‘Listing is not Privatization’: SriLankan Airlines could benefit by going public

An Interview with Dr. Nalaka Godahewa, Chairman Securities and Exchange Commission

by Maheen Senanayake

You took over the Securities and Exchange Commission following the resignations of two chairpersons. No sooner had you come in did you overturn previous directives? What was your brief when you took on this job?

This is a very important question that I am frequently asked and still remains misunderstood. So I am going to try and answer this fully.

I came into the SEC in August 2012. Before that I was the Chairman of Sri Lanka Tourism. I left that job and came here. Actually I resigned from my job in tourism within three months of joining the SEC. I was asked to take over this job by HE the President. The reason I was asked to take over this job was because the SEC was going through a crisis at that time. The whole capital market was going through a crisis. The fingers however were pointed at the SEC- rightly or wrongly. The general impression was that the SEC was not managing this. There was a lot of noise and pressure on the SEC. Two former chairpersons left giving different reasons. There was turmoil. The market was crashing for 18 consecutive months. The clear target given to me was – " stop the bleeding and bring back stability to the market". ‘How you do that is entirely up to you’. I was not given a brief on how I was to do this. I presume the president had confidence in me looking at my previous track record specially with Sri Lanka Insurance and Sri Lanka Tourism. The biggest problem I had at the time was that I was being looked at through coloured glasses. People said ‘this guy was maneuvered into this job by those being investigated. They are the people who want him to come in and cover up the whole thing’.

"That was also my impression,’’ I intervened.

And there were lot of questions and accusations and even in parliament there were statements being made. I decided to keep my mouth shut without responding to these allegations and arresting the situation inside.

When I kept my mouth shut people became more suspicious. When I came to the SEC I had clearly understood two facts; the crisis had been created by not one or two people but by the ignorance of the masses trading in the market which was exploited by some knowledgeable people. As soon as the war was over, people who had hitherto not invested in the market entered it seeing an opportunity to make money. You put in money, it doubles the next day; you borrow money (to invest further) and in the meantime the market does not go up. People did not realize that this was an artificial situation. The knowledgeable people exploited the ignorant ones. When the bubble burst many lost money.

In trying to arrest the situation, the SEC had brought in about 10+ directives. Within about one year the SEC issued so many directives one after the other to try and ‘fix’ the problem. We re-looked at the directives issued and we overturned those that we did not agree with. These were corrections made by the commission because we as the commission felt that they were quick fixes and not very well thought through. Then there were 17 investigations. Everybody was keen to see these 17 people investigated and punished. And the impression was that these 17 were big shots in industry. My directives to the secretariat were "Follow due process as far as investigations are concerned". We stopped making public statement about the investigations. You remember I said I did two things, the first was stopping quick fixes and the second was refraining form making public statements because every time you make a statement you are asking for a reaction. I actually decided to not make any announcements until I had fixed the problem. We in fact gave the investigators time to complete the investigation and bring the results to the commission. After 18 months all those investigations have been completed. What people have to understand also is that the investigation does not necessarily find the investigated ‘wrong’. So the secretariat made recommendations to the SEC. The commission (SEC) consists of 10 people including four ex-officio and six from the private sector. Right now we are short of one private sector representative. The commission then makes the final decision.

What is the process of investigation?

They summon people, call in witnesses, our computers capture trading data which they go into. Data monitored real time is analyzed and a host of very complex activities take place during an investigation. That include going through documentary evidence. And I must say that this due process has been in existence for a very long time. Nobody has tampered with this due process.

When any investigation report is brought before a commission, you must remember that the commission is not one individual. What I am trying to say is that the chairman is only one of 10 people.

Contrary to public perception these 17 people investigated were not big shots. These were brokers/traders. There is therefore a little bit of a misconception of who these 17 people were. We display on our website those against whom we have taken action. The others are not mentioned. So now people are saying "where are the 17 people?"

Brokers may violate due process. That is probably what SEC investigated. But isn’t there a bigger issue here. Following Standard Operations Procedures (SOP) are important. But on a grandeur scale of things, playing within the system, the market was manipulated creating a bubble. In other words the market was well and truly played. On the other hand, the broker is an agent of the investor. When a single investment can move a market because the market size is small, shouldn’t the smaller investor be protected? How does the SEC protect the market from being played whilst also protecting the smaller investor?

Essentially the market is like a small glass of water. If you tilt it you can see the difference. But you cannot do that with the sea. Our market is no doubt small. The big guy with a few big trades can upset the market. The solution is therefore to make the glass bigger. That will take time. Secondly, awareness creation and education is the only thing we can do. The SEC very clearly found that the bigger players did play the market within the law. During the last two years of my tenure we have done a lot of work to educate the public.

In my speeches, seminars and press articles we concentrated on education. We also realized that chasing after these investigations is not the only thing the SEC has to do. The SEC has a much bigger role to play.

We have an investment protection and market development agenda and for almost fifteen to twenty years we had neglected that aspect. The market was stagnant during the war. From 2009 to 2012 the market had lost. So I thought we must put a plan for the future and we sat with all the industry stakeholders and sat down to formulate this. Until that time the Stock Exchange and the SEC had not worked together. We came up with a three year strategic plan also popularly referred to as the 10 point action plan and launched in November 2012. It was also the first time I faced the media. Ever since we have been asking everyone to measure the progress of the SEC against that plan. In fact we ensure that the media is kept up to date on any of the developments.

Brokers make money whether the client makes money or not. Has the SEC explored a new mode of remuneration for brokers – perhaps performance based outside the commission base.

No we have not. There are globally accepted systems and they are commission based and we have not deviated from this. There are probably few other priorities before we can come to that.

If you look at the number of brokers, the 21 brokers that is fixed. How do you see this number?

Well in my opinion I think that 21 is too high; too many for this market size.

Why do you say that? If there were more brokers wouldn’t it help protect the smaller investor?

If you look at a country like India there are no restrictions on broking licenses. But in Sri Lanka we have had this number for a long time. These people have invested in their businesses and if we increase this number survival of each would be jeopardized. We have to ensure sustenance of key stakeholders in the market. If you ask me perfect competition would have been the ideal way but at this point in time, it wouldn’t be appropriate. We have to first make the pie bigger and then look at how these guys can survive and then probably open it up.

What is your market development plan?

Market development has several areas. Number one is Infrastructure. For our market to get into the next level we have to start with infrastructure. In the late 90s we were the most advanced market in the whole of South Asia. When we went into scripless trading in the Colombo Stock Exchange, we were the first in the region. But because of the war we did not make any further investments. For instance the systems used by the CSE are used by the London Stock Exchange.

Our market is 90% equity driven and a little debt. The capital markets have complex instruments. All those can be done only if we have the necessary infrastructure. The Central Counter Party system which is a clearing house is a primary requirement we are working towards together with the Colombo Stock Exchange and the Central Bank to enable us to bring in those sophisticated instruments. The plan is to implement fully this clearing house by 2015.

One of the arguments is that the 2007/8 global credit crunch was a result of reliance on complex instruments such as derivatives. Would you want to really introduce them to broaden our capital market?

The idea is not to ‘not have them’. In a way we are blessed that we are coming late. We have the benefit of that learning.

Where will your base come from?

Investors will have to come from both the local market and overseas. During the last two years we were focusing on the foreign investor. Confidence among the local market was low. 30 – 40% of the trading activities during 2013 as well as 2014 is from foreign investors. This is a result of the promotions we did overseas. But that is not a good ratio to maintain in the long run. Ideally I would like a 30% foreign 70% local ratio when it comes to trading.

You need local companies going public. What has the SEC done to facilitate this?

We have started talking to industry. We have educated companies and now about 30-40 are willing to and interested in coming up with Initial Public Offerings (IPOs). Some of the bigger players however do not see any need to raise capital because they feel they have sufficient capital. For example take the apparel players. They are totally uninterested in going public. Though we would love to have them here they do not see a need. With new economic development we are hoping the bigger companies will see a need to expand. And since banks generally do not support expansion, there is a likelihood of seeing some of these bigger companies going public.

How do you incentivize someone to come in? Specially the debt component?

That is why we went to the Treasury in 2012 and asked for the withdrawal of the withholding tax. We made debt more appealing and immediately the debt market shot up by 400%. We have been talking about this and in any other capital market the debt market is always bigger than that of equity. We in fact have a unique situation where equity is bigger than debt.

You have more short-term selling than long term holding. That is not a healthy situation.

What is your opinion specially with respect to dividends? How do you intend to make long time holding more attractive?

We are concerned that some companies do not pay dividends. But we cannot and do not want to force companies to pay dividends at this stage. At this point in time, we are trying to get more and more companies to feel comfortable to come here. In other words if we encourage trading you don’t have to wait for dividends to make money.

In the current scenario only market fluctuations provide returns. It becomes roulette. If dividends were more attractive, holdings would be more long term. Wouldn’t you say that is healthier?

Wouldn’t that also act as investor protection?

You don’t have to have dividends to gain. If a company keeps investing the net asset value goes up.

But the issue is that the market value of shares do not respond to these. A good example is NTB which fluctuated by a few rupees for many years. Why do you think that is the case?

The prices were not realistic for a very long time and it is only now that they are becoming more realistic. We cannot look at the past and make a judgment. Particularly last two three years. During the war the prices were affected and after the war the prices became unrealistic.

I go through annual reports and I have only public information to go on. I find that share prices are not receptive to actual financial health of the respective company’s corporate performance. I would have thought that would raise a red flag at the SEC. What is your opinion?

That is because the investors are not yet mature.

Are you and the CSE harmonized when it comes to investor promotion?

Yes very much.

You have been trying to engage the smaller investor? Are you succeeding?

Yes. The numbers are growing. CDS numbers are growing. We are happy with our performance. Whether they have the money to invest is the question. But certainly the numbers are coming. We advise them to start investing with a little money and get comfortable with trading. We advise them not to rush in with everything they have.

Are you on track with your three year plan?

Yes.

What is the advantage of investing in Sri Lanka for the foreign investor?

Well when a foreigner invests in Sri Lanka, then the investor is truly diversifying because we are not indexed to the other markets in Europe and the states.

You are probably reducing risk exposure?

Yes.

What is happening with the public float?

This has been an issue for us. Whenever we go on a road show to promote the investor’s first question is where are the shares for us to buy? When we looked at our current portfolio, more than 100+ companies had less than 15% and some as low as 2-3% in the public float. This kind of public float will not encourage liquidity. That is why we brought in a directive that everybody who wants to remain in the market must increase his public float to 20% on the main board and 15% in the Diri Saviya board. This might prompt some to de-list but we don’t mind.

Why isn’t SriLankan Airlines, Mihin or Sri Lanka Cricket not public companies?

We have made our recommendations. It is only a matter of time. There is a little bit of political confusion and misunderstanding with listing and privatization. That misunderstanding must be cleared by the government. People must understand that going public is not privatization. This is true peoplisation, and bringing of more accountability. The government I think is working on this and trying to figure out how to educate the public.
http://island.lk/index.php?page_cat=article-details&page=article-details&code_title=105116

Thank you for posting. Was a worthy read. Specially the part on Public Float.