Sri Lanka securities watchdog mulls new fines for price manipulators - LANKA BUSINESS ONLINE

Sri Lanka securities watchdog mulls new fines for price manipulators - LANKA BUSINESS ONLINE
Sri Lanka securities watchdog mulls new fines for price manipulators
Sept 15, 2010 (LBO) - Sri Lanka's securities watchdog will bring new laws to make it easier to prosecute 'pump and dump' fraud and also bring in a new set of fines going up to three times of profits made by perpetrators, officials said.
The Securities and Exchange Commission (SEC) imposed a 10 percent price cap in August to curb steep rises in stock prices especially in illiquid stocks. From September 20 a refined formula will be used to cap activity of the most volatile stocks.
"According to the SEC Act, there are enough provisions to take action," SEC chairwoman Indrani Sugathadasa said.
"It is not easy to prove."
SEC officials said they would bring in new laws including fines of up to three times of any profits made from price manipulation.
Sugathadasa said prices of some companies were moving up without any fundamental reasons including firms that made losses.
Pump and dump fraud usually involves small (or micro) cap companies, especially illiquid stocks that can be easily pushed up.
Manipulators of such companies can either be insiders who run the company or groups of outsiders.
Methods used to promote such companies can include newspaper articles, postings on websites and especially in developed markets 'cold calling' where investment advisors call up stock buyers to persuade them to buy the stock.
Such stocks can be identified by their small caps, being illiquid, not having strong revenues, having losses and making claims of entering promising new businesses. By the time the new business ventures turn out not to be profitable it will be too late.
In Sri Lanka however the entire stock market has been re-rated upwards and has been supported by generally looser monetary policy of some of the lowest interest rates seen in years.
Prospects for a real economic pick-up, after the end of a 30-year war, are also high. As a result stocks that went up have tended to stay up, at least so far, despite having weak fundamentals in some cases.
But bank credit for real investment has been weak so far though banks are flushed with excess liquidity.
Such conditions are also ideal for asset prices bubbles and speculative activity.
The market price to earnings multiple in now over 24 times profits.
The SEC has also issued directions stopping brokers from giving informal credit to clients, and has asked all credit to be formalized through approved margin providers.
It will soon ask day trading activities to be conducted through separate accounts with a cash margin put up front.
"We are not saying day trading is bad," SEC's deputy director general Malik Cader said.
"The stock exchange will open a separate account for day trading. You will have to put an up-front margin.
"If you do not sell (at the end of the day) it will be transferred to the normal trading activity."
Standard trades have to be settled within three days. Though day trades are required to be settled everyday clients were carrying positions forward, officials said, which was a systemic risk for brokers if the market turns.
With higher trading volumes the regulators are also considering asking brokers to inject more liquid capital. Analysts say among limits being considered could be 100 million rupees and at least 50 million in liquid capital.
Sri Lanka has 21 brokers and another three have been recently licensed.