Sri Lanka’s stock market, once a darling of investors, has seen its value plummet 26 percent in the past year and now faces a crisis of confidence after its regulator quit in a storm of controversy.
The tiny bourse became the world’s top gainer soon after the country ended decades of ethnic war, but three years later it has imploded amid allegations of corruption.
Market regulator Tilak Karunaratne quit on Aug. 17, saying he could no longer battle against a “mafia of crooks” preventing probes into insider trading and “pump-and-dump” scams in which investors drive up shares and then sell them.
Allegations of corruption are not new at the US$14.5 billion exchange, but it is the first time the regulator had 17 high-profile cases of insider trading and other irregularities at the same time.
Karunaratne’s predecessor, Indrani Sugathadasa, also resigned last year, saying she was unwilling to compromise her “principles.”
The euphoria soon after troops crushed Tamil rebels in May 2009 sparked a bull run which has now been replaced by a search for scapegoats for the loss of more than US$5 billion in value at the Colombo Stock Exchange within six months.
The Colombo market’s slide has come on the back of impressive post-war growth. The economy expanded by more than 8 percent for two years in a row and this year’s growth is expected to be 7.2 percent.
Former Sri Lankan foreign minister Mangala Samaraweera has accused the authorities of blocking independent regulators and undermining the credibility of Sri Lanka’s capital markets.
“The sad truth today is that the Colombo Stock Exchange has become the premier center for money laundering east of the Suez Canal,” said Samaraweera, who is an opposition legislator.
The IMF, which has extended a US$2.6 billion bailout to Sri Lanka since the end of its nearly four-decade Tamil separatist war, has raised concerns over the crisis.
“From all credible accounts, Karunaratne [as the Securities and Exchange Commission chairman] and his team were taking exactly the right steps to ensure that stock market participants obey the rules,” said Koshy Mathai, the IMF’s representative in Colombo.
The government has not named a new regulator and has not yet commented on the crisis. However, Sri Lanakan Media Minister Keheliya Rambukwella said the government is considering tighter laws.
“There is a debate on this,” Rambukwella told reporters one week ago. “Different views have been expressed. We are ready to look at tighter laws if necessary.”
Mathi stressed that a firm set of regulations and an active regulator were necessary to instil confidence in foreign and domestic investors and demonstrate that the market was not designed for the benefit of a select few.
“This is an important issue for Sri Lanka as development of the capital markets is a key priority in ensuring the country’s continued rapid growth,” the IMF representative said.
No one has been jailed in Sri Lanka for securities fraud and previous cases of insider trading have been settled by the parties paying small fines without accepting guilt.
A major player in Colombo, Sri Lankan-born financier Raj Rajaratnam is currently serving an 11-year jail term in the US for the biggest hedge-fund insider trading case in US history.
His market activities ended with his arrest in October 2009 and his Galleon Management Fund pulled out of Sri Lanka and was wound up, but he never faced any allegations of wrongdoing in Colombo.