The Sunday Leader

Watchdog Or Lapdog?

  • Securities and Exchange Commission of Sri Lanka

“The setting up of the Securities Council alone will not result in the development of the capital market. The balanced development of the market in the long run would depend on the creation of the right climate, the right inducements and the right incentives,” -  The late Finance Minister Ronnie de Mel when presenting the then Securities Councils Bill in 1987

By Dinuk Samarasinghe

The past few weeks had been, undoubtedly, an eventful period for Sri Lanka’s capital market watchdog – the Securities and Exchange Commission of Sri Lanka. In addition to the scrapping of the licence of Lanka Rating Agency (LRA) – one of three credit rating agencies operating in the country and the revelation that an investment advisor being fined over one million rupees to compound an offence to manipulate the share market, the capital markets regulator was charged for pampering an organisation linked to a ‘heir apparent’ of the former regime!

Former United National Party (UNP) Kurunegala District Parliamentarian and livewire of Helidarawwa (Revelation) – Ashok Abeysinghe alleged that the capital markets watchdog in fact had become the lapdog of the previous regime.

“The Securities and Exchange Commission has given Rs. 10 million towards the promotion of the political manoeuvrings of former Parliamentarian Namal Rajapaksa, son of former President and present SLFP Prime Minister hopeful Mahinda Rajapaksa,” Abeysinghe told The Sunday Leader.

“Out of this amount, five million rupees was given to Namal Rajapaksa’s Tharunyata Hetak organization, while the other five million was given to Ceylon Premier Sports at the request of Tharunyata Hetak.”

MP Abeysinghe said that a complaint had been lodged with the Financial Crime Investigation Division (FCID) headed by DIG Ravi Waidyalankara.

However when asked for the documents, the former Parliamentarian had a surprising answer.

“We have been asked by the Party leadership not to give any documents to media.”

When inquired from the sitting Chairperson of SEC, Thilak Karunaratne said that he could not comment on whether investigations into alleged malpractices and manipulations prior to January 2015 were being continued or not.

 

Conduct of most SEC officials commendable

However, a source close to the SEC on grounds of anonymity said that although the Commission wasn’t immune to interference under the previous regime, majority of SEC officials executed their duties in a transparent and impartial manner.

“They knew that there would be a change of regime some day and so conduct of most officials was commendable,” he said.

However it was very unfortunate that investigations that were conducted in an unbiased manner prior to January to be re-considered by the present administration questioning the integrity of SEC officials, he lamented.

“Certain issues were there but investigations were conducted in a right and proper manner!”

 

Factually incorrect

Another official on grounds of anonymity said the allegations raised by MP Abeysinghe were factually incorrect.

“The allegation that Rs 10 million had been granted is absolutely wrong. What has happened is that there was a proposal submitted by Tharunyata Hetak citing an educational programme including seminars and workshops to empower youth, and after ascertaining that their goals were in line with the goals of SEC.

“Since Tharunyata Hetak was a movement the SEC inquired as to how the cheque should be drawn and it was requested that the cheque be drawn in favour of Premier Sports. So there was only one cheque issued not two. Plus as far as we were made aware, the SEC officials adhered to all proper procedures when making this payment. It is factually incorrect to say two cheques were issued. Whether these funds were used properly has to be ascertained from Tharunyata Hetak.”

But when asked whether any organisation can obtain funds from the SEC as long as their ‘goals were in line’ with that of the watchdog, the official was unable to answer.

Although SEC officials can’t wash their hands completely by citing compliance with due procedures, future probes will have to look into what Tharunyata Hetak really did with the proceeds.

 

Riddled with interference

Anyone merely looks into the timeline of SEC can ascertain whether it was able to function without any hindrance.

  • 2015 April – Colombo Stock Exchange (CSE) is requested by SEC to provide information on suspicious transactions conducted prior to 2013
  • 2015 March – The Media reports of a former Commission official traded in stocks whilst holding office in breach of SEC laws.
  • 2015 February – Former Secretary to the President Lalith Weeratunga’s wife Indrani Sugathadasa reappointed as the Chairperson of the Insurance Board of Sri Lanka, which she headed along with the SEC, prior to being forced to quit.
  • 2015 January – The UNP Government announced its intentions to reappointed once beleaguered SEC chief Tilak Karunaratne. After taking over the reins, Karunaratne noted that the Commission had a ‘poor record’ with the archaic SEC Act being one reason for this. The new SEC Act would not allow serious frauds to be ‘compounded’ or settled with a fine.
  • 2013 September- Dr Harsha de Silva (currently the Deputy Minister of Policy Planning) charges that SEC was planning to compound undisclosed securities fraud by some billionaire investors… we nevertheless believe it is the SEC’s duty, as the regulator, to take swift action against fraudulent activities… says the Deputy Minister.
  • 013 March 23 – Dr Hareendra Dissa Bandara tenders his resignation stating reasons ‘based on principles’
  • 2013 March – Amidst charges that Commission was turning a blind eye to rampant market manipulations and dragging probes, the parliamentary watchdog – Committee on Public Enterprises (COPE) summons top SEC officials and was informed that the proposed amendments to the SEC Act were forwarded for the Attorney General’s opinion.
  • 2012 September – Karunaratne alleges ‘daylight robbery’ by a ‘stock market mafia’ closely connected to leaders of previous Government, including Rajapaksa.
  • 2012 August 28 – Dr Nalaka Godahewa is appointed as the new Chairman under highly controversial circumstances. He is alleged to being well-connected to the Government.
  • 2012 August 17- Thilak Karunaratne resigns reportedly under duress less than one year after taking over the reins of SEC.
  • 2012 May- Current Finance Minister Ravi Karunanayake writing to COPE Chairman DEW Gunasekera pays a glowing tribute to deposed SEC Chief Mrs. Indrani Sugathadasa, who resigned in protest of the workings of the alleged stock market mafia and implores that she and others responsible should be summoned before COPE.
  • 2012 April – Dr D. B. P. Hareendra Dissabandara appointed as Acting Director General of the SEC
  • 2011 December 8 – Former parliamentarian Thilak Karunaratne appointed as SEC chief.
  • 2011 December 1- Karunaratne’s predecessor Indrani Sugathadasa, who was the wife of the then Secretary to President Lalith Weeratunga quits citing a matter of principle and conscience.
  • 2011- With allegations of manipulation intensifying SEC imposes limits on the transaction of shares of several counters and later on commences investigations into alleged frauds. However, just as probes began the then SEC Director General Malik Cader was ‘kicked upstairs’ and made Senior Advisor on Capital Market Development at the Ministry of Finance.
  • 2002 February – SEC creates history when it became the first capital market regulator in the world where its own incumbent Chairman (Michael Mack) was being investigated for alleged insider dealing in a company in which he was once a Chairman (i.e. Aitken Spence). Two other former Aitken Spence Directors – Norman Gunewardene and Manil de Mel are also probed into. SEC also inquires into the stock transactions of Gunewardene’s son – Ajit Gunawardene, who was then the Colombo Stock Exchange Chairman.
  • 2001- Out of seven allegations of insider dealing probed by SEC, five cases were terminated due to lack of evidence.

 

Turnaround for the worse

The Securities and Exchange Commission of Sri Lanka (SEC), though a non-profit making statutory body has made a loss (deficit) of Rs. 13.19 million for the year ended 31 December 2014 in contrast to a profit (surplus) of Rs. 12.8 million recorded in 2013, official figures showed. SEC’s main revenue is generated through Broker License Fees, Administration Levy and through Educational Programmes conducted throughout the year.

During the year, while revenue from Educational Programmes declined from Rs. 7 million to Rs. 4 million, Capital Market Development Expenses rose from Rs. 66.2 million spent in 2013 to Rs. 102.7 million.

 

Vital conduit for growth

Incumbent SEC Chairman Thilak Karunaratne in his Chairman’s Review noted the following.

“The capital market is considered a vital conduit for long term fund mobilization and a key driver of economic growth. As the capital market regulator, our focus is to facilitate a fair, efficient, orderly and transparent market, in which issuers can raise funds with adequate safeguards provided to protect investors. Hence, the regulatory framework of the securities market has been designed to fulfill this mandate and ensure a reliable price discovery mechanism, reasonable market access to all investors, prompt action to contain market failures and timely and efficient dissemination of market disclosures. The Securities and Exchange Commission of Sri Lanka (SEC) continues to ensure that it strikes a balance in regulation since over regulation can stifle growth and discourage active stakeholder participation.”

 

Integrity of the market

“A vital aspect in maintaining the integrity of the market, as well as making certain that investors are protected is the dissemination of quality and reliable of information on an ongoing basis. Disclosures increase the ability of investors to make informed investment decisions, improve shareholder sentiment, as well as deter management from engaging in improper behaviour. When material information is made available in a timely manner it can also reduce the herd instinct of many investors. Since the lack of reliable and timely information hinders market development as well as investor confidence, the SEC will continue to impose stringent rules and undertake rigorous enforcement action against non compliance.

“In line with our mandate we continue to monitor, mitigate and manage risk with the aim of promoting integrity in the market. Since systemic risk has the potential to not only affect the financial market but the entire economy as well, our scope of supervision encompasses the identification of risk in regulated entities, issuers, transactions and the market. Through our Risk Based Supervisory Framework we attempt to focus on capital and other prudential requirements for market intermediaries, protect client assets and compliance with internal controls on a regular basis.”

 

Firmly committed against regulatory breach

“The SEC is firmly committed to taking rigorous action against those who commit regulatory breach, which include market manipulation, misconduct by regulated entities, as well as corporate disclosure-related offences etc. However, the current Sri Lanka securities law, which was enacted 28 years ago, has its drawbacks inter alia the enforcement framework built on criminal prosecution and compounding of offences. Therefore, in the past the SEC has mainly resorted to issuing warning letters, imposing suspensions on investment advisors and compounding. In tandem with the expansion of the capital market it has been considered necessary to make changes to the SEC Act with a view to broaden the range of enforcement powers. The proposed amendments to the SEC Act will introduce a range of administrative and civil sanctions, including the seeking of restitution to any person aggrieved. The SEC increased its efforts to expedite the amendments since this will pave the way for credible regulation and market confidence…”

 

Investor confidence and setting standards

“Investor confidence can be described as the foundation on which the capital market is built, and sound governance will be able to contribute towards attracting both local and foreign investors and stimulate economic growth. As the capital market regulator, the SEC strives to promote good corporate governance practices through a framework of rules and regulations which ensure accountability, fairness, and transparency. However, upholding good corporate governance requires the concerted efforts of all stakeholders of the capital market. We have achieved a lot in the area of facilitating this but there is still much to be done and we will continue to work in partnership with the capital market industry to enhance corporate governance standards.

“Regulation begins with setting standards. We have been mindful of avoiding burdensome standards as well as overly lenient rules for compliance by Market Intermediaries, codes and guideline aimed at protecting investors’ interests. Regulation has also provided minimum entry standards as well as initial and ongoing capital and other prudential requirements for Market Intermediaries that reflect the risks that the Intermediaries undertake. We are of the view that our minimum entry standards and ongoing prudential requirements need to be enhanced more, to be on par with international standards and practices, in order to ensure sound business practices, appropriate safeguards for investors and market confidence.”

 

1 Comment for “Watchdog Or Lapdog?”

  1. gamarala

    Corruption is ruining Sri Lanka – in almost every sphere of statecraft.
    SEC is an example.
    142 MPs who never qualified OLevels were unable to comprehend, busy looking after their own futures.

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