UNP MP and Chief Spokesman on Economic Affairs Dr. Harsha de Silva yesterday called for an increase in SEC fines on securities fraud by 10 times to Rs. 100 million.
This suggestion was part of his response to the SEC’s recent action against Environmental Resources Investments (ERI) over non disclosure of related party transactions. Here is Dr. de Silva’s full statement:
In a country where even a poor jay walker can be fined Rs 1,000 what is the justification of fining a well connected billionaire a measly Rs. 500,000 for committing watered-down securities-related offences on a multi-million dollar transaction? It is quite possible that profits made by committing such offences could run into the billions. The premise that punishment for breaking the law must be large enough to discourage others from breaking the law somehow seem to be absent here.
The recent action by the Securities and Exchange Commission (SEC) to compound offences committed by Directors of Environment Resources Investment; namely Kosala Heengama and his father, former Director General of Customs Lalith Heengama, former Governor of the Central Bank H.B. Dissanayake and former High Commissioner to Bangladesh and South Africa Gamini Sarath Munasinghe and one Scott Newsome has not been received well by the vast majority of law-abiding investors of this country.
It seems very much like a case of selective justice as in the past where high profile white-collar criminals were set free without being prosecuted or worse yet, while being prosecuted. The case of compounding the case of a certain director of the Nawaloka Group conspiring to manipulate the share price of Nawaloka Hospitals comes to mind. The good work done by the SEC in catching wrongdoers obviously gets overshadowed when they are released without being held accountable for their action.
In a recent statement issued by the SEC proudly quoting chapter and verse, it has announced to the naive public, in bold lettering no less, that under Section 51A of the SEC Act, offences committed could be compounded for an amount not exceeding one-third of the maximum fine imposable upon a summary trial by a Magistrate.
At present the maximum fine is Rs. 10 million. Thereby, two of the offenders have been fined Rs 3.3 million each and another, Rs. 500,000. Two other have supposedly been warned. None of these warnings have been made public and no disclosures have been made by ERI about the offences. The directors continue to manage the establishment and preach the virtues of good governance on its website.
When the SEC Act was amended in 2003 to set the maximum fine at Rs. 10 million, the annual turnover of the CSE was Rs. 73 billion and daily average turnover was Rs. 307 million. But by 2010 the annual turnover had risen to Rs. 570 billion and the average daily turnover to Rs. 2,400 billion. This is a huge eightfold increase.
With the increasing size of the market and value of transactions, the scale of the crimes committed has also increased. It is not uncommon for ‘highly respected’ corrupt individuals to make tens of millions in profits in just one day of trading on insider-information or engaging in other activities contravening the SEC Act. The sad irony is that while it is well known such activity takes place, the kind of punishment meted out when one gets caught will not put off any one engaging in such crime.
The recent comment by former SEC Director General Arittha Wikramanayake that the CSE is a “cess pool of indiscipline with no regulation” does not seem to be too far off mark. If this trend continues, the entire credibility of the CSE will crumble causing further erosion of investor confidence in Sri Lanka.
In a country where any law can be passed in a day; including amending the Constitution, it will be a piece of cake to enact legislation to increase the maximum fine to Rs. 100 million to discourage individuals from continuing with the current practice of fraudulent activity ranging from false disclosures to market manipulation.
I propose the Government start the process of getting the amendment to Parliament. I am certain the entire opposition will support such a move. But that is if the regulators sincerely wish to protect the innocent investors and use the CSE for genuine development of the country instead protecting their fat cat friends.