Thu Dec 1, 2011(Corrects value of hotel deal in paragraph 9 to $500 million (not billion)
* Resignation follows deputy's transfer
* Brokers, big investors pin bourse woes on SEC
* Sugathadasa's exit may hit confidence
COLOMBO, Dec 1 (Reuters) - The head of Sri Lanka's Securities and Exchange Commission (SEC)resigned on Thursday "to uphold her principles," barely a month after her deputy was moved amid broker complaints that tougher regulation was hurting stock market prices.
Indrani Sugathadasa's resignation comes three days after the island nation's brokers met President Mahinda Rajapaksa to urge him to intervene in his capacity as finance minister to revive the slumping Colombo Stock Exchange.
Her decision to leave could further damage Sri Lanka's campaign to attract foreign investors after the end of a three-decade civil war in 2009, a campaign that has taken a series of hits since October including a warning from ratings agencies.
"I have decided to resign, upholding my principles," Sugathadasa told Reuters. She said she had written her reasons in her letter of resignation, which "would come to be known."
It was not immediately clear what prompted her exit, but brokers and influential investors have blamed increased SEC regulation for slumping prices and trading on the $20.2 billion bourse, which was Asia's best performer in 2009 and 2010.
The SEC this year has investigated several cases of share price manipulation, including "pump and dump" schemes involving illiquid shares, and tightened up the amount of credit brokers can extend to clients to avoid a crash.
The bourse through Thursday's close was down 8.3 percent on the year, the ninth best return in Asia year-to-date. That follows two years as Asia's best performer with a total return of 342 percent, surging with the end of Sri Lanka's 25-year civil war in May 2009.
CONFIDENCE CRISIS
Sugathadasa's deputy, Malik Cader, in November was transferred to the finance ministry after brokers and politically connected investors complained to the president his regulation of the industry was too aggressive and that he had urged them to only invest in blue-chip shares.
That move, along with the government's cancellation of a $500 million hotel deal and swift passage of a law that allowed it to take over state assets leased to private individuals, has dented investor perceptions of Sri Lanka.
Ratings agencies in November warned that the takeover law could hurt confidence and hit Sri Lanka's sovereign rating.
Last week's shock 3 percent currency devaluation may also have hurt, since the central bank -- the responsible authority -- was not made aware of it until Rajapaksa uttered it during his budget speech.
Sugathadasa, whose husband is the president's top aide, has been leading a campaign to bring Sri Lanka's capital markets into compliance with global standards, including hiring white-shoe consultants McKinsey and Co. to advise.
That has often put her at odds with big market players who benefit from lax standards, and brokers who have enjoyed huge commissions amid a post-war influx of small investors, who often act on rumours to their own detriment.
Among the loudest critics are a number of high net-worth investors who either hold government positions or who sit on corporate boards with top government officials.
The government has increasingly moved into the private sector by re-nationalising privatised state assets, or by buying large stakes of private companies through the central bank-controlled Employees' Provident Fund and, in some cases, appointing board members. (Additional reporting by Shihar Aneez; Editing by Matt Driskill)
