August 2010 - Guide to CSE


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Sunday, August 15, 2010

Is there a right way to regulate stock markets?

10:19 AM 3
Adopted from
, by R.M.B Senanayake

The Securities and Exchange Commission clamped down last week on the stock market introducing a rule that stock prices must operate only within a band of 10% of the previous day’s close. This has sparked off a controversy as to whether such a rule is desirable. The brokers oppose it because it more or less eliminates the day traders who buy and sell stocks looking for a profit from the difference between the buying and selling prices within the day. So when the SEC limits the price changes to 10%, the scope for day trading is severely limited. But Mr. Vignarajah speaking on behalf of longer term investors welcomes it.

There are two kinds of investors- those who buy shares as investments and hold them to benefit from the growth in profitability of the underlying company and those who buy and sell stock as a trade. Both groups of investors are needed for a market. In fact the momentum of a market depends more on the latter group. In recent weeks day traders, or rather short term traders, have concentrated on a few shares which have displayed high volatility (perhaps created by their own buying and selling).

Day or short term trading requires volatility in the particular share targeted and hence shares which are less volatile are not considered suitable for the purpose. The allegation is that there is market manipulation. It is always possible for a person who has deep pockets to keep on buying a share and then send its price up and up. But however deep his pocket, those who push up the price of a share cannot sustain it at the higher level unless everybody else thinks that the share is worth that price. The day trader has no intention to hold the shares he buys and must sell to realize his profit. So the price must first be down and then purchases push it up.

Stock Markets are based on ‘expectations’. There are two kinds of expectations: those called bulls who are optimistic about the future and expect prices to go up and the bears who expect prices to come down because they think the current prices are too high and not sustainable. These become self fulfilling prophecies depending on which group is in a majority and count more votes in the market as buyers or sellers. Stock markets all over the world are very volatile and there are price swings much higher than in commodity markets.

Since our stock market doesn’t have short selling, the only way is to buy first and then sell. Invariably if the stock prices rise to unsustainable levels (in the absence of short selling) and then comes down sharply some players will be adversely affected. There will be market corrections as investors take profits. During such corrections some will suffer losses while others realize their profits. Those who lose look for scapegoats and day traders and speculators are the scapegoats. But why did they go into speculative shares in the first instance?  


If the SEC considers there has been excessive speculation then it must address that problem. The problem is caused by excessive leverage and the solution must be to limit leverage - not fix prices.  In the past such day or short term trading was confined to those who were physically present in the trading place. But with the electronic systems in place it is no longer necessary to do so and investors can trade from their laptops watching the market in their homes or workplaces. They can trade more actively since orders need not be routed through the brokers as in the past provided they hold sufficient portfolios.

The leverage problem arises with the margin traders. These are the traders who borrow from the stock broking firm and trade with the funds of the brokers. One employee with Rs 30,000 monthly salary bought 2,000 Ceylon Leather Products shares at the price of Rs 247 hoping it will go up further. But the price decline began and the share hit a low of Rs 199. The employee could not meet the loss and the broker had to carry it. Margin transactions involve speculating in securities with borrowed funds. The ease with which such transactions are allowed by the brokerage houses, and the absence of any scrutiny by the broker of the personal credit of the borrower encourage the purchase of securities by persons with insufficient resources to protect their accounts in the event of a decline.

In my opinion the spate of speculators is due to the laxity in enforcement of the margin finance conditions. Brokers are allowed to give credit to customers up to 50% of the value of their portfolios. But this is checked only on two days - the 15th and the last day of the month and even then only the aggregate is checked and not the individual customer accounts to verify if the rule is followed or not.  This enables window dressing.

A common saying in financial literature is ``higher the risk, higher the return.’’ So the present rule of limiting price changes to 10% interferes with the fundamentals of stock market investments.

Free Market versus Regulated markets

The current crisis in the stock market has renewed the debate about the roles of governments and markets in protecting investors from themselves and from one another. Should government regulation lean towards a completely free market without any intervention and allow consenting adults to buy and sell as they wish? Or should government regulation tilt toward paternalism and constrain the choices of consenting adults in order to protect them from themselves and from others and to protect the rest of us from them? Those who value freedom and who doubt the capacity of governments to act in the public interest would lean towards completely free markets while others would depend on regulation.

The dispute here however is not about the need to regulate the stock market. That is generally accepted. The issue is whether the regulatory body should limit prices as the present rule does? Stock markets all over the world are volatile and see much fluctuations in prices. Fluctuations here are more because we do not have short selling or derivatives. The day traders are an essential segment of the market for it is they who provide the momentum for the price movements. The 10% rule effectively eliminates them for prices cannot vary by more than 10% a day. Surely a 10% gain is not a sufficient reward for taking a risk to buy shares which are not fundamentally sound?

What this rule does is to reduce the liquidity of the market. A may have bought a share a few years ago and may want to sell because he needs money for an operation. He cannot hold the asset because of his need for cash. But at the going price he may not find any buyer for his shares. Nor can he reduce his asking price below 10%. So if he cannot find a buyer for 10% less, he would have to wait. He would have preferred to sell at 15% below the market price of yesterday because of his need for cash but he cannot do so. Does this help to promote liquidity of the stock?

The whole issue is whether to allow day traders or to eliminate them. As far as I am aware there is no stock exchange anywhere which has laid down a band like the SEC. Some countries impose what are called circuit breakers on individual shares which may go up too much in a day or a sessions trading. Trading is halted at the limit say 10% and then inquires are made from the listed company about any price sensitive information which the company’s directors are privy to but which is not generally available to the investing public. Invariably the listed company will deny any knowledge but the veracity of their denial must be followed up. If they have lied they should be fined. Anyway such halts are only temporary, perhaps an hour or so. The Colombo Stock Exchange has previously resorted to such circuit breakers. Of course the point which sparks off a halt should be sufficiently high. The rationale is not to interfere with the price mechanism but to treat all investors equally since insiders only may be in the know of something material to the share price.

``Myidea is that affairs of trade are best regulated by natural law. The careless banker has lost his reputation; the careless investor has lost his money; and the result of it is, more care will be taken" (Charles Flint). But there are others who think differently. They are against speculators not realizing that forward prices and future prices are always to an extent speculations. Damn speculators and you lose some important elements in a market. Speculation is not a dirty word as some people seem to think. Everybody has some idea of what a future price is likely to be and if there are financial instruments available for those who wish to protect themselves from such price falls, would it not be a good thing? But that requires counterparties who take a different view.

Remember the CPC hedging operation. Someone has likened the transaction to a wagering contract and argued that it is a prohibited act under the Penal Code. I wouldn’t know if it is a penal offence but if so it would have to be amended before the Stock Exchange introduces derivatives trading in the local market.
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Thursday, August 12, 2010

EPF investing in stocks creates wealth for members

12:10 PM 0

Central Bank Governor answers critics:

Central Bank Governor
Ajith Nivard Cabraal

The Employees Provident Fund (EPF) has an active membership of 2.1 million as its custodian Monetary Board of the Central Bank of Sri Lanka has the responsibility of managing the fund and make prudent investments for gaining high returns to its members.
The EPF is actively involved in stock market trading making investments in sectors such as hotels and banking.
Some have criticized the fund’s investments in some stocks saying EPF is not permitted to invest on those areas.
Daily News Business interviewed Central Bank Governor Ajith Nivard Cabraal to find out on EPF investments and its returns to members.
* Daily News: Can a fund like EPF invest in banking and financial institutions?
Governor: Of course it can. In terms of the EPF Act, the Monetary Board of the Central Bank of Sri Lanka has been charged with the responsibility of managing the Fund as its custodian while the general administration of the Fund has been vested with the Labour Commissioner.
The overall objective of the Fund in investing its money is to provide a reasonable return to members, while safeguarding and enhancing the value of the Fund. In terms of the section 5(e) of the EPF Act, Monetary Board may invest the moneys of the Fund in such securities as the Board may consider fit and may sell such securities.
In keeping with these statutory obligations, the EPF, as Sri Lanka’s biggest fund, has been keen to provide attractive returns to the EPF members while safeguarding their investment.
In that context, especially at times of low interest rates, we need to diversify our portfolio and ensure that reasonable returns which are essentially higher than inflation are achieved. 

 Since of late, Sri Lanka’s stock exchange has been hailed as one of the best performing markets in the world and a massive peace dividend has been generated due to the efforts of our President, Government, the armed forces and all patriotic people.
Why should not the ordinary people of our country whose savings are invested by the EPF benefit by this peace dividend? Unfortunately, there are some people who believe that the exceptional gains in the stock market should be enjoyed only by the foreign portfolio investors as well as their wealthy friends in Colombo!
While we have no objection to these parties benefiting by our stock exchange, we are also keen to ensure that the ordinary people of our country receive a part of this boom.
That is why the EPF has invested in fundamentally sound stocks with a long-term focus. By maintaining such a diversified portfolio, we will also provide millions of our members an indirect ownership of the top listed companies in our country as well.
By our actions, the country and the economy will also benefit because when the EPF enters the stock market, it will help to stabilize the market on a long-term basis and that would safeguard the market, to some extent, from speculative actions which are generally prevalent in emerging markets.
Let me also remind you that the banking and financial sector is the largest contributor to the Sri Lankan equity market with more than 20 per cent of the total market capitalization.
This sector has always been performing exceptionally well. So, why should the largest Fund in Sri Lanka deprive itself of the opportunity to invest in these stocks? That is why the EPF has now decided to invest in banking sector shares with the intention of creating more wealth for our millions of EPF members in the long run.
The EPF is a superannuation fund with long-term time horizon for its investments. Unlike an individual investor or a short-term hedge fund, EPF is not unduly pressurized by short-term fluctuations in the market prices, but will focus on the long-term fundamental performance of the stocks that it invests in.
* Daily News: EPF has invested in various sectors such as banking and leisure. What are the other investment options which EPF has focused?
Governor: A large chunk of EPF investments are in the government paper and this trend would perhaps continue over the next few years as well.
However, if the government were to reduce its fiscal deficit, over the next few years (as they have announced), there is a strong possibility that the EPF investment options of investing in government paper could reduce to some extent in the medium to long-term.
In that scenario, interest rates too could decline further and hence the returns to the members could reduce proportionately, although of course such returns may be reasonably above the inflation rate.
In that environment, a slight shift towards other instruments which provide higher yields, such as; debentures, mortgage backed securities and selected private equities would be a useful diversification.
As you know, the EPF has been carefully investing a small portion of its funds in such instruments in order to provide an edge to its overall returns, and this policy will continue.
As a prudent investor, our responsibility is to scan the environment and anticipate the impact of various policy measures, both international and local, in the future.
We have to look at these matters with a long term focus and that is the only way that we can ensure such a prudent and reasonable return.
* Daily News: What is the ROI during the first six months of these investments and what is the progress of it compared to last year’s performance?
Governor: In this market, which is performing well, our returns have been very attractive. But, I would hasten to add that in the future, we would concentrate more on long-term returns, growth and capital gains, rather than short-terms gains.
The way to judge a long-term fund is not to see whether it is making money week by week, but to look at its investment strategy and long-term focus.
In that regard, the Monetary Board has given the broad direction to the investment committee of the EPF that their focus should be based on those parameters and we are satisfied with those broad directions are being followed in the investment decisions that have been taken so far.
* Daily News: What is the EPF fund value up to date and the number of members?
Governor: At present, EPF has an active membership of 2.1 million and the total value of the fund is Rs 835.5 billion as at end June 2010.
* Daily News: When it comes to investing in the stock market, does the EPF do an analysis to identify the best stocks before they invest?
Governor: Of course they do. The EPF has been providing exceptionally good returns to its members over the past few years and they have done a lot better than what some of the private sector managers of investment funds were able to achieve.
I know there have been various attempts by some previous governments to break up the EPF fund and hand it over to various fund managers to manage.
Some of the people who are shouting today about the EPF investing in the stock market, are the same people who were attempting to break up the fund and give pieces of it to private managers.
Naturally therefore, they may be upset that this Government has not privatized the EPF or given the Fund to those so-called fund managers, who may be friends of the persons who are making these wild accusations against the EPF.
I can categorically confirm that those dreams of these theoreticians would not materialize. But, we have to understand that in their frustration about the successes of the country, the economy, the stock market and the EPF, they must be getting very upset.
That is why they are doing an about turn and calling the stock market a ‘casino’. This is very childish and foolish. I hope these people will take a more mature stand in the future.
May I also, for the record, confirm to you that the EPF fund is managed by a team of highly professional fund managers who act in accordance with the stipulated rules and regulations with proper checks and balances. Therefore, we are confident of providing satisfactory yields for our millions of members in the long term.
* Daily News: Memberwise, what is the target for this year?
Governor: The target of EPF is to consistently provide for a positive real rate of return to all its members in the long-run. As in the previous years, EPF will continue to maintain this policy through prudent investments.
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Friday, August 6, 2010

Suspended securities begin trading

6:01 PM 0
Adopted from DailyNews
SEC introduces price band:
Stock trading should be based on fundamentals and the 10 percent price band was introduced to safeguard the integrity of share trading, the SEC said yesterday.
The Securities and Exchange Commission of Sri Lanka (SEC) on Wednesday directed to impose a 10 percent upward and downward price band on all listed securities within any trading day based on the previous day's closing price with immediate effect. "We think that unrealistic price increases or decreases will not reflect the fundamentals of the country's stock market. When considering the price fluctuations, the price band of 10 percent is a high fluctuation", SEC Deputy Director General Malik Cader told Daily News Business. 

"Not only Sri Lanka, but also other countries in the past has taken similar measures to protect investor interest. We need to create an information based decision environment for investors. The information is necessary to take prudent investment decisions, Cader said.
The SEC also lifted the trading halt which was imposed on securities of Dankotuwa Porcelain, Blue Diamond Jewellery Worldwide (Voting and Non Voting Shares), Environmental Resources Investment PLC and Touchwood Investment yesterday.
These companies have made disclosures relating to the price appreciation of its securities as mandated by the SEC directive on Tuesday.
Foreign investors were not affected by the directive issued by the SEC. The country has a mature market place and stakeholders welcome this move, Cader said.
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Thursday, August 5, 2010

Sri Lanka PC House IPO oversubscribed

9:59 PM 0

Aug 05, 2010 (LBO) - An initial public offering by PC House, a Sri Lankan information technology company, was oversubscribed on its opening day Thursday, August 05, a stock exchange filing said.

PC House is raising 630 million rupees by selling 57 million shares at 11 rupees each.SSP Corporate Services, registrars to the offer, has informed the CSE that the PC House IPO has been oversubscribed and that the issue would be closed at 4.30 pm Thursday.
PC House has said it is planning a 100-seat business process outsourcing centre in the island's northern Jaffna peninsular to provide accounting and back office services to the international market.
The company also has a firm revenue stream from computer hardware and software sales and setting up networks.
In the year to March 2010 the group earned 123.8 million rupees on revenues of 3.0 billion rupees with 171.7 million shares getting 72 cents of earnings per share.
After the IPO total shares will go up to 228.9 million.
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Wednesday, August 4, 2010

ODEL වේගයෙන් ඉහළට

3:03 PM 2
ඔඩෙල් සමාගමේ කොටස් අද, කොළඹ කොටස් නිකුතුවේ අලෙවිය සඳහා නිකුත් උනා, ODEL.N0000 කියන Ticker එකේ නමින්.
අද දවසේ, ඔඩෙල් ඉතාම වේගයෙන් ඉතාම විශාල කොටස් ප්‍රමාණයක් හුවමාරු උනා. නමුත් බොහොමයක් (80%ක් වගේ ප්‍රමාණයක්) ගනුදෙනු උනේ කොටස් 100 හා 1000 අතර. 
IPO එකේදි රු.15 කට මිලට ගනු ලැබූ කොටස් ඉයේ දිනය තුළම මිල දෙගුණ උනා. ඉයේ දිනය තුළ එහි අවම මිල රු.29.80 කුත් ඉහළම මිල රු.38.50කුත් ලෙස ගනුදෙනු උනා. එහි ආරම්භක මිල උනේ රු.30ක්. 
කොටස් මිලියන 18.5ක් පමණ ගනුදෙනු උනා.
ඉතින් අද දවසේ ඔඩෙල් කොටස් පිළිබඳ විස්තර හා මිල උච්ඡාවචනය වුනු ආකාරය ‍ මෙන්න මේ වගෙයි.

ඔඩෙල් සඳහා විශාල ඉල්ලුමක් තිබෙනවා කියල පේනව, Order Book එක බැලුවම. නමුත් කොටස් හිමියන් වැඩි දෙනෙක් ඉහළ ලාභයක් බලාපොරොත්තුවෙන් ඉන්නව කියලත් හොඳින්ම පේනව.

 ODEL මේ ආයෝජකයින්ට ලබා දුන්නෙ ඔවුන්ගේ සමාගමේ 11.5%ක අයිතියක්, කොටස් මිලියන 16.7 ක් හරහා. ඔඩෙල් සමූහයේ ජුනි මාසයේ ආදායම 187%කින් ඒ කියන්නෙ රුපියල් මිලියන 37 කින් ඉහළ ගොස් තිබෙනවා පසුගිය වසරට සාපේක්ෂව. ඔඩෙල්හි ආaදායම තව තවත් ඉහළ නඟී කියල තමා විචාරකයින් පවසන්නෙ.
මේකට තියෙන ඉල්ලුම හා මෙහි සිදු වුනු ඉහළ නැගීම ගැන හිතල, ඊලඟට තිබෙන PCH IPO එකේදිත් හුඟක් අය මේ වගේ බලාපොරොත්තු තියාගෙන ඇති. නමුත් ඒ සඳහා මෙතරම්ම ජනප්‍රියත්වයක් ලැබෙන එකක් නෑ කියලයි සමහර විචාරකයො කියන්නෙ.  අපි බලමු මොනව වෙයිද කියල.

මේ ගැන ඔයාලගෙ අදහස් මොනවද? ODEL වල මිල තව ඉහළ යයිද, PCH වලට මොනව වෙයිද?
ඔබේ  අදහස්, අපගේ Forum එකේ මෙන්න මේ ත්‍රෙඩ් එකටත් පලකරන්න ඔබට පුළුවන්.
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"Belated action by the SEC,’’ says analysts High-flyers grounded *Brokers in hot water?

10:29 AM 1

The Securities & Exchange Commission (SEC) yesterday cracked a whip imposing a trading halt on some of the most popular stocks traded on the Colombo bourse "until further notice" placing a pall of uncertainty over the Colombo share market.

Trades were imposed on Dankotuwa Porcelain, Blue Diamonds ( voting and non-voting), Environment Resources Investments (ERI) warrants of four maturities and Touchwood with the SEC attributing its action to "unusual increases in the price and the number of transactions of the said securities during the period from July 29 to August 2."

Analysts noted that the ERI share itself, which had also been heavily traded in large volumes posting sharp price gains, was not affected by the trade halt.
Many brokers and analysts felt that the SEC action had come too late with fortunes made on the high running shares, the price of which had gone through the roof in recent weeks and had been traded in very large quantities.
"Many brokers are likely to have settlement problems as clients who had bought these shares with the intention of selling them off taking a quick profit now being saddled with the shares, unable to sell," one analyst said.
Most brokers who had done nicely on the bull run were not able to comment on the extent of their liability saying that these had to be calculated.
"Some clients have the ability to pay while others don’t and we will have to see where we stand," a broker said. ``Where a share was sold, there was also a buyer and somebody is holding shares that can’t be sold.’’
The bull run on the CSE continued yesterday before the SEC directive came into force at 1.45 pm, 45 minutes before the market closed. Thereafter a downturn followed and market closed with the All Share Price Index down 26 points and the Milanka down 17 points on a turnover of Rs.4.1 billion, down from the previous day’s Rs.6.03 billion.
Dankotuwa Porcelain was up Rs.3.25 to Rs.124 on 3.9 million shares done yesterday between Rs.90 and Rs.144 while Touchwood was up Rs.1.30 to close at Rs.39.80 on 9.5 million shares done between Rs.30 to Rs.39.80.
ERI lost Rs.23.50 to close at Rs.110 on nearly 3.3 million shares traded between Rs.104 and Rs.133.
The ERI warrants all lost - 02 down Rs.8.50 on nearly 1.8 million traded closing at Rs.70 on a trading range of Rs.60 to Rs.83; 06 warrants down Rs.8.75 to Rs.66 on nearly 1.6 million done between Rs.58 and Rs.79.20 while 03 warrants were down Rs.9.85 to Rs.65.40 on nearly 1.5 million traded.
Ceylon Leather Products of the ERI group lost Rs.21.90 to close at Rs.246.10 on nearly 0.3 million shares.
The electronic trading system on the CSE went haywire with websites reporting buyers above sellers with some brokers saying the whole system was jammed.
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Monday, August 2, 2010

Positive growth in all sectors : Industry and Commerce Minister

8:51 AM 0
Adopted from Sunday Times.

All sectors of the economy are achieving positive growth, according to Sri Lanka's Minister of Industry and Commerce, Rishad Bathiudeen. Further remarking that private sector was responsible for 75% of the GDP of the country, he also noted that this segment of Sri Lanka must endeavour to meet the growth targets put forward by the government. He also noted that his ministry was playing its part by appointing a high-powered, seven member committee to formulate a 10-year plan which would also include improving the Indo Sri Lanka Comprehensive Economic Partnership Agreement, particularly with regard to its impact on industries and small and medium enterprises.
He also suggested that anyone could submit to him, through affiliated professional bodies, chambers and companies, proposals which could be helpful in improving growth so that these could be incorporated into the 2011 national budget, which would be made public in the next four months.
Making these comments on Wednesday at the inaugural dinner of the Chartered Institute of Management Accountants (CIMA) Business Leaders Summit 2010, Mr. Bathiudeen also urged the private sector to enter new areas, and highlighted hotels in the North as well as agriculture and fisheries as possibilities. He also encouraged exploring the employment of groups such as war widows.

A full-day conference held in Colombo this week, this event featured a number of presentations by local and foreign resource people; including a report by the country's Board of Investment (BOI) Chairman, Jayampathy Bandaranayake, which covered domestic opportunities for growth in the areas as diverse as investments, tourism, exports, etc.
Slated presentations also included: "Re-create your Mind DNA" by Reg Athwal, Founder of RAW Group LLC and Co-Founder and Chairman of OneTVO, Business Advisor and World-Renowned Speaker, based in Dubai; "It’s your future: take or lead it" by David Taylor, World acclaimed business management and motivational author / Honorary Professor of Leadership at the UK's Warwick University Business School; "Re-imagine and re-create Sri Lanka's Tourism Brand" by Sandie Dawe, Chief Executive of VisitBritain; "Re-imagine brand, re-create returns" by Ray Perry, Executive Director - Brand, Profile and Marketing of CIMA, UK; "Re-imagine and re-create, the JKH experience" by Ajit Gunewardene, Deputy Chairman of Sri Lanka's John Keells Holdings; and "Staying ahead in challenging times" by Mahesh Amalean, Chairman of Sri Lanka's MAS Holdings.
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