Friday Nov 15, 2024
Friday Nov 15, 2024
Thursday, 20 June 2013 00:39 - - {{hitsCtrl.values.hits}}
During the post war era the stock market grew by 400% within a time span of two years. Most new investors who entered the market did not have a good understanding of market dynamics. Speculative traders looking for short term gains thronged the market creating a high degree of volatility in the market. The herd mentality created a market bubble and the regulator stepped in at this juncture and introduced risk mitigation measures, which created debates within the industry.
In 2012 the Securities and Exchange Commission of Sri Lanka (SEC) removed or amended some of these regulations. Prior to relaxing these measures, we were mindful of obtaining the views of industry participants and held regular meetings with them.
Our primary focus was to ensure responsive regulation that would offer appropriate safeguards for investors and provide impetus for capital market growth. And to this end we amended the adjusted net capital calculation of stock brokers for the purpose of granting credit to their clients, lifted the upper limit imposed on the price of transactions on the Crossings Board and lifted restrictions placed on share transactions of stock brokers.
It is noteworthy to mention that the market has recorded a gain of nearly 14% during the second half of 2012. Increased investor confidence and improved macroeconomic situation of the country led to a net foreign inflow of Rs. 38.6 billion, the highest yearly net foreign inflow recorded at the Colombo Stock Exchange (CSE).
A well-functioning capital market is able to mobilise savings and channel capital to its most productive use and thereby ensure that investors get the best returns for the risk they take and businesses can access finance efficiently.
During the year the SEC was able to successfully make representations to the Government to eliminate some impediments that hindered the capital market from realising its potential and also further develop the capital market. The Government addressed these concerns which reflected its commitment to develop the capital market by proposing many reforms that were outlined in the National Budget.
During the year we also focused our attention on taking a strategic approach to fulfilling our dual mandate of regulating and developing the capital market thereby being a catalyst for economic growth. We engaged in developing a capital market development master plan to make the regulatory system more proactive, in line with international standards and contribute effectively to the capital formation requirement of the country.
This master plan will pursue 10 key strategies aimed at expanding the products offered, listing companies from both private and state owned enterprises, developing the unit trust and bond market, modernising market infrastructure, demutualising the CSE, amending the SEC Act and widening the opportunities for investors.
This capital market development master plan was carefully formulated in consultation with all the key capital market stakeholders and during the year a number of working groups were formed comprising of senior representatives from the securities industry, CSE and SEC to spearhead this plan and provide policy direction.
Though the capital market is an important source of long term finance, in Sri Lanka more companies are still reliant heavily on banks for their financing needs and the capital market is still underpenetrated. In order to encourage companies to list on the CSE, the SEC took several measures to refine the listing requirements, simplify the listing process and educate potential listed companies on the benefits of listing.
The Government provided further impetus in the Budget for companies to list by offering tax incentives for new companies that will be listed on the CSE before December 2013.
Demutualisation of the CSE was one of the highest priorities of the SEC and we fast tracked the process of developing modalities during the year. The need for a demutualised exchange has been increasingly felt since it would be able to operate more efficiently and develop into a profit oriented exchange which can respond to new challenges and changes.
To create an active and efficient corporate bond market which can offer the private sector an alternative source of funding with suitable maturity structures we stepped up our efforts to develop the corporate bond market.
During the year we held discussions with the Central Bank, CSE and market participants to enhance market infrastructure as well as operational and trading procedures. We are confident that measures taken by the government to grant an exemption on withholding tax on interest income from listed bonds and debentures, on a request made by the SEC will facilitate the expansion and depth of the market.
Delivering responsive regulation that fosters investor confidence is a prerequisite for effective capital market regulation. The amendments to the SEC Act gathered momentum in 2012 and this was yet another noteworthy achievement towards building a fairer and more efficient capital market.
The Financial Sector Reform and Strengthening Arm of the World Bank provided necessary recommendations and proposals to reform the Act. These amendments to the Act will establish a regulatory framework for a derivatives exchange, clearing house, licensing of a demutualised stock exchange and give powers to the SEC to institute civil sanctions and administrative actions against capital market offenders.
To mobilise domestic savings more efficiently and to allow investors with small funds to participate in the capital market, we worked towards inculcating market awareness on the diverse opportunities that exist in investing in unit trust funds. To further popularise investments in unit trusts the Government permitted direct investments in foreign currencies in unit trusts for Sri Lankans living overseas without having to channel through Securities Investment Accounts.
This inducement would undoubtedly encourage investors to invest in unit trusts and move away from traditional investment options. In tandem with the surge in economic activity that took place in the post war era stock market activity also grew significantly. This has led to a rapid increase in the stock broker branch expansion. Due to the advancement in technology drastic changes have taken place in the investing landscape globally.
To enable the stock broking industry to keep abreast with new technology and to modernise the infrastructure such as trading, back office systems etc. on a recommendation made by the SEC the Government permitted stock broking firms to claim 100% depreciation allowance on capital items such as IT infrastructure and branch networking. This would enable stock broker firms to compete and grow and meet the requirements of investors efficiently.
During the year we were committed to improving the level of financial literacy among retail investors and assist them to make informed investment decisions. Our investor education initiatives comprised of regular articles in newspapers on investing in the capital market in all three languages, investor day programs as well as a quiz program to foster greater awareness on the capital market.
We also communicated all our policy decisions to the media and embarked on a transparent media policy without having an arm’s length approach. We are hopeful that the new strategic initiatives will bring about a new era of growth for the capital market as well as the economy.
I wish to thank the members of the Commission for the support extended to develop the capital market. I wish to express my appreciation to the Ministry of Finance and Central Bank for the assistance given throughout the year and industry stakeholders including the CSE, stock brokers, unit trusts and staff of the secretariat for their hard work and commitment to achieve our new strategic direction. Last but not least I would like to thank the media for their continued support.
