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Ceylon FT decided to share the perspectives of a renowned capital market industry professional, Nishan Sumanadeera, who pointed out the strategic way forward for Sri Lanka’s Capital Market to reposition the country as an investment safe haven for both local and foreign investors.
A top Investment Banker, Nishan Sumanadeera had facilitated the some of the top investment ventures and transactions, and has mulled some of the biggest investments made by listed companies during last three years.
In an exclusive interview with Ceylon FT, Sumanadeera shares some of his perspectives on the current dilemma faced by Colombo Stock Exchange (CSE).
Q: As a person who had been involved in the financial industry for a significant period of time, do you think the regulators should be blamed for the current crisis?
A: The Regulator’s main role and responsibility is to regulate and create an orderly market to provide a level playing field for all investors. One cannot blame or applaud the Securities and Exchange Commission (SEC) or Colombo Stock Exchange (CSE) for the negative or positive movement of the stock market. It is the market forces such as demand and supply that determine direction of a market. The outcome of many variable factors affects the creation of these negative and positive market forces.
Some factors are internal while others are external. Some may be controlled and some may not be. If any individual or institution tries to interfere with these free market forces, it will eventually result in dire consequence similarly to what was witnessed previously. Therefore I think SEC or CSE should not be blamed for the current crisis.
Q: Do you think the current inaction of the SEC and CSE is acceptable?
A: Currently the Colombo Stock Market is going through a phase of market correction. This is a natural phenomenon seen in all stock markets. Any immediate action without a clear foresight would only result in a short term result with no long-term sustainability or benefit. What is required right now is to have a uniform set of regulations that is conducive to the market, which will remain in force for a reasonable period of time. Frequent changes to regulations will only result in uncertainty in the minds of the investors and uncertainty is one of the greatest enemies of an active market.
Therefore it is important for SEC and CSE to take the Right Decisions instead of Quick Decisions. Time is not a critical factor or of an essence.
Q: What action should the SEC take in order to regulate the market?
A: Whatever decision taken by the SEC that affects the overall sentiment of the market should be taken with considerable duty of care and responsibility. It is important to consult all stakeholders of the industry such as Stock Brokers, Investors, financiers and policy makers before arriving at a decision. Currently we do not see much involvement of the investors and financiers in this process. Therefore it may be good idea for the SEC to encourage and develop these various interest groups so that the decisions taken by the SEC is not only widely accepted and also fall within the overall economic and development objectives of the country.
Apart from regulations, I also believe it is very important for the SEC to educate the investors. One of the main reasons for the anxiety of investors is the lack of proper understanding and knowledge of the risk return co-relation and inherent risk factors affecting equity markets. Any high return that can be achieved from investment in equity market comes with the greater risks. Particularly retail investors and new entrants to the stock market, which represent significant segment of the market, should be made aware of these inherent risks. This process should begin at School level.
I also believe that SEC should place considerable importance to the area of Equity Research. Currently we notice that various Research Companies and Stock Brokering companies without proper diligence release research reports and issue recommendations with regard to the direction of the market without proper analysis or basis. It may be important to regulate these areas by issuing licences confirming their competency.
Q: How could SEC and CSE ensure that the market moves towards positive territory and reaches the level that was previously achieved?
A: It is not proper for us to expect regulators to promote the stock market, value companies or speculate with regard to the direction of the market. Recently I have noticed some regulators stating that market is overvalued and fundamentally good stock are still cheap etc. I think these types of statements are inappropriate and should be discouraged, as it will only send the wrong signal to the investor community. Stock valuations and analysis should be entrusted to experts of the relevant industry that posses the required knowledge and expertise.
Q: What do you think of the current credit rule and how should it be improved?
A: Credit is an important aspect of any growing economy. Credit will provide many opportunities to businesses and contribute to the betterment of the society in general. Likewise over extension of credit could lead to many serious crises such as subprime mortgage crisis, credit default etc, which some countries witnessed during recent past. Therefore credit to any industry should also be provided with certain set of rules and guideline. Best example is how Central Bank regulates Bank and Non Bank Financial institutions.
We do not see any depositors blaming Central Bank for low interest rates or Banks complaining about statutory ratios and credit rules. But we have recently noticed many stockbrokering companies and investors talking about credit rules and blaming the SEC. My belief is that credit should be based on Net Asset Value and liquid assets of the brokering companies and SEC and CSE should monitor these ratios at Macro Level instead of Micro Managing Broker Credit.
Q: As an Investment Banker, what would you think is the best way to promote the market?
A: As we are all aware the current inflow of investment to the country is not at desired levels. Our FDIs are close to two per cent of the GDP. There are many reasons for this, some are beyond our control, but what is in our favour is the positive outlook of the country and the fact that we have peace today after 25 years of civil war. As a result the country’s economy has been growing at a steady pace of eight per cent opening many investment opportunities. It is important that as responsible investment bankers we take the responsibility to promote the country and the stock market outside Sri Lanka. This will not only increase the inflow of the inbound investment but will also help the country to strengthen the rupee against the other currencies.
It is quite noticeable that upsurge of the market beyond the benchmark valuations was as a result of local buying and selling in anticipation of large-scale inflow of foreign investment to the country. This scenario could result in a stock market bubble and crash unless carefully addressed. It is interesting to see how pension and other large-scale local funds intend to exit from their current investments. It may be a wise decision to set up an investment promotion arm with the required market expertise in investments and marketing to promote these investment opportunities outside Sri Lanka, which would certainly help the stock market and the country to move further towards positive direction.
Q: Do you think the Market is over-regulated?
A: This is a mere perception. I believe that there are certain rules and regulations that require be put under the microscope in order to determine whether it has achieved the original objective. These may include Price Band, Credit Rules etc. The market requires foolproof regulations and only such regulation can create a level playing field for investors, which will be conducive to the overall development of the market. A market without regulation would be like a car driven on the Southern Highway without brakes.
Q: How would you think manipulation of stock should be curtailed and manipulators should be punished?
A: Firstly I would like to avoid the use of the word ‘manipulation’. No person is a manipulator or involved in manipulation until such time the person is found guilty of an offence. One cannot blame investors for making use of the available opportunities to enrich themselves. This is a natural human behaviour. In the past we have noticed the collection of shares in the backdrop of bad news such as bombs, tsunamis etc. Therefore it is the responsibility and the task of the regulator to ensure that they remedy and rectify these loopholes instead of blaming the investors.
This is a very vast subject; therefore it is difficult to discuss at length now. But I will take illiquidity stocks, which have become a much-discussed topic during recent past as an example. As per the CSE listing Rules there is minimum amount of shareholdings that should remain with the public in order to qualify for a listing. This quantum will vary depending on the type of the listing sought. This is a very good rule. But then what does the Takeover and Merger Code, which is monitored by the SEC say. It says that if any shareholder or an acquirer exceed 30% threshold of a listed company will have to make a mandatory offer in respect of the balance shareholdings. This situation will make companies totally illiquid by reversing the listing rules that stipulate minimum public float. These types of rules require careful analysis and amendments.
Courtesy - Ceylon FT
A top Investment Banker, Nishan Sumanadeera had facilitated the some of the top investment ventures and transactions, and has mulled some of the biggest investments made by listed companies during last three years.
In an exclusive interview with Ceylon FT, Sumanadeera shares some of his perspectives on the current dilemma faced by Colombo Stock Exchange (CSE).
Q: As a person who had been involved in the financial industry for a significant period of time, do you think the regulators should be blamed for the current crisis?
A: The Regulator’s main role and responsibility is to regulate and create an orderly market to provide a level playing field for all investors. One cannot blame or applaud the Securities and Exchange Commission (SEC) or Colombo Stock Exchange (CSE) for the negative or positive movement of the stock market. It is the market forces such as demand and supply that determine direction of a market. The outcome of many variable factors affects the creation of these negative and positive market forces.
Some factors are internal while others are external. Some may be controlled and some may not be. If any individual or institution tries to interfere with these free market forces, it will eventually result in dire consequence similarly to what was witnessed previously. Therefore I think SEC or CSE should not be blamed for the current crisis.
Q: Do you think the current inaction of the SEC and CSE is acceptable?
A: Currently the Colombo Stock Market is going through a phase of market correction. This is a natural phenomenon seen in all stock markets. Any immediate action without a clear foresight would only result in a short term result with no long-term sustainability or benefit. What is required right now is to have a uniform set of regulations that is conducive to the market, which will remain in force for a reasonable period of time. Frequent changes to regulations will only result in uncertainty in the minds of the investors and uncertainty is one of the greatest enemies of an active market.
Therefore it is important for SEC and CSE to take the Right Decisions instead of Quick Decisions. Time is not a critical factor or of an essence.
Q: What action should the SEC take in order to regulate the market?
A: Whatever decision taken by the SEC that affects the overall sentiment of the market should be taken with considerable duty of care and responsibility. It is important to consult all stakeholders of the industry such as Stock Brokers, Investors, financiers and policy makers before arriving at a decision. Currently we do not see much involvement of the investors and financiers in this process. Therefore it may be good idea for the SEC to encourage and develop these various interest groups so that the decisions taken by the SEC is not only widely accepted and also fall within the overall economic and development objectives of the country.
Apart from regulations, I also believe it is very important for the SEC to educate the investors. One of the main reasons for the anxiety of investors is the lack of proper understanding and knowledge of the risk return co-relation and inherent risk factors affecting equity markets. Any high return that can be achieved from investment in equity market comes with the greater risks. Particularly retail investors and new entrants to the stock market, which represent significant segment of the market, should be made aware of these inherent risks. This process should begin at School level.
I also believe that SEC should place considerable importance to the area of Equity Research. Currently we notice that various Research Companies and Stock Brokering companies without proper diligence release research reports and issue recommendations with regard to the direction of the market without proper analysis or basis. It may be important to regulate these areas by issuing licences confirming their competency.
Q: How could SEC and CSE ensure that the market moves towards positive territory and reaches the level that was previously achieved?
A: It is not proper for us to expect regulators to promote the stock market, value companies or speculate with regard to the direction of the market. Recently I have noticed some regulators stating that market is overvalued and fundamentally good stock are still cheap etc. I think these types of statements are inappropriate and should be discouraged, as it will only send the wrong signal to the investor community. Stock valuations and analysis should be entrusted to experts of the relevant industry that posses the required knowledge and expertise.
Q: What do you think of the current credit rule and how should it be improved?
A: Credit is an important aspect of any growing economy. Credit will provide many opportunities to businesses and contribute to the betterment of the society in general. Likewise over extension of credit could lead to many serious crises such as subprime mortgage crisis, credit default etc, which some countries witnessed during recent past. Therefore credit to any industry should also be provided with certain set of rules and guideline. Best example is how Central Bank regulates Bank and Non Bank Financial institutions.
We do not see any depositors blaming Central Bank for low interest rates or Banks complaining about statutory ratios and credit rules. But we have recently noticed many stockbrokering companies and investors talking about credit rules and blaming the SEC. My belief is that credit should be based on Net Asset Value and liquid assets of the brokering companies and SEC and CSE should monitor these ratios at Macro Level instead of Micro Managing Broker Credit.
Q: As an Investment Banker, what would you think is the best way to promote the market?
A: As we are all aware the current inflow of investment to the country is not at desired levels. Our FDIs are close to two per cent of the GDP. There are many reasons for this, some are beyond our control, but what is in our favour is the positive outlook of the country and the fact that we have peace today after 25 years of civil war. As a result the country’s economy has been growing at a steady pace of eight per cent opening many investment opportunities. It is important that as responsible investment bankers we take the responsibility to promote the country and the stock market outside Sri Lanka. This will not only increase the inflow of the inbound investment but will also help the country to strengthen the rupee against the other currencies.
It is quite noticeable that upsurge of the market beyond the benchmark valuations was as a result of local buying and selling in anticipation of large-scale inflow of foreign investment to the country. This scenario could result in a stock market bubble and crash unless carefully addressed. It is interesting to see how pension and other large-scale local funds intend to exit from their current investments. It may be a wise decision to set up an investment promotion arm with the required market expertise in investments and marketing to promote these investment opportunities outside Sri Lanka, which would certainly help the stock market and the country to move further towards positive direction.
Q: Do you think the Market is over-regulated?
A: This is a mere perception. I believe that there are certain rules and regulations that require be put under the microscope in order to determine whether it has achieved the original objective. These may include Price Band, Credit Rules etc. The market requires foolproof regulations and only such regulation can create a level playing field for investors, which will be conducive to the overall development of the market. A market without regulation would be like a car driven on the Southern Highway without brakes.
Q: How would you think manipulation of stock should be curtailed and manipulators should be punished?
A: Firstly I would like to avoid the use of the word ‘manipulation’. No person is a manipulator or involved in manipulation until such time the person is found guilty of an offence. One cannot blame investors for making use of the available opportunities to enrich themselves. This is a natural human behaviour. In the past we have noticed the collection of shares in the backdrop of bad news such as bombs, tsunamis etc. Therefore it is the responsibility and the task of the regulator to ensure that they remedy and rectify these loopholes instead of blaming the investors.
This is a very vast subject; therefore it is difficult to discuss at length now. But I will take illiquidity stocks, which have become a much-discussed topic during recent past as an example. As per the CSE listing Rules there is minimum amount of shareholdings that should remain with the public in order to qualify for a listing. This quantum will vary depending on the type of the listing sought. This is a very good rule. But then what does the Takeover and Merger Code, which is monitored by the SEC say. It says that if any shareholder or an acquirer exceed 30% threshold of a listed company will have to make a mandatory offer in respect of the balance shareholdings. This situation will make companies totally illiquid by reversing the listing rules that stipulate minimum public float. These types of rules require careful analysis and amendments.
Courtesy - Ceylon FT
