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Commercial Leasing and Finance fiasco at CSE 

14 Nov 2021

  • Potential plunge of ASPI reason for regulators’ ‘blind-eye’? 
By Madhusha Thavapalakumar The Colombo Stock Exchange (CSE) is booming. It has, in fact, been booming for the past few months. Family businesses were making CSE debuts. Every Initial Public Offering (IPO) of various businesses that were announced so far this year were oversubscribed on the opening day itself. The word “oversubscribed” became commonplace in the front pages of this year’s business newspapers. The All Share Price Index (ASPI) kept, and is still, breaking all-time-high records back-to-back, and surpassed 10,000 for the first time in CSE history. However, while the CSE is on one of its booming epochs, several investors, who are active on social media, have raised concerns about a listed company, making it the talk of the investor town.  The company is none other than Commercial Leasing and Finance PLC (CLC). CLC was founded in 2008 and was quoted on 5 June 2012. As of last Tuesday (9), its market capitalisation was Rs. 479.6 billion, about 10% of the total market capitalisation of the CSE. In the first week of November, CLC’s market capitalisation exceeded Rs. 500 billion, making it the most valued listed entity; a title previously held by Expolanka Holdings PLC. Adding to that, a couple of months ago, CLC recorded its best-ever financial year, achieving a growth of 43% in Profit After Tax (PAT) in 2020/21 over the preceding year to reach Rs. 2.2 billion. The company, issuing its financials, noted that its deposits grew 32% during the year under review.  However, since recently, CLC shares have been mired in speculation and controversy as per the social media posts of several high-profile investors. One of the leading investors of CSE stated in a tweet: “Commercial Leasing and Finance market capitalisation is more than that of LOLC Development PLC. CSE market cap is misleading and a joke.”  Another investor stated: “Extremely disappointing to see that CSE is silent. Our hard-earned money deserves better.” “CLC is totally misleading. I fail to understand why people are still behind these junks without any basis. CSE and Securities and Exchange Commission (SEC) need to take action to correct the formula for ASPI as soon as possible, otherwise the whole market will become a joke,” another tweet of an investor stated. In this rapidly-heating situation, what is the exact issue of CLC here, and are the regulators – CSE and SEC – silent, as claimed by these tweets? The Market Mine of The Sunday Morning Business seeks answers to these questions this week.  ‘Highly illiquid’ shares with ‘organised trading activity’  Two of the main allegations leveled against the CLC shares by several investors were that CLC shares are “highly-illiquid” and that they suspect “organised trading activity” following the recent price movements of CLC shares, mere months after a company from the same group, LOLC Holdings, was alleged to have been conducting organised trading activities. We spoke to entrepreneur and investor Nimal Perera, who is also the NP Capital Ltd. Chairman, to get a better idea of this issue from an investor point of view. Perera told us that it is apparent that organised trading by some veteran traders is taking place at CLC.  Perera told us that CLC shares are highly-illiquid, with only about 0.45% of the shares free-floating as of last week. “At least 20-30% of the listed companies do not have required liquidity in the market, as their free-floating shares are less than 10%, which is below the requirement. But CSE is silent on this matter. CLC has created huge chaos in the market, and the market credibility has gone to the dogs. The regulator is also keeping its eyes closed and not taking any action. We were talking about this matter for so long but no action has been taken so far,” Perera added.   Explaining further, Perera stated that the CSE should either de-list the company or ask the company to buy-back the remaining shares/ask the company to release some of their shares.  “Distillery Company of Sri Lanka PLC and Agalawatte Plantations PLC also have this liquidity issue. But both these companies, every once in a while, release shares to the public,” he stated.  While such organised trading activities are taking place in the market, foreign investors will not look at CSE, Perera noted.  According to the general requirements of listing shares in CSE, on the date of listing, a company should meet the minimum public holding requirement by selecting any of the options as set out in figure 1.  Any company planning to get listed in the CSE has to comply with the float-adjusted market capitalisation, corresponding public holding percentage, and the number of public shareholders applicable under the option the company selects to adopt, as depicted in the aforementioned figure 1.  “Float-adjusted market capitalisation shall be calculated by multiplying the public holding percentage of the applicant company by the market capitalisation of the applicant company. In order to calculate the market capitalisation of the applicant company at the time of listing, the applicant company shall utilize the issue price of a share in respect of an Offer for Subscription/Offer for Sale and the Reference Price of a share in respect of Introductions,” CSE listing rules further clarify.  Why is this a problem?  An equity analyst, who wished to remain anonymous, told us that CLC has pushed up market capitalisation beyond Rs. 10 billion, to the point where a minimum public holding percentage is not required, as mentioned in the figure.  “Liquidity requirement of a listed company depends on its market capitalisation. But in CLC’s case, no minimum requirement is there because their market cap is over and well above Rs. 10 billion. They have pushed their prices up to reach this level. But this is certainly a non-compliance with CSE rules and regulations. Their share price is 20-25 times higher than their book value,” the equity analyst briefed.  According to reports, the share price of CLC was around Rs. 8 about three months ago, but as of last week, it was trading above Rs. 80/-. The equity analyst noted that, more than the sudden growth in the share prices within a period of mere three months, what is funnier is the fact that CLC share prices have reached as low as Rs. 46/- on a market day and as high as Rs. 86/- on the same day, a growth of 100% within a matter of hours.  The analyst further noted that most of the companies are not complying with the CSE’s minimum public floating requirement, and, in the case of CLC, over 99% of the shares are held by major shareholders, leaving less than 1% – or about 60 million shares – for the public, a percentage that can easily manipulate CLC share price if in the hands of veteran investors.  “CSE is currently filled with retail investors who are trading with a herd mentality. This mentality has turned CSE from a bull market to a buffalo market. At the moment, about 56% of the trading at CSE is done by retailers,” the equity analyst noted.  According to the equity analyst, the reason why both regulators are “silent” on this matter would be because of the chaos a similar incident created early this year.  On 7 February 2021, The Sunday Morning Business ran an article titled “Circular saga at CSE” explaining this very issue. On 1 February, issuing a circular, the CSE requested stockbroker firms to submit information pertaining to credit extended by stockbroker firms to a list of six company shares, which were named in the circular. The naming of those companies appeared to have created a misperception of those stocks amongst potential investors, and the companies were furious with the CSE.  The information required by the CSE included debtors’ and creditors’ age analyses for specified categories, the computation of excess of cost-over-market value for unsettled purchase transaction on an individual client basis, overdraft position of each client fund, firm fund bank account maintained by the stockbroker firm, and confirmation of liquid assets obligations as at the end of each week, commencing from the week ended 22 January 2021. In addition to this, stockbroker firms were also asked to forward the reports and analyses of Browns Investments PLC, LOLC Holdings PLC, Expolanka Holdings PLC, Industrial Asphalts (Ceylon) PLC, Sierra Cables PLC, BPPL Holdings PLC, and Piramal Glass Ceylon PLC. According to the equity analyst, this move by the CSE, to a certain extent, resulted in the ASPI losing its growth momentum in February 2021. The investors “blamed” CSE for the incident.  “If CSE takes steps to address these liquid companies’ issues, the ASPI would lose over 2,000 points and go back to below 9,000 levels. Maybe this is the reason CSE is silent on this matter,” the equity analyst concluded.   CLC maintains dead silence, apart from a disclosure  The Sunday Morning Business, two weeks ago, reached CLC to get their comments on this issue. They requested us to send them the questions we would like to get answered. However, even as of last Thursday (11), CLC had not responded to our questions. In addition to this, last Monday (8), we attempted to reach CLC Chief Executive Officer/Executive Director Krishan Thilakaratne through their general line, but were told that the entire management is in a full-day meeting and we would not be able to speak to anyone from CLC. The next day we received a similar response as well, when we attempted to contact them. On Wednesday (10), we received a response that they are not interested in talking to the media.  Issuing a corporate disclosure on 3 November 2021, CLC stated that there is no undisclosed price-sensitive information with the company in relation to CLC.  We did not turn a blind-eye: SEC SEC Chairman Viraj Dayaratne PC, speaking to us on this matter, dismissed allegations leveled against the SEC and the CSE by investors and equity analysts, firmly stating that SEC has not turned a blind eye towards companies with less than required public floating.  “Companies that do not comply with the requirements are being transferred to the Second Board now. We are closely monitoring trading activities. Our surveillance is always keeping an eye out for organised trading activities. We always try to find out whether there are any suspicious trading activities going on. However, sometimes, analysis of data requires some time, and is not easy to find out what exactly is going on. But one thing, we are certainly not turning a blind-eye towards organised/suspicious trading activities,” he noted.  However, SEC has requested the CSE to come up with a new way to deal with the companies that do not comply with the requirement, instead of merely transferring them to the CSE Second Board when they do not comply and transferring them back to CSE Main Board when they comply. Dayaratne stated that SEC does not take decisions on such matters on their own and has asked CSE to think of a more suitable option, given that CSE is the front-line regulator that deals with companies directly.  “They should consult with the industry and come up with a solution at which we can look after it is submitted to us, without us having to tell them what to do. This is something we would like to see happening,” he stated.  Speaking further on a new option to deal with the companies that do not comply with the listing requirements of CSE, Dayaratne stated that they made this request from the CSE approximately four or five months ago, when SEC felt that illiquid companies are also contributing to ASPI, failing to reflect the actual value of the market.  “CSE is yet to come up with an answer to this problem. CSE told us they did some backtesting including making ASPI a free-float-based index. We are not happy with the delay but CSE has its own reasons for the delay. However, it should be done quickly, otherwise, the blame comes on the SEC as well,” he noted further.  When asked whether CSE and SEC are concerned that measures taken to address companies that do not comply with the minimum public floating requirement would result in a massive plunge of ASPI, Dayaratne had the following to say.  “You should not do anything to create a chaotic situation, and that is why CSE is also taking time, being careful in terms of a new methodology for ASPI calculation. But, that does not mean we are trying to maintain the index artificially. Price movements change due to demand and supply,” Dayaratne noted.  CLC transferred to second board in 2019: CSE Meanwhile, issuing a response to our email query, CSE stated that CLC had been transferred to the Second Board on 15 November 2019, as a result of the violation of the public float rules in accordance with their listing rules.  According to CSE, the Second Board has been established for companies that are in violation of the public float rules. Directors of the companies that are in the Second Board are not permitted to buy shares of that company as long as it remains on the Second Board.  “The company is also subject to an additional annual listing fee of Rs. 300,000 or twice the annual listing fee payable by the Entity for the applicable year, whichever is higher, subject to a maximum of Rs. 3,000,000/=. However, as per the current Listing Rules, trading is not prohibited on the shares of such companies,” the response further noted.  However, on our questions on allegations of organised trading at CLC and CSE surveillance, the response noted that the CSE does not comment on surveillance matters and added if any suspected market offenses are detected by the CSE, appropriate referrals will be made to the regulator promptly. Conclusion Investors are concerned that news and reports surrounding potential “market manipulation”, “organised trading”, and the presence of companies that do not comply with the listing requirement would result in foreign investors pulling away or not coming to CSE at all. However, based on the comments SEC provided for this article, it is quite apparent that the stock market regulators are working on addressing this long-term concern. We, and the investors, can only hope that the solutions will be found soon, before the current “chaotic” situation aggravates.   


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