Saving The Share Market
By Charitha P. de Silva
With the disastrous decline in the share market and the recent revelations of a ‘Mafia’ that has been having a field day making billions by Insider Dealings, Market Manipulation, Front Running and various other violations of SEC Regulations, the time has come for the government to re-assess its policies. The first thing to do is to stop putting the blame on others such as the Tamil Diaspora, Western Conspiracies, Regulators, Hob-Goblins and so on. The government has to realize that apart from external factors beyond its control, the decline is largely attributable to a market correction from the unrealistically high levels to which the Manipulators had pushed share prices (making fortunes for themselves in the process).
Instead of trying to put the blame on the Regulators for attempting to curb the Manipulators, the government should protect and strengthen them by giving them more teeth and the freedom to fulfil their duty of regulating the share market and protecting investors. They have two functions: to regulate and promote, and there needs to be a delicate balance between these two. The screams of the Mafia that there is over-regulation that has been the main cause of the market decline should be ignored for two reasons: firstly such a defence would be the natural reaction of wrong-doers, and secondly it is manifestly not the reason for the decline, as all honest cognoscenti would confirm. They will also go on to say that one contributory factor to the decline is the activity of the Mafia itself that has resulted in a loss of confidence in the integrity of the Share Market.
The latest action of the Government in forcing the resignation of the second upright Chairman of the SEC within a year has done nothing to restore this shaken confidence. Very few people would believe that a person of Thilak Karunaratne’s calibre would succumb to direct pressure from the Mafia itself. Without a widespread perception of integrity in the Share Market it is futile to imagine that it will be restored to its former glory until the government is seen to change its policies that have resulted in the present situation.
If anything can restore confidence in the share market it would be the vigorous investigation of known wrong-doers and their prosecution. Prosecutions, followed by convictions, have been singularly lacking in the past. ‘Compounding’ has been the order of the day. This is something that differentiates our market from well-regulated markets in the West. Regulatory authorities in the West do not shy away from jailing wrongdoers. It is recognized as the only effective deterrent to criminal behaviour. Fines of millions when one has made billions are no deterrent; they are mere irritants. Something that could go a long way to bolstering share prices would be a general all-round increase in dividend payouts. If all companies were to emulate companies such as John Keells and Nestles that have had payouts in excess of 50%, it would give a palpable boost to the Share Market. However the world is such that exhortations to virtue alone do not work. They have to be backed by penalties or deterrents to bad behaviour.
Good behavior is the essence of the Code of Conduct of the Ceylon Chamber of Commerce, first formulated in 1982. That made it clear that Boards of Directors are obliged to pay annual reasonable dividends to their shareholders if they are in a position to do so. A recent Commercial High Court judgment has found a company guilty of violating Section 224 (Oppression of Minorities) and 225 (Mismanagement) of the Companies Act by failing to declare dividends when it was able to do so.
The way to persuade companies to declare bigger dividends is to penalize them if they do not do so. The President, as Minister of Finance, introduced in 2006 a Deemed Dividend Tax that did exactly that. It had the desired effect of bringing about an immediate increase in the dividend level and giving a palpable boost to the Share Market. However in the course of time the Ministry of Finance succumbed to pressures and the Tax was emasculated. In the desperate situation that we are in now, the Government should have the courage to re-introduce a cure that worked before; but with an enhanced benchmark level of either 33 1/3% or 25% for dividend payouts, depending on how important the government considers the rehabilitation of the Share Market. There will be the usual howls of protest from interested parties (just like the recent howls from the Mafia) but the government should ignore them for two reasons: firstly no company that is observing the Code of Conduct of the Chamber and behaving ethically would become liable to the tax, and secondly all minority share holders would be deeply grateful to the government. It would, in other words, be a popular move that would gain political capital. There is a current theory that shareholders are not interested in dividends but only in capital appreciation. I have disposed of that fallacy in another article “Dividends or Capital Appreciation; or Both?” I might mention here that it is the culture of the Fast Buck that has made the pursuit of capital appreciation by Market Manipulation so seductive. Investors should not be compelled to sell their shares in order to get any benefit from them. Capital Appreciation is of no value until the shares are sold.
There are many investors who are averse to selling their shares but would like them to be a permanent source of steady annual income. That is what a former President of this country had in mind when he dreamt of Sri Lanka becoming a ‘Share Holder Democracy’. Such a Democracy would imply a long-term commitment not speculative trading that is at the root of today’s ills. This Government has the power to achieve this dream; if it can summon the courage to do what is required.
The best way to safe guard the stock market or any market or anything involved with money, is to appoint a president like Mr( Clean) Ranil Wickramasingha. He has no obligations like to collecting money for his family.
Anay aththa thamaiy
Rathu KOLLO.
The fat man who tried the helping Hambantota scam is now minister of finance?
Who said its a scam? Ask the CID,
They said it was not a scam ,,just pocket change.
I bet Tilak reminded MR about the RS. 1 Million he gave to run for the Presidancy in 2005. MR, Its time to pay the friend who helped you. Ask Srinath, Tilak’s brother he could shed some light on to this matter…..Suri.
This problem in the SEC or Stock Market cannot be dealt with in isolation. This is only symptoms that are propping up hear and there in various forms of a virus engulfing all aspects of public life where there are supposed to be Mafias here, there and everywhere. We have to find the anti-biotic that can fix the root cause.
The problem is the Presidential Constitution that makes the President the only person above the law. JRJ who is responsible for introducing this PC was also a Finance Minister in the first Cabinet of DS Senanayake, but as the first President appointed Ronnie De Mel as Finance Minister though by virtue of the PC he could have also been the Finance Minister. If one looks at the Ministries under the President it is obvious he cannot be Super Human let alone above the law.
This is what is wrong with the Country and every civic minded citizen must urge the President to change the Constitution and spread the political power among his Cabinet of Ministers and be the Chief Minister which is the PM as before. The disease we have is due to concentration of Power in one person who is above the law and also only Human and having a 24 hour day to solve every ones problems.
Don’t people understand the adage that ‘Absolute Power Corrupts Absolutely’.
We have to lift the President from this ‘Cesspit’ that he finds himself in before we all fall in and there is no point making these ‘Mafias’ the convenient Scapegoats.
I have great respect for Mr.Charitha De Silva and his remedial advise for the two institutions in question, but Sir this is only an issue of a bigger problem that can ruin the Wonderful opportunity that Sri Lanka has been Blessed with right now where we could find our feet and rightful position in the World today. The PC could have served us well to get rid of Terrorism but nor the War against Poverty.
What I see is that the both the PC and Free Market policies have not worked for many reasons. Terrorism promoted by Mrs.Indira Gandhi ruined our Free Market and the PC has been ruined by the absolute power vested in the President.
The President has become a Prisoner of a system that has landed everyone citizen in Soup and we should all take responsibility and get rid of it for our Good.
.
Dear Mr Charith P.De Silva,
You are trying to save stockmarket,,,,,,,,,,,,,,,,, very good
you praised Mr Thilak Karunaratne …. if he can do he couldhave punished a single broker or investor who does not have political power. but he failed to do so why…….let me telll you the truth, he is not interested at all.
What he interested is only big fish involved for wrongdoing. I suggest he is having deferent agenda in his mined Because he is UNP politician and long time investor, which he himself made money selling shares to others. I found he hate market and people making money…..
Market manipulation done by SEC & CSE let me tell that too…. IPO selling price and rights again price …….who desided to approved this prices SEC and SEC those prices are today at what level you must study
Investors was cheated by this CSE and SEC officials by approving those prices this was the main problem we had faced in colombo stock exchange…..
If you are a realy honest , truth loving and independent gentleman please publish this comment and I REQUEST YOU AND YOUR PAPER TO PUBLISH ARTICAL ON THIS WITH OUT BLAMING MAFIA
MAFIA CAN BE ANY ONE REGULATORS, INVESTORS, POLITICOS OR MEDIA ….. PLEASE PLEASE PLEASE NEED ONE ARTICAL ON THIS …FROM YOU>
Our main problem is we are too arrogant to learn from others. There are SEC’s elsewhere with tried and tested rules and regulations. There are older Stock Exchanges in other countries no doubt had their share of market manupilators and now resolved. A couple of years ago I read about a software from Thailand that could identify market manupilators was being tested, but what happened to it? Perhaps it was too effective. I am also intrigued on the insistence by the CSE that shares could only be traded through an accredited broker but notwithstanding some of them are apparently corrupt. In the developed countries, E.g. UK USA etc. any share could be bought and sold through your banker. With this ease of operation there could be very little room for manupilation