Jan 132014
 
By Indika Sakalasooriya

Dr.Nalaka Godahewa, Chairman of the Securities and Exchange recently shared his thoughts with the Mirror Business about the year that ended and his expectations for the country’s capital market for the New Year. The following are excerpts.

Q: Let’s begin with your expectations for the capital market in the New Year?Expectations for 2014 are extremely positive. There is a lot of positive sentiment about the market activities if you talk to any stakeholder.One of the key reasons is, in 2013 we stabilized the market and laid a very strong foundation for us to grow from this point onwards. The regulatory leaks that were there were plugged and very clear-cut three year plan was introduced and of which at least 40 to 50 percent is completed. And also, if you look at the total capital raised in 2013, that was the perhaps the best in the recent past. It grew over 270 percent. So, I would say in 2013, the capital market has done well. Since we have now laid strong foundation, the market stakeholders should make sure to deliver on the strong platform we have created.

Q: Though you say market stakeholders are extremely positive, we hear that a number of stockbrokers are struggling?They are struggling because of what happened in the past. They are not negative about what will happen in the market in the coming years. Last year, the equity market reported a growth of 4.8 percent. So, the people who depended on the equity market—when the business is distributed among 29 brokers—had to undergo certain hardships. In fact almost 50 percent of them are struggling. It is a fact. If you look at every other industry it is same. That’s why the Central Bank is asking finance companies to merge and consolidate.  Same thing goes for brokering companies. There are far too many. When there’s too many, some consolidation needs to come in. Either they could consolidate or become deactivate for a while, and come back when the market is ready accept a larger a number.

Q: Is there such a possibility? For those struggling to go into hibernation and come back when the times are good?There’s proposal which has come to the Colombo Stock Exchange (CSE). They have forwarded it to us. We have not discussed it at the Commission level but at the Secretariat level we have discussed about it, and we are looking at it positively. In many other countries this has happened and it’s not a new thing.

Q: We hear that some brokers are even closing their regional branches.Yes, we are aware of it. As I said about 50 percent of our brokers are currently losing money. When they are losing money and the market is not growing they are compelled to scale down their operations. We don’t like it. But as I said, we cannot interfere into their business and tell them what to do. My only hope is that market will pick up faster, so they can expand or at least maintain where they are. To support them, we went a little beyond our scope and talked to all these large government entities and asked why they were not active in the market. We felt that they were missing the bus. Now I can see they are coming back and this will help brokers. At the same time, we have given fair warning to brokers not to mess it up like the last time by trying to dump shares into these state agencies. The professional fund managers at these state agencies should also be mindful not to get caught. We as the regulator will also closely monitor this and expect to take proactive actions to avert any misconduct.

Q: Since you admitted that many brokers operate, is the SEC actively, like the Central Bank, encouraging the brokers to consolidate?Unlike the Central Bank who clearly told finance companies to consolidate, we haven’t told brokers anything of that nature. We are not telling them what to do. The industry has to decide itself. If you look at the last one and a half years, every time they have come up with a constructive idea, we have accommodated it. We have these consultative meetings with them which are part of an ongoing programme. But we are not here to tell them how to do business. Our job is to develop the market and protect investor interest.

Q: What is the current position of the SEC Act amendment?SEC Act amendment as you know was handed over the Finance Ministry after the Commission approval in July last year. Then the Treasury took a decision to review it once again with an independent group, which I think is a good move. There were several bills that came into the parliament last year which were challenged.  Therefore it is important to get an independent view. They are regularly meeting and SEC representatives are also there.

From what I hear, 50 percent of the draft bill has been looked at. If you ask me I would like them to finish fast as possible. But I don’t know how long that’ll take. But as soon as that process is over, it should go the Cabinet and then to the parliament.  We need it very badly.

Q: What are the salient points in the amended Act?The new Act will give SEC civil sanctions. Everything we currently have is criminal sanctions. When it comes to criminal sanctions, everything you have to prove beyond reasonable doubt which takes a longer period and sometimes you might not be able to prove at the end. That’s why regulators all over the world have moved towards civil sanctions where you can make a call on probability. When the market is growing, to strengthen the regulation we need those powers. At the same time the Act will facilitate product development, CCP and demutualization of the CSE.

Q: When you assumed duties as SEC Chairman in 2012, the market was in turmoil. It was referred a “casino” run by a certain “mafia”. Three were stories of manipulation, front-running and all kinds of market malpractices. Some alleged that your appointment to the SEC was also engineered by a section of powerful investors who wanted manipulate the market the way they wanted. But in 2013, the market sort of stabilized and as far as we know there were no major incidents of market misconduct. And top of that you are bringing new regulations. What was the formula you adapted?First of all I thank you for asking that. When I assumed duties there was a crisis. I was in fact asked to come by the President because there was a crisis.In a crisis, people always tend to find scapegoats. So there was a lot of suspicion and allegations. Even when I came, there were allegations that my motives are different. But my approach was to be patient and focus on what we need to do.

Firstly, we sat down, analyzed the situation and developed a long term plan. We got all the market stakeholders involved and got their views and put in an action plan to recognize what we needed to do to develop the market in the long term.

Secondly, we focused on the issues. There were a lot of investigations going on and we went into each and every one and completed them. One position I took was you can’t go by what people say. You have to go by the book and follow procedures. Rather than making statements to the media about what I feel about investigations, I kept my mouth shut. I declined to comment and allowed the Secretariat to do their job. They went to the Commission with their recommendations and now everything is completed.

During the initial period, our focus was stabilizing the market because I felt that was what we were lacking at that moment.  Having stabilized the market, now our focus is shifting more towards the regulatory areas.

If you look at the last 3 to 4 months, we have focused heavily on the gaps that were there in the regulatory mechanism. Sometimes it’s easy to find fault with people and the system when there are gaps in the regulation. There is no point in crying over spilt milk. You must find out why these things are happening. I believe we have identified the issues and addressed them so that they cannot happen any longer. And even the surveillance system was much focused last year. They were very proactive and when we feel that there was something funny going on, we called them and took proactive measures to prevent any market misconduct. That is why if you take 2013, it was more of an eventless year. If you ask me from 2014 onwards, our focus will be more on regulation and protecting investor interest.

Q: As you said during last few months, you have been bringing in a number of new regulations. Don’t you think that’s far too many at a short span of time?Actually someone else also asked me the same questions whether it’s far too many. I don’t think so, because if someone wants to get ready for the future, we should have done those things long time before. The series of regulations that came into play were not new ideas. They were in the system.The SEC had been discussing those with the CSE and the industry for many years. If you take minimum free float, there were three previous consultations but nothing really happened. What’s the point of talking about them and doing nothing? Somebody has to act. Then when you act there is fear that there would be resistance. But I was confident there wouldn’t be resistance because everything we did was brought in after a lot of discussion. We have discussed with every concerned party before implementing. Although you saw a number of regulations coming in together, none of them were ad-hoc. The media also gave us a lot of support and looked at the new regulation at a very positive manner.

Q: With regard to the minimum 20 percent free float rule, I was told that about 100 companies will have to comply. Has any concerned party contacted the SEC and asked for any kind of leeway of exception?About 100 companies listed are below 20 percent and about 70 are main board companies. And if you look at some of the companies, they have only about 3 to 4 percent public free float and some even don’t have that. Formerly nobody has spoken to use but informally a few people have checked about the process. We in fact ran a few advertisements clearly putting down the formula and we got the CSE to write to all the companies. It was more or less a clarity issue rather than a concern.At the same time, there was fear among the people that the multi-nationals won’t like this. The little bit of informal feedback I’ve received suggest that it is not the case going to be.

Q: Since you came in, we see the SEC and CSE working together and doing a lot market development activities on a joint-basis. Don’t you think in doing that the SEC has gone beyond its scope?First of all, we cannot say we have gone beyond our scope because our scope has two aspects; market development and investor protection.When I say market development, people think the SEC is talking about marketing. Market development is creating a market where people can raise funds and trade in a transparent and fair manner. World over capital markets have become very sophisticated and offer a number of new products and instruments. We need to create those things in our market so that there are opportunities to raise funds. That is one of the primary objectives of the SEC.At the same time, because people are raising money from the public, the SEC has the primary job of protecting investor interest. That becomes a more important aspect in a developed and established market. In our case the market was not there. We were at least 20 years behind when you compare with our closest neighbour, India.

I would like you to look at SEBI (Securities and Exchange Board of India) which was set up in 1987, the same year where our SEC was set up. At the time our market was far ahead of India in terms of technology and sophistication. But if you look at India today, their markets are as sophisticated as any other market in the world. And who was driving that? It was SEBI. They played a very active role in developing the market and are still doing it. But in Sri Lanka, we got this mindset that we are regulators and didn’t do much to develop the market. Now what we are trying to do is to do both; market development and investor protection. That’s why we work closely with the CSE and we would continue to do so.

Q: There were indications that Sri Lanka was seriously looking at in setting up a commodities exchange. What is the current status of it?Commodities exchange I understand had been an assignment at one point given to the SEC. But it is not necessarily SEC’s mandate to establish a commodities exchange as it involves a number of other stakeholders and ministries. The SEC has come to a particular level with regard to this about two-three years ago and got stuck. To me, a commodities exchange was not a priority last year. We need Treasury advice in this if we are to pursue a commodities exchange.

Q: There was strong speculation that you will either step down or asked to leave. What do you have to say about these speculations?Question is for what? And if those speculations were correct, I wouldn’t be here now. I have a term and if the term is to end early there has to be a valid reason. So far I have not been communicated anything in this regard by those who appointed me to this position.

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Jan 052014
 
Brokers seek permission to close shop temporarily
Several struggling stock brokers have written to the Colombo Stock Exchange (CSE) requesting permission to temporarily halt their operations mainly due to low activity levels in the bourse, Mirror Business learns.

This was confirmed by Securities and Exchange Commission (SEC) Chairman Dr. Nalaka Godahewa during an inquiry.

“There is a proposal by several brokers requesting temporary deactivation of their operations. The CSE has forwarded it to us and we are considering it. We have not discussed it with the Commission yet, but at the secretariat level, we are looking at it positively,” Dr. Godahewa said.

He further said, it was not a “bad idea” as it has happened in many other markets as well.

“You allow those who are struggling to remain deactivate for a while. It will give more opportunities for others who will continue to operate in the market,” he noted. Altogether 29 stock brokers currently operate in the CSE, and many are of the opinion that the number is too high for all to sustain their businesses.

A number of new broking licenses were issued just after the conclusion of an almost three decade war in 2009—at a time when the market was undergoing a re-rating.

In 2010 and 2011, the daily average turnover stood over a couple of billion with the arrival of new set of retail investors into the market, providing ample opportunities to brokerages to make money.

However, in 2012, with the market undergoing a painful correction, the euphoria died down and many new retail investors burnt their fingers.

The daily average turnover in 2012 plunged to Rs.883.6 million, creating a highly competitive environment for brokers to operate. The daily average turnover in 2013, according to latest CSE figures, stands even lower at Rs.828.4 million.

“I think there are far too many brokers in our market. But like the Central Bank who has told the finance companies to consolidate, we have not told brokers to do so. The industry has to decide on its own. We are not going to tell them how to do business,” Dr. Godahewa stressed.

Jan 052014
 
Brokers seek permission to close shop temporarily
Several struggling stock brokers have written to the Colombo Stock Exchange (CSE) requesting permission to temporarily halt their operations mainly due to low activity levels in the bourse, Mirror Business learns.

This was confirmed by Securities and Exchange Commission (SEC) Chairman Dr. Nalaka Godahewa during an inquiry.

“There is a proposal by several brokers requesting temporary deactivation of their operations. The CSE has forwarded it to us and we are considering it. We have not discussed it with the Commission yet, but at the secretariat level, we are looking at it positively,” Dr. Godahewa said.

He further said, it was not a “bad idea” as it has happened in many other markets as well.

“You allow those who are struggling to remain deactivate for a while. It will give more opportunities for others who will continue to operate in the market,” he noted.

Altogether 29 stock brokers currently operate in the CSE, and many are of the opinion that the number is too high for all to sustain their businesses.

A number of new broking licenses were issued just after the conclusion of an almost three decade war in 2009—at a time when the market was undergoing a re-rating.

In 2010 and 2011, the daily average turnover stood over a couple of billion with the arrival of new set of retail investors into the market, providing ample opportunities to brokerages to make money.

However, in 2012, with the market undergoing a painful correction, the euphoria died down and many new retail investors burnt their fingers.

The daily average turnover in 2012 plunged to Rs.883.6 million, creating a highly competitive environment for brokers to operate.  The daily average turnover in 2013, according to latest CSE figures, stands even lower at Rs.828.4 million.

“I think there are far too many brokers in our market. But like the Central Bank who has told the finance companies to consolidate, we have not told brokers to do so. The industry has to decide on its own. We are not going to tell them how to do business,” Dr. Godahewa stressed..

The trading floor of the Colombo Stock Exchange

Jan 012014
 
SEC mulls ‘independent opinion’ on offer price for future IPOs
The Securities and Exchange Commission (SEC) has carried out a study to assess the possibility of mandating the justification of the ‘fairness of the Initial Public Offering (IPO) offer price’ by an independent and competent party, an year-end review by the SEC noted.

Overpricing was identified as one of the key reasons for some of the post-war IPOs to fail by a section of the country’s analyst community.

Meanwhile, the SEC and the Colombo Stock Exchange (CSE) is currently engaged in discussions with information technology (IT) and business process outsourcing (BPO) companies in the country to identify the possibility of getting them listed.

“IT/BPO industry initial discussions were held in November 2013 to identify the possibility of listing to raise capital. A follow-up awareness session with representatives of the Sri Lanka Association of Software and Service Companies (SLASSCOM) is scheduled for January 2014,” the review noted.

Both the SEC and CSE have been trying to get more privately held companies to go public to develop the country’s capital market. A separate initiative is currently underway to see the possibility of getting the state-owned enterprises.

With the intention of attracting further foreign direct investment into the country, a concept paper has been finalized to list the Board of Investment (BoI) companies.

“The inputs from the CSE and BoI were also considered during the process. A presentation in this regard was made to BoI representatives,” the SEC said.

Dec 172013
 
Getting back into MSCI Emerging Market Index, top priority: Rajeeva

By Indika Sakalasooriya


Mirror Business met with Rajeeva Bandaranaike who assumed duties as the Chief Executive Officer (CEO) of the Colombo Stock Exchange (CSE) last month. Bandaranaike is no stranger to the CSE as he worked at the place for 19 years holding various senior capacities. He served the CSE from July 1992 to June 2011 and held the positions of Head of Clearing and Settlement and Head of Business Development. After quitting the CSE in 2011, he served as the CEO of People’s Merchant Bank PLC and subsequently as the CEO of Orient Finance PLC.

Q:  How does it feel to be back?
It’s good to be back. I was out for a two and a half years and that experience has been worthwhile since now I very well understand the perspective of a listed company better, having worked in two organizations that were listed.
Now I think I can appreciate and understand better than earlier of the issues and challenges a listed entity would face. So I think on this side of this fence—when you are formulating policy— I can better appreciate the concerns of a listed entity. To that extent, the period I did serve a commercial entity, I was able to gain firsthand experience in running an organization which is profit based. So all in all the experience was good but of course it’s good to be back in the familiar territory.

Q: What are your immediate priorities?
The market is now in a very progressive state. First I’m taking stock of what happened in the last two and a half years to find out where we are now and find out what needs to be done in terms of prioritizing. As you know the SEC has embarked on this 10 point initiative which I think is a very progressive step in developing the capital market. The SEC is working very closely with the CSE in implementing some of this. What I see now is that some progress is really happening in the market as some of these initiatives are with time frames.

One initiative that is on is the handling of settlement risk. We are thinking of setting up a clearing corporation. So that probably is a priority area. Once you set up a Central Counter Party (CCP) in a delivery vs. payment environment, it will drastically reduce the settlement risk and pave way for us to even go for new instruments. It will be a precursor to any new instruments that can be introduced in the market.

The other one is getting new investors—both retail and foreign. There are initiatives in that direction as well. Investor education is a must for retail investors. Investor education builds confidence and improves sentiment. Both the SEC and the CSE are carrying out investor education programmes for those retail investors who have the time to invest in investor education. For others who do not have the time, we are recommending unit trusts. The unit trust industry in the country was not aggressively promoted. In all our investor awareness activities, we are taking representatives of the unit trust industry to talk to prospective investors.
In the meantime, there are separate programmes to attract foreign investors like foreign roadshows. One area of high priority is to explore how we can get ourselves back in the MSCI Emerging Market Index within the next couple of years. By virtue of getting ourselves back in this index, there are fund manager who will park their investments. We are on this index in the year 2000. We were taken off of it due to a major terrorist attack which negatively impacted on our indices and the market cap.
Demutualization of the Stock Exchange is also on the cards. We hope that it will take place within the next couple of years along with the implementation of CCP.

Q: CSE is a disclosure-based market. But there is this allegation that sometimes disclosures by listed companies are not forthcoming, specially with regard to related party transactions. It is evident that some of the listed firms are using regulatory loopholes to do this. Most of them tend to go with the letter of the law than the spirit of the law.
At a high level, if we compare our listing rules with any other jurisdiction, I think we are really up there. In terms of disclosure, fairly timely information does flow in. I’m not really aware of any regulatory loophole where listed companies could carry out delayed disclosures. But if there are instances we would definitely look at it and if tightening up of the rules is needed, we will do it.

Q: What is your opinion on increasing the free-float? The SEC has put out a consultation paper with regard to this.
One of the key issues with our market is the lack of liquidity. So we need to increase liquidity. We are trying to get more listed companies into the market, both state enterprises and private companies. We have set up an issuer relations unit and the SEC also has a separate team working on new listings. So on one hand we need get large privately held players into the market and increase the number of listed companies, so that the investors have a better choice.

The second part of this is to encourage the companies which are already listed to release more of their shares into the public domain. The moment you do that, I think it will remedy a number of issues we have in the market in terms transaction costs—the price of entering and exiting the market, it has impacted on price ultimately. And your price discovery mechanism will get far more efficient when the market is more liquid. It will also impact on us getting into the MSCI Emerging Market Index. A lot of things are actually tied to the liquidity, which is a key concern not only to us but all the frontier markets.  So now we see how we can encourage and not force companies to increase their public float. I hope we would be able to achieve this in the early part of next year.

Q: How would the local units of the multi-nationals respond to this?
We would love to see those companies being more liquid because their shares are excellent shares to have. The discussions with these companies are currently underway and hope for the best.

Q: There was this talk about setting up a separate board to encourage Board of Investment (BoI) companies to list. Can you give us an update on it?
There is some progress and we discussing the mechanics as to how this can happen. We are thinking of a separate board for these companies, but I think its bit premature to comment on it. We are currently working out the mechanisms of how to accommodate a separate set of requirements for these companies. Right now we are diligently working with the SEC and the BOI with regards to this.

Q: How many new listings you are looking at in 2014?
I can’t give a number. I’m sure the tax incentive introduced in 2013 budget and continued in 2014 budget will encourage companies to list.

When you look at a new listing, it will take window of about two to three years for a company to do it. You can’t suddenly come in and list your company, because changes are need to be carried out within the company in terms of management, governance etc. You may not be able to see instant results, you need to give it bit more time.

Q: What are key hindrances for large private companies—for example say Ceylong Biscuit, Brandix or MAS going public?
I don’t think there are hindrances as such. What I think is the company has to decide itself what is the most opportune time in terms of their business strategy to list. However much we may want them in the market, it will ultimately depend on the business strategy and the timing of the company when they want to list. Eventually all of these companies will list and it’s just a matter of when.

Q: How successful have foreign road shows been? Have you quantified the foreign investments materialized from them?
In fact we are quantifying it now. Most of our investments channel through Singapore or Hong Kong and we’ve had road shows in these cities. So we need be out there because all markets routinely go and meet fund managers. And I think the model of taking the listed companies there and having one-to-one discussions with fund managers is quite effective. You need to expose our companies to foreign fund managers.

Q: From fund managers’ side, do the people who are at the very top—those who can make a decision—attend these roadshows to listen the Sri Lanka’s case?
Yes. The big names in Singapore always attend and it’s same with Hong Kong. I think our roadshows have always attracted the right fund kind of fund managers—who would move to a frontier market like Sri Lanka. Those one-to-one meetings the listed companies have with foreign fund managers have proven very effective. These are hot money flows—they come in and go out. Therefore you have carry out these roadshows on a regular basis.

Q: Foreigners account for 30 to 40 percent of the CSE’s turnover. What is your target for 2014?
Well, we would like to maintain this balance between local and foreign at 60:40. At present foreigners account for 36 percent of the turnover.

Q: The end of the war rerated the market in 2009. But now the euphoria has subsided and the market underwent a painful correction. From where do you think the next growth phase would come?
I think it’s a combination of factors. I’m sure more liquidity through increased free float requirements and foreign inflows will trigger it. As we all know, markets are cyclical.

Q: Brokers have written to the CSE asking for a brokerage fee hike. Given the high number of brokerages and the low turnover levels, it is evident that the brokers are finding it difficult to survive. What is the CSE’s stance on this?
With market expansion we see more companies getting licenses. Unfortunately this year we have see the turnover levels dropping. We have to look at means and ways of how turnover levels can be increased. That’s the only way we can make the market grow.
 I think the broking side, I’m sure they will find measures themselves how to sustain right through this difficult period. The brokers have made a request the CSE with regard to a possible brokerage hike and that is currently being considered.

Q:  But isn’t the CSE is among those already having higher brokerage fees? Wouldn’t this discourage investors to come to the market?
Well, I wouldn’t say that will be the only criteria investors will look at in making an investment. I think in attracting investors, the bigger issues are settlement risk, free float and other market infrastructure related things. But so far no decision has been reached either way with regard to a brokerage fee hike. We have to strike a balance between being competitive and facilitating all the market stakeholders. So at this juncture, I’m unable to comment any further.

Q: The 2014 budget directly has asked banks and finance companies to consolidate. Don’t you think that this is the way forward for the brokerages as well?
The focus should grow the market—how can we develop our US $ 20 billion market to US $ 40 billion. But if somebody wants to merge or consolidate, we would encourage them to do so. In any industry it happens. That’s the natural evolution.

Q: Sri Lanka is taking a lot flack from specially the Western world with regard to human rights and various other governance issues. Has this in any way acted as a hindrance for those foreign investors who want to come the CSE and invest?
Not really. Particularly we can see the response from the foreign road shows we have been. I don’t think  that has been a concern at all as far as the portfolio managers are concerned. I think they are more concerned about the returns and the governance of the companies they invest in. it has not been a deterrent.

 (Pic by: Pradeep Pathirana)

Dec 162013
 
CSE to implement minimum free float from January
The capital market watchdog Securities and Exchange Commission (SEC) is likely to issue a directive in early part of next year, setting out rules on the ‘minimum mandatory continuous free floating limits’ for Colombo Stock Exchange (CSE) listed companies, according to a top official.

SEC’s Officer in Charge (OIC) and Director Investigations Dhammika Perera said the directive would come as a blanket rule which must be applied by all listed entities— big or small, domestic or multinational.

The new rules will require a Main board listed company to maintain a minimum of 20 percent stake in the hands of the public while the requirement for a Diri Savi board listed company is 10 percent.

“Having said that, we do not expect all these companies to have their 20 percent or 10 percent stake in the hands of the public on the following day of the directive. We will give them some time to increase their existing public stakes to the stipulated levels over time. But eventually all will have to up their public free float to these levels,” he insisted.

The draft rules in the public consultation paper issued by SEC in September 2013 said they would allow two years from the effective date of the rules for all the listed entities to increase their public shareholding to the stipulated levels, but the increase must happen at least by 5 percent per annum.

Furthermore, SEC will have the discretion to reject or grant extensions for companies that fail to maintain the minimum public float. In the event of no further extension time is granted, those companies will be penalized by transferring them to the Default board.

However, the yet to be issued directive will have some leniency on Main board listed companies while some exemptions might be granted for them if the circumstances warrant.

“We might consider some of the requests on a case-by-case basis and they might be allowed some kind of leniency on the rule if the circumstances warrant. But no exemptions will be granted for Diri Savi board listed companies,” he added.

Mirror Business learns that exemption might be granted for entities whose market capitalization of the public float is maintained at minimum Rs.5 billion. But this will also depend on the number of shares and the percentage stake held by the public is in agreeable terms to the SEC.

The absence of a sizable free float is often cited as a deterrent to a more transparent and a liquid stock market. Hence the Colombo bourse is becoming less attractive for foreigners and foreign funds who seek easy exit whenever they want.

However the lack of liquidity in the Colombo bourse was also proved helpful to avert sudden massive capital outflows during the heightened Fed tapering fears this year. On the contrary, emerging markets like Indonesia, India and Brazil which have liquid capital markets saw massive outflows during the same period.

Setting up of minimum continuous free float limits has been on SEC’s agenda for the last three years and it never took off having twice called for the public comments back in September 2010 and July 2011.

“This time we received many representations for our consultation paper and we took all the measures to incorporate their concerns as much as possible in drafting the directive,” Perera said. (DK)

Dec 112013
 
DEBT LISTINGS: Above investment grade rating becomes mandatory
The Colombo Stock Exchange (CSE) announcing a series of amendments to listing rules yesterday made it mandatory for debt issues to have ratings one notch above investment grade, and completely shelved Second Board listing of debt issuances.

Hence, all future debt issuances can only be listed on the Main Board, and such debt instrument must carry a minimum credit rating of one notch above the investment grade.

Minimum par value of a listed debt instrument was also made at Rs.100, but the minimum subscription as well as any subsequent subscriptions in excess of the minimum which was brought down to Rs.10,000 and its multiples respectively remained unchanged.

The rules were made effective from December 09, 2013.

Further, any State Owned Enterprises (SOE) seeking listed debt issuances will have to be guaranteed by the government of Sri Lanka or a commercial bank having an ‘A’ rating. But that SOE’s debt instrument needs to carry only the investment grade rating of BBB.

However, the existing issuances which are already in the Second Board plus the applications received on or before the date these rules come into effect shall deem to be valid until the debt instruments are expired.

The Colombo bourse in the recent past saw few companies with their debt instruments having below investment grade ratings raising capital via listed debenture issues. But capital market stakeholders flagged their concerns over such issuances warning that one such failure could completely shy away investors from the debt market.

“In fact we went and told the minimum should at least be BBB+ and not anything below,” said CSE Director Vajira Kulatilaka who is also a member in a committee to decide the minimum issuer ratings in end October.

Year-to-date 29 entities have raised as much as Rs.45.6 billion in capital via 27 debenture initial public offerings and 2 introductions by Pan Asia Bank PLC and Alliance Finance Company PLC.

While 19 issuances already listed, the balance 08 issuances are awaiting their listing turn.

As it was not certain whether the withholding tax exemption given in the budget 2013 might be reversed by the budget 2014, Sri Lankan corporates were in a debenture rush during the second half of the year.

Sri Lanka’s Corporate debt market is projected to reach at least US $ 10 billion by end 2016.

Oct 292013
 
SEC mulls minimum credit rating for debt issuances
The Sri Lanka’s capital market watchdog Securities and Exchange Commission (SEC) is currently considering the restriction corporate debt issuances which are coming with below investment grade, according to a top SEC official.

Director Capital Market Development at the SEC, Vajira Wijegunawardane yesterday told a forum that the market should not allow issuances with low ratings to be listed even in the second board as failures could damage investor confidence which sometimes could never be regained.

“This is something we are currently looking at to see whether we can restrict them,” he said, speaking at a round table discussion on the Corporate Bond Market (CBM) outlook.

According to the Colombo Stock Exchange’s (CSE) listing rules, a company can list its debt instruments in the Second Board irrespective of their credit rating. However listing in the Main Board requires the debt instrument to have the investmentgraderatingof BBB.

Be it the Main Board or the Second Board, the risk associated with the instrument is the same and thus the investors become vulnerable by investing on such low rated bonds, some analysts point out.

Another section of analysts argue that there should be debt instruments with different risk and return profiles as investors assume different risk appetites. They also said that the regulator should not regulate issuer’s rating, but the investment bankers who manage these issues.

Meanwhile, the CSE Director Vajira Kulatilaka said that unsophisticated investors could sometimes be driven more by a higher interest rate than the credit rating of the debt instrument. “In fact we insisted the minimum should be at least BBB+ and not anything below,” he remarked.

Kulatilaka who is also the CEO of NDB Investment Banking Cluster is one of the members in a committee that decides on the minimum issuer ratings.

Sri Lankan companies are currently in a debenture rush, getting the maximum benefit of the withholding tax exemption allowed on such interest income. Year-to-date, 18 Lankan companies have raised as much as Rs. 40 billion through debentures, breaking the previous highest of Rs. 15 billion recorded in 2010.

“People simply cannot bear a single debenture issue failure at this pace market growth. We have to be very careful in getting credit ratings. So, we are very careful in deciding who should come to the market,” Kulatilaka stressed. In 1996, Bangladesh suffered a debenture issue failure and the corporate debt market never recovered since then.

These comments were expressed at the International Organization of Securities Commissions (IOSCO) Asia-Pacific regional committee, CBM outreach program in Sri Lanka hosted by SEC at Colombo Hilton.

Oct 142013
 
Separate board to list BoI firms
Both the Securities and Exchange Commission (SEC) and Colombo Stock Exchange (CSE) are currently working on a project to lure the Board of Investment (BoI) companies into the stock market in a bid to increase the number of listings and market liquidity, according to a top capital market official.

SEC Chairman Dr. Nalaka Godahewa told last week that a separate board would be introduced in addition to the existing Main Board and the Diri Savi Board to facilitate the process.

“We have agreed to allow the BoI companies to list on a separate board without having to wait three years to list on the Main Board,” he told a business forum organised by the CSE targeting potential new listings.

Currently, a company seeking a listing on the CSE, irrespective of being a BoI or otherwise, will have to follow the existing listing rules and thus, the BoI firms do not enjoy any special treatment.

Meanwhile, CSE Assistant General Manager for Regulatory Affairs Renuke Wijewardena speaking to Mirror Business said although this is a new development, they have not finalized any rules as yet.

“This is a new thing. But we have not yet finalized any rules so far,” he remarked.

However, to this end, a policy paper has already been prepared and both the SEC and CSE have extensively discussed them.

“These policy papers have been extensively discussed both at the CSE and SEC to address all possible concerns,” Dr. Godahewa added.

According to the BoI, there are about 1,700 BoI companies operating in Sri Lanka but did not have figures as to how many are already listed on the CSE.

“But I believe most, if not all leading Sri Lankan companies such as John Keells Holdings have some of their business units established under the BoI and most of these companies are listed,” said BoI Director Media and Publicity Dilip S. Samarasinghe.

Both the SEC and CSE are currently exploring all available options to lure more companies to go public in their quest to increase the number of listed entities to 400 by 2016 from the existing 288 and to improve the market capitalization to at least 50 percent of the gross domestic product (GDP) by the end of 2016. (DK)

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