Temporary closure of share trading based on pragmatic considerations – CSE

By Sanath Nanayakkara and Hiran Senewiratne

Colombo Stock Exchange (CSE) said yesterday that it recommended the Securities and Exchange Commission (SEC) to temporarily close trading activities of the CSE based on ‘uncertain’ information, yet with a most pragmatic view of the unprecedented crisis situation in the country, with its statutory obligations and overall investor protection at heart.

CSE Chairman Dumith Fernando, CEO Rajeeva Bandaranayake and Director Dilshan Wirasekera made these comments at a press briefing held to explain their decision to halt the business of CSE for five days from April 18 to April April 22.

CSE Chairman Dumith Fernando said,” We accept that there is no answer that is 100% or 100% wrong. There are parties and individuals some supporting the decision and some others opposing it. This was a difficult decision. We have multiple stakeholders. It is the responsibility of the CSE to give the general public the key factors that led to this decision.”

He further said:

“CSE needs to be consistent with the duties and responsibilities placed on the Board by the new SEC Act. In this context, we are obligated to ensure the long term sustainability the stock market. So we have to look at the evolving events and act to ensure the long term sustainability of the stock market. And then we need to understand the public interest, particularly in relation to investors. SEC Act stipulates a very clear responsibility to CSE to give particular attention to public interest in terms of investor protection.”

“We used the information available to us to make this decision which is in large part was uncertain information. So it was a tough call, but it being our responsibility, we had to meet with that tough call.”

“We have three primary stakeholders – this is not to ignore other stakeholders – one is the intermediaries, then you have listed companies, the core of the CSE. Thirdly you have investors. There is a broad range within investors; foreign investors, institutional investors, high net-worth investors and retail investors. The Stock Exchange has to look at things in totality and make decisions to protect overall interests of all of these investors. Given the responsibility in accordance with the new SEC Act, this decision heavily leaned on investor protection. In the old SEC Act, there was very little described in terms of responsibilities of the Stock Exchange which dealt with who can apply to CSE, granting of licences, establishing rules of the Exchange, but there weren’t any expressive provisions on the duties of CSE. The new SEC Act is quite clear. According to Section 24 of part two, we need to maintain a fair, orderly, transparent and efficient securities market in Sri Lanka. Two; we need to enhance effective and efficient functioning of the securities market, and thirdly we need to mitigate systemic risks. Those are the objectives of a market institution. Section 27 speaks most specifically about our duties and responsibilities as a stock exchange. It says that it shall be the duty of an Exchange to ensure an orderly and fair market in securities. It further says that the Exchange shall act in the public interest. Having particular regard for the protection of investors should supersede any other requirements. Section 30 stipulates that SEC under consultation with the Exchange can decide to close the market in certain circumstances including natural disasters, or in an economic or financial crises or other similar circumstances within or outside Sri Lanka.”

“There is a statutory obligation for us to look after the public interest especially with regard to investor protection. One of our key responsibilities is to ensure fair, efficient and orderly market. A fair market is one that includes the market that reflects the forces of supply and demand of shares. Not artificial supply and demand. So one factor that we looked at was achieving a natural demand and supply of shares driven by fundamentals. One of the issues that led to the fall of the market in the last month was ‘forced selling’ by margin providers and stockbrokers whose clients have taken shares on credit. Margin providers and stockbrokers force sell when portfolio values of clients go to certain levels which is in fact within the rules. Now the question is whether it’s a fair market. When there is a systemic drive to force sell, actually the selling side outweighs the fundamental interest in those stocks creating an imbalance. Such artificial pressure was one factor we took into consideration. Secondly, to create an efficient market, there has to be efficient information. The news that came out on preemptive foreign debt was followed by an extended holiday. We don’t believe that investors, investment advisors had enough time to digest and understand what the impact of that announcement would be. Without that transparency of information, it is very difficult for investor to have the transparency of efficient information to operate an efficient market.

‘Another factor of a fair market is that a market should remain liquid which means that it is kept open. Our natural instinct is that market should remain open. We don’t believe that the market should remain indiscriminately closed. The market should remain open and provide liquidity- that is the fundamental pledge we have made to our stakeholders. But when you want to provide a fair and orderly market, now there are factors in conflict with each other. To keep the market open, we might undermine some of the other factors that create an orderly market. So this decision was not about one set of pros and one set of cons. So, this decision was made on the fact that we have these duties and responsibilities under the new SEC Act. Disposing of these duties can be an offence under the Act. We had to make this decision based on the unprecedented crisis situation prevailing in the country in order to cool it off and then be able to make more informed decisions and resume fair, transparent trade activites soon.”


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