New broom at SEC

About four years ago, precisely on November 21, 2014, the Securities and Exchange Commission (SEC), struggling to tackle a slew of allegations of pump-anddump trades and insider dealing, published an interesting advertisement.

It was preparing a consultation paper on ‘Evaluating the possibility of establishing a minority investors’ association for investors of public listed companies’. Public representation was called for.

The SEC chairman at the time was Thilak Karunaratne, who just like one of his predecessors, Ms. Indrani Sugathadasa, refused to be cowed down by the infamous stock-market mafia, with both quitting rather than add ‘shame’ to their name.

Both tried to take on the pump-and-dump traders who had powerful political patronage, but were unable to move forward with probes and investigations.

What happened to that proposed minority investors association? To this day, no one knows, at least as far as the media is concerned. There has been no public communication as to whether an association was set up or not.

My attention was drawn to this firstly, after listening to Kussi Amma Sera pouring her woes to her comrade-in-arms Serapina about the struggle a relative in her village, working in Colombo who had applied to take out her Employees’ Provident Fund (EPF) money after reaching the retirement age, faced.

“Kochchara amaru wuna-da may salli ganna (how difficult it was to take out the money,” Kussi Amma told Serapina.

The conversation, under the margosa tree over a piping hot cup of tea (which I too was enjoying at the time), then drifted to other political issues and the constant grumble these days that “the government is not working, it is chaotic and confusing”.

This also came to my mind when the telephone rang on a damp morning (erratic weather has not only affected the dayto-day work of Sri Lankans but also, it appears, affected the minds of the politicians. Otherwise, why do we have a pushstart-reverse approach in policy-making just like the way fuel prices are fixed these days?).

It was my jolly-mood, economist friend, Sammiya (short for Samson), on the line. But today he was in a more sober mood.

“Machan, I hope the new broom at the SEC will improve governance and activate those old pump-and-dump cases,” he said, alluding to a new Board of Directors with a new Chairman, Ranel T. Wijesinha taking over from Thilak Karunaratne.

“I thought Thilak tried to bring these culprits to book but the main problem was the system (FCID) was slow,” I replied.

“It’s three years now but none of these culprits has been charged, while the only case filed has been one involving a for-

mer SEC Chairman and disbursement of funds,” he said, adding that he also burnt his fingers in the infamous pump-anddump trades in 2011-2012.

On July 30, 2017, the Business Times reported that the SEC was reopening eight cases involving pump-and-dump traders. However there doesn’t appear to be any movement since this report appeared.

The need for stronger vigilance and action against perpetrators of those white collar crimes and in the process assuring a stronger, regulated and crime-free market, would not only help foreign investors but also local retail investors, many of whom lost badly a few years ago.

That pump-and-dump era also saw EPF funds being invested in some ‘doubtful’ companies resulting in huge losses to the fund and, in turn, to EPF members. Rogue trading with EPF funds also came to the fore after the entry of the MaithripalaRanil government in 2015, when it was revealed at the inquiry into the Treasury Bond scam that millions of rupees in bribes were allegedly paid to EPF fund managers. In both instances, investing EPF funds in the stock market (prior to 2015) and in bond trades (after 2015), the involvement of the infamous Perpetual Treasuries Ltd (PTL) has figured.

Recently, trade unions urged that workers should be represented on a management committee which is tasked with investment decisions on investing EPF funds. This came at a meeting convened by the Labour Ministry to discuss an ADBfunded proposal to maximise returns of the EPF by investing in the stock market and other equities.

The EPF has been investing in bonds and Treasury bills (over 90 per cent) and a small percentage in the stock market but in the last three years (owing to allegations of tainted investments), it has stopped investing in the stock market.

Auditor General H.A.S. Samaraweera was reported in the local media on October 10, 2013, as stating that the EPF’s 2011 annual report showed the fund had lost nearly Rs.11.7 billion through investments in 58 private companies, an issue raised aggressively in Parliament by then Opposition Parliamentarian Dr. Harsha de Silva.

Since stock market returns are higher (that is, if invested with proper governance structures in place) than bonds, moves are afoot for the EPF to return to this market place, albeit with safeguards.

At this point, Sammiya disturbed my trend of thought, saying: “The new SEC board has just 18 months to clean up and bring the culprits to book – ahead of presidential elections. Do

you think they’ll act fast?”

“Maybe, maybe not,” I responded, not sure myself whether these powerful traders – who were responsible in sending two SEC chairpersons home -- could be brought to book. “Maybe the President (Maithripala) needs to intervene and speed up the probes,” I added.

The rather subdued Colombo stock market today is looking for proper governance signals (action against errant traders) and more consistent policies, and to some extent depends on foreign trades to keep it chugging along. Low trading levels have also seen many brokers struggling to keep their heads above water.

The All Share Price Index (ASPI) which was pegged at 2,722.4 in 2006 rose to 6,074 in 2011, then fell to 5,913 in 2013. In 2014 it rose sharply to 7,298.9 before falling to 6,350 in 2017. As at June 2018, the ASPI was 6,118.

Transparency International Sri Lanka (TISL), in a report at the time on pump-and-dump trades, said public perception “on white collar crime must be changed; the public must understand that the implications and consequences of market manipulation affect the overall wellbeing of the economy and thus, the public themselves suffer”.

It also quoted then Opposition Parliamentarian Eran Wickramaratne as urging the need to appoint a Parliamentary Select Committee to investigate the happenings of the stock market.

Emphasising on the need to protect the funds of the employees, Wickramaratne, now a respected State Minister in the Government, said at the time that “the government does not have a right to misuse this money for their personal glory”.

This is what trade unions are also urging the Government to do (ensuring workers and employers have a bigger say in where their contributions are invested) in deciding whether or not the EPF should return to the stock market.

Apart from that, one hope is that the new team at the SEC will re-visit cases pertaining to the era of pump-and-dumptrades and bring the culprits to book, as soon as possible.

At this moment, Kussi Amma Sera, brings in the kiri-bath (my usual breakfast on a stressful Thursday morning), saying “Mahattaya, Serapina kiyanawa … EPF gena liyanna-lu (Serapina says write about the EPF issue)”.

Restoring confidence, I believe, would be the wish of many investors in the stock market, millions of EPF members and the general public. Whether the new broom at the SEC sweeps fast, slow or at all, remains to be seen.