SEC Chief outlines challenges of regulating and reinvigorating the capital market

Securities and Exchange Commission of Sri Lanka (SEC) Chairman Viraj Dayaratne PC in this interview with the Daily FT takes stock of recent developments in the capital market, including key milestones and efforts taken to address issues. He also deals with the bull runs at the Colombo stock market in December 2020 and January 2021 and the subsequent fall and how the SEC is dealing with regulation as well as market development and the new SEC Act. Here are excerpts:

By Nisthar Cassim

Q: How do you view the Colombo stock market’s performance, especially since the all-time high level in January 2021?

Volatility by way of ups and downs is normal in any market. It is the very nature of markets though every regulator will want to and will take action to avoid too much volatility. Yes we saw in January the market rose unprecedentedly high and all were aware that that level could not be sustained though investor behaviour was influenced by an uptick in sentiments. 

It is good to have bullish runs but at the same time it is a fact that such a phenomenon isn’t permanent since there will be profit taking naturally. We weren’t overly alarmed because since mid-2020 the Colombo stock market has been on the up in a well measured way on sentiments and future earnings outlook despite challenges arising from the COVID-19 pandemic. In that context the spike in December 2020 and January 2021 wasn’t a surprise and the correction thereafter is linked to normal profit taking as seen in any market. 

One also must take into account that interest rates declined since mid-last year, prompting high net worth individuals to enhance their exposure to equities and retailers to get active. Due to import restrictions, those in the vehicle trade also shifted their funds to the stock market. More importantly we saw a host of new investors entering the market as evidenced by 20,000 new accounts opened, which is partly due to digitalisation initiatives as well. Around 90% of the new accounts opened were via online.

We also stepped up investor education especially through popular social media channels, Facebook, Twitter, YouTube, etc. so the newcomers make their decisions based on recommendations from Registered Investment Advisors (RIAs) than relying on various individual social media posts. We have uploaded a list of RIAs on our website.

As a departure from the traditional role of the regulator, we went out of the way and encouraged people to invest in listed equities given their medium- to long-term upside for the benefit of people. We did so with a caution that in any market, all must be mindful of the famous saying ‘buyer beware’. 

By encouraging digital initiatives, we improved ease of entry, trading as well as information dissemination especially via social media platforms. There have been over 50,000 downloads of the new CSE app and this is very encouraging. 

Q: How is the new administration at SEC addressing the core function of regulating the market?

With the revival of the stock market the SEC has been responsible for how it conducts itself. We did proactive smart surveillance which ensured timely and preventive measures to instil discipline and prudence on the part of brokers. During the bull run we were paying attention to our regulatory role and we are continuing to do the same. We are on the ball. Where necessary and whatever enforcement action needed we have taken to stop, warn or punish misconduct, though we haven’t gone public. 

There is a fine line between what is permitted and what is prohibited, and based on this a comprehensive manual has been prepared to educate and guide capital market participants. The approach of early and timely intervention has helped improve regulation and reduced incidents of misconduct. Regulating the market is a fine balance and a tightrope. We should neither ruin the market nor prop it. 

Q: What is on offer next in the digitalisation roll out?

We will roll out the second phase of the digitalisation initiative which enables resident and non-resident Sri Lankans abroad and foreign and local companies to open accounts online subject to meeting the conditions. Consultative meetings have been held in developing a suitable framework with the relevant stakeholders. 

One of the items under the second phase will be the CDS eConnect. Its main functionalities will include viewing of CDS account information, viewing of balances, transaction history, facility to request reports, sending information requests to CDS/stockbroker, ability to give instructions to change CDS account details of the logged in user accounts, intra account transfer requests, access for brokers online trading apps (an integrated solution), corporate action alerts such as dividends/rights and other corporate actions and access to research reports, etc. User categories will be individual CDS accountholders, issuers, CDS participants, institutional users, etc. Some of the other offerings under the second phase are eIPOs, eWallet, chat bot, My CSE, My Portfolio, voice clips to help in accounting, etc. 

Q: What measures has the SEC championed to ensure there is wider public participation in the stock market?

 Partly due to the revival of the market and initiatives by the SEC and CSE, there has been a surge in new investors, especially the young. We are taking stock market and investor education to provinces via our initiative titled ‘Kotas Welendapola Nagarayen Nagarayata’ (stock market city to city) with four workshops in Sinhala planned between May and June in cities of Colombo, Kurunegala, Kandy, Matara and Jaffna (in Tamil). The CSE’s mobile app as well as SEC website will be made trilingual. 

Giving proactive leadership the SEC has also supported endeavours to increase listings on the CSE. Engagement with chief financial officers as well as nearly 70 family companies were made. The misunderstanding that listing is cumbersome and costly was dispelled via these engagements and SEC and CSE also highlighted a host of measures to simplify listing rules as well as operationalise alternatives such as the Empower Board targeting Small and Medium Enterprises (SMEs). The first IPO by Chrissworld Ltd. is available for subscription. We are keen to encourage more services sector companies including startups to list since services account for over 50% of the country’s GDP.

I must emphasise that the WindForce IPO was processed and approved within three weeks so as to encourage those who are keen to rely on the capital market. The Rs. 3.2 billion IPO which was the biggest in 11 years turned out to be a major success with eight times oversubscription.

The new Government has announced tax incentives to those who list before 31 December 2021. Listing is also beneficial as it ensures collateral free capital as well as improved corporate governance, professionalism and sustainability of enterprises. We are proactively supporting more listings as the conditions are right apart from the incentives offered. The SEC is also encouraging Special Purpose Acquisition Companies (SPACS) with the framework has been approved. A sponsor (reputed individual or company) lists a shell company with an IPO. Funds raised (from accredited investors initially) will be utilised to acquire willing unlisted companies. CSE has been tasked to come with the rule/guidelines.

We are also promoting ‘over the counter’ trading of paper gold products and the framework has already been approved in principle.

Another focus is the revival of debt listing and in April we saw the Ceylon Electricity Board becoming the second State-Owned Entity to issue listed debentures worth Rs. 20 billion, a record at CSE. This issue too was a success and we will facilitate more listed debt issues by SOEs.  We also launched the Real Estate Investment Trusts (REITS) option and are confident of activity in the near term after a few issues are resolved since there is strong interest.

From the perspective of further capital market awareness, it will be introduced as a subject in the school curricula from Grade 6 onwards as opposed to Grade 10 at present. We are working with the Ministry of Education and the National Institute of Education (NIE) on that. The proposed curricular has already been submitted to the NIE. We are planning to include this in the 2023 syllabus change. 

Q: What is the status of the new SEC Act?

 After the Attorney General clears it, the Cabinet will have to approve it once again and then the Bill can be presented in Parliament. We are hopeful that it will happen soon. The new Act will ensure best practices in regulation ensuring consistency, predictability and effectiveness. It gives more teeth or overarching powers to the SEC to deal with breaches of the law and the rules.

Under the new Act there is provision for issuing ‘Freezing Orders’ for a limited period of seven days similar to that in the Finance Business Act. The SEC has to go to Court if it wants to extend such Orders and the accused party will be heard before the Court decides whether such order should be extended. There is also provision for the imposition of Administrative Sanctions which can only be imposed after a fair hearing. 

These provisions enable the SEC to impose sanctions which are commensurate with the breach committed. Although additional powers have been conferred on the SEC in order to ensure deterrence, there are checks and balances to ensure that there will be no arbitrariness in their application. We are keen to ensure that there is predictability and consistency in the way we act in order to ensure fair play in the process of regulation.

In addition there are several other salutary features which will help develop the market and bring more clarity to its functions. A lot of stakeholder input has gone into the new Act and Parliament is able to make further changes if necessary after the Bill is taken up in Parliament and prior to its approval. 

Q: DVP and Demutualisation too have taken very long. What is the progress?

Delivery versus Payment (DVP) is on course for implementation in the second quarter with test runs already concluded. Efforts on demutualisation of the CSE are also progressing whilst there is a likelihood of a strategic investor like many other global exchanges coming on board. 

Good corporate governance rules proposed have been after due consultation and inputs from multiple stakeholders and not entirely an act of the SEC. The draft is open for public scrutiny and suggestions for further considerations to ensure best practices are welcome.

Q: What is your assessment of the future of the capital market?

The capital market, consisting of listed equities, debt and other instruments, has an important role to play in a country’s development. There is immense potential for the same in Sri Lanka provided we develop it carefully and consistently with stakeholder engagement and inputs. We also need to attract more foreign institutional investors and efforts will be made once external conditions are favourable to conduct roadshows, etc. 

The SEC with the Foreign Ministry and the CSE is currently conducting online forums for the staff of Sri Lankan Embassies abroad in order to educate them on the attractive market valuations, the growth potential of the market and latest developments. The next step will be to organise forums for foreign investors, fund managers and Sri Lankan diaspora.

As opposed to what and how some may negatively portray the prospects, one of the world’s biggest fund managers Blackstone buying the Piramal Glass stake and Norwegian fund Norfund agreeing to take a 10% stake in NDB are among positive signs for investors to take strength from and be optimistic.

With an improved outlook for the economy and judging by record quarterly corporate earnings despite the COVID-19 pandemic, as well as a host of measures already taken and those planned both by the SEC and the CSE and the Government, the capital market is bound to grow further with resilience.

On our part we have strengthened the investor protection aspects as well as best practices on the part of brokers, who must be commended for readily agreeing. My advice to investors, both old and new, is don’t be wary of the market but be informed and professionally advised and make your decisions accordingly.