Former SEC chief stresses need to minimise market manipulation
Thilak Karunaratne, former head of the Securities and Exchange Commission (SEC), has stressed the need of giving more powers to the SEC to minimise market manipulation so that the bourse can flourish with all sections of investors entering into a level playing field.
Addressing a luncheon meeting of the Colombo Club on Tuesday at the Taj Samudra Hotel, he urged retail investors to enter the Colombo Stock Exchange investing in unit trusts as several stock brokers are not trust-worthy, with some of them being investigated for using dummy accounts to manipulate the market while some firms were showing their newly bought Mercedes and BMW as assets against which more credit could be generated.
He disclosed that the share prices of George Steuart, Asian Alliance Insurance PLC, Lanka Hospitals Corporation, HVA Foods PLC and East West Properties PLC have been blown up unrealistically during the latter part of last year.
Owing to this, regulation of a demutualized exchange including a Stock Exchange, a Derivatives Exchange, a Futures Exchange or a Commodities Futures Exchange has become essential, he said.
Some brokers had been urging a relaxation of broker credit and had blamed the regulator for the bourse’s recent slump. This was despite the fact that around Rs. 5.7 billion of unutilized credit was available in the system, Mr. Karunaratne said.
He alleged that the post conflict rise of the stock exchange was driven by manipulation and unrestrained credit. "Of course there was the post conflict euphoria but the market’s rise was unbelievable. The market PE peaked at 29 per cent at one time and this was ridiculous," he said.
"Some brokers were using dummy accounts, apart from their own accounts, to trade shares in the stock exchange. These crony brokers and dis- honest investors made it seem as if the SEC was over regulating the stock exchange, but this is not the truth. They had entered the market with nothing and in a short time built up large fortunes despite the measures we took to minimise the market manipulation," he said.
Praising the Sunday (Business) Times, he welcomed its recent initiative to facilitate the formation of a small investors association which would have to be nurtured by the SEC and the stock exchange so that independent monitoring could be possible.
"Such associations in Canada, Malaysia and Thailand can even take listed companies to courts if proper information is not made public," Mr Karunaratne said adding that many of the recent IPOs had been overvalued.
During the last 10 months or so interest rates have doubled which had a twofold effect on the market. Margin financing costs became prohibitive and it significantly eroded corporate profitability, he disclosed.
Mr. Karunaratne has suggested the creation of an Industry Consultative Committee to assist in developing the future direction of the Sri Lankan capital market, declaration of higher dividends and developing the unit trust industry.