As the country’s equities market ends a controversial year, a senior minister says steps are already being taken to clean up the market and bolster investor protection by giving the Securities and Exchange Commission (SEC) more power to take out capital market offenders.
Earlier this year SEC Chairman Dr. Tilak Karunaratne resigned citing undue interference by a group of influential investors and their crony brokers who were being investigated for market offences. He was the second SEC head to resign under a year.
"The SEC in its effort to facilitate market development and ensure that its laws, rules and regulations are in line international standards is in the process of amending the SEC Act with the objective of facilitating regulation of Demutualized exchanges, facilitating the establishment of a Central Counter Party, introducing civil sanctions and administrative sanctions to deal with capital market offenders. And we also believe that these provisions will strengthen investor protection. Implementation of a robust risk management system, a clearing corporation and a Delivery vs Payment system will enhance the CSE’s effectiveness and credibility," Senior Minister for International Monetary Cooperation and Deputy Finance Minister Dr. Sarath Amunugama said.
He was addressing a convocation last week where over 800 individuals received certificates after successfully completing an educational programme conducted by the SEC.
The capital market is a very important component of the financial sector which supplements the role of the banking system in the economic developments of the country.
"The economy of Sri Lanka has been showing progress in a number of areas in the recent past particularly after the end of the war. We have been recording 7 – 8% growth in GDP reaching a per capita income of USD 2,836 as at end 2011 which is projected to reach USD 4,000 by 2016. Inflation has reduced to single digit and is currently around 7%. Budget deficit has reduced to 6.8% of GDP while Debt: GDP ratio has reduced to 78.5%. The social economy indicators which reflect the quality of life has improved significantly with unemployment reducing to 4.2% in 2011 and poverty reducing to 8.9%. These figures have improved further in 2012," Dr. Amunugama said.
"If you are to continue near 8% economic growth annually we need consistent flow of local and foreign investments. A vibrant capital market can facilitate this economic growth by converting savings to investments and also assisting companies to raise funds.
"In reality ours is not a matured capital market yet. The capital market heavily depends on equity contribution at the moment yet the market capitalization of Colombo Stock Exchange is still below USD 20Bn and as percentage it is around 33% of the GDP. In a comparable economy we would expect market capitalization to be at least 70 – 80% of the GDP.
"Therefore, we have work to do to develop our equity market further. If we target market capitalization to be 50% of the GDP by 2016 which means we need to envisage the market capitalization of Colombo Stock Exchange to reach approximately 6.5 Trillion by 2016.
"The capital market of our country has to think beyond just equity. We need to develop our debt market and other financial instruments such as derivatives, futures. We need to look at new concepts such as commodity market development.
"The primary reason for small capitalization at the CSE is the fact that there are only 288 listed companies though there are more than 10,000 registered and operationally active companies in the country," Amunugama pointed out.
"We need to identify the reasons for why companies are reluctant to get listed and encourage them by creating more awareness of the benefits involved. We must show companies that CSE in an ideal forum to raise capital and make the listing process less cumbersome. We are hoping to increase to double the number of companies listed on CSE by 2016. The market liquidity can be increased by increasing the number of listed companies.
"However, it is also equally important to attract new funds to the market both local and foreign. Currently less than 1% of the Sri Lankan population is actively involved in the market. "This number has to be increased significantly by creating greater awareness of the investment potential. The Colombo stock market has always given good returns to the investors in the long run far exceeding the returns of conventional savings methods. Also the prices of most of stocks are currently quite attractive with overall forward P/E ratio of the market being less than 15 times. This is one reason why in 2012 we saw the highest ever net foreign inflow of Rs.37Bn. These foreign investors have seen the potential of the market and have entered at the right time. We urge the domestic funds and investors to study and understand the behavior of the foreign investors and exploit the opportunity without waiting further.
"The development of the Unit Trust industry is important because it is one of the conduits to mobilize savings of the less sophisticated small investors. When people are encouraged to save for long run these savings can flow as capital to industrialists who are in need of capital. The resulting investments create employment opportunities and contribute to the economic growth of the country.
"As I mentioned earlier Sri Lanka’s capital market primarily evolves around equity. The corporate Bond market is yet to see its full potential. One of the priorities we have identified under the 10 initiatives is developing the corporate bond market by providing the necessary regulations and infrastructure to safeguard the interest of the investors and the public. A well developed bond market can supplement the banking system in meeting the long term capital requirements of the corporate sector. We expect the volumes of the bond market to grow substantially to about Rs.1 Trillion by 2016.
"In order to have a more efficient stock market one prerequisite will be the demutualization of the CSE. We are confident that demutualization of the CSE will give the exchange the opportunity to position itself better to respond to the interests of its stakeholders and become more competitive and customer driven. Developing infrastructure of stock brokers and other stakeholders too will increase the efficiency of the capital market.
"In Sri Lanka still has less than 1% of the population invests in the stock market. One main obstacle to attract investors to the market is the lack of awareness. To reap the benefits of the capital market investments every Sri Lankan needs to be financially literate. The road map to develop the capital market highlights the significance of educating not only investors but other professionals involved in the industry. This awards ceremony to confer Diplomas and Certificates to industry professionals and other stakeholder will undoubtfully be a milestone in enhancing financial literacy.
"To facilitate this road map to develop the capital market the Government after consulting all the stakeholders of the capital market provided significant incentives in the National Budget 2013 by way of providing a 3 year half tax holiday for new companies that will be listed on the CSE before December 2013, and maintain a minimum of 20 % of its shares with the public. This will encourage companies to list on the CSE and thereby increase the market capitalization and liquidity. Exemption of withholding tax on interest income earned from investing in bonds and debentures listed on the CSE will increase the activities of the debt market. The Budget proposal to permit direct investments in foreign currencies in Unit Trusts without having to channel through Securities Investment Account (SIA) and the application of the 10% tax applicable to Unit Trusts to Unit Trust Management companies will strengthen the Unit Trust industry. The Budget proposals also included some other significant initiatives such as exemption of transfer of shares for margin trading from Stamp Duty, permitting Stockbrokers to claim a lump sum depreciation for expenditure on IT infrastructure, branch networking, and such other capital items and the appointment of a Presidential Task Force to implement the Capital Market Development Master Plan which will oversee the entire road map of the capital market development," Dr. Amunugama said.