Aug 07, 2013 (LBO) - Sri Lanka's securities regulator said companies who are selling tax free listed debt will not be allowed to exclude small investors by setting high million rupee minimum subscriptions in the future.
Several companies set minimum subscription levels of a million rupees to listed debentures where banks were among the largest buyers. The high threshold kept out small investors.
Securities and Exchange Commission chairman Nalaka Godahewa said a minimum level of 10,000 rupees had been proposed following consultation with the Central Bank and others.
"Our intention is to allow the participation of the ordinary people through this move," he said.
The new threshold still needs Colombo Stock Exchange approval.
The million rupees minimum level had attracted criticism as there was a perception that high net worth investors and institutions were using it as a tax loophole.
But analysts say it may make sense to exclude small investors from bank Tier II subordinated bonds, as they are used as a capital buffer to pay off small investors when banks fail and small investors may not fully realize it.
Regulators in developed countries targeted Tier II capital at institutions as they had more skills and ability to keep an eye on highly leveraged banks.
There was a rush to issue listed debentures this year after they were made tax free.
"After exempting the tax companies have raised 24 billion rupees through listed debentures for the first half of this year," Godahewa said.
"But we have only had 19 billion rupees from the 13 initial public offers in 2011."
He said there was a dearth of dealers in brokerages who were familiar to handle debt and the SEC was also trying to promote secondary market trading.
"Currently we don’t have knowledgeable people to handle the corporate debt market," Godahewa said.
"So we'll invite primary dealers, who already registered with the government debt market to register with the stock exchange."
Primary dealers however deal on their own account making markets, unlike pure brokers making markets.
There is only one specialist debt broker, First Capital Markets, who that is a trading member of the stock exchange at the moment.