By Laksiri Fernando –

Dr Laksiri Fernando

The recent crisis in the Securities and Exchange Commission (SEC), the official regulator of the Colombo Stock Exchange (CSE), speaks volumes of how the affairs of the country are managed or rather mismanaged by the present regime and its highest authority, the President. It was not one crisis, but one crisis after the other. On the issue of the recent resignation of Tilak Karunaratna, the outgoing Chairperson of the SEC, Frederica Jansz from the Sunday Leader asked “So the President pressured you to resign?” The answer was “I am saying that the Minister of Finance was the person.” Then Jansz asked “The President is the Minister of Finance.?” The obvious answer was “Yes.”

The ‘pressure to resign’ that Karunaratna talked about was obviously against the investigations that the SEC was conducting on market manipulation, under his chairpersonship, on certain individuals and organizations including some broker companies, according to him and to other revelations. It was not about his incompetence or incapacity as a Chairperson. After all he was appointed by the same authority, the President as the Minister of Finance, just few months back in January 2012.

The above are the reasons why there are genuine suspicions whether the President himself is linked, directly or otherwise, to what Karunaratna said about the Market Mafia. If he is not, then why does he want to stop investigations on the market manipulators or safeguard them by pressuring Karunaratna to resign?

A Flashback

The formal stock exchange or the CSE started in 1985, revealed a growth potential at several junctures depending on the progress of the business sector, investment capacity of the people and of course the political climate. Therefore, any manipulation of the stock exchange is a crime with repercussions on the economy and the people.

Until the peace agreement in 2002, the share price index in general was stagnating around 500-1,000 mark but surged up to 2,000 and above during the ‘illusive peace’ period. Although it went up to 4,000 by 2003, came down again to around 3,000 when the war erupted in 2006. The real boom was only after 2009 May, which apparently enticed big time ‘manipulators’ to enter the market with political links or eventually making political links. The boom until mid-2010 was more or less real and thereafter what we could see was largely a ‘created bubble’ manipulated by some players which even exceeded the 7,000 mark.

I give the above a bird’s eye view with approximate figures, closer to the All Share Price Index (ASPI) than to others. I also write this article not only as a usual political critique but also as a former appointed Director of the CSE between 2009 and mid-2011.

A stock market undoubtedly is a reflection of the economy, but not always real. That is why we need a regulator to keep the stock market in place without harming the economy through bubbles. The world learned this lesson particularly after the great depression in 1929. Before that the stock markets were not regulated. Again there was a tendency towards deregulation under neo-liberalism, but the international financial crisis in/since 2008 has again emphasised the need for smooth regulatory system. I use the adjective ‘smooth’ because regulation does not and should not mean control.

Frederick Engels writing to Conrad Schmidt in 1890 said the following.

“Economic, political and other reflections are just like those in the human eye. They pass through a condensing lens and therefore appear upside down, standing on their heads. Only the nervous system which would put them on their feet again for representation is lacking. The Money Market Man only sees the movement of industry and of the world market in the inverted reflection of the money and stock market. So effect becomes cause to him.”

I have only emphasised in bold ‘The Money Market Man,’ to indicate similar people in our system. They see the ‘reflections upside down’ and ‘so effect becomes cause to them.’ I understand that the President convened a meeting of primarily stock brokers and big time investors and Dilith Jayaweera gave a power point presentation ‘proving’ that the regulatory measures that the SEC has taken since late 2010, yet willy-nilly in my opinion, have created a down turn in the stock market. The President has apparently believed the interpretation and the ‘messenger has been shot down.’ It is not the first messenger but the second one. Let me explain my interpretation and experience on the situation.

My Experience

When I was appointed as a Director of the CSE, the market was booming for real reasons after the end of the war. It was a vacancy reserved for an academic in the Board of Directors that I filled. The CSE staff was enthusiastic about the situation and the Board members were keen in further promoting the stock market with various new measures. By early 2010 we realised that the market was getting over heated and we were watching. The most unusual was the rising of stock prices of some companies without much base or financial fundamentals. Those were not blue chip companies but rather unknown ones. Those were the first indications of manipulation. As the CEO alarmingly reported ‘they buy they sell, they buy they sell.’ But we were, or at least I was, not aware at that time that they were playing the game among themselves to artificially inflate the prices.

My first political misgiving came when we were selecting new broker companies among applicants. There were only 15 at that time and we were selecting 5 more among the applicants. I was approached by a person from the SEC over the phone to say the Presidential Secretariat wants to appoint certain applicants instead of others etc. Of course I was appointed by the HE as the Minister of Finance but my understanding was that I was there to safeguard the interests of the public but not the government per se. There were nine Directors on the Board; five elected by broker companies and four appointed by the Minister of Finance to represent certain professions. I also understand that now there are 28 broker firms in the stock market which is quite unnecessary as Tilak Karunaratna has remarked.

I was not happy with the way the SEC at that time, before Indrani Sugathadasa became the Chairperson, was acting towards the CSE, quite like a political controller. The SEC itself should have been independent in my opinion. Even the price band system in August 2010 came out of the blue and there was no proper consultation between the SEC and the CSE on this matter. Although there is an impression created that the price band system was introduced independent of the government, in my opinion, it was not the case. It was exactly the government or its key financial decision makers that prompted the price band system to curtail the (artificial) price rise but instead what it created was a drastic price fall. It was a too harsh measure to correct the stock market and what should have been done from the beginning was to curtail the insider trading and artificial manipulation to raise the stock prices by a group of organized investors and brokers. The price band affected not only the culprits but also the other genuine investors in the stock market.

Under the price band system, no action was taken against the culprits and instead they were allowed step by step to sell the shares that they stocked, without risking a sudden drastic price fall. As a result the most hard hit were the legitimate investors whose investments became ruined within months. Added to the calamity were the misleading instructions given by some stock brokers in cohorts with manipulative players. Karunaratna has revealed that it was the same person, the former Director General, who initiated the price band system that instructed the Director Investigations before Karunaratna’s time to put a stop to investigations. In my experience he was very closely working with the top notch government decision makers.

Market Downturn

There have been many interpretations to the market downturn since late 2010. Dilith Jayaweera’s main interpretation seems to be ‘overregulation’ to mean both the price band and the investigations, in addition to few other steps. There are more valid and standard interpretations given, for example, by the Central Bank. The down turn is mainly interpreted as a realistic market correction by the CB. All may have had their contribution to the situation, but what is overlooked is the role played by the market manipulators themselves largely causing the downturn.

It is possible that the insider trading must have been there for a long period. But what new was the ‘pooling system’ probably by high-net-worth investors in connivance with some stock brokers buying low priced stocks (2009) and then selling among themselves and inflating the price (2010) and then selling to the small investors (2011). But when the small investors try to sell (2011-12) and make profit, the prices obviously went down and in the panic the repercussions became accelerated. The years are given only to indicate the main trends or otherwise the interactions occurred during the same periods.

Fluctuations are normal to all stock markets, but what is experienced inSri Lankais rather unique most probably the high-net-worth investors having close connections with high-net-work politicians! Otherwise it is difficult to overturn in fact three Chairpersons of the SEC since 2010 and keeping the DG post on limbo for a long period. Whatever the motives, this turnover of personnel at the SEC has also created panic in the stock market, or uncertainty in regulatory measures which is the main job of the SEC.

The matter also can be explained focusing on the market capitalization. The market capitalization was barely 7 billion in US dollar terms in 2007. But it went up to nearly 20 billion by late 2010 and it has gradually come down to 13 billion by now. This down turn is parallel to the price index coming down from 7,000 mark to below 5,000 mark. This is not merely a ‘market correction’ but something has gone fundamentally wrong in the stock market. This is also not similar to the Asian Storm in late 1990s where the stock markets plunged due to capital outflow overseas.

To be sure, there is no complete crash in the stock market inSri Lanka. It has become from one of the best to one of the worst. That is alarming enough. The downturn is also not caused by foreign withdrawals from the market. Raj Rajaratnam in fact withdrew his money well before the downturn and during the bubble or the boom.

Then where has the money gone? The difference between market capitalizations from 20 billion to 13 billion must have gone somewhere? Because when the ‘losers’ lost money by buying stocks at higher prices, the ‘winners’ got the money to their accounts and must have invested somewhere or done something with them. The worst scenario is if some money has gone to some political funds! Market capital cannot just evaporate.

Conclusion

The whole scandal at the stock market should be properly investigated. What I have expressed are some views and questions and those are not by any means accusations or definitive evidence. There are clear and unclear matters.

But I have never seen a Head of State or even a Minister of Finance meeting with stock brokers or investors and making directives to a Securities and Exchange Commission on their behest. There are many other jurisdictions where SECs operate. But almost all are independent. Although the executive branch usually appoints them there is no possibility for the executive to remove them let alone the Chairperson during the tenure unless there are serious charges. Those commissions are truly independent.

In my opinion, Tilak Karunaratna has made two mistakes. He should not have resigned whatever the pressure unless there was a request or removal in writing. He also should have given the relevant names to COPE when the names were requested not as ‘mafia’ but as those who are under investigations. I state this with all respect to Tilak Karunaratna and also appreciating his integrity.

There are also ‘bad habits’ on the part of many institutions and individuals in Sri Lanka to run to the President and then ‘trouble him’ which he might relish for political or other reasons. But his intervention in this instance cannot simply be considered an accident or incidental. The whole story of the meeting revealed by Karunaratna – the seating arrangement and President’s request for Dilith Jayaweera to make the presentation etc. – does not imply that.

There is an undeniable fact. In my very objective opinion, the President has very clearly taken the side of the ‘market manipulators’ by requesting the Chairperson of the SEC to resign and effectively stalling the investigations so far carried out by the SEC. The investigations are necessary to safeguard the public interests. I am not sure whether this is good enough reason for impeachment of the President, if it is politically feasible. I leave this question open for the legislators and the lawyers concerned to consider.