By Indika Sakalasooriya
Even the plainest thinking took his return to the high post as a way to avenge those who schemed and succeeded in kicking him out. But upon his return, he said he had no axe to grind. This was the second time we interviewed him as the top market regulator. Our first interview with him was in 2011 and he was breathing fire! But this time we found the man mellower, more focused and determined to complete a mission—making Sri Lanka’s capital market a fair place to everybody, from the high-net-worth investor to the small-time trader.
Yes, it’s Thilak Karunaratne, the entrepreneur and politician-turned capital market regulator.
Interestingly, during the interview he never uttered ‘stock market mafia’, a phrase he coined to identify some of the high-net-worth investors and influential stockbrokers in the country, who were hand in glove with the leaders of the previous regime. They acted as if they were above the law and were successful in getting rid of two Chairmen and a Director General of the Securities and Exchange Commission (SEC) within just a couple of years.
Getting the house in order
His immediate priority upon the return, he said, was to get the house in order. Sri Lanka’s SEC has too often been at the butt of ridicule for being a lapdog rather than a watchdog.
Karunaratne is determined to change this perception. Like any other state agency in Sri Lanka, the structures and procedures that were put in place to safeguard the integrity of the SEC had also been gradually dismantled. Karunaratne is now trying to put these structures and processes back in place, so even after his departure one day in the future, the SEC would function as a highly professional state agency.
According to him, a new SEC Act is vital in this regard. Amending the existing SEC Act had begun five years ago under successive SEC Chairman. But so far the attempts have been unsuccessful for whatever the reasons. This time the SEC has appointed a special committee headed by K. Kanag-Isvaran PC to study the draft amendments proposed in 2013 and to prepare same according to the drafting conventions followed in Sri Lanka.
The new Act is expected to align Sri Lanka’s regulatory framework with International Organisation of Securities Commissions (IASCO) standards. Karunaratne is hopeful that the Bill would become law by the end of this year or early part of next year.
“The amended Act would give us wider scope; from aligning the market to the international standards as well as to effectively penalize market misconduct,” he said.
Along with amending the SEC Act, the regulator has also embarked on reviewing some of the other key securities laws such as the Takeovers and Mergers Code and Listing Rules and Stockbroker Rules of the Colombo Stock Exchange (CSE).
The SEC is also in the process of converting the CSE into a company owned byshareholders from a mutual company owned by its members, in order to increase its efficiency. The amended SEC Act would be a precursor to this.
The sour point: Investigations
Investigations was the reason Karunaratne lost his job in 2012. But he doesn’t seem to give up. A thorough re-examination of the incidents of malpractice has been carried out since his reappointment last year and six cases were identified for further investigations and possible enforcement actions.
Karunaratne says now he doesn’t get calls from the “top” asking him to drop cases against powerful individuals as earlier. When he resigned from the post in 2012, Karunaratne publicly said he was cornered to throw in the towel by the then Finance Minister, a portfolio held by the then President Mahinda Rajapaksa.
“To his credit, Prime Minister Ranil Wickremesinghe, under whose purview the SEC now falls under, hasn’t so far intervened in anyway that threatens the independence of the market regulator,” Karunaratne said.
A welcome change
Another welcome change was Karunaratne’s open recognition of market development and investor awareness as an integral part of the responsibilities vested with the capital market regulator.
During his first tenure, the thrust was on regulating the market, which ultimately led to some accusing him of trying to over-regulate the market.
In hindsight, however, many of those would now feel that the efforts Karunaratne put into regulate the market weren’t totally unwarranted. As we all remember, the re-rated market following the war victory in 2009 was operating similar to the Wild West. There were a few overnight millionaires against many who burnt their hands and lost their life’s savings.
“I believe it’s the responsibility of the SEC to develop the market. But this does not mean that going and promoting the Colombo bourse,” Karunaratne said, noting the subtle difference between the two notions.
“Our job is to make the investor aware and give him a level playing and well-regulated market to invest. That is why we make emphasis on investor education, new technology, etc.,” he said.
A little anecdote may suffice to corroborate what Karunaratne was talking about.
A small-time investor, who does online trading, gets a call from the SEC about a certain share transaction he has just carried out. The SEC official appreciates his role as an investor in the Colombo bourse and encourages him to invest more. Then only the official points at the element of market misconduct that could be attributed to the share transaction he just carried out and instructs him not to repeat it. The small-time investor, who narrated this incident to Mirror Business, said the new approach of the SEC was a welcome change!
Equip to tackle
Karunaratne has also embarked on several new initiatives to equip the SEC with the required infrastructure and skill sets for his people. The SEC is currently actively pursuing to acquire a fully automated surveillance system.
At the same time, the officials of the Investigation Department of the SEC are undergoing a training programme under a senior retired Criminal Investigation Department (CID)official, learning the art of extracting information.
It is testing times for most of the capital markets around the world. Sri Lanka is not an exception. Sri Lankan stocks have gone down 8.9 percent this year so far, which is not so bad compared to markets in the Asian region as well as others. Plunging oil prices, slowdown in China, an unsettled Europe, coupled with a migration crisis, have hindered economic outlook for 2016. The International Monetary Fund (IMF) for the third time revised down the global economic outlook in less than one year last week, particularly due to the slowdown in China.
International financier and philanthropist George Soros, who visited Sri Lanka recently for an economic forum, said the world was facing a crisis similar to that of the financial crisis that rocked the world in 2009.
In Sri Lanka’s case, these external shocks come in addition to the structural economic issues dogging the country for so many years. The absence of a proactive monetary policy process has pushed the country on to the verge of another balance of payment crisis.
All of this is not good news for the capital market. Some even blame the current situation on Karunaratne, for which he laughs dismissively and says he remains positive about the market. He pointed out that cycles were nothing new to stock markets and said having the right structures in place, it wouldn’t be much difficult to navigate these ups and downs in a sustainable manner. He said that was the reason why the SEC was pushing to set the right infrastructure in the first place. The Colombo bourse is currently working on revising its payment system into a low risk from high risk and is also looking at setting up a clearing house.
The introduction of several new products is also in the cards. The SEC has conducted a study on the Real Estate Investments Trusts (REITs) to introduce the same to the country’s capital market.
At the same time, studies have been carried out to introduce products relating to Exchange Traded Funds (ETF) and infrastructure financing.
“With the right infrastructure and the regulatory framework in place, we, as the SEC, believe that our capital market could overcome the present global gloom to a certain extent,” Karunaratne said.