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Monday Nov 25, 2024
Friday, 30 August 2013 00:00 - - {{hitsCtrl.values.hits}}
By Kinita Shenoy
Kathpalia: The Governor articulated that he expected the corporate debt market to grow tenfold over a four-year period. In February of this year, you spoke about the need for the growth of the market, and focused on the corporate debt market as well. As the regulator of the capital markets, what changes in regulation policy are planned to support the development of the debt market in Sri Lanka?
Dr. Godahewa: The need for development in the corporate debt market is apparent. For the private sector to contribute to the economy, it requires further investment. Today, the private financial sector depends heavily on the Sri Lankan banking system. In terms of equity and debt pool, not much has happened in the last 10 years or so. In many developing countries, the bond market is usually bigger than the equity market. But in Sri Lanka, unfortunately, the equity market is about 98%, which means there is a long way to go. The Government bond market is at about 80% of GDP. So we have now taken a conscious decision to aggressively deal with it. As a starting point, last year we requested the Treasury to remove the 10% withholding tax on corporate debt, which was a hindrance, and we can already see the results of this although we have to do some marketing to make sure people know it is available.
In the past six months there have been 10 debenture issues, which have raised 24 billion, which is more than all our other issues combined for the last 24 years. We have also developed a policy matrix, to develop the corporate debt market of about 18 policies. The consultation paper is available on our website. We require expanding our secondary market and we also require market makers. So we have now made a decision to create a band of market makers by firstly allowing private dealers to operate in the bond market, allowing stock brokers to enter, and institutional investors to get involved.
The primary dealers are allowed to invest about 5% of their net capital in the corporate bond market. We have also approached the Central Bank to take it up to about 10%. The stock brokers, without having to increase their net capital requirement have gotten a risk rate adjustment formula, which if they can manage their equity and debt they can become. Likewise we are looking at ways to increase foreign investment by allowing companies to issue dollar bonds, for which we are also in discussion with the Central Bank.
"Unfortunately, we don’t have a secondary market; we require action. We don’t have sufficient tier 1 and tier 2 investment, which should ideally be driving the bond market. The minimum amount of the investment has been reduced from one million to Rs. 10,000. This should encourage further retail participation – TFC Chairman Preethi Jayawardena"
We are also looking to revamp the infrastructure – bond trading is currently done through the CSE system. We are going to allow Reuters and Bloomberg to link their trading platforms to the CSE system so that foreigners can easily operate it. We are in conversation with the Treasury to reduce the extent of restrictions on institutional investors in the corporate debt market. We now have a clear strategy and action plan, which should help us do this.
"Transparency is required for credibility, and takes a while, which means it needs to begin now. A good track record is required to convince international credit rating agencies. Interaction with third parties like domestic or international agencies will definitely help you figure out what elements your operations and the market should be looking at. It also instils a sense of discipline even in strategy formulation and really helps in the longer run. To sum up, my main two suggestions are: diversification in funding and transparency in issuers – Standard & Poor’s Managing Director – Lead Analytical Manager, Financial Services Ratings, Asia Pacific Ritesh Maheshwari"
Kathpalia: Do you have any comment on this regulatory policy and what are the sectors you feel are in need of funding?
Theagarajah: From a regulatory perspective, it is important to keep things as user friendly as possible, although there is a cap of 15% on foreign borrowing. There is one other aspect that one needs to realise. The 4.5% gap is very real, and the country is on the way to long term debt. As that comes in, and the more retail Sri Lanka gets exposed to the debt market, it is a wake-up call for the banking system which has traditionally enjoyed high margins, and the CASA will possibly be tested and stressed in the next few years. There is pressure on banks to improve internal efficiencies. We still have not seen PPPs in a large way, but we are seeing the beginnings of the banking sector support that.
Kathpalia: You have been in the corporate and industrial sector for a long time. What have been the traditional sources of funding for the corporate community? Furthermore, what is the role of the bond market for the corporate community?
"Today, the private financial sector depends heavily on the Sri Lankan banking system. In terms of equity and debt pool, not much has happened in the last 10 years or so. In many developing countries, the bond market is usually bigger than the equity market. But in Sri Lanka, unfortunately, the equity market is about 98%, which means there is a long way to go – SEC Chairman
Dr. Nalaka Godahewa"
Jayawardena: Traditional issues can be categorised as public issues and private placements. Both have an equity and debt part. Private equity mainly comes from individuals and venture capital funds. When it comes to debt, it can be categorised into three – the security papers (with a tenure of three years), commercial papers (short term), and unlisted debentures (predominantly high net worth individuals). Security papers generally come from the banks, unit trusts, and investment companies, while commercial papers from just the latter two.
As for public issues, equities usually come from EPF, the unit trust, and high net worth individuals plus retailers. But the corporate bond market comes from EPF, insurance companies, banks and high net worth individuals.
As for the bond market, I question what is lacking in this country that we do not have a developed bond market. If you take into consideration the total volume, it is less than 100 million rupees, whereas if you take the total deposits, all but the finance companies, it’s up to Rs. 3 trillion. This means that the bond market is just a fragment. We have seen a rapid growth this year mainly because the corporates have been allowed to issue rupee bonds.
Unfortunately, we don’t have a secondary market; we require action. We don’t have sufficient tier 1 and tier 2 investment, which should ideally be driving the bond market. The minimum amount of the investment has been reduced from one million to Rs. 10,000. This should encourage further retail participation.
"From a regulatory perspective, it is important to keep things as user friendly as possible, although there is a cap of 15% on foreign borrowing. There is one other aspect that one needs to realise. The 4.5% gap is very real, and the country is on the way to long term debt. As that comes in, and the more retail Sri Lanka gets exposed to the debt market, it is a wake-up call for the banking system which has traditionally enjoyed high margins, and the CASA will possibly be tested and stressed in the next few years – NDB Bank CEO Rajendra Theagarajah"
The problem is that we have a fiscal deficit of 5.8%, and 0.6% in public sector investments. Thus, private sector investments are lacking due to the inability to get long term net capital. While banks are willing to provide short-term capital, it is pointless because within the time necessary, the investment will no longer be viable. This is because short-term rates are based on average-rated PLRs, which keep on changing.
The CB Governor told us that very soon the Government securities and corporate bonds will be dealt on one platform. However, I feel that it should be confined to the primary dealers and the investment bankers, and not stock brokers as they do not have as much knowledge on the debt instruments. If this happens, and the corporate bond market is developed, we should be able to get the private sector investment to the required level in order to get to the $ 4,000 per capita goal by 2016.
Kathpalia: In his speech, the Governor touched on the gap in funding. What do you see as the alternative sources of finance for Sri Lanka’s issuers?
Gallagher: What is obvious to me, in my few months here is that a number of the avenues of foreign involvement in Sri Lanka have already been tested, with corporates going for bilateral and syndicated loans. On the finance side, both recourse and non-recourse structures and credit financing. Thus, all of the typical conduits have been used. It’s just a matter of deepening those over time. The main trouble with the capital markets is that they are relatively clunky too. From a corporate perspective especially, you go for a large amount of money in one hit, and you have to do something with it.
So firstly, in normal bank lending it can be a bit clunky. But we have seen lots of examples of FIs especially go to the bank market. We’ve also seen demand from overseas, as a wall of capital is available to this part of Asia from Middle Eastern banks as they try to expand their investment outside their region. At this stage, with Pakistan closed off, India, Sri Lanka, and Bangladesh are the obvious choices to approach. In addition we look at banks in Asia and the Far East following their corporates. Obviously at this point the main source therefore for Sri Lanka is China, although there is a lot of interest from the Japanese and Korean banks too following their export credit agencies as they look to invest.
A lot of capital is available depending on the specific FI or the specific corporate. As needs, manner, tenor and availability period are required for individual funding, that can be the difficulty with capital markets as when the wall of cash arrives, it has to be used. There is no long availability period. Thus, lots of availability from more conventional overseas sources, i.e. the bank market. Perhaps not long tenor as certain corporates would require, which is an issue with corporate finance and expert credit financing in all markets. Longer tenors become a lot more difficult. But certainly, we must have lots of depth in the conventional bank market.
Kathpalia: What do you think Sri Lankan issuers need to do before getting into foreign borrowing?
Maheshwari: I believe that corporates need to be more farsighted and deliberate in diversifying funding sources, even though long-term funding is difficult to get here from the banks per se. It may also be costlier, but it will offer a large amount of benefits to deliberately incorporate in your capital structure.
While there is some domestic market availability, as Patrick mentioned, there is a lot of money waiting outside, looking for the right structure and sector here. That could be something that treasurers and CFOs will have to deliberately work on. On the point of ‘clunkiness,’ we have seen a great example in Indian banks, which have acted as aggregators of such external commercial bonds. From their offshore branches, they’ve given 25 million worth of ECBs to their corporate clients. This works well as banks and clients know each other and they don’t need to go for a 100 or 200 million kind of market loan.
Transparency is required for credibility, and takes a while, which means it needs to begin now. A good track record is required to convince international credit rating agencies. Interaction with third parties like domestic or international agencies will definitely help you figure out what elements your operations and the market should be looking at. It also instils a sense of discipline even in strategy formulation and really helps in the longer run. To sum up, my main two suggestions are: diversification in funding and transparency in issuers.
- Pix by Lasantha Kumara
