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Thu, 18 December 2014 20:27:51
Sri Lanka capital market rule-making needs improvement: industry
20 Jun, 2011 18:02:46
June 20, 2011 (LBO) - Sri Lanka's stock market regulators and the industry should engage in formal consultations to make sure that rules are accepted as fair, frequent revisions are minimized and unintended consequences avoided, industry officials said.
"It is imperative that the regulator have a constant and open dialogued with the regulated," a former director general of Sri Lanka's Securities and Exchange Commission Arittha Wikramanayake told a forum on capital market development.

"Unfortunately in my opinion this does not appear to exist in adequate measure."

Wikramanayake has founded his own law firm, Nithya Partners, which is active in corporate law and capital markets.

He said the fault was partly with the industry, where associations, which were created to engage in structured consultations with the regulator, were not coming out with their responses.

"Sadly - and I may add, through no fault of the regulator perhaps - these professional associations have failed to get their houses in order, and/or been able to speak with one voice, or convey different opinions as a single body," Wikramanayake said.

"This has resulted in a very unfortunate situation where regulation increasingly appears to be imposed top down with some terrible results."

The problem of lawmaking without adequate research and consultation is not limited to capital markets. Rights advocates say that shortcomings in lawmaking have contributed to an overall breakdown of just rule of law and liberty in Sri Lanka over several decades.

Lawmaking

Laws are coercive and can limit freedoms of citizens, making consultation a fundamental process of lawmaking in a free country.

Laws are made in parliament with the approval of representatives of the people giving them legitimacy and acceptance. Liberal democracies usually release a white paper for public discussion before drafting bill.

Critics say in Sri Lanka some laws are increasingly hatched in secret and rammed through the parliament as 'urgent bills' using brute majorities, helped by a constitution that does not have sufficient guarantees of absolute equality.

The most recent of such cases is a controversial bill to set up a third state managed pension fund, which has left one private sector worker killed in protests.

Under Sri Lanka's securities law regulations can be written and published in a state 'gazette' to give it legal effect.

Enacting laws by gazette is the most dangerous form of lawmaking devised in the course of Western European political evolution, which Sri Lanka has inherited. It by-passes the parliament and treads a thin line between democracy and fascism.

One of its most extreme examples of law by gazette is the 1933 Enabling Act of Germany which allowed the enaction of entire laws by cabinet by passing the Reichstag, the country's parliament, and even the constitution.

In Sri Lanka taxes, even on food that people eat are raised by mid-night gazette literally while citizens are sleeping.

Britain's Magna Carta considered a key milestone in people's path to democracy, was partly a result of King John raising taxes (scutage levy) without consulting his Barons who were affected.

The charter to required the king to seek "common counsel of the realm" before increasing taxes.

Murtaza Jafferjee, head of JB Securities, a Colombo brokerage, said some rules have unintended consequences, with outcomes that were not foreseen or not desired coming out later.

"We need to try to understand cause and effect, why things are happening," he said. "Spend time how things are happening and come out with a solution."

Analysts say from the mid-1990s Sri Lanka's telecom regulator for example, started making rules with wide consultation.

It brought in international expert consultants to research an issue, allowing the experience of other countries to be brought in, and released consultation papers. It also conducted a public hearing on issues such as tariffs.

The SEC also usually puts out consultation papers on most issues.

At the capital market development workshop SEC director general Malik Cader encouraged participants to be "free and open" as they can be. Industry responses on improving rule making themselves came in a session on whether the market was over-regulated.

Tinkering

"A good example of the very inclusive process that was followed by the SEC is the recent draft of the take-overs and mergers code," Wikramanayake said.

Following consultations the SEC had avoided making changes suggested by some of its own experts, he said.

If broader consultation had been followed, the unhappiness expressed by market participants in relation to price bands on volatile micro stocks and subsequent relaxation of broker credit rules could have been avoided.

"The opposition that is created forces constant tinkering with the regulation creating an impression that the regulator is weak or incompetent, which does no good for the regulator or industry," Wikramanayake said.

"Now had there been an open and frank dialogue between the regulator and industry this process might have been far more efficient, transparent, and above all, been acceptable to the industry and public as a whole.

"Once the industry associations are co-opted in to the process, they cannot snipe away at the regulators' actions."

Analysts say even when the regulator relaxes rules on appeals if the process is not a transparent structured one, it may create the impression that the regulator caved in under pressure, rather than being proactively responsive to justified complaints.

Ray Abeywardene, head of Acuity, an investment bank, said a consultative committee made up of representatives and regulators should be established to deal with issues that come up.

"My appeal is…capable market participants should be brought into this consultative committee," he said.

"It will give all of us the opportunity to get it right the first time."

Surekha Sellahewa, director general to the Colombo Stock Exchange, said a consultative committee could also include an expert who could give a wider perspective about an industry in addition to practitioners who are directly affected.

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