Original Date of the Article - Sunday, August 1, 2010
By Jithendra Antonio
After the ending up the three decade war in May 2009, Sri Lanka stepped into a new era of prosperity in development. But in order to give returns to country’s economy and its people one area of development is to encourage capital market investments. So far the government has been creating space for a boom in local capital market whilst discouraging fixed investments in bank deposits due to reduced interest rates.
The Bloomberg News recently reported that with the performance of the All Share Price Index (ASPI) of Colombo Bourse, Colombo Stock Exchange (CSE) was ranked the second best performing stock exchange in the world for the year 2010 to date, a title it clinched during 2009.The ASPI closed above the 5,000 level for the first time in history last Wednesday July 28 and closed at 5,138.9 gaining 139.8 points (2.8 percent) compared to 4999.05 the previous day. The Milanka Price Index (MPI) gained 159.5 points (2.8 percent) to close the day at 5,828.7, also recording the highest level in history whilst the total turnover recorded during the day was at Rs. 3.2 bn. The market capitalisation at the end of trading on Wednesday was of Rs.1.68 tn which is the highest market capitalisation recorded in the history of the CSE. The ASPI gained 1,753.3 points (51.8 percent) for the year 2010 to date while the MPI gained 1,979.3 points (51.4 percent) for the year to date.
As from August 1 there will be enhanced room for investing community with the reduction of minimum price change (ticker margin) from cents 25 to 10 in the Automated Trading System (ATS) and implementation of reduced transaction costs totaling to .020 percent for transactions up to Rs.50 mn and 0.5125 percent for transactions above Rs.50 mn while the parcel of crossing threshold is set to be increased to Rs.20 mn of a security (exceeding more than 5 percent of the quantity of an issued security) as per directive of Securities and Exchange Commission of Sri Lanka (SECSL) issued on April 30, 2010.
Increased liquidity
In the wake of developments and amendments in reduced transaction fees from August, many market analysts are of the view, that if the move was to uniformly apply a minimum price change of Rs 0.10 for all orders is also likely to improve liquidity and boost market turnover in coming months.
However, being the second best performing Stock Exchange in the world is something that Sri Lanka should be proud of making it a global brand in capital markets. But on the other hand, still the Colombo Bourse is in a stage where it needs to accompany many companies with a vast sector of business portfolios and a vast number of companies that are into new sectors which could drive country’s development in areas such as bio medical research, retail sales, metal and natural resources mining, renewable power and energy, logistics and transport, petroleum and information technology, telecom and real estate giving many choices to both retail and large scale foreign and local investors, according to capital market experts.
Share trading in Sri Lanka commenced in the nineteenth century when British planters needed funds to set up Tea Plantations in Sri Lanka. The Colombo Share Brokers Association commenced trading of shares in limited liability companies in 1896, involved in setting up plantations. Thereafter, the Colombo Share Market continued operations for almost a century experiencing several vicissitudes due to political and economic factors during the period. A landmark event in the history of share trading in Sri Lanka was the formalisation of the market with the establishment of the “Colombo Securities Exchange (GTE) Limited” in 1985, which took over the operations of stock market from the Colombo Share Brokers’ Association. It was renamed Colombo Stock Exchange (CSE) in 1990.
CSE is a company limited by guarantee established under the Companies Act No. 17 of 1982 and is licensed by the Securities & Exchange Commission of Sri Lanka (SEC). It is a mutual exchange and has 15 full members and 6 Trading Members licensed to trade both equity and debt securities. All members are licensed by the SEC to operate as stockbrokers. All members are corporate entities and some are subsidiaries of large financial institutions.
Demutualisation of CSE
Recently the Watch Dog of the local Capital Market Securities and Exchange Commission of Sri Lanka was in talks to ‘Demutualise’ the CSE from a not-for-profit to a for-profit organisation with another plan to bring in derivatives into CSE.
Since its beginning late 19th century, Colombo Bourse is still mainly housed with plantation, banking, finance, insurance, food and beverages companies with a few blue chips such as John Keels Holdings, Carson Cumberbatch, Distilleries, Hemas Holdings, Hayleys PLC, and Richard Peiris. However, with the recent emergence of new entities, CSE has seen two telecom companies Sri Lanka Telecom and Dialog along with ICT oriented E-Channeling Limited performing at a higher rate of returns during 2005 to 2008 whilst the low performance by technology shares since global financial turmoil was after late 2008. While 2006 to 2008 era was a delisting period of some highly valued stocks the year 2009 brought up a new recovery stage for CSE bringing up new Initial Public Offerings (IPOs) such as Hemas Power in 2009. And in 2010 it made a record with fresh IPOs of family owned enterprises coming to South Asia’s most bullish market with public offerings of Ceylon Tea Brokers, Renuka Agri Foods, Raigam Wayamba Salterns, Vallibel Finance. Now, with coming up of listings of ODEL and PC House, the market will in turn give more opportunities for many investors, small timers and big timers for the next few months.
There are 232 companies representing 20 business sectors on the CSE as at March 31, 2010. The Colombo Stock Exchange is in its ‘teenage’ status in terms of diversity of sector wise corporate equities that are being traded in the bourse. However, recently, with the coming up of many IPOs, there has been a booming capital market drive attracting many investors from even rural areas and further international capital despite the falling interest rates in country’s banking sector and lost confidence in fixed deposits in registered financial industry of Sri Lanka.
Market Manipulation
On the other hand while Sri Lanka’s only Stock Exchange is booming with a fast phase, the regulator, Securities and Exchange Commission of Sri Lanka will also need to introduce new regulations and monitoring to handle the manipulation issues that arise as the capital market grow.
‘Lies, Secrets, Rumors on Market Sentiments. What’s Up, What’s Up, What’s Up?’ asks a Fan Page on world’s popular social networking site Facebook. This fan page titled by ‘CSE Gossip’ is growing in popularity in Facebook attracting more than 1012 fans who are active retail traders on the growing world’s second best performing stock exchange.
As for fans of the page, it is a famous page which gives up to date information on CSE and its equity performance via Facebook while it has a Pivot tool with accurate chart information which are coming from stock brokering firms’ internal information. “I can calculate the resistant and support up to 3 level from their website CG Technicals,” said Chinthaka Gnanasiri.
The fan page itself says “This is an Investor Forum to educate the investors. Buy or sell recommendations will not be provided. Anyone can start a discusion in our wall analyst and others will be helping him. Tool is at http://www.cgtechnicals.com/” Although the fan page seems to be having a massive number of comments and responses it is hard for anyone in the page to identify the real stock brokering individuals of the country managing it by indirectly creating a push to some stock in the Colombo bourse such as Lanka Cement. If the regulator scanned through the whole history of the page one can easily identify how the stocks were pushed by CSE Gossip on small information that was leaked out based on market performance for the last six months.
“Meanwhile, 53 percent of Muller and Phipps (MULL) changed hands and will there be a mandatory offer at 1.3 ? We expected the ASI to touch 5200 but it went up to 5192 and turned, hope who followed our analysis might have booked their profits and as per our trend analysis tomorrow closing will confirm us that ASI is going to establish a new trend line or it will continue old trend further.... Await today’s graph by 7p.m to 8 p.m in our website, until then you can see yesterday’s graph... all the best, lets rock and roll”, said CSE Gossip in its status last Thursday.
CSE Gossip
According to Rule No. 12 and 13 of the Securities and Exchange Commission Of Sri Lanka under Rules, published in Gazette Extraordinary no. 1215/2 of December 18, 2001, No person shall create, cause to be created or do anything that is calculated to create a false or misleading appearance or impression of active trading or a false or misleading appearance or impression with respect to the market for or the price of any securities listed in a licensed stock exchange and No person shall by means of purchase or sale of any securities that do not involve a change in the beneficial ownership of those securities, or by any fictitious transactions or by any other means, create a false market in any securities listed in a licensed stock exchange.
Similarly, as amended in 2003 at such events the Commission has the power to suspend or cancel the certificate of registration granted to a market intermediary or the stock brokering individual.
Speaking on the grounds of anonymity, a Senior Investigative officer of SEC said, “If Securities and Exchange Commission find out matter of evidence on such an initiative by stock brokers or any stock brokering individual we will definitely take action on it.” Speaking to The Bottom Line he was of the view that SEC is liable to temporarily suspend or cancel the license of a stock brokering firm or even to blacklist a particular stock brokering individual’s license if convicted in a court of law.
“Even if it is a Director of a listed company or an unlisted businessman or even a staff assistant of a company who is trying to push the market price of a listed security in a manipulative way, we would definitely investigate and enforce action to prosecute them,” said this official from Securities and Exchange Commission of Sri Lanka.
Meanwhile, another fan page on facebook with a website titled http://srilankastockpicks.blogspot.com and a equity analytical website, had gained investor sentiments on its early news about stock rises. According to one concerned investor, the site has leaked information on April 20 stating “We have been reliably informed by our sources that Galadari family had already entered into an agreement with the Government of Dubai to sell 29 percent of its shareholdings in GHLL as a settlement/structuring of its finances in Dubai. This transaction is expected to take place on the CSE within a short period of time.
Further as a result of this proposed transfer of GHLL shares by the Galadari family the top shareholdings will be shared between Galadari Family, Government of Dubai and locally based Nawaloka Group. It is further rumoured that certain interested parties have already approached Nawaloka Group and Galadari family for a potential takeover bid of the hotel at a price range of Rs 40 per share subject to full write off of the debt owed to the Galadari Family.” And soon by the first week and second week of May Galadari share reached Rs.40 to Rs. 45 which was at Rs.28.50 on April 21. “You can obviously see who are running these websites if you scan and analyse the Colombo Stock Exchange announcements of stock brokers who did the transaction on behalf of the deal and the relation between these website running individuals who are associated to a group company of the same, ”said Dinesh Gunasighe, another investor at Colombo Stock Exchange.
In the same manner, the site has published a report on share warrants titling an example of a made up ‘Goodco’ company (Posted: 19 Jul 2010 09:25 AM Pacific Day Time) quoting that one of the features of warrants is ‘gearing’. This means that a small rise in the price of the share price results in a large rise in the value of the warrants, and a fall in the share price has an equally dramatic downward effect on the value of the warrant. e.g. Goodco’s share price rises 33 per cent from Rs.150 to Rs.200.
The intrinsic value of the warrant rises from Rs.50 to Rs.100 (a 100 per cent rise). It has also noted that the owner of a warrant does not have to buy the shares. He has a right, not an obligation. Note too that the value of a warrant can quite easily drop to zero (if the exercise price is higher than the share price) and that it will definitely be zero once the time for exercise has passed. So warrants are risky!” said the equity analytics fan page with a headline on ‘Stock Market Manipulation and Share Warrants’. On the same day, Colombo Bourse saw the coming down of GREG share value from Rs.100 to Rs.97.
“Regulator needs to identify who is behind these kinds of malpractices and how they are organised. It is evident if you deeply investigate into these blogspots, and facebook fan pages, that they are run and maintained by Directors of listed companies, some of whom have not even submitted annual reports for years and that they even have links with to stock brokering firms with large volume tradings,” said Saman Fernando an investor of Colombo Stock Exchange.
According to many investors, in the recent past many websites had been started as blogs to promote Colombo Stock Exchange such as http://www.stock-market-today.net/ and http://lankaswingtrading.com/ in a view of outlining investor focus while indirectly pushing the shares of the Colombo Bourse. Investors, in desperation, appeal fr the Regulator to take heed of this threat as it harms the capital market industry.
