8 June, 2023


Who Is Accountable To Signal To Investors Any Emerging Risks Of Securities Trading?

By Chandra Jayaratne

Chandra Jayaratne

At times, due to external environmental reasons or entity specific reasons, publicly traded securities face heightened risks. These risks may emerge at an entity or group consolidated level or it may apply to a specific sector or in general to all securities; these risks may arise consequent to specific events or be systemic risks.

Some of the risks that Sri Lankan traded securities have already faced/may face in the future, include the following:

Fiscal and Monetary Policy related risks including tax policy

State policy changes or inconsistency of application of state policy related risks

Weather and natural perils and or natural /manmade disasters including fire etc. related risks

Board and Top Management conflicts and Capability related risks

Litigation related risks including assets subject to mortgage being appropriated

Major Fraud, Misappropriation, Corruption or Money Laundering related risks

Transparency risks, gross misrepresentation and fraudulent financial statements  based risks

Non-compliance with legal and regulatory requirements and set standards related risks

Trading in insolvency/ with Serious Loss of Capital/ Major transactions and unmitigated capital commitments  based risks

Liquidity risks and working capital adequacy risks

Inability to meet licensing and other contractual commitments based risks

Market integrity and efficiency risks; including risks from securities offences – pumping and dumping, front running, conflicts of interests and insider dealings related risks

Complexity Risks and Concentration and Heavy Exposure Risks

War and International Sanctions/Boycotts and International Trade and Tariff Restrictions based risks

It is well recognized that many active and passive participants in the Sri Lankan securities market are not sufficiently sophisticated nor backed by professional analysts/brokers and advisors nor are they exposed to professionally developed flags/indicators and media exposes to be cognizant of current and emerging risks? In such a context, the most important question is who should be accountable to transparently with independence /no-conflicts of interests basis signal to the market current and emerging risks?

The Central Bank, Securities Exchange Commission, Stock Exchange, Chamber of Commerce, University Academics, Researchers/Analysts, Brokers Association, External Auditors, Professionals bound by ‘NOCLAR’ commitments, Accounting and Auditing Standards Monitoring Board, Professional Accountancy/Investment Associations, Media and Investigative Journalists are some of the options to undertake commitments for signaling.

In order to simplify let us now look at some of the past and present examples of risks of Securities Trading in Sri Lanka:

The collapse of banking and finance and primary dealer companies with serious losses accruing to depositors

Larger and growing informal economy perceived to be funded by smuggling of gems/precious metals, narcotics trading, and transfer pricing in import and export trading and services

Purported market manipulations, pumping and dumping , front running, insider trading as reported by the Bond scam investigations

Conflicts of interests and related party transactions of significant magnitude that have plagued many a failed listed and unlisted entity 

Exposes as per Panama Papers, and possibly also in recent Mauritius Papers

The exposes around management fees and profit transfers by managing agents of plantations and hotel companies

The plantations sector now facing a purported debilitating statutory compliance regards minimum daily wages, with a threat of take-over – some of these entities; whereas are in the process of issuing  new rights to existing shareholders

Initial Offer prices of IPO’s and Rights Issues being unreasonable, unrealistic and unprofessionally developed, with questionable valuation methodologies and without reference to expected prudent  benchmark valuation methods; and at times totally inconsistent with previous recent issue prices and genuine market trades

Offer prices on de-listing and mergers and acquisitions being unreasonable, unrealistic and unprofessionally developed with questionable valuation methodologies and without reference to expected prudent  benchmark valuation methods

Banking sector facing imposed lending rate ceilings, directed lending,  moratorium on outstanding loan portfolios and CRIB negative reports being ignored 

Serious money laundering, proceeds of crime  and transfer pricing allegations and linked suspicious transactions purportedly discovered during  FCID/CID investigations

Significant cases and observations discovered by the Accounting and Auditing Standards Monitoring Board- http://slaasmb.gov.lk/significant-cases-detected/

Spiraling downwards independent Debt ratings and perceived impending external debt crisis

Risks of high fiscal deficits and ambers signals  from international monetary authorities

The SEC Sri Lanka’s mission is “to promote, develop and maintain a capital market that is fair, efficient, orderly and transparent”. The US SEC, which the local SEC uses as its benchmark, has as its mission “to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formationand states “As more and more first-time investors turn to the markets to help secure their futures, pay for homes, and send children to college, our investor protection mission is more compelling than ever”- “all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it, and so long as they hold it”-the SEC continually works with all major market participants, including especially the investors in our securities markets, to listen to their concerns and to learn from their experience”- “SEC is concerned primarily with promoting the disclosure of important market-related information, maintaining fair dealing, and protecting against fraud”.

Should not the SEC and other parties specified in paragraph 4 above, collectively develop cohesive systems of accountability to actively be conscious of/ concerned  with & engaged in early identification, amber light signaling, minimizing and managing systemic risks, likely to impact on securities trading in General, including risks identified in paragraph 2 and amplified by examples in paragraph 5; especially, where the levels emerging risks are significant and can impact  sustainable profitability and financial stability/solvency of an entity or place such high risks an entire sector; and in such instances will they publicly announce and make investors aware of the potential general or for a limited period valid heightened risks signals, by amber signal marked flags, the heightened risks applying to any sector of securities?; Or even freeze/halt trading in any sector of securities, where heightened risks are anticipated?  

It is pertinent that the SEC and other parties specified in paragraph 4 above, recognize that IOSCO Research Department: Staff Working Paper 2012/1 titled Systemic Risk Identification in Securities Markets states that the use of macro- and micro-level indicators allow for a top-down and bottom-up approach to systemic risk identification and monitoring; and further that internal and external risk factors (within and outside of securities markets) can be taken into account by securities regulators, minimizing the chance of risk build-up ‘falling through the cracks’.  This top-down and bottom-up approach is represented in Figure 1.

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Latest comments

  • 2

    What ever who ever says, even in the west lay people can not win. It is always institutional investors. They hire trained people, they know every thing in time if not in advance. I here, even in Sri lanks, there is lot of stock market corruption and businesses can use the stock market to rip the small investor or just some invest their life savings. In sri Lanka, I here, only the wealthy and financial dealers who work for foreign companies harvest the profits and go home.
    I do not think except for the wealthy and powerful, stock market work for and profitted any one.

    • 2

      Have a drink & dinner with fund managers with good past performance once in a while. If you judge the manager to be a sharp cookie then invest cautiously in their funds. Chasing individual stock returns is too much work for little gain and high risk. Leave the hard research to smart fund manager and enjoy a stiff drink everyday evening!

      • 0

        Lak de Silva.

        You seem to be a serious punter in our CSE. Or are you a pretender…

        With all due respect, I don’t think all that in Dr Jayarathana.s Spiel will save the poor Punters, who take a dip in the Stock Markets , no matter where it is .

        Days where you made big bux are gone, unless you have the dosh to take big Punts in the NYSE in Tech Stocks.

        Good Old Days where you could put 10 grand in a Penny dreadful and waited to make that Million to enjoy the life like yours, sipping cocktails at the Cinnamon Lake are gone.

        Our CSE has a few good stocks ,

        If you want to take a punt , go for the Consumables, Banks ,Tourism , Transport , Utilities, Infrastructure .Health Care and Lotteries.

        The name of the game now is HOLD , Reinvest the Dividends and hope for the best..

        Now that Dr, Rani and his crooked Cabinet is not there , my prediction is all the above will perform well in the next 5 years..

        As for Dr Jayarathna’s spiel , all I can say is buyer be aware…

  • 1

    Some one can buy a certain stock to jack up the prize which will influence the stupids to buy the stock. In the mean time, they sell it and go with the profits. Others lose. How can the software predict that. Will it says, particular buyer/seller always play the game?

  • 0

    Our economy runs on borrowed money. There is no FDI here. Corruption, inefficiency everywhere. There is no national policy. How can we have market stability when uncertainties hang on . Only few benefits from various deals. When future is bleak no one can dream.

  • 0

    The saying goes like this to win you have to begin. when you have fever doctors check and give a tablet to bring down the tempwrature for risck assemant.

    1. Predictive Analysis software tool, ( monitored on monthly basis ) for Risk Adjustment Coding, process involving diagnosis reporting.

    2. Manmade disasters including fire etc. related risks. The gramer saver office must train some near residing peopple to invoice the house fire and all department must be trained and monthly demonstration place fire extigusher reachable places in an area.

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