Wednesday, January 23, 2013

The road ahead for Sri Lankan capital markets

By Shabiya Ali Ahlam

  The Securities and Exchange Commission (SEC) showcased its 10-point road map to boost capital markets in the country yesterday, at a forum organised on the subject by UTO EduConsult Ltd.

SEC’s Acting Director General Professor Hareendra Dissa Bandara presented the development of the capital markets industry over the years and the plan for future development.

To establish the proposed link between capital markets to economic development link, Prof. Bandara
listed the 10 point capital market road map as enunciated by the SEC. The road map comprises of:

 ■Expedite SEC Act amendments

 ■Demutualisation of the CSE

 ■List large private and public companies

 ■Attract new foreign and local funds

 ■Develop infrastructure in terms of back office systems, interne trading and etc.

 ■Develop corporate debt marke

 ■nIntensify awareness, education and training

 ■Develop unit trusts

 ■Strengthen risk management systems

 ■Develop new products, derivatives, ETF, commodities

Outlining the backdrop of the Sri Lankan stock exchange, Professor Bandara shed light on the capital market scenario in Sri Lanka. Looking at the All Share Price Index (ASPI) performance from 1985 to 2012, it was noted that the ASPI gained only 1,400 points for the period of 24 years and soon after the war ended, the points considerably shot 4,000 more in just three and half years.

 Focusing on the index growth at three year periods, 2000-2003 showed 137% growth, 2003-2006 showed 156% growth, 2006-2009 showed 24% growth and 2009-2012 showed a growth of 66.7% from which no significant negative aspects could be attributed.

 Equity risk premium estimates for Sri Lanka for 2002-2012 show that the stock market has given 20.81% higher returns than Treasury bills which stood at 12.01%. Post war capital market recognised economic prospects leading to private and public investment in economic development process. Fall in interest rates, inflation brought to 7%, unemployment dropping to 4.2% and the GDP standing at 8% sets the surroundings as best for investments to take place. A key highlight of the post war capital market was market capitalisation amounting to Rs. 2.16 trillion by end 2012 from Rs. 1.09 trillion by end 2009.

 Linking capital markets to economic development in the post war era, the Government’s economic policy and its outlook on the capital market included political will and clearly defined vision, continuity to maintain 8-9% economic growth annually, and a strategic naval link-five hub model for economic development have been planned out.

 In this context, the professor noted the need for a consistent flow of local and foreign investments.

“A vibrant capital market can facilitate the projected 8% economic growth by converting savings to investments and assisting of companies to raise funds,” he said.

 Four crucial pillars of capital market were identified by professor which is listed companies – do they have the fund raising ability? Investors – do they have confidence? Market intermediaries – do they have performance and facilitation? Market institutions – do they have the infrastructure and involvement?

 He said that the number of listed companies was low, as from the total 39,187 registered companies all together, only 288 companies are listed which amounts to a percentage of only 0.73%. Reasons for the low listing remain unknown. It indicates low levels of awareness in capital formation, poor confidence in the CSE, issue with IPO pricing and lack of IPO assessment by analysts, and fear or myths in family owned and public entities.

 To overcome this, the dire need for conducting programs for registered companies prevail. Within the 288 listed companies, less that 1% of listed companies have only very basic produces equity and debt, low public float, insider dealings, disclosure issues, poor governance practices and poor knowledge on regulatory requirements.

 Looking at lower investor confidence, comparing 2009 -2012’s active number of CDS accounts, there are 99% non-operating CDS accounts. This indicates low levels on capital awareness of the capital market, bank dominance is very powerful, there has to be a shift from savings to investments methods if comfortable in the bank service only, investments will not take place, and reluctance to move or change due to inadequate financial literacy.

 Therefore, there is a great need of conducting systemic comprehensive investor education programs.

With 94,807 investors in the current market, investors have little familiarity with only very basic products. Unit trusts are not popular amongst investors, and lack of information pertaining to poor investor relations and research reports prevails. Speculative trading amounts to a significant portion of market turnover.

 Focusing on problems relating to market intermediaries of inadequate turnover, issues include lack of readiness to enhance market efficiency, reluctance to shift from existing retail mentality, lack of risk management and proper research based recommendations.

 Concerns relating ethical behaviour, attitude to change the behaviour towards global standards also prevail, while activity level of investment banks in debt and equity, inappropriate investment advice and issues pertaining to loss of investor confidence and inadequate capital structure were more factors identified.

 Issues at market institution levels include lack of proper risk management system, frequently changed regulatory measures in terms of broker credit and price brands, introduction of new products, capacity issues on developed markets and regulatory exposures.

 The professor advised the gathering present to take into account the view presented and stressed that the cause of issues in the current capital market were not the causes analysed thus far. “We need to extend our horizons as there is a mountain of opportunity in this sector to focus on,” Prof. Dissa Bandara emphasised.

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