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Price band on stocks will check manipulation, insider trading

The Securities and Exchange Commission (SEC) imposed a price band on some stocks a few months ago after observing over a considerable period of time, the wild fluctuations of prices as a result of some investors pushing them. Self styled independent, analysts, advisors and other parties, have criticised the move and said this intervention is unwarranted and will have negative impacts.

K. C. Vignarajah, former chairman of the Ceylon National Chamber of Industries, and a long time campaigner for a healthy stock market to cater to decent shareholders, argues that the move is most welcome as it will check manipulation and insider trading at the Colombo Stock Exchange (CSE).

It will do justice to the large majority of honest investors and the economy.

Following are excerpts from his interview with the Sunday Observer.

From the very inception of the introduction of the price band by SEC, interested parties who would profit from a highly distorted stock market, carried out strong propaganda against the move.

There have been many anonymous analysts, pundits and errant players of the stock market orchestrating criticism against the SEC to achieve their mean ends.

The SEC under the leadership of the Chairperson Indrani Sugathadasa and the dynamic support, innovation and administration of the Director-General Malik Cader have performed very well as a team. They face concerted, coordinated, sly, sniper attacks from many directions to dilute and distract them from their goals and toil towards ensuring fairness.

The valiant and determined effort made by the SEC towards creating a transparent level playing field should be applauded.

Many people have said that in the matter of credit given by stockbrokers, SEC has overreacted in imposing stringent credit restrictions.

It appears that the SEC had to act due to some errant stockbrokers giving credit to customers far in excess of even what could be termed extremely high risk lending!

The SEC, smelt collusion and even possibly insider trading which is a serious crime. These concerns had to be remedied quickly in the interest of the stock market. Now that stability has been achieved, a reasonable credit to clients of 25 to 30 percent of portfolio value would be a good thing in many ways to ease the hardship of shareholders as well as stockbrokers.

We have to create and nurture a vibrant stock market to support the effort to make Sri Lanka the Wonder of Asia in a manner where a large majority can benefit in such economic prosperity; that would make the goal worthwhile. What we need is a caring, competitive capitalism which would use its undeniable talents and resources to give leadership in tapping the potential of our country.

Companies must most importantly distribute a substantial portion of profit earned to shareholders because morally and legally this is right. Shareholders should be given adequate, timely information of performance, assets value appreciation and potential growth to assess correct valuation of shares.

Errant directors also deny information. They pick up the ball and disappear into the crowd, by delisting and even compulsorily purchasing shares. Ceylon Oxygen PLC (Ltd later) which was a classic case of Public Private Partnership (PPP). From 60 percent foreign 40 percent local PLC is being transformed to a 100 percent foreign monopoly! Action by SEC after investigation of long-term planned insider dealing must be pursued.

Some errant controlling interests do not act ethically or morally. Even illegal actions are brazenly passed by an overwhelming majority. They create shareholder fatigue by not paying dividends, not maintaining liquidity with a public float of about 45 percent. They lobby and mislead the powers, by presenting half truths and erratic statements.

In the 2006 budget speech President Rajapaksa made an excellent recommendation to corporates to be responsible. They should distribute at least 50 percent of net profit after tax. He mandated a dividend tax if the payout was less than 35 percent. This has been sabotaged by a capital expenditure loophole and should now be restored to ensure equity and good governance which will enhance genuine investments.

A differential tax, (earlier 5 percent advantage for widely held PLCs), plus a punitive delisting levy will increase the liquidity and attractiveness of CSE listing and have a l stimulating effect on the stock market, benefiting all the stakeholders.

It would also create a source of continuous, reasonable and justifiable 10 percent withholding tax revenue stream to the government, which when used well will benefit the entire population of the country including non shareholders. If additional capital is required, a Rights Issue, after a good dividend, will be oversubscribed many times over. Foreign investors will also be attracted to the CSE and contribute to our economy. It is a Win-Win situation for all.

GW

 

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