it would have strengthened the economy and the Government’s image and made the Government more popular. It is apparent that the main opposition party in its desperation to prove the economic failures of the government had to stop the stock market from developing further.

2. It has been alleged that the majority of top officials and Commissioner/Directors of SEC and CSE had very close link with the opposition. These directors pushed through a series of dangerous decisions approved by the SEC while the Government was misled to believe that it was in the best interest of the CSE. The comments made by the President at the recent meeting that only one senior official at SEC was really managing the Government policies confirms that now the Government is fully aware of the situation.

    It was hoped that with the departure of the Chairperson and the Director General, suitable persons with faith in the Government policies and small investor friendly would be appointed as replacement. However, in reality the new Chairman joined the bandwagon of opposition and directors who managed to stay on. He damaged the market further with his negative attitude and serious statements made which were extremely detrimental to the stock market and the government policies.

    The following statements which were made by the present SEC Chairman to media are some which are very dangerous and that would ensure the stock market went into a further collapse without any revival and encourage both local foreign investors to flee.

(A) “Upward movement of the market in 2009 and 2010 is mainly due to pump and dump policies.”

It is an undisputed fact that the movement was due to elimination of terrorism with prospect of peace and economic growth which subsequently proved correct. In this rally all the shares irrespective of speculative, small and high capped shares recorded gains based on forecasted future developments based economic logic.  Accordingly the Chairman’s remark was highly irresponsible and damaged the market immensely. Either he is ignorant of economic factors or he is attempting to give a boost to the opposition to justify their action in destroying the market.

On the contrary the CSE in its Annual Report of 2009 says: “This was the year that saw us shattering virtually every record previously set creating positive investor sentiment around the globe and bringing Sri Lanka and the CSE under the spotlight of international attention” and comments that it is a fine achievement (please refer the annual report 2009/2010 of the CSE). The Chairperson is calling the annual report a lie by saying that pump and dump was the reason that the market performed well. This confirms how irresponsible and ignorant the new SEC Chairman is regarding stock markets because he is contradicting the CSE report itself.

(B) “You need to get in at least 10 to 15 billion rupees initially and add Rs. 100 billion within a year so to get the market up”

We do not understand on what basis the Chairman gives figures. On one hand if we are unable to attract above foreign funds his thinking is that the market cannot be revived. In fact central bank expects only US$ 500 m to be received this year 2012 and out of this the balance to be received is only US$ 300 (Rs. 39 billion) if we account for the investments already received.

If the Chairman’s theory is correct then since the Central Bank expectation is insufficient to stimulate the stock market, the CSE cannot be revived in the near future. Rather than making flippant comments and giving baseless figures the Chairman should gracefully resign and allow a person who could stimulate the market take over without wasting the time of the Government.

(C) “Last year 42 billion came out of the market by way of IPOs and some dumped in ventures such as hotels and where are we going to get this money?”

It is sad that the Chairman does not know these IPOs have been approved by the SEC and CSE despite investor outcry. Approval of many IPOs at short time spans were detrimental to the market and should have been considered on a staggered basis considering the liquidity of the market. Also the approval was given to IPOs for which private placements had been done at substantially lower prices prior to the IPO.

What is interesting is in most of the cases where the underpriced private placements were done, the brokers who benefitted from the said transactions were the so called independent stock brokers who keep commending the SEC for an excellent job done. So much for the competence and transparency of the SEC and the CSE officials who played out the small time investors through these shady private placements.  As for the IPO issuing companies investing in hotels, the Chairman is not aware that the Tourism Sector is a government priority area for development (which is rapidly developing as shown by improved tourism figure) and that IPOs are made to expand the businesses not to reinvest in the stock market.

(D) “Relaxation of credit restriction has not improved the market since – it was not the reason for the downfall”

This is another attempt to hoodwink the investor public and the Government. It should be noted originally that the brokers were in a position to give 10 times net capital without any conditions and the SEC suddenly decided to stop any credit within three months. This created market chaos.  If the market was overheating the sensible thing should have been to reduce the credit up to three times net capital and watch the developments. Certain commissioners and officials had secret political motives to completely stop credit which would bring the prices down and crash the market thus achieving the political objectives of the opposition. Ignorance and inexperience of the former chairperson was very useful for this decision to be pushed through by the directors with vested interests.

During the latter part of last year due to SEC pressure zero times net capital was permitted which significantly reduced the capacity of the brokers. Due to the intervention of the President, three times net capital was permitted only after two-and-a-half months. However, in order to sabotage the President’s effort an adverse formula (which several financial analysts also have pointed out to be incorrect) was introduced with which the end result was that the brokers were not permitted to give even zero times net capital. The fact remains even as at 30 July 2012 there has been no complete relaxation of credit restriction, and we request the Chairman to be honest in his statements.

(E) “But if EPF is investing wisely and prudently and in a calculated manner, they should come into the Bourse”

The Chairman too is aligning with the opposition and it is apparent he too is attacking the Government on previous investments made by EPF. While the opposition is trying to make the EPF a political talk point in the forthcoming elections, the SEC Chairman is implying that the EPF had been unwise and not prudent in investing in the past and now is the best time for them to come into market.

(F) “Creation of negative sentiment in the market”

The Chairman states our PE is 13 compared to PE of 5 and 6 for Vietnam and China respectively. In the first place he should explain the sources for such data. According to Bloomberg PE for China and Vietnam is 11.6 and 10.6 respectively. The chairman should maintain highest standard of integrity without giving false information to achieve his ulterior motives. Secondly, he has not been appointed to give these data even if it is correct because it is bound to create a negative sentiment. Further he is quoting Arjuna Mahendra, a staunch supporter of UNP removed from BOI Chairman’s post in 2005, that PE should drop to 8 for investment to happen in the country. In effect he attempts to bring down the market drastically in line with UNP expectation. This is tragic. The PE figures mentioned is incorrect and further there are nearly 30 countries in Asia with higher PEs than Sri Lanka and the chairman deliberately has not commented on them.

(G) “Criticism against Government policies”

He states that weak economic parameters, volatility of the rupee also contributed to the downfall of the market. This is open criticism of Government policies by a person appointed by the Government and as such this would create fear among the foreigners and local investors. How can the brokers market investments in the country when the SEC is commenting about weak economic parameters and instability of the rupee?

Further the Chairman’s comments are in direct contrast to what the Secretary to the Treasury has quoted to even international media. The President in the capacity of the Minister of Finance should seriously look into the actions of these types of officials who sabotage the efforts put in by the Government. The Chairman’s actions should be questioned further since the said article that appeared in the newspaper and carried all the points discussed above was circulated using the official e-mail address of [email protected]. Shouldn’t action be taken against such employees and the officials who are responsible?

Today over two million people numbering 10% of the population have suffered immense financial difficulties and some are virtual beggars due to the commission and omission of SEC and to a lesser extent by CSE. The Chairman says what has gone up should come down without realising many shares favoured by small investors have come down by 85% to 90% and the comment reflects the attitude of capitalists who have no feeling for affected small investors.

The Chairman devotes 100% of his comments on manipulation, and insider trading and is very silent on commission and omission of SEC, which contributed 90% for the downfall of the market and the losses suffered by the investors as follows:

1. Sudden unprecedented suspension of seven securities in August 2010

2. Permitting IPOs to made for prices very much above the price of private placements

3. Sell down of directors’ shares

4. Credit restrictions not relaxed even 1% up to 30 July 2012 despite intervention of the President. (It would appear SEC and CSE mafia is more powerful than the President.)

It is an open secret that the rich class belonging to the opposition and those connected to SEC and CSE under nominees had earned billions of rupees from the above at the expense of the small investors.

There are still many senior officials/commissioner/directors directly linked to above decisions still in power and it is very necessary to completely replace such persons including the Chairman in a major overhaul in order to make the stock market vibrant.

Summary

(1) Never in the history of SEC and to a lesser extent CSE has the public image, credibility and acceptance dropped to such a low level. The majority of commissioners and senior officials for the past three years with secret agenda had fully contributed to this situation.

(2) It is an open secret large scale leakage of confidential information of SEC and CSE to opposition parties is taking place. During the recent meeting with President it transpired that there are many moles already identified.

(3) Attempt by the SEC to portray that due to handful of high net worth investors the market collapsed is a ridiculous argument to divert attention from serious commissions and omissions of this institution in the past. It is observed at the highest of the bull run market turnover averaged Rs. 3,000 m daily and no way they could even play a significant part. In order to cover up their own actions the Directors of SEC have hidden behind the investigation regulations and launched a campaign to target individuals who speak out and point the blunders made by the SEC. Therefore it is threats and intimidation tactics used by the SEC that prevents the small investors from opening their mouths but they may surely open their vote against the Government

It is the SEC mafia that should be eliminated by weeding out anti-Government elements from SEC and CSE who have caused a huge embarrassment to the Government.