Lack of liquidity and concerns over the time it can take to sell shares on the island nation's 2.43 trillion rupees ($18.6 billion) bourse have deterred foreign funds from buying more than a few select stocks.
Nalaka Godahewa, the head of the SEC, said the regulator is in talks with large government funds on acquiring and building up stakes large enough to attract foreign interest.
"When foreigners come, there must be parcels to buy. This is one area I am talking about to government funds," Godahewa told Reuters in an interview on Thursday.
"They (government funds) must be more strategic and build up and create these parcels when the market prices are low and hold it.
Now when the foreigners come, there is a problem in finding (adequate shares). There are no parcels to buy.”
Sri Lanka has attracted a net 22.48 billion rupees (US$ 172 million) foreign inflows into stocks so far this year after a record 33.66 billion rupees last year.
But offshore investors have been buying shares in only around 10 firms, including top conglomerate John Keells Holdings and largest lender Commercial Bank of Ceylon, out of 288 listed firms.
Sri Lanka’s Government funds include Employees Trust Fund, the largest local fund with more than 1 trillion rupees (US$ 7.65 billion) in its portfolio, Employees’ Provident Fund, funds held by State-run banks and an insurance firm.
However, they do not invest heavily in stocks, preferring lower-risk investments. Government funds traded 36.1 billion rupees (US$ 276 million) worth of stocks last year, compared to 66.5 billion rupees in 2011.
In the first 11 months of this year, they have accounted for only 17 billion rupees.
Government funds are much bigger than private local equity funds, but they invest heavily in government securities. Economists say the government uses them to hold down market interest rates by accepting low yields.
The market boomed in 2009 and 2010 with respective annual growth of 125.3% and 96% in the main stock index , largely due to new retail investors flocking into risky assets on a surge of optimism after the end of a 26-year war.
Since 2011, however, insider dealing and market manipulation has dented retail investor sentiment and the index is down 25.6% from its record high of 7,863.74 points hit on Feb. 15, 2001.
Godahewa said that the SEC has dealt with all suspected market manipulation and the regulator aims to list two new firms per month from next year.
“We’ve something like 30 initial public offerings (IPO) earmarked right now which are likely to come to the market within next two years. But you can’t allow too many IPOs coming at the same time. So we’d like to see two IPOs a month roughly next year.”
The regulator has already ordered the main listed companies to ensure that at least 20% of their shares are available to trade by the end of 2016 to raise liquidity, attract foreign funds and curb manipulation. (Reuters)