Thursday, November 17, 2011

There Has To Be A Better Way Than Outright Designation Of Shares

Read this at a forum, a letter well written by Lim Guan Eng back in 2006 to SC following the calamity caused by the designation of Iris Corp. I am all for controlling over speculation but there has to be a better way. Some will call for an earlier designation instead of a stock having risen 500%-1000% over a short period.
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Firstly, you have to allow for some leeway for speculation or else no one will play the stock market, thats the reality. Cowboy activities are part and parcel of any healthy bourse anywhere in the world, let's not kid ourselves. You need some speculation. 


The UMA is as effective as mentioning Uma Thurman to the companies, who cares? Investors need to have a better guiding light than the current "system", whereby an UMA is a first sign, usually ineffective as shares will still gallop. A better way would be to give "danger signal" instead of a sudden outright designation. A sudden designation is so up in the air, it could be implemented for Harvest at 50 sen or RM1.00, why RM1.70 or RM2.00? Its so subjective and this gives rise to potential "insider information" for those in the know to "dispose shares first just prior to designation.


The usual UMA could be issued, and if the shares continue to be rampant then issue a "danger signal". OK, what is "rampant", lets set a ballpark of 100%-300% gain within 2 weeks. If it continues to be that way, then issue a new warning, let's call it I.D. SC could issue a subsequent Imminent Designation if there continues to be rampant speculation after the issuance of an UMA. Then investors will know beforehand that this counter could be, might be designated within the short term if excessive speculation continues.
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At least an I.D. would cool investors participation and calm things down without setting off enormous collateral damage to sentiment and on other stocks as well. If you continue to play the stock after an I.D., then you deserved to get whacked royally when the designation happens.


Of course the SC cannot be too vigilant or too quick to issue an I.D. following an UMA, or else that will kill off activity after any UMA. This is just one proposal, I am sure there are better ways of handling over speculation rather than the current subjective system.

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Yg Bhgia DATO' ZARINAH ANWAR                                                                                      7 June 2006.
Chairman,
Securities Commission Malaysia,
Securities Commission (SC),
No 3, Persiaran Bukit Kiara 
Bukit Kiara, 50490 Kuala Lumpur                                                                                               BY HAND
Yang Berbahagia Dato’ Zarinah,
Avoiding A Repeat Of The Designated Securities Fiasco Of IRIS Corporation Berhad (IRIS) Resulting In RM 39 Billion Losses Of Market Capitalisation - Need For A Consistent, Fair, Accountable And Transparent Enforcement To Facilitate The Development Of A Competitive Capital Market That Protects Informed Investors.
We are concerned with the use of designated securities as a regulatory mechanism and whether such measures assist in developing a healthy capital market that is competitive, efficient and creates value. SC must be consistent, fair, accountable and transparent in enforcement to facilitate the development of a competitive capital market that protects informed investors.
For this reason, SC must avoid a recurrence of the designated securities fiasco of IRIS which while well-intentioned in punishing those who manipulate or involved in insider trading has also led to innocent informed investors in counters unconnected to IRIS being unfairly punished. This is shown by the erosion of market capitalization of Bursa Malaysia. On 11 May 2006 before the designation of IRIS was RM 769.07 billion. On 2 June 2006, the market capitalization is RM 729.97 billion.
The designation of IRIS is a RM 39 billion loss of market capitalization, a mistake that Bursa Malaysia has today still not recovered. Whilst the SC is intent of taking tough action on stock manipulation or market abuse, we have received many complaints of selective enforcement or even double-standards. 
A designated security compels investors to pay for any purchases up-front and in cash to protect minority investors from the manipulations of counters with cornered stock. As IRIS is not a cornered stock with 910 million shares. Further, the SC and Bursa Malaysia are supposed to enforce rules to ensure that there is a diverse equity spread to ensure that no one group controls more than 75% of a company to prevent it becoming a cornered stock. If adequate monitoring is done then there is no need for any designation to prevent it from becoming a cornered stock.
Iris Corp, a Malaysian security systems company, saw its share price soar 1,500 percent over eight eight months before it was made a designated security to curb excessive speculation, However why were other counters that had similar price surges not taken similar action especially well-connected companies such as SCOMI, UEM Builders or UEM World where the price rose 7 times during the past year from a low of 31 cents and a high of RM2.10. Or is there any clear guideline on the quantum of such price surges or excessive speculation before action is taken?
SC and Bursa Malaysia should have taken action by designating Iris earlier and not after the value has soared. Such failure has given an unfortunate impression to the public especially foreign investors that IRIS was doing well according to market rules. Instead of designating securities, a more effective approach is to charge the stock market manipulators under ample enforcement provisions of the Securities Industry Act 1983 without hurting innocent investors.
The failure of SC and Bursa Malaysia to follow up with charges against insider trading and stock market manipulators of IRIS after almost a month, with all the disclosure mechanism, computerization and easy detection of trades under the CDS and scripless system in place, does not inspire confidence in its enforcement capabilities. The records show who trades in IRIS shares – who are the manipulators and where is the market abuse? From a high of RM 1.38, IRIS is now trading at around 80 cents. If there is market abuse why have the shares still been sustained?
Instead, the investors in particular and market generally have been penalized whey foreign funds sell off stocks in reaction to the designation of IRIS. Malaysia is probably one of the few if not the only country in the world that designate stocks. Foreign investors hate any interference with competitive trading. Artificial devices that curb trading and unfairly penalize innocent informed investors will drive away foreign investors.
With nearly 20% foreign shareholding in IRIS showing foreign investor’s confidence in its management, this is what happened when IRIS was designated. Foreign fund managers such as Morgan Stanley disposing not only of IRIS shares but other counters as well to reduce risk exposure to the possibility of any other counters being similarly designated.
In the United States, the Securities Exchange Commission does not designate shares but impose trading curbs of 15 minutes to alert investors that there is something amiss with excessive speculation. In accordance with competitive market rules, if informed investors chose to ignore such alerts by continuing to invest in such shares, then they are responsible for their own losses. Malaysia have similar devices in the form of Unusual Market Activity(UMA) alerts sent out. Perhaps adopting a trading curb of 15 minutes as in the US will be more effective than the UMA.
Even if SC and Bursa Malaysia still intends to retain this practice, then sufficient notice should be given. If excessive speculation continues even after notice has been given, then the counter should be designated but not otherwise if excessive speculation stops. The market has lost RM 39 billion in market capitalization of which the designation of IRIS was one of the triggering factors.
Such huge losses of 5% within a month can not be easily sustained. The interference, disruption and effect on foreign investor confidence is also contrary to SC’s Mission “to promote and maintain fair, efficient secure and transparent securities and futures markets and to facilitate the orderly development of an innovative and competitive market.” The use of designated securities should be replaced with trading curbs to alert the market and action against market abuse.
Need For The Compensation Fund of Bursa Malaysia Securities Berhad To Be Readily Available For Victims Of Market Abuse.
The Compensation Fund of Bursa Malaysia Securities Berhad should be readily available for victims of market abuse. Set up udner the Securities Industry Act 1983 (SIA) for the purpose of compensating persons suffering monetary loss under Section 72 of the SIA because of :
·     defalcation or fraudulent misuse of monies or other property by a director, officer, employee or representative of a licensed stockbroking company
·     insolvency of the stockbroking company
Even though each claim is only RM100,000, Bursa Malaysia has been very “niggardly” in dispensing such claims. The amount of claims disbursed has not provided any safety net or protection for victims. Further such claims should be increased to RM 200,000.
Such claims meet almost certain rejection when the parties complained of are institutional fund managers or banking institutions. As Malaysian from all over the country invest in stock markets, Bursa Malaysia should provide such machinery and mechanism for such claims to assist investors in every state and not only in Kuala Lumpur.
DAP shares the desire of maintaining a well-regulated, fair and orderly market. An internationally competitive market is critical towards spearheading economic growth to achieve Vision 2020 of Malaysia becoming a developed state. Value creation can grow only when there is quality in management, regulation and competition.
Market misconduct has eroded the confidence of many of our retail investors, who still represent a sizeable participation in our stock market. Winning back their confidence is crucial as our retail investors today still have a lot of cash as shown by total deposits placed with the banking institutions of more than RM380 billion. These depositors are now getting negative real returns from their deposit savings as a result of the highest inflation rate of 4.8% in March 2006 in 7 years.
To get these retail investors to invest in the stock market again the SC must offer safe and sustainable investments. This can only be achieved if the SC adopts the right medicine for the particular disease and conduct a surgical strike quickly and without prejudice against those who abuse the market regardless of their status or position. RM380 billion in savings is a waste of productive resource.
The SC should restore investor confidence and regain public trust quickly by stopping such counter-productive devices as designated securities and quickly delist companies that are not performing whether or not PN4/17 to ensure that only healthy companies that grow both earnings and business opportunities are listed on Bursa Malaysia.
Yours faithfully,
LIM GUAN ENG
SECRETARY-GENERAL

8 comments:

chewltg said...

I believe if bursa impose cash up front for the counter, the market sentiment will not be so negatively affected.

Mohammed said...

I have heard the refrain that speculation is necessary for the stock market too many times and have failed to understand the reasons. Call me boring or stupid.


Is speculation necessary because it perks things up or creates an atmosphere of excitement that makes people forget its perils, while it lasts? Enjoy the moment and profits while it is going on? And let the affected parties or the society at large deal with the consequences?


Is speculation necessary because it somehow adds to the attractions that the market can provide? May be. Is speculation necessary because it enables the smooth functioning of markets or even the real economy? By redistributing wealth? By increasing the income for the gatekeepers and shysters?


If anyone can provide me with studies that shows the real economic or other benefits of speculation to the society at large, I would appreciate it very much. Till then I would part by saying that if I was in charge of affairs, I will designate all stocks!


Luckily or otherwise I'm not, lol.

topgun said...

just bought few lots lately, wanna cut lost but no buyer now. so frustrate now

bonny b said...

The SC is too involved with its own issues to care about what happens to punters. We are still awaiting their investigation reports on eg. Kenmark, E&O, etc. To cut the debate short, this SC is not really up to the mark, and only keeping the job because of 'connections'..thats what happens when stewards of industires are not selected based on merit. Too bad investors.

doraiddd said...

dali, i'm sure if jibby jnr goes whining to mommy abt how he's abt to go underwater, you'll have your wish for a rule change sooner than later.

but wld daddy then be seen dead following YB LGE's advice way back in '06?

and just as mommy learnt her lesson on her magic carpets, jibby jnr is abt to learn that frollicking with contractors from the east who engage ex-computer salesmen to run the show, does not pay.

he shld instead have consulted our 'designated' master low thiam hock.

btw, dali, dont you think there's already enough warnings abt over-speculation? and also the great leeway already given?

zarinah's saliva also no more already....

i just think that the whole world forgot abt the 'designated' weapon except the people old enough to be around when master low was still an apprentice.

Bonescythe said...

Malaysia is dead corrupted. Insider sold shares and then designated. And they are going to eat up the shares again this time? Something like forcing people to sell the shares back to them at a low price when they eat at high?

This is totally crap!

Kingsmen said...

more regulation and govt intervention is always counter productive. The free market practices must always be allowed within the rules and regulations that is already been placed. People needs to know what they are getting into when investing in high risk instruments such as the stock market where sharks and vultures awaits its victims. This Harvest episode alike previous idris, iris, liqua, repco, nbt...etc are classic examples of people feeding on greed and the desire of want to punt despite all red stop signs flashing right in front of them. George soros coined this kind of behavior in his theory of reflexity. Who does not know that designation of a stock is one of the red cards bursa could anytime pull up anytime they sees fit?

No point crying over spilled milk. No pain no gain. The joy of victory and the angony of defeat. At the end of the day...we have no other to blame than ourselves for not being wise.

So please let free market to reign.

clongviews said...

Your write up and comments are apt and fitting. Surely, the SC with such vast experience on rocketing prices and dumping must be well equiped and armed with various rules and regulations to cope with the various situations.UMA is now a joke!! IT is still people with power and strong financial backing coupled with priveleged information and influence that still calls the short.The ones that join in later may make some money whlie those in the last of the trailers may have to lick wounds. The warning is still, going in at your own risks.
Anyway this is a game of the capitalist society and that's why its called the capital market, money market and what ever name.