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In his first newspaper interview after becoming the regulator of the country’s only equity market, Colombo Stock Exchange, Thilak Karunaratne who was once a member of Sri Lanka’s Parliament spoke to Mirror Business about regulations, market manipulations, the recent The Finance-nsb deal and much more. Excerpts: I studied the SEC Act and discussed with the SEC’S directorate and the Finance Ministry Secretariat and found out that the laws in the Act were quite archaic
Q: Has your perception about Colombo Stock Exchange changed after becoming the regulator?
Well, Colombo Stock Exchange compared to some of the more mature capital markets was not really performing up to expectations. I’m not talking about volumes, but the regulatory aspects of the market. There were a lot of cases of insider trading and manipulation. So I knew those things were happening even as an investor. When I accepted this position, my objective was to do something about the illegal activities taking place in the market. Even when I was an investor in this market, I had this idea that the market should be well regulated for it to do better and create investor confidence. So I wouldn’t say my perception has changed. But of course, my approach has now changed after becoming the regulator.
Q: It was no secret that the former SEC Chairman and the Director General had to step down from their positions as a result the pressure exerted on them mainly by powerful investors.What were you thinking when you accepted the offer?
Yes of course I was aware of all these things. I knew that former SEC Chairman Mrs.sugathadasa, to her credit did an excellent job and it was unfortunate that she had to leave. But still I thought, this was something I should take on and see whether I could make a change.
Q: Were there any conditions from your side when you accepted the job?
I’m of course not well connected as Mrs. Sugathadasa. But I have a reputation to maintain and a credibility to safeguard. So, with those two I thought I wouldn’t have to ask for any guarantee from anybody and if they respect me for what I’ve been doing in the past, I should be permitted with a free hand and so far there hasn’t been any pressure on me.
Q: What are the key issues you have identified that should be rectified immediately for the betterment of the market?
It is nothing to do with the Colombo Stock Exchange’s management. It’s the systemic weaknesses the regulator has not addressed. When I came here, I studied the SEC Act and discussed with the SEC’S directorate and the Finance Ministry Secretariat and found out that the laws in the Act were quite archaic. It needs a lot of amendments to bring up the regulator to the level of developed and mature markets. So, that’s what we’ve now embarked on. What we want is the SEC to become a modern regulator with all the powers that it needs to regulate the market.
And also, we don’t have systems such as Central Counter Party (CCP) and Delivery Verses Payment (DVP). Dialogue has been going on about for four years brining these things, but unfortunately it has not happened. So I’m determined with the support of our commission and the board of the CSE to make sure that this can be implemented before the end of this year. There had been so many timelines set for these things to be implemented. So there’s no excuse this time.
Q: But some say the market is overregulated and that is killing the investor sentiment
I don’t subscribe to that all. Markets have to be well regulated. If you take US capital markets they are extremely well regulated. That’s how they were able to catch a big fish like Raj Rajaratnam. I think Colombo Stock Exchange is loosely regulated. But most of the necessary technology and other resources were there in place for the CSE to be well regulated.
Q: There has been this allegation for some time that SEC only investigate the small timers and always let the big time offenders who are well connected and have money and power go free. What is your response to this allegation?
I suppose there is some truth in it, though I cannot say it’s fact. But the fact remains that we haven’t brought to books the so called high networth individuals who have become high networth recently, who made their money between 2009 and 2011. But of course, the investigations are still on, on some of the cases. But, when I took over I found that most of the investigations had been stalled due to some reason or the other. And they were not on a continuous basis and even the ones that were being investigated were slowed down. With the fullest co-operation of my commission, we gave necessary individuals to fast-track investigations and it is happening now. Hopefully, we’ll be able to see something in the coming few months. In fact, surveillance and monitoring had been carried out quite regularly. But as I said, due to some unexplainable reasons, proper investigations had not been carried out on them.
Q: Most of the times when SEC brought in rules, it tended to bow down to investor/broker pressure and amended them. Hasn’t this lenient approach affected the credibility of the regulator?
I can’t agree with you more. The SEC lost its credibility sending wrong signals. That’s why when I assumed my duties we relaxed this credit rule. There was so much of outcry, specially the media, saying that the SEC is trying to kill the market. When we analyzed we found that it was not the limitations on brokercredit that had been hurting the market. So that’s why we relaxed it and then showed everybody that credit is not panacea for all the ailments CSE is suffering from. The thinking behind lifting the price band was same. And also, price bands are not the thing for a market that is trying to emerge. But of course, if the need arises we will not hesitate to use it again.
And also SEC’S move not to allow share Introductions in the CSE is also a step taken toward shutting regulatory loopholes. We don’t bother about the number of companies that will get listed on the CSE for one year but the value it can bring to the market as well as to the investors. Likewise we are now trying to correct things, which of course should have been done earlier.
Q: Many small time investors in the CSE have got themselves wiped off when the market started to come down. They blame the SEC for it. What do you have to say?
It’s nobody’s fault but theirs. They should have known better. Everything that goes up should come down. They knew about the risks in the equity market and they should have evaluated the risk element involved when following the big fish with a herd mentality. As much as they were willing to accept profits when the going was good, they should also prepare to accept the losses.
Q: You think the steep rises we saw in the market indices were unrealistic?
That rise was mostly manipulated. Proper actions should have been taken at that time to curb it, which unfortunately didn’t happen. So when the market started to come down, a lot of small timers got their fingers burned.
Q: Let’s talk about the recent The Finance- NSB deal that has created much controversy.
I can assure that SEC will do the maximum to bring the wrongdoers to books involved with this deal. We already have summoned the particular stock broker involved in the case and the director board of his brokerage for clarifications. What has happened is really unfortunate as this is first instances where a payment has not been honoured. This will definitely impact the credibility of the CSE and it has set a very negative precedent. We are trying our best to bring the culprits to books and minimize the systemic risk the deal has already created.
Q: Any final thoughts?
It’s a challenging job and challenging times for SEC. My dream is with the assistance of the SEC Commission and the Secretariat to make the CSE a well regulated and well respected capital market.
Q: Has your perception about Colombo Stock Exchange changed after becoming the regulator?
Well, Colombo Stock Exchange compared to some of the more mature capital markets was not really performing up to expectations. I’m not talking about volumes, but the regulatory aspects of the market. There were a lot of cases of insider trading and manipulation. So I knew those things were happening even as an investor. When I accepted this position, my objective was to do something about the illegal activities taking place in the market. Even when I was an investor in this market, I had this idea that the market should be well regulated for it to do better and create investor confidence. So I wouldn’t say my perception has changed. But of course, my approach has now changed after becoming the regulator.
Q: It was no secret that the former SEC Chairman and the Director General had to step down from their positions as a result the pressure exerted on them mainly by powerful investors.What were you thinking when you accepted the offer?
Yes of course I was aware of all these things. I knew that former SEC Chairman Mrs.sugathadasa, to her credit did an excellent job and it was unfortunate that she had to leave. But still I thought, this was something I should take on and see whether I could make a change.
Q: Were there any conditions from your side when you accepted the job?
I’m of course not well connected as Mrs. Sugathadasa. But I have a reputation to maintain and a credibility to safeguard. So, with those two I thought I wouldn’t have to ask for any guarantee from anybody and if they respect me for what I’ve been doing in the past, I should be permitted with a free hand and so far there hasn’t been any pressure on me.
Q: What are the key issues you have identified that should be rectified immediately for the betterment of the market?
It is nothing to do with the Colombo Stock Exchange’s management. It’s the systemic weaknesses the regulator has not addressed. When I came here, I studied the SEC Act and discussed with the SEC’S directorate and the Finance Ministry Secretariat and found out that the laws in the Act were quite archaic. It needs a lot of amendments to bring up the regulator to the level of developed and mature markets. So, that’s what we’ve now embarked on. What we want is the SEC to become a modern regulator with all the powers that it needs to regulate the market.
And also, we don’t have systems such as Central Counter Party (CCP) and Delivery Verses Payment (DVP). Dialogue has been going on about for four years brining these things, but unfortunately it has not happened. So I’m determined with the support of our commission and the board of the CSE to make sure that this can be implemented before the end of this year. There had been so many timelines set for these things to be implemented. So there’s no excuse this time.
Q: But some say the market is overregulated and that is killing the investor sentiment
I don’t subscribe to that all. Markets have to be well regulated. If you take US capital markets they are extremely well regulated. That’s how they were able to catch a big fish like Raj Rajaratnam. I think Colombo Stock Exchange is loosely regulated. But most of the necessary technology and other resources were there in place for the CSE to be well regulated.
Q: There has been this allegation for some time that SEC only investigate the small timers and always let the big time offenders who are well connected and have money and power go free. What is your response to this allegation?
I suppose there is some truth in it, though I cannot say it’s fact. But the fact remains that we haven’t brought to books the so called high networth individuals who have become high networth recently, who made their money between 2009 and 2011. But of course, the investigations are still on, on some of the cases. But, when I took over I found that most of the investigations had been stalled due to some reason or the other. And they were not on a continuous basis and even the ones that were being investigated were slowed down. With the fullest co-operation of my commission, we gave necessary individuals to fast-track investigations and it is happening now. Hopefully, we’ll be able to see something in the coming few months. In fact, surveillance and monitoring had been carried out quite regularly. But as I said, due to some unexplainable reasons, proper investigations had not been carried out on them.
Q: Most of the times when SEC brought in rules, it tended to bow down to investor/broker pressure and amended them. Hasn’t this lenient approach affected the credibility of the regulator?
I can’t agree with you more. The SEC lost its credibility sending wrong signals. That’s why when I assumed my duties we relaxed this credit rule. There was so much of outcry, specially the media, saying that the SEC is trying to kill the market. When we analyzed we found that it was not the limitations on brokercredit that had been hurting the market. So that’s why we relaxed it and then showed everybody that credit is not panacea for all the ailments CSE is suffering from. The thinking behind lifting the price band was same. And also, price bands are not the thing for a market that is trying to emerge. But of course, if the need arises we will not hesitate to use it again.
And also SEC’S move not to allow share Introductions in the CSE is also a step taken toward shutting regulatory loopholes. We don’t bother about the number of companies that will get listed on the CSE for one year but the value it can bring to the market as well as to the investors. Likewise we are now trying to correct things, which of course should have been done earlier.
Q: Many small time investors in the CSE have got themselves wiped off when the market started to come down. They blame the SEC for it. What do you have to say?
It’s nobody’s fault but theirs. They should have known better. Everything that goes up should come down. They knew about the risks in the equity market and they should have evaluated the risk element involved when following the big fish with a herd mentality. As much as they were willing to accept profits when the going was good, they should also prepare to accept the losses.
Q: You think the steep rises we saw in the market indices were unrealistic?
That rise was mostly manipulated. Proper actions should have been taken at that time to curb it, which unfortunately didn’t happen. So when the market started to come down, a lot of small timers got their fingers burned.
Q: Let’s talk about the recent The Finance- NSB deal that has created much controversy.
I can assure that SEC will do the maximum to bring the wrongdoers to books involved with this deal. We already have summoned the particular stock broker involved in the case and the director board of his brokerage for clarifications. What has happened is really unfortunate as this is first instances where a payment has not been honoured. This will definitely impact the credibility of the CSE and it has set a very negative precedent. We are trying our best to bring the culprits to books and minimize the systemic risk the deal has already created.
Q: Any final thoughts?
It’s a challenging job and challenging times for SEC. My dream is with the assistance of the SEC Commission and the Secretariat to make the CSE a well regulated and well respected capital market.
Last edited by GMNet on Mon May 14, 2012 2:53 pm; edited 1 time in total
