Rs. 2 t in value wiped off; battered margin traders seek easing of ‘forced selling’ rules

With a staggering Rs. 2 trillion in value wiped off from the Colombo stock market, investors engaged in margin trading are justifiably seeking critical relief by way of a temporary easing of ‘forced selling’ rules.

Owing to a series of negative developments the Colombo Stock Exchange (CSE) benchmark All Share Price Index is down by 34% to 8,135 points from 12,226 points as at end 2021. The more active S&P SL20 is lower by 38% to 2,623 points from 4,233 points. The market capitalisation has plummeted to Rs. 3.5 trillion from Rs. 5.5 trillion. 

The plunge caused initially by the economic crisis and worsened by the current political instability has been shocking for investors. Friday’s Central Bank move to hike policy rates by 7% announced after the market was closed, was a further jolt for listed equity investors.

Even before the CBSL move, capital market stakeholders decided to keep the Colombo bourse closed today and tomorrow thereby the entire holidays-filled week. If it were to open today, most analysts fear the market will dip further on account of CBSL move which however would help improve macroeconomic stability in the medium term.

The stock broking community and investors last week made representations to the Securities and Exchange Commission as well as the CSE to consider and lobby for relief from rules governing “forced selling”, a mechanism to minimise risk on the part of banks and finance companies who are  margin providers when outstanding amount goes to above 70%.

Consensus among the capital markets community is non-enforcement of force selling for six months out of empathy and to bring stability first and give confidence to the market since the recent plunge is viewed as an aberration and future fundamentals

“There was a degree of forced selling like there is no tomorrow. That is not the case. Some relief is critical given the fact that Colombo still remains an emerging market,” sources said.

Brokers and investors are also hoping that the SEC will be successful in lobbying for a debt moratorium from the Central Bank.