Brokers’ body clarifies recent proposals to revive stock market

In the wake of recent media reports, which have led to some adverse publicity about the Colombo Stock Market, the Colombo Stock Broker’s Association (CSBA) in a long statement yesterday cleared some of the misconceptions which might have arisen.

The statement is as follows:

The CSBA has been in existence since 1995 and our members have played an active role in the Colombo Stock Exchange (CSE) and have always acted in the overall best interest of developing the Sri Lanka’s stock market.

In the recent past, the CSBA has earnestly sought some policy changes in order to formulate strategies in developing the equity market and to keep in line with the broad macroeconomic objectives set by the Government in post-war Sri Lanka.

Towards achieving this goal, we went through a series of meetings beginning with the Board and Management of the CSE, then the Securities and Exchange Commission (SEC) and finally with President Mahinda Rajapaksa, who gave the CSBA an opportunity to place its proposals for consideration.

All the 28 registered stock broking firms of the CSE were individually invited to attend the meeting with the President and 22 of them attended.

The requests the CSBA put forward and the reasons thereon are as follows:

To allow stock broking firms to extend credit up to a maximum of three times leverage of net capital. This is to bring in more liquidity into the market. Prior to 14 September 2010 broking companies were allowed to extend credit up to 10 times their net capital. The credit given at present is based on the computation of liquid assets less obligations of the broking company, which is effectively less than leveraging of zero times. At present there are risk management measures in place which are monitored by the regulators. In the future giving credit would not create any systemic risk as all the stockbrokers will be required to establish risk management systems shortly under the initiatives taken by the CSE.

To remove the price band, which has a secret formula. This request is mainly due to the disruption it causes to the price discovery mechanism in the market. Having said that, the CSBA understands the importance of regulations to ensure a level playing field, CSBA believes this function can be achieved more efficiently with circuit breakers as practiced in most other markets presently and previously in Sri Lanka.

Commercial Bank’s lending on listed equity, to be increased from its current 5% to the 7.5% of bank’s loan portfolio. Last year the banks did not have a ceiling on lending against listed equity collateral from a regulatory standpoint. The CSBA feels that the banking sector should be given the flexibility to lend to booming sectors in a growing economy. This of course is entirely at the bank’s discretion.

Provide blanket permission for foreign-owned margin providers licensed by the SEC to provide margin-trading facilities. The reason for requesting such permission is that the Money Lending Ordinance of 1918 prohibits carrying on of the money lending business by foreign companies. However, margin trading is a specialised transaction relating to the securities market and such permission of the Central Bank will allow flexibility to meet the new financing needs of the investors. This will also create a favourable environment to support the expanding capital market activities in the post conflict era. This will also facilitate foreign funds from entering the local economy.

CSE to provide a 50% subsidy to cover the cost of opening stock broking branches outside the city of Colombo in order to broad base the market participation. The CSE is a company limited by guarantee and is a non-profit organisation having funds intended to be used for capital market development. As such CSE needs to play a direct role in using a part of these funds towards encouraging brokers to go to the rural areas and channel more capital towards growth-oriented listed company shares who in turn would invest same for projects resulting in the creation of new jobs and the development of the country as a whole.

Encourage more Government institutions to participate in the market. This is to encourage wider institutional participation in the Colombo stock market.

The President gave a patient hearing to the above proposals and solicited clarifications, which resulted in an active dialogue between the representatives of the stock broking companies present and the high-level delegates consisting of Basil Rajapaksa – Minister of Economic Development, Lalith Weeratunga – Secretary to the President, Dr. P.B. Jayasundera – Secretary to the Treasury, W.A. Silva – Deputy Governor of Central Bank and P.H.O. Chandrawansa – the Controller of Exchange.

We would like to point out that providing credit is a basic need in any industry and all stock broking companies in almost all the countries provide margin-trading facilities directly or through its related companies. Our proposals were put forward as a plan of action to energise investor participation and restore confidence in the Colombo stock market. The association would like to reiterate that we are fully supportive of regulations and any action taken against wrong doers, and would shortly adopt a code of ethics to ensure that all members follow rules and regulations in line with international best practices.

Be that as it may, negative publicity has caused the public to lose confidence in the Colombo Stock Market. We the CSBA would like to categorically state that we are unequivocally committed towards the development of the capital market whilst appreciating a balanced approach towards regulating the market. In this regard, we very much welcome a consultative approach through which a majority consensus could be obtained prior to introducing new regulations to the market.