Three-year road map to boost capital market growth

Economic growth hinges on an efficient capital market that mobilises savings for productive investments. From the perspective of Sri Lanka's fast emerging economy status the role played by the capital market as an integral driver of the overall macro economy is constantly evolving.

The Securities and Exchange Commission of Sri Lanka (SEC) believes that while regulation is fundamental to ensure the capital market mechanism is fair and transparent, it has to facilitate market development.

The Sri Lankan Capital market is one of the key areas which witnessed impressive growth in the post-terrorism period and the SEC in consultation with key industry participants put forward a three year Capital Market Development Road Map in October 2012 to reposition the market to play an important role in capital formation and development of the economy.

Apart from the road map to develop the capital market, the SEC and the SCE implemented several important initiatives in the recent past. These initiatives were implemented to increase liquidity and strengthen the regulatory framework.

Some of the important initiatives undertaken in the recent past were - Upgrading of the Takeovers and Mergers Code, Introducing a lock-in period for Pre-IPO private placement, Streamlining Related Party and Director's Disclosures, Replacing ad-hoc policies with long-term initiatives, Re-instating Introduction as a listing mechanism with enhanced Investor Protection, Introducing Panel of Valuers for transparent financial reporting purposes, Enhancing disclosures on the IPO mechanism inclusive of Independent Valuer's Opinion, Enhancing global visibility via Investor Fora in Hong Kong, Mumbai, Dubai, Singapore, London and New York and creating an enabling environment for Primary Dealers to trade Corporate Debt maintaining a minimum number of unit holders for each unit trust.

Execution of the Road Map has progressed steadily over the years and most of the initiatives have reached substantial completion.

The broad objectives of the Road Map are structural and functional in nature covering many areas such as regulation, investor protection, market development, infrastructure development and enhancement of financial literacy and risk management.

A summary of the progress made so far -

Corporate Bond Market. To complement the economic growth plans of the government it is deemed important to broaden the ability and capacity of the bond market to supply financing to a wider spectrum of industries and projects. Towards this end, the SEC is in the process of calling upon issuers to include the rating rationale in the issue prospectus to enhance transparency and disclosures.

An upgrade to the CSE trading system for debt securities and upgrades to the surveillance system of the SEC to accommodate corporate debt trading is being finalised. CSE Member Rules for stock dealers and brokers are being finalised to improve debt trading.

Unit Trusts. The unit trust industry is a vital segment of the capital market since it is the best conduit to mobilise savings of the less sophisticated investors. Over the years the unit trust industry played a pivotal role in developing the capital market by channelling capital into the real economy.

To develop the unit trust industry, the SEC initiated a unit trust campaign as part of the marketing campaign for the capital market. In this regard a reality Quiz program, Danno Dinanno and a media campaign comprising of newspaper advertisements and radio trailers were initiated to attract investors to unit trusts.

The SEC has taken steps to publish the performance of the unit trust funds in daily newspapers and is compiling a brochure to be given to EPF recipients.

The SEC successfully made representations to the Central Bank to include unit trusts that invest exclusively in Government Securities within the definition of 'Government Securities' for the purposes of calculating Statutory Liquid Assets by banks and finance companies and to be eligible to be considered under mandatory investments in Government Securities category by pension funds and provident funds.

New funds. To showcase investment opportunities in the country and attract institutional and high net-worth investors from across the globe the SEC and the CSE conducted investor fora in a number of foreign destinations such as UK, USA and Singapore.

Following the hosting of international fora, data was obtained from the CSE and analysed to assess the movement in foreign trading flows. It was identified that there have been a significant number of new Central Depository System (CDS) accounts opened by foreign investors and that there are improvements in foreign trading activity from the countries where road shows were held.

Central Counter Party (CCP) mechanism. Stock markets globally are assessed on the basis of their ability to offer a stable environment in the form of efficient trading, clearing and settlement systems apart from market returns. The CSE proposes to introduce a Central Counter Party (CCP) to implement a robust risk management framework.

A CCP is an entity that acts as a buyer for all the sellers and acts as a seller for all the buyers in the secondary market transactions thereby ensuring negligible counter party risk for involved parties. The SEC embarked on setting up an integrated CCP jointly with the CBSL and the CSE to effectively manage risk.

Expression of Interests were called and upon evaluating the proposals a suitable party was selected as the Consultant cum Project Manager for the implementation of the CCP in view of their thorough understanding of the CCP framework and satisfactory hands-on experience in implementing a fully-fledged CCP.

Thereafter, the SEC, CSE and CBSL signed a tripartite agreement outlining the responsibilities of each institution. At present the CSE is in the process of finalising the contract to be signed with the consultancy firm.

Education and awareness. The SEC plays an important role in conducting financial literary programs for existing investors and potential investors. The SEC is also committed to producing a pool of competent and knowledgeable market professionals by delivering licensing examinations and conducting continuous learning opportunities for professionals in the securities industry.

Initiatives in 2014. A one hour pre-recorded television program titled 'Going Public' comprising 13 episodes was telecast on MTV. This TV series was telecast to educate the corporate sector and top business executives of potential listed companies on the benefits of investing in the CSE.

Chat show in Sinhala. A live radio chat show Ayojana comprising 18 programs was aired over Lakhanda Radio to discuss various aspects of investing in the capital market to enhance investor education and broadbase the investor base.

Danno Dinanno - Quiz program. As part of the joint marketing campaign the SEC and the CSE with Sirasa TV conducted a Reality Quiz television program titled Danno Dinanno comprising 12 programs to disseminate comprehensive knowledge on investing in the stock market and unit trusts. This was Sri Lanka's first ever Reality Quiz on the capital market.

More than 250 newspaper articles pertaining to the capital market of Sri Lanka was published during 2014.

New listings. To developing the capital market, the SEC took steps to encourage private sector and state owned enterprises to fulfill their funding needs by listing on the CSE.

The SEC conducted listing promotion fora for commercial ventures in many parts of the country to create awareness on the possibilities of raising capital via the capital market and address any apprehension faced by potential listed companies.

Discussions were also held with indentified State Owned Enterprises (SOE) to encourage them to list on the CSE.

The SEC with the CSE published a Guide to Listing on the CSE in all three languages.

It is also envisaged that increased listings will lead to capital formation, improve liquidity and spur economic growth.

On the regulatory side, the SEC re-instated the mechanism of listing by 'introduction' with safeguards to address any shortcoming to protect the investors and the integrity of the market.

The SEC also introduced a mandatory minimum public float needed for listed companies following a practice that has already been adopted by a large number of international and regional jurisdictions.