How to revive the ailing stock market is a topic that has received top attention of the government in the recent times. The main reason for this priority is that the market is down by 19% year-to-date with over Rs. 300 billion in value lost. Last year it was down by 8.5% after two years of a bull run, which made Colombo the world’s most consistent best performer mainly due to revival in investor sentiments and economic outlook following the end of three decades of conflict.
Concern was such it prompted President Mahinda Rajapaksa to convene a special meeting with all the stakeholders of the stock market followed by two meetings chaired by treasury secretary P B Jayasundera – one with the regulators and the Colombo Stock Exchange directors and the other with the broker community. This was followed by another meeting with listed blue chips to get their views on developing the capital market and their future investment plans.
The fact remains that during the years all the markets in the region have been moving up while the CSE has recorded a downward trend. Government seems to think that all the fundamentals are alright and what is needed is all stakeholders in the market to act in unison while many others have different views on the matter. However there is no magical solution while the remedy should include a combination of many measures while the approach has to be both short term and long term.
To look for remedies one need not go beyond the precincts of the Securities and Exchange Commission. The several capital market development plans drawn by them from time to time with technical support from reputed organizations contain valuable proposals. The sad story is that some of these vital proposals have been relegated to the backyard with haphazard change of commissioners and officials. The euphoria created by the sudden rally in the market following the end of the war also discouraged the authorities from looking at long-term plans aimed at developing the capital market.
One such plan which deserves some attention is the 10 year Master Plan for Capital Market Development drawn by the SEC in 2005 under the chairmanship of Dr.Gamini Wickramasinghe. Encouraging State-Owned Enterprises (SOEs) to list at least 10 percent of their equity in the Colombo Stock Exchange, getting the retirement funds like EPF and ETF to actively participate in the capital market, encouraging large corporates to list on the CSE and to issue private debt securities and encouraging foreign corporates to list on the CSE were among the far reaching recommendations contained in the master plan.
There was also a proposal to list profit making state-owned enterprises in a strategic way while retaining the government ownership control. The idea of setting up a National Equity Corporation (NEC) on the lines of similar organizations set up in countries like Malaysia was proposed as a useful vehicle for getting the SOEs to enter the capital market while still being under state control.
The NEC was proposed with three main objectives. They were: to encourage greater participation especially among rural populace in the capital market; to cultivate widespread savings habits and wealth creation among the urban and rural populace; and to enhance capital market liquidity.
The 10- year Master Plan was developed by the SEC with technical assistance from Ernst & Young Malaysia provided through the Asian Development Bank. The Master Plan developed based on Malaysian experience envisaged the future direction of the Sri Lankan capital market for ten years until 2015 and aimed at enhancing the development of the market by providing the clarity of vision and objectives to the capital market stakeholders.
Alternative funding source
Sri Lanka is heavily dependent on the banking sector to fund its economic development. One of the aims of the Master Plan was to change this situation by developing the capital market as an alternative source of funding to complement the banking sector. It was noted that the ratio of capital market size to banking sector assets in Sri Lanka was only 0.29 in 2004 while benchmark studies had shown greater reliance on capital market as a key source of fund raising in the other economies.
The Master Plan recognized the capital market as ‘a jewel in the crown’ with significant future potential to contribute to the development of the Sri Lankan economy and suggested that it needed some ‘polishing’ to maximize its potential. There were also plans to enhance CSE’s international standing by getting All Share Price Index reinstated on the Morgan Stanley Capital Index with the intention of attracting more foreign investors.
Another important proposal was the demutualization of the Colombo Stock Exchange and listing it on the CSE itself. Currently the governance structure of the CSE is modeled on that of a “not for profit, mutually owned” organization. Its owners are the stockbroking forms who are the original members of the exchange. The idea was to change this to make a distinction between ownership rights and trading rights and enable management to make strategic decisions looking at the perspective of the Exchange rather than being limited by the interest of members.
There were also plans to incorporate capital market as a part of the education syllabus for schools and universities. The SEC was supposed to identify and leverage such as TV, radio, personalized meetings, seminars, workshops, direct mail and e-mail campaigns etc. to meet the programme objectives.
Recommendations had also been made to encourage EPF and ETF to diversify the management of its funds by outsourcing 5% to external fund managers. It was also proposed to enhance investment activity in the capital market by encouraging greater investment by state owned enterprises.
The idea of setting up a minority shareholders’ watchdog to safeguard shareholders’ interests was another timely proposal. The aim was to promote and preserve minority shareholder’s rights and confidence by effectively monitoring potential abuse by controlling shareholders. Such a body would certainly give confidence to the minority shareholders whose increased participation in the market is essential in order to broad base the market.
Due to some reasons this plan was not implemented in full; however it was followed by another plan a few years later. Many valuable ideas including introducing legislative changes to enable demutualization and introducing changes to broad base the market and to increase the market capitalization were also included in ‘Capital Market Development Plan for 2011-2013 unveiled during the chairmanship of Indrani Sugathadasa. The amended SEC Act was to have legal provisions expressly for Demutualized Exchanges, profit sharing, listing of a Demutualized Exchange, limitation of shareholding, Government appointees to the board of a Demutualized Exchange and public interest mandate.
Influenced by increasing competition many exchanges have opted to demutualize the governance structure and make the Exchanges commercially focused business organizations. Some of the other reasons that have influenced the change in governance structure are the need to make a distinction between ownership rights and trading rights and enable management to make strategic decisions looking at the perspective of the Exchange rather than being limited by the interest of members. Demutualization of CSE will make it more dynamic and efficient and will increase the confidence of the foreign investors as well as the local investors in the Sri Lankan capital market. The small size of our capital market has always been an issue when attracting major individual and corporate investors and foreign funds. This question has to be addressed if we are to develop our market to be comparable with some of the emerging markets in the region.
If we are not to be left out in the foray it is important for us to take whatever the meaningful steps necessary to expand the size and liquidity of the market. And in this regard capital market development plans proposed at various stages and not implemented up to now deserve top attention of the authorities concerned as they provide valuable insights on how to develop the market on a more long term basis.