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Sri Lanka’s market watchdog, the Securities and Exchange Commission of Sri Lanka (SEC), has flexed its muscles to come down hard on investors who operate without declaring their assets.
According to the SEC’s future initiatives towards protecting and widening investors spelt out by SEC Director General Malik Cader at a recent presentation, SEC will make amendments to the SEC Act, introduce internet trading rules, establish Investor Association of Sri Lanka, introduce Exchange Traded Funds and amend the Takeovers and Mergers Code. The regulator also plans to demutualise the Colombo Stock Exchange, draft legal framework to establish a Central Counter Party to introduce listing rule to maintain minimum public float as a continuous listing requirement, provide the necessary legal framework to enable cross border listings and introduce Commodities and Derivatives Exchanges.
The exploitation of minor loopholes in the SEC Act to make unauthorised earnings has opened the eyes of the market watchdog. In this respect, one of the chief offenders has been casino operators who do not reveal enormous earnings, according to Cader.
Regulatory changes
Cader, who recently addressed participants on ‘New Regulatory Changes impacting on Business’ in relation to regulatory changes in the securities market, observed that a key issue facing the SEC was the fact that casinos did not do enough in respect of declaring their finances. Further, there was much money laundering of customers and under the present Act the SEC had only limited legislative scope to act. Therefore, the new legislation to be enacted would go a long way in clamping down on errant casino operators.
“To streamline the accounting of casinos, we will enact legislation to have the banks play a role in facilitating transactions whereby there will be transparency,” he stressed adding that the new laws would also require a company, NGO or co-operatives dealing in micro finance activities will have to register under the Micro Finance Act.
A key issue facing the SEC was the fact that casinos did not do enough in respect of declaring their finances. Further, there was much money laundering of customers and under the present act the SEC had only limited legislative scope to act.
While ensuring that the stock market is not abused by money launders, another key area of importance to the SEC will be looking after the investor; particularly the small investor and giving them wider scope in transacting with the stock market is finding the top priority of the island’s market watchdog, the Securities and Exchange Commission SEC.
Bigger role
At the same time, the SEC will arm itself with new legislation to play a bigger role in manifesting itself in a more significant and positive role with the country’s economy opening up.
In respect of giving wider scope and protecting investors, the SEC will act to remedy this lacuna in regulation by introducing guidelines to ensure that internet trading service provider has satisfactory arrangements in place to safeguard the integrity of the service and to prevent misappropriation of IDs, impersonations (leading to unauthorised/ illegal transactions) and unauthorised usage.
Another key area to be addressed by the SEC will be individuals’ rights.
“The establishment of the IASL is founded on the basis that the only avenue of assistance for individuals whose minority rights have been violated is by way of resorting to the provisions in the Companies Act No. 7 of 2007. Whereas the creation of the IASL would make way for collective action to be taken by an organisation of Sri Lankan investors as there would be strength in their numbers and this organisation would focus on sharing and exchanging investment information in order to protect investors’ rights and benefits,” the DG noted.
Overhaul SEC Act
Another significant move by the SEC is the initiation of reviewing the Securities and Exchange Commission of Sri Lanka Act No. 36 of 1987 (as amended) with the intention of overhauling the said SEC Act and introducing new legislation to regulate the securities market.
Cader echoed the fact that moving in such a direction will require far-reaching changes for which the SEC is gearing up to drive forward the stock market to new heights in an expanding economy.
In this direction, a bill is to be introduced to amend what the Director General described as an old-fashioned act of 1977. With it will follow the decentralisation of the CSE thus, creating in Cader’s words, ‘a more vibrant and efficient stock market than now.’
Cader said, “The Securities Exchange Commission laid down guidelines pertaining to outsourcing of functions to be adopted by exchanges, central depositories and clearing houses. The Colombo Stock Exchange with the approval of the SEC has drafted new guidelines to regulate internet trading to promote confidence in the efficiency and fairness of the securities market and will be incorporated into the Member Regulations of the CSE.”
The SEC has been quick to identify certain provisions and accordingly we will be making certain necessary provisions in making changes in the act in respect of the years 2011 and 2012. It will give teeth to ensuring the security of the investors from a presently negatives in respect of regulating exchange through the setting up of an investors association.
“This will be mainly for the benefit of small investors. It will give voice to the minority investors who as it is are at a disadvantage in comparison to the big time investors,” Cader reasoned.
Meanwhile, regulations will also be gazetted in respect of exchange traded funds in respect of gold, silver, and platinum will be in the Colombo Stock Exchange
Far reaching changes in the Securities and Exchange Commission (SEC) shortly will enable the SEC intends to remedy the lacuna in regulation by introducing guidelines to ensure that internet trading service provider has satisfactory arrangements in place to safeguard the integrity of the service and to prevent misappropriation of IDs, impersonations (leading to unauthorised/ illegal transactions) and unauthorised usage so as to meet new demands with new regulatory initiatives for the capital markets in Sri Lanka with a suppressed economy opening out and the country reaching political stability after the war as envisaged by the SEC.
Central clearing house
On the proposed central clearing house, the SEC Director General said, “The SEC initiated process of facilitating the CSE to introduce a central clearing house expected to operate on the basis of a Central Counterparty (CCP) which will clear and settle all market transaction taking place through CSE.
CCP will be an ‘entity that interposes itself between parties to contracts in one or more financial markets, becoming the seller to the buyer and the buyer to the seller.’
He explained that the CCP will help facilitate the clearing and settlement process in CSE. It will enter the stage after a trade is concluded and will interpose itself between counterparts to financial transactions, becoming the buyer to the seller and the seller to the buyer by way of innovation.
In order to facilitate futures and options trading in Sri Lanka, it is necessary to establish a clearing corporation; for all derivatives transactions contain counterparty risk which can generate a liquidity crisis, bankruptcy and market inefficiency. In order to prevent this, a CCP which is actually a clearing corporation has to be established, Cader stressed.
Under this proposal, the following were proposed in this respect:
• To introduce a listing rule to maintain minimum public float as a continuous listing requirement.
• To provide the necessary legal framework to enable cross border listings.
• To introduce Commodities & Derivatives Exchanges.
As to the present credit risk in respect of paying securities, the DG said, “There is a huge risk there. Therefore, we will have a central counter party system to take out the risk. Legislation in this regard will be established before the end of this year.”
Furthermore, the SEC has identified certain provisions and accordingly we will be making certain necessary provisions in making changes in the act in respect of the years 2011 and 2012.
It will enable give teeth to ensuring the security of the investors from a presently negatives in respect of regulating exchange through the setting up of an investors association. This will be mainly for the benefit of small investors. It will give voice to the minority investors who as it is are at a disadvantage in comparison to the big time investors.
Meanwhile, regulations will also be gazetted in respect of exchange traded funds in respect of gold, silver, and platinum will be in the Colombo Stock Exchange
He elaborated that here will be far-reaching changes in the Securities and Exchange Commission (SEC) shortly so as to meet new demands with new regulatory initiatives for the capital markets in Sri Lanka with a suppressed economy opening out and the country reaching political stability after the war, according to SEC MD.
Extensive powers
In regard to amending the SEC Act Cader said, “There are a number of sections that need to be modified before the bill is legalised. It will give provision to recover wrongful gains under the new regulations. Accordingly, the Monetary Board will have extensive powers. He said that the board will be full-time monitoring the activities of micro finance institutions.
Also, the SEC has completed the process of amending the Unit Trust Code to enable the operations of ETFs within the framework of the unit trusts and is in the process of finalising the modalities and the other legal requirements necessary for the operation of the ETFs.
Further, the SEC has initiated the process of amending the Takeovers and Mergers Code in order to remedy certain lacunae in the said law and in order to make the Sri Lankan law relating to takeovers and mergers in line with current developments in the securities market. It has also conducted consultations with market participants in order to solicit the opinion and views of the market participants on the proposed amendment to the Takeovers and Mergers Code.
Demutalsation is a process by which an existing member-owned, mutually operated, stock exchange is converted into a shareholder-owned, commercially operated, corporate entity. It segregates ownership and management from the trading tights of the members of an exchange.
Painting a tall picture of the SEC’s contribution to the economy Cader observed that in the last two years we have seen a significant growth of 250 per cent in the market. In 2011, so far a growth rate of over 15 per cent has been recorded with the turnover from January 3 to February 23 in the SEC has already reached Rs. 127 billion.”
He added that the annual turnover figures went over Rs. 142 million in 2010 as against Rs. 142m in 2009. He was with it touching on the role of the share market and the SEC and a developing economy which required a shot in the arm by giving new powers to the SEC to act in raising earnings to capacity levels. Towards direction, he insisted that the SEC with more powers would come down on such business establishments like casinos which did not declare most of their earnings.
Right information
Stressing on new teeth being given to the SEC act, Cader pointed out that with the industry growing changes were imperative in a scenario ‘where we have to work in a manner to achieve the objectives of the Colombo Stock Exchange. It has to fit in respect of stock brokers and stock dealers.’
Today, investors of shares were at a disadvantage. This was because they had no control of their shares in the stock exchange. Therefore the new legislation would plug this loophole. In a capital market, the key element is that it’s governed by a disclosure base regulation. Therefore, such legislation was imperative..
In respect of the investors, the SEC DG reminded that it was the duty of the legislator to ensure that investors are provided with the right information. “We give them the information, and they decide how to go about it. Investors indeed have a role to play and assume responsibility for his decision,” he pointed out adding that ‘we found out that in respect of the issue of share warrants by registered companies, the rights of investors would also be protected.’ “We found that companies with the minimum public votes take undue advantage over investors in the case of issuing warrants. We have capped it with a maximum of 10 per cent.”
Another investor disadvantage that will be plugged by the new piece of legislation is where company directors had the advantage of trading heavily as they were in the advantageous position of being in possession of the market prices which investors are not aware of. Under the new legislation such directors will be prohibited from trading if they are in a default board. Further, now investors will need a 50 per cent upfront margin to invest in the stock market. Hitherto, people were investing on credit which they cannot legally do.
One of the more serious implications arising from an outdated SEC act was the fact that people without a monthly income could invest in the share market. “The best examples of this fact was that a man without a monthly income had Rs. 172 million in sales and Rs. 130 million in purchases,” he reasoned pointing out that in such cases it was the broker who would suffer.
The SEC will also be hard on the stock broker community in extending credit. The new legislation in that respect which came into effect from January has enabled to reduce the risk factor in the market tremendously. A retarding factor had been a heavy price volatility in 2009. Prices at Rs. 10 were trading at Rs. 150 million in a bullish way by about 300 people which was not good.
Artificial demand
He also stressed that in the event there was an artificial demand the SEC would then step in. “We have introduced various price laws and so many said the small timers were deprived. But it was proved to be wrong. The daily averages rose from Rs. 2 billion to Rs. 3 billion which, in fact, reflected that the market has stabilised.
Cader struck a chord in regard to foreign companies when he said that they essentially created a financial hub in so much as a resourceful stock market. As it was, there were numerous foreign companies making inquiries as to how to list in the Colombo Stock Exchange. This was following the government opening out to foreign investors with the road to a prosperous economy now created.
“But, we have to be careful in regard to foreign companies and be selective in giving them the go ahead. Of course, in this climate by the end of 2011 we will have a fair number of foreign companies investing here,” the SEC MD cautioned while assign that a draft bill being prepared to repeal the Finance Act of 1978. Once this is done, acceptance of deposits and lending money and investment of money will come under the hammer of this act. Accordingly, no person without a licence will be able to carry out business activities.
Courtesy- The Bottom Line
According to the SEC’s future initiatives towards protecting and widening investors spelt out by SEC Director General Malik Cader at a recent presentation, SEC will make amendments to the SEC Act, introduce internet trading rules, establish Investor Association of Sri Lanka, introduce Exchange Traded Funds and amend the Takeovers and Mergers Code. The regulator also plans to demutualise the Colombo Stock Exchange, draft legal framework to establish a Central Counter Party to introduce listing rule to maintain minimum public float as a continuous listing requirement, provide the necessary legal framework to enable cross border listings and introduce Commodities and Derivatives Exchanges.
The exploitation of minor loopholes in the SEC Act to make unauthorised earnings has opened the eyes of the market watchdog. In this respect, one of the chief offenders has been casino operators who do not reveal enormous earnings, according to Cader.
Regulatory changes
Cader, who recently addressed participants on ‘New Regulatory Changes impacting on Business’ in relation to regulatory changes in the securities market, observed that a key issue facing the SEC was the fact that casinos did not do enough in respect of declaring their finances. Further, there was much money laundering of customers and under the present Act the SEC had only limited legislative scope to act. Therefore, the new legislation to be enacted would go a long way in clamping down on errant casino operators.
“To streamline the accounting of casinos, we will enact legislation to have the banks play a role in facilitating transactions whereby there will be transparency,” he stressed adding that the new laws would also require a company, NGO or co-operatives dealing in micro finance activities will have to register under the Micro Finance Act.
A key issue facing the SEC was the fact that casinos did not do enough in respect of declaring their finances. Further, there was much money laundering of customers and under the present act the SEC had only limited legislative scope to act.
While ensuring that the stock market is not abused by money launders, another key area of importance to the SEC will be looking after the investor; particularly the small investor and giving them wider scope in transacting with the stock market is finding the top priority of the island’s market watchdog, the Securities and Exchange Commission SEC.
Bigger role
At the same time, the SEC will arm itself with new legislation to play a bigger role in manifesting itself in a more significant and positive role with the country’s economy opening up.
In respect of giving wider scope and protecting investors, the SEC will act to remedy this lacuna in regulation by introducing guidelines to ensure that internet trading service provider has satisfactory arrangements in place to safeguard the integrity of the service and to prevent misappropriation of IDs, impersonations (leading to unauthorised/ illegal transactions) and unauthorised usage.
Another key area to be addressed by the SEC will be individuals’ rights.
“The establishment of the IASL is founded on the basis that the only avenue of assistance for individuals whose minority rights have been violated is by way of resorting to the provisions in the Companies Act No. 7 of 2007. Whereas the creation of the IASL would make way for collective action to be taken by an organisation of Sri Lankan investors as there would be strength in their numbers and this organisation would focus on sharing and exchanging investment information in order to protect investors’ rights and benefits,” the DG noted.
Overhaul SEC Act
Another significant move by the SEC is the initiation of reviewing the Securities and Exchange Commission of Sri Lanka Act No. 36 of 1987 (as amended) with the intention of overhauling the said SEC Act and introducing new legislation to regulate the securities market.
Cader echoed the fact that moving in such a direction will require far-reaching changes for which the SEC is gearing up to drive forward the stock market to new heights in an expanding economy.
In this direction, a bill is to be introduced to amend what the Director General described as an old-fashioned act of 1977. With it will follow the decentralisation of the CSE thus, creating in Cader’s words, ‘a more vibrant and efficient stock market than now.’
Cader said, “The Securities Exchange Commission laid down guidelines pertaining to outsourcing of functions to be adopted by exchanges, central depositories and clearing houses. The Colombo Stock Exchange with the approval of the SEC has drafted new guidelines to regulate internet trading to promote confidence in the efficiency and fairness of the securities market and will be incorporated into the Member Regulations of the CSE.”
The SEC has been quick to identify certain provisions and accordingly we will be making certain necessary provisions in making changes in the act in respect of the years 2011 and 2012. It will give teeth to ensuring the security of the investors from a presently negatives in respect of regulating exchange through the setting up of an investors association.
“This will be mainly for the benefit of small investors. It will give voice to the minority investors who as it is are at a disadvantage in comparison to the big time investors,” Cader reasoned.
Meanwhile, regulations will also be gazetted in respect of exchange traded funds in respect of gold, silver, and platinum will be in the Colombo Stock Exchange
Far reaching changes in the Securities and Exchange Commission (SEC) shortly will enable the SEC intends to remedy the lacuna in regulation by introducing guidelines to ensure that internet trading service provider has satisfactory arrangements in place to safeguard the integrity of the service and to prevent misappropriation of IDs, impersonations (leading to unauthorised/ illegal transactions) and unauthorised usage so as to meet new demands with new regulatory initiatives for the capital markets in Sri Lanka with a suppressed economy opening out and the country reaching political stability after the war as envisaged by the SEC.
Central clearing house
On the proposed central clearing house, the SEC Director General said, “The SEC initiated process of facilitating the CSE to introduce a central clearing house expected to operate on the basis of a Central Counterparty (CCP) which will clear and settle all market transaction taking place through CSE.
CCP will be an ‘entity that interposes itself between parties to contracts in one or more financial markets, becoming the seller to the buyer and the buyer to the seller.’
He explained that the CCP will help facilitate the clearing and settlement process in CSE. It will enter the stage after a trade is concluded and will interpose itself between counterparts to financial transactions, becoming the buyer to the seller and the seller to the buyer by way of innovation.
In order to facilitate futures and options trading in Sri Lanka, it is necessary to establish a clearing corporation; for all derivatives transactions contain counterparty risk which can generate a liquidity crisis, bankruptcy and market inefficiency. In order to prevent this, a CCP which is actually a clearing corporation has to be established, Cader stressed.
Under this proposal, the following were proposed in this respect:
• To introduce a listing rule to maintain minimum public float as a continuous listing requirement.
• To provide the necessary legal framework to enable cross border listings.
• To introduce Commodities & Derivatives Exchanges.
As to the present credit risk in respect of paying securities, the DG said, “There is a huge risk there. Therefore, we will have a central counter party system to take out the risk. Legislation in this regard will be established before the end of this year.”
Furthermore, the SEC has identified certain provisions and accordingly we will be making certain necessary provisions in making changes in the act in respect of the years 2011 and 2012.
It will enable give teeth to ensuring the security of the investors from a presently negatives in respect of regulating exchange through the setting up of an investors association. This will be mainly for the benefit of small investors. It will give voice to the minority investors who as it is are at a disadvantage in comparison to the big time investors.
Meanwhile, regulations will also be gazetted in respect of exchange traded funds in respect of gold, silver, and platinum will be in the Colombo Stock Exchange
He elaborated that here will be far-reaching changes in the Securities and Exchange Commission (SEC) shortly so as to meet new demands with new regulatory initiatives for the capital markets in Sri Lanka with a suppressed economy opening out and the country reaching political stability after the war, according to SEC MD.
Extensive powers
In regard to amending the SEC Act Cader said, “There are a number of sections that need to be modified before the bill is legalised. It will give provision to recover wrongful gains under the new regulations. Accordingly, the Monetary Board will have extensive powers. He said that the board will be full-time monitoring the activities of micro finance institutions.
Also, the SEC has completed the process of amending the Unit Trust Code to enable the operations of ETFs within the framework of the unit trusts and is in the process of finalising the modalities and the other legal requirements necessary for the operation of the ETFs.
Further, the SEC has initiated the process of amending the Takeovers and Mergers Code in order to remedy certain lacunae in the said law and in order to make the Sri Lankan law relating to takeovers and mergers in line with current developments in the securities market. It has also conducted consultations with market participants in order to solicit the opinion and views of the market participants on the proposed amendment to the Takeovers and Mergers Code.
Demutalsation is a process by which an existing member-owned, mutually operated, stock exchange is converted into a shareholder-owned, commercially operated, corporate entity. It segregates ownership and management from the trading tights of the members of an exchange.
Painting a tall picture of the SEC’s contribution to the economy Cader observed that in the last two years we have seen a significant growth of 250 per cent in the market. In 2011, so far a growth rate of over 15 per cent has been recorded with the turnover from January 3 to February 23 in the SEC has already reached Rs. 127 billion.”
He added that the annual turnover figures went over Rs. 142 million in 2010 as against Rs. 142m in 2009. He was with it touching on the role of the share market and the SEC and a developing economy which required a shot in the arm by giving new powers to the SEC to act in raising earnings to capacity levels. Towards direction, he insisted that the SEC with more powers would come down on such business establishments like casinos which did not declare most of their earnings.
Right information
Stressing on new teeth being given to the SEC act, Cader pointed out that with the industry growing changes were imperative in a scenario ‘where we have to work in a manner to achieve the objectives of the Colombo Stock Exchange. It has to fit in respect of stock brokers and stock dealers.’
Today, investors of shares were at a disadvantage. This was because they had no control of their shares in the stock exchange. Therefore the new legislation would plug this loophole. In a capital market, the key element is that it’s governed by a disclosure base regulation. Therefore, such legislation was imperative..
In respect of the investors, the SEC DG reminded that it was the duty of the legislator to ensure that investors are provided with the right information. “We give them the information, and they decide how to go about it. Investors indeed have a role to play and assume responsibility for his decision,” he pointed out adding that ‘we found out that in respect of the issue of share warrants by registered companies, the rights of investors would also be protected.’ “We found that companies with the minimum public votes take undue advantage over investors in the case of issuing warrants. We have capped it with a maximum of 10 per cent.”
Another investor disadvantage that will be plugged by the new piece of legislation is where company directors had the advantage of trading heavily as they were in the advantageous position of being in possession of the market prices which investors are not aware of. Under the new legislation such directors will be prohibited from trading if they are in a default board. Further, now investors will need a 50 per cent upfront margin to invest in the stock market. Hitherto, people were investing on credit which they cannot legally do.
One of the more serious implications arising from an outdated SEC act was the fact that people without a monthly income could invest in the share market. “The best examples of this fact was that a man without a monthly income had Rs. 172 million in sales and Rs. 130 million in purchases,” he reasoned pointing out that in such cases it was the broker who would suffer.
The SEC will also be hard on the stock broker community in extending credit. The new legislation in that respect which came into effect from January has enabled to reduce the risk factor in the market tremendously. A retarding factor had been a heavy price volatility in 2009. Prices at Rs. 10 were trading at Rs. 150 million in a bullish way by about 300 people which was not good.
Artificial demand
He also stressed that in the event there was an artificial demand the SEC would then step in. “We have introduced various price laws and so many said the small timers were deprived. But it was proved to be wrong. The daily averages rose from Rs. 2 billion to Rs. 3 billion which, in fact, reflected that the market has stabilised.
Cader struck a chord in regard to foreign companies when he said that they essentially created a financial hub in so much as a resourceful stock market. As it was, there were numerous foreign companies making inquiries as to how to list in the Colombo Stock Exchange. This was following the government opening out to foreign investors with the road to a prosperous economy now created.
“But, we have to be careful in regard to foreign companies and be selective in giving them the go ahead. Of course, in this climate by the end of 2011 we will have a fair number of foreign companies investing here,” the SEC MD cautioned while assign that a draft bill being prepared to repeal the Finance Act of 1978. Once this is done, acceptance of deposits and lending money and investment of money will come under the hammer of this act. Accordingly, no person without a licence will be able to carry out business activities.
Courtesy- The Bottom Line
