SEC committed to build capital market

The Securities and Exchange Commission of Sri Lanka (SEC) plans to amend existing regulations, develop new products, obtain advance technology and infrastructure and improve practices during 2011-2013, said Chairperson of the Securities and Exchange Commission of Sri Lanka (SEC) Indrani Sugathadasa.

She said that the SEC has identified the amendment to the SEC Act as a priority to create a conducive infrastructure to the capital market. The present SEC Act was introduced in 1987. Though there were three amendments thereafter, an overall review of the provisions to align it to global market trends has not been done.

Introduction of the new Takeovers and Mergers Code, new market intermediary rules and guidelines to register auditors of listed companies will strengthen the functioning of the capital market in Sri Lanka, said Ms Sugathadasa.

The per capita income in Sri Lanka is expected to double in 2016. It is estimated that Rs. 1 trillion of this will be generated from sectors other than the banking sector, a significant portion of which will be generated from the corporate debt market.

The anomaly which existed in the treatment of withholding tax on corporate debt securities as well as the anomaly of the risk reward structure was addressed and we expect the debt market to develop rapidly.

The SEC will follow up on the Corporate Bond Market Development Implementation Plan approved by the Commission. Also the SEC will liaise with the CSE on encouraging trading on the DEX System.

She said that steps have been taken to frame suitable guidelines to encourage the introduction of new funds namely Real Estate Investment Trusts (REITs) and Exchange Traded Funds.

This will undoubtedly give rise to more investment opportunities for investors and will contribute to the expansion of the number of investors in Unit Trusts.

Ms Sugathadasa said that Sri Lanka's capital market has developed faster and more extensively in the last 18 months than any other period in history. In a relatively short span of time, the capital market's role in funding and mobilising savings has become more comparable to that of the banking sector.

She said that the capital market has also firmly established its profile as an indicator and facilitator of growth within the Sri Lankan economy. This promising growth in the stock market was mainly backed by peace prevailing across the country.

The economy has continued to benefit from stability after the 26-year conflict. The phenomenal growth in the stock market is a positive sign that Sri Lanka's business landscape is changing for the better.

The effects of growth will, no doubt, spill over into the national economy. The government's stability has given investors a positive outlook. The positive growth momentum of the country so far has factored into the capital market through continued gain in the indices.

With the 26-year-old war that overshadowed Sri Lanka coming to an end, Sri Lanka is poised to embark on an accelerated development process. In the medium term the government is targeting an economic growth in excess of 8% and anticipates market capitalization to increase to Rs. 3 trillion.

The proposals outlined in the Budget 2011 will provide further impetus to the development of the capital market of Sri Lanka. The Budget 2011 incorporated many important proposals the SEC had made thus eliminating the impediments that prevailed in the market.

In order to promote Unit Trusts to mobilize savings several significant proposals were included in the budget. The turnover of the Unit Trust industry is to be exempted from Economic Service Charge whilst foreign investment restrictions placed on Unit Trusts investing in Government Securities was relaxed. To encourage companies to list on the Colombo Stock Exchange, expenses on listing a company will be deductible subject to a limit on the value of the Initial Public Offering and the anomaly which existed in the treatment of withholding tax on corporate debt securities was also addressed.

These incentives will further create a supportive environment for the SEC to achieve its goals and objectives.

The Key strategic goals identified by the SEC are to facilitate improvements in the capital market infrastructure and liquidity, introduction of new products to the capital market, encourage and facilitate the widening and broadening of Issuer base and investor base.

She said that from this year Market Capitalisation is expected to increase at least by 20 percent per annum. Within a macroeconomic environment of high GDP growth and low inflation supported by fiscal discipline and political stability in Sri Lanka, more companies and infrastructure projects will consider financing their projects through the equity market

It is expected that 50 to 60 new companies (of which approx 25 finance companies as directed by the Central Bank of Sri Lanka), will be listed on CSE in 2011.

Hence, it is anticipated that market capitalisation will increase to Rs. 3 trillion by 2011 from the current Rs. 2 trillion. The SEC is also exploring the possibility of introducing Cross Boarder Listing on the CSE.

The SEC thinks that it is important to increase the number of active investors in the CSE as well as to increase awareness among the investors. The importance of this goal is to broaden the investor base to increase the liquidity of the market to minimise market manipulations and other market abuses.

The stock market should venture into rural areas further in order to achieve our objective of widening and broad basing the investor base. More investors in the stock market will create more liquidity. The liquidity of the stock market provides investors the ability to quickly and easily sell securities.

This is an attractive feature of investing in stocks, compared to other less liquid investments.

The CSE has already ventured into four provinces. The development projects that are under way in the Northern and the Eastern provinces has shown a full swift where society is keen in knowing latest developments at the stock market and to invest in it.

The five branch offices of the CSE have performed exceptionally well during 2010 and the SEC would like the CSE and stock brokers to venture into other areas such as the East by establishing branch offices.

The Unit Trust industry, a vital segment of the capital market of Sri Lanka is the best conduit to mobilise savings of the less sophisticated small investors. The SEC encourages small-scale investors to begin investing through Unit Trusts as it is less risky than investing in the market directly. The SEC already has suggested a marketing plan to promote Unit Trusts within Sri Lanka.

Sri Lanka is undoubtedly poised to take off in 2011. The stock exchange, as an indicator, speaks for the economy's health and prospects for the local and foreign investors. President Mahinda Rajapaksa has opened the door for foreign investors to invest in Sri Lanka and the political stability of the country provides confidence to both local and foreign investors.

"Let me reiterate our resolve to build our capital market and set it on a strong foundation over the next few years and to contribute towards the President's efforts of placing Sri Lanka as 'the emerging wonder of Asia'", she said.