Govt. rubbishes Central Bank, SEC

The government has ignored Central Bank analysis that the stock exchange’s fall was a result of market correction, which is contrary to what the ‘mafia’ operating in the stock exchange has to say.

It seems the government has allowed itself to be swayed by shady high net worth individuals and their crony stock brokers into thinking that the Securities and Exchange Commission (SEC) was being anti-government by carrying out investigations into market offences and by adopting measures to cool-off on overheated stock exchange. Clearly, the government has not only compromised the credibility of the SEC but has rubbished the Central Bank as well.

The views of the SEC nor the Central Bank has not been given any thought, it would seem, with those in high government preferring to take the word of a few investors who are being investigated for market malpractice.

If the President and the government were really interested in developing a credible stock exchange, then the Central Bank’s analysis of the country’s equity market could have been useful, not just relying on a presentation by an investor being investigated for market malpractices, an analyst pointed out.

"The price indices of the Colombo Stock Exchange (CSE) declined during 2011 following an upsurge in the previous two years. The All Share Price Index (ASPI) and the Milanka Price Index (MPI) dropped by 9 per cent and 26 per cent, respectively, by end 2011. Equity prices rose to an all-time high in mid-February 2011 and moved downward thereafter, due to restrictions on credit extended by brokers, continued net foreign outflows, a liquidity drain on account of several Initial Public Offerings (IPOs), Rights Issues (RIs) and Private Placements as well as the impact of the global financial markets," the 2011 Annual Report of the Central Bank said.

"The decline in the price indices resulted in a market correction following the upsurge in prices since mid-2009. The price indices of the majority of sectors declined in 2011. Consequently, the market price to earnings ratio (PER) of the CSE declined from 25 at end 2010 to 16 at end December 2011.

"A positive development was the rise in IPO activity. There were 13 IPOs through which Rs.19 billion was raised and 22 rights issues through which Rs. 28 billion was mobilised during the year. The number of companies listed on the CSE increased by 30 to 272 by end December 2011. Market capitalisation, having increased to Rs. 2,214 billion at end 2011 was equivalent to 34 per cent of GDP.

"In terms of sectoral composition, the Banks, Finance & Insurance sector and the Diversified Holdings sector each accounted for 22 per cent of market capitalisation, while the Beverage, Food & Tobacco sector accounted for 14 per cent. The ten largest companies listed on the CSE accounted for 37 per cent of total market capitalisation. The equity turnover of the CSE declined in 2011 when compared with the previous year and stood at Rs. 546 billion. Consequently, the average daily turnover declined marginally to Rs. 2.3 billion in 2011 from Rs. 2.4 billion in 2010. Domestic investors accounted for about 89 per cent of the turnover, 97 per cent of transactions and 95 per cent of the number of shares traded on the CSE. Of them, retail investors accounted for around 55 per cent of the total turnover.

"Foreigners were net sellers in the market, and net foreign purchases continued the downward trend which started in the latter part of 2009. Total foreign purchases and total foreign sales were Rs. 50 billion and Rs. 69 billion respectively, recording a net foreign outflow of Rs. 19 billion for the year, compared with a net foreign outflow of Rs. 26 billion in 2010.

"Several measures were introduced to facilitate the smooth functioning of the stock market. In view of the large amount of unregulated credit extended by stockbrokers, the SEC introduced measures to restrict the provision of credit by stock brokers from 2011. Accordingly, stock-brokers were prohibited from providing credit to investors and were required to sell securities in arrears at T+5 days from January 2011. In addition, stockbrokers were required to clear outstanding debtor positions by 50 per cent by end March 2011 and by 100 per cent by end June 2011.

"The time period for clearing debtor balances was subsequently extended to end September 2011 and end December 2011. In August 2011, the SEC relaxed the prohibition on provision of stockbroker credit subject to certain prudential requirements, due to the difficulties faced by retail investors. Accordingly, stockbrokers were permitted to extend credit to investors over T+3 days based on the computation of liquid assets less obligations, maintaining leverage at zero level," the Central Bank said.

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