State intervention to revoke a stock market transaction involving a State owned institution may be acceptable in extreme cases to prevent an obvious fraud or irregularity that would dent the confidence and trust in the capital market system, stock market analysts said.
However, there could be ramifications to the institution and the integrity of the stock exchange, if this authority is used haphazardly or even abused, analysts said.
It is market analysts’ view that, any action with regard to a stock market transaction should be transparent. Investors should have the right information and know exactly what takes place with regard to their investments. The parties transacting must be accountable.
Prime Minister Ranil Wickremesinghe ordered last week the revocation of the sale of 7.5 percent stake held by BoC in the Seylan Bank for Rs. 1.3 billion.
The BoC, a 100 percent State owned institution was called upon by the Central Bank several years ago to manage and bring stability and confidence to Seylan Bank, which ran into crisis following the collapse of the Golden Key Credit Card Company, an institution of the Ceylinco Group.
A stockbroker said, a transaction being revoked by a government on an exchange is a very rare occurrence, though transactions do get cancelled due to system failure or human error or ‘fat finger’ as it is called in the industry. He added that there was no system failure or human error in the Seylan Bank trade.
He said for a transaction to be revoked by a government gives the assumption that the transaction is marred by grave fraud or an irregularity beyond doubt.
First Guardian Equities (Pvt) Ltd. Managing Director/ CEO Rohan Goonewardene said, “Markets run on information and determine capital flow in and out of markets.”
The rationale of this decision will be of immense interest to those, both, in and outside the country, looking at investing in Sri Lanka.
Colombo Stock Brokers’ Association President, Ravi Abeysuriya said, whether or not, the necessary approvals had been obtained by the Bank of Ceylon or who the foreign buyer is, is not the issue. “Cancelling stock market transactions has a major negative connotation on the integrity of the stock market and foreign investor confidence of a country.
These incidents destroy an already fragile Stock Market, making it futile whatever efforts made to build the confidence and credibility of the market with foreign and local investors,” he said. This is the second time a stock market transaction had been cancelled alleging misconduct by senior management of captive institutions. Captive institutions (i.e. Government owned institutional funds) such as EPF, ETF, SLIC, NSB, Bank of Ceylon, etc. have significant stakes of listed entities in Sri Lanka. It is impractical for the counter party of the stock exchange transaction to check whether the Minister in charge or the Board of Directors of the captive institution has approved the transaction each time a portfolio investment decision is made to buy or sell a strategic stake from a captive investor, Abeysuriya said.
He said, as per the stock exchange rules, a market trade can be cancelled only under extraordinary circumstances with the consent of both the buying and selling broker.
A senior banker and stock market analyst said, the BoC decided to exit from the equity held in Seylan Bank as the bank is in good footing. However, no one knows whether it is a strategic or trade decision.
He said, equity could be categorized as investment portfolio, available for sale portfolio and trading portfolio. The BoC has the right to sell the stake if it is under trading portfolio and available for sale.
However, we do not know to which category it belongs.
The Bank of Ceylon could exit from the stake if it is not an investment portfolio which requires a procedure to be followed, he said.
Colombo Stock Exchange, CEO Rajeeva Bandaranaike said, the CSE had received a request from the stock broker who executed the transaction of 13.1 million shares at Rs. 100 a share last Friday to cancel the transaction.
Such cancellations are permitted under the automated trading rules of the CSE provided both parties to the transaction mutually agree to the cancellation.
The buying broker and selling broker have consented and requested a cancellation with the approval of the CSE. The transaction was cancelled accordingly, Bandaranaike said. The broker for the buyer and seller was JB Securities. - LF