While fostering the development of the economy, the capital markets also play an important equalising role. Viz – it attracts the participation of a large number of people in the economy by investing in securities and other derivatives. Therefore the role of the regulator becomes even more important as there is a large number of stakeholders involved. It follows that a well regulated market will encourage more people to come in as investors and contribute to the development of the economy.
Sri Lanka’s capital market has developed faster and more comprehensively in the last 3 years than any other period in history. It directly accelerated economic growth to a larger extent by providing a boost to domestic savings and increasing the quantity and the quality of investment. During the last three years, the Colombo stock market provided the public an additional avenue of investment even though many did not tread this path carefully by not assessing the risks involved in an appropriate manner.
The high growth in the Colombo stock market seen in 2009, 2010 and in the first quarter of 2011 caused a high degree of price volatility and it also created many regulatory and supervisory issues. The SEC was forced to step in and take several – perhaps not very popular – measures to curb the volatility and to reduce the systemic risk in the capital market.
2011 was a difficult year for the world’s stock markets largely due to the European debt crisis. International stocks, measured in US dollars, lost 14.4% in 2011. Losses varied by region and, in spite of the Euro crisis, European stocks fared the best losing 11.9%. Pacific-rim stocks, comprised mostly of Japan and Australia, lost 14.4%, while emerging markets fared the worst, declining 18.8%. Worldwide stock market capitalisation fell 12.1%.
As a consequence of these trends, and also due to factors which were local in nature, the Colombo Stock Exchange (CSE) too recorded a negative growth of 8.5% in 2011.
During the year under review the Securities and Exchange Commission of Sri Lanka (SEC) continued to provide proper direction and consistency in policies towards fulfilling our mandate of fostering a fair, efficient and transparent capital market. In line with our objectives the SEC made significant strides in developing market infrastructure, institutions, intermediaries and investors in order to expand the role of our capital market in financing the growth of the economy.
The regulatory reform process of the SEC is focused on strengthening investor protection and market integrity. We made significant efforts in reforming the legal framework with these objectives in mind. After extensive consultations with all the stakeholders, amendments to the SEC Act were finalised, while the Unit Trust Code was amended and gazette to enable the regulation of exchange traded funds. The SEC is in the process of finalising the draft bill for the Demutualisation of the CSE to bring our capital market to be in line with those in more mature jurisdictions.
During the year we embarked on a more proactive role to make the capital market accessible to the masses through financial literacy programmes. In association with market participants the SEC conducted a live television series comprising of studio discussions.
It also organised Investor Day programmes throughout the country aimed at imparting the required knowledge on investing in the capital market which enabled the public to make better investment decisions. In addition we published regular articles in news papers in order to make the public better informed of these matters.
The SEC is of the view that for a market to be attractive to potential investors and draw wider participation it must earn investor confidence. In the middle of year 2010, as fears of a speculatory bubble grew, we imposed credit restrictions in order to bring sanity in the market. However towards the latter part of year 2011 in order to stimulate the market, these restrictions were relaxed to some extent and further concessions were given at the beginning of 2012.
In the face of changing conditions in the domestic capital market landscape it necessitated us to step up our efforts in the supervisory front to a more proactive risk focused framework. The risk-based supervision of the SEC focused on continuous monitoring and evaluation of the risk profiles of regulated entities in relation to their business conduct and financial soundness.
We continued to remain vigilant and maintain robust surveillance of the trading activities to ensure that the market operates in a fair and orderly manner and promote efficient price discovery. The SEC is able to monitor trading activities on a real time basis to detect a wide range of possible market misconduct. This enabled us to act promptly to curb potential market misconduct and enhance investor protection.
During the year we conducted a Capital Market Development Workshop with the participation of industry participants to discuss issues of mutual interest on the securities market. This workshop enabled us to obtain insights and opinion of stakeholders towards developing the capital market and this forum gave us the opportunity to obtain industry views prior to implementing new policies. These dialogues had a positive outcome and the SEC shall strive to maintain close interaction with the industry and where possible obtain the concurrence of all stakeholders.
In the coming year we are determined to further strengthen the regulatory and supervisory arrangements in keeping with modern trends. Investigation capability will certainly be enhanced and we expect better performance in this area.
We are of the view that the settlement risk which currently exists between T (Trade Day) and T+3 (Settlement Day) will be fully eliminated by improving equity-market infrastructure such as establishing a Clearing Corporation. We will also pay more attention to improving corporate governance, improving market liquidity, creating a well informed and educated investor base, re-evaluating market volatility controls and developing a long-term listed debt market in the immediate future. Introducing a minimum free float is one measure that the SEC is currently contemplating in order to increase the liquidity of the market.
In conclusion I wish to express my appreciation for the unstinted cooperation of the Commissioners, management and staff of the SEC for their professionalism, commitment and support for the smooth functioning of the Commission. With the support of all those mentioned, I look forward to carrying out our Mission, i.e “To promote, develop and maintain a capital market that is fair, efficient, orderly and transparent” and making it a reality in 2012.