Sri Lanka’s capital markets regulator, the Securities and Exchange Commission (SEC) has become the talk of the town within business circles and even amongst the country’s lawmakers following the resignations of two Chairpersons within a short span of one year. Amidst number of controversies and allegations that the market is being manipulated whilst the regulator is being pressurized to protect few powerful investors,
Dr. Nalaka Godahewa, who also heads the Sri Lanka Tourism Development Authority, was appointed to fill this hot seat on August 28, 2012. Ironically, two weeks after the new Chairman assumed duties, the market bounced back from world’s worst performing stock market status to the third best performing stock market, according to Bloomberg statistics. Dr. Godahewa in his first interview to the media hints that the present rally, given that it is coupled with both positive market sentiments, and many bargain buys available to investors is likely to last longer than compared to the rally in 2010/2011 period, given that that there is a heavy demand for fundamentally strong stocks this time around.
Q: How do you view the Colombo Stock Market performance at the moment to what it was during the past few months?
We all know that the market went through a downward trend from February 2011 to August 2012 creating panic across the society. The stock market and the regulator both became subjects of discussion at various forums. The All Share Price Index (ASPI) which had reached almost 7,800 points in February 2011 dropped below 5,000 points by July 2012. The average daily turnover which was around Rs.3.5 billion dropped below Rs.0.5 billion by July 2012. The drop in average trades per day during the same period was from approximately 24,600 to approximately 4,800. The total market capitalization went down by Rs 710 billion. This was not all a healthy situation. The market turnaround actually started during the latter part of August 2012. One can be happy today as at mid September 2012, ASPI had reached 5,800 points level, daily turnover has increased to Rs.1.6 billion and average trades per day is touching around 24,500 once again. Market capitalization has recovered Rs 368 billion. We can see both big and small investors active in the market at present.
Q: Some say that the market has bottomed out and that is the cause of the Bull Run in recent times whilst others view that it has been artificially inflated and therefore will experience a correction in time to come. Which of the two is your point of view?
The fast recovery of the market could be due to two possible reasons; firstly, there seems to be positive market sentiments, secondly, there seems to be many bargain buys available. One would notice that the overall market Price/Earnings ratio which had reached about 29.5 when the market was at a peak had fallen significantly. Even after the Bull Run for couple of weeks, it was still at 15.8 times by mid September 2012. Our surveillance department is closely monitoring the movements of the market to see whether stocks are being artificially inflated. What we notice is that the share prices of all types of stocks are on the rise. If you carefully look at market data you may notice that there is a heavy demand for fundamentally strong stocks this time compared to the rally in 2010/2011 period. We at SEC do not want to interfere too much with the market without extremely valid reasons. I believe a mature market should take care of its own corrections from time to time.
Q: During the month ended 14 September 2012, according to analysts, top 50 volatile stocks appreciated more than 40% although their YoY earnings are down by 50%. Doesn’t this suggest that speculation is still active and therefore there is a fear that it may affect ‘small investors’ heavily when there is a case of ‘pump and dump’ of these shares?
One must accept the reality that no stock market in the world has been able to completely eliminate the speculations. Every market has long term investors as well as speculators who do not care about the inherent value of the stocks. Speculators only care about whether or not the price of the stock is likely to go up so that they can sell and make a quick profit. We think the retailers who burnt their fingers last time will be more cautious in their trading activities this time.
Q: Do you think speculation is healthy if the market is to grow and what advise would you give to the retail investors who seem to be eyeing on stocks for short-term gains rather than stocks based on fundamental values?
Some people argue that speculation helps market liquidity. But one must be aware that you could easily be misled by following the speculators. Whether a retail investor wants to be a long term investor or a speculator looking for a short term gain is a personal decision. It is a generally accepted fact that speculation is risky and most often leads to diminishing returns in the long run. .
Q: How would your role as a regulator be different to what it was under previous Chairpersons?
The regulator’s role cannot be different whether it is a previous Chairperson or the current Chairperson. The role is clearly defined in the SEC Act. It is the extent to which you understand and abide by these provisions that might make the difference in the behaviour.
Q: How differently would you be tackling specific issues such as request for more credit by brokers or requests to relax rules pertaining to regulation? Do you hope to be more consultative than the previous two Chairpersons?
It is always good to consult all stakeholders and evaluate their observations before making key decisions. We have begun a consultative process and the observations will be discussed by the Commission before making the relevant decisions.
Q: On the development aspects of the stock market, what are the areas you hope to concentrate on?
One has to attract more investors to the market and at the same time create more opportunities for them to invest, so we hope to work on both these areas.
Q: From time-to-time, both CSE and SEC have come up with capital market plans, spanning from 5 to 10 years, though they had not been implemented properly. Do you have any plans to review these plans and implement whatever is suitable?
Yes we will review the plans that are already in place.
Q: Is there a target as to how many market development programmes and investor education seminars you hope to conduct in the first year of your tenure?
The existing corporate plans include current targets. We will review them where appropriate.
Q: In previous tenures of the SEC Chairpersons, they had stated that a Central Counter Party (CCP) system would be put in place to mitigate settlement risks. What is your view on this?
It is a good concept. There are several ongoing discussions on this subject as well.
Q: Certain stock market experts are of the view that demutualization of the Exchange is important. What is your opinion on this?
Starting from early 1990s stock exchanges around the world have been undergoing major organizational and operational changes and one of the most visible has been the trend towards demutualization. Most of the well known stock exchanges in the world such as Amsterdam, Australia, Copenhagen, Hong Kong, London, New York and Singapore have gone through a demutualization process. Stock Exchanges of many developing countries are also either going through this process or have announced plans for demutualization. For us also it is an important topic of discussion at the moment.
Q: Do you believe for the stock market to be representative of the economy, some of the large state institutions should also enter the Bourse and boost the market capitalisation?
Stock market is one of the indicators of the economic health of a country. It is important from both industries’ point of view as well as from the investors’ point of view. For example, when a company wants to raise funds for further expansions or setting up a new business venture they have to either take a loan from a financial institute or consider issuing shares through the stock market. The stock market not only provides the much needed funds for the businesses but also provides a common place for trading shares. Actually it is the stock market that makes the stocks liquid encouraging general public to get involved in the business world. We would therefore definitely welcome large state institutes to enter the stock market.
Q: At the recent meeting, the brokers have highlighted the need for a National Task Force to map a long term capital market development master plan. Is that under consideration and when do you think you could put it out?
It is a good suggestion which we will be discussing at the next Commission meeting.
Q: You had recently asked the brokers to be self-disciplined in conducting their duties? What are the areas brokers will need to show discipline?
The brokers are at the forefront of the market and they are likely to be the first to know if there are manipulations or unhealthy speculations. They can advise their clients to be cautious.
Q: The brokers have also requested the SEC to grant them monetary concessions to improve their infrastructure which includes back office operations. What are your responses?
Yes. There was a request at the meeting and if it is included in the formal proposal that we are still awaiting from the brokers, the Commission will discuss the possibilities.
Q: An Investor Association to protect minority interests has been on the cards for a long time and even the latest SEC Annual Report said such an Association will be established by the SEC. What is your opinion on this?
I need to check what was the thinking behind the SEC getting involved in a private association if, there was any such reference. The role of the SEC is clearly defined in our Act and we must work within those parameters.
Q: On the investigations already begun you had told brokers that they will continue as usual, but with specific time frames. However, a recent press release from SEC said there were no investigations into companies that were named in recent media reports. There seem to be some confusion. What is the exact position?
The press release was very clear. On the 29th August 2012, the day after the new SEC Chairman assumed duties, a particular daily newspaper dedicated its headline to an article titled ”SEC Spotlight on two dozen companies”. By publishing the names of 30 listed companies this newspaper created an impression among the public eye that these companies are suspects of stock market manipulations. However, the official clarification issued by SEC pointed out that not a single company is under investigations and all ongoing SEC investigations are related to transactions carried out by individuals.
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“This rally will last long” – Dr. Nalaka Godahewa