Director General

It is with much satisfaction that I review the work completed by the SEC in the year 2022.

It could be said that 2022 has been a year of extraordinary challenge for the country as the economy faced severe constraints. To live up to the challenge and overcome this financial and economic predicament, it is critically important to understand what needs to be done and how it can be done to avert further weakening.

Looking back, mismanagement of the monetary policy and insufficient foreign reserves coupled with a loss of access to international capital markets and a decision to default on debt without much analysis are among several factors that contributed to the economic collapse and in turn the country to experience unprecedented shortages of food, fuel, and medicine. The inflation rapidly escalated and hovered over 60% during the latter half of the year. This resulted in the CBSL tightening its policy rates.

However, the increase of policy rates in turn resulted in higher bank rates, which steered companies to halt their business activities and investors to channel their investments from the stock market to the fixed income investments. That led the All Share Price Index (ASPI) to plummet by 30.5% to end the year at 8489.66. Further, S&P SL20 index witnessed similar sentiments with the index declined by 38% to end the year at 2635.63.

On a positive note, daily average turnover stood at Rs. 2.97 Bn in 2022. The foreign investor contribution to the total turnover increased to 7.6% in 2022 compared to 5.2% in 2021. The renewed interest among foreign investors helped the market to record a net foreign inflow of Rs. 30.6 Bn. This was the first time in which the market witnessed a net foreign inflow after four years of consecutive outflows. The local investors remained active in the market similar to that of the year 2021. Local investor contribution was recorded at 92.4% for the year 2022. A total of Rs. 44.73 Bn capital was raised in the market in the year under review. The market price to earnings (PER) ratio remained at a modest level of 4.95x. Further, dividend yield of the market increased substantially to 4.1% in 2022 from 2.2% recorded in year 2021.

At SEC during the year, we embarked on a program of reform intended to enable the country to emerge as an internationally competitive middle market. Development of deep and liquid capital markets should be and has been recognised as a priority by the Government. Our market capitalization and the value of market turnover have fluctuated between 15% and 25% of GDP in recent years, which is significantly less than other markets in the region.

Thus, we at the SEC continue to engage in robust regulation and market development activities with a view to enhance the capital market footprint in the country. The key to building a deep and liquid market is building investor trust and confidence in the market. It is important to understand that the capital market plays a pivotal role as a source of financing for businesses to meet their capital requirements while creating investment avenues for investors.

Dollar earning listed companies are able to play a significant role in driving the recovery of Sri Lanka’s economy. It is time to pick the winners from our dollar earning listed companies by looking at their potential, drive and commitment. We also need to incentivise and nurture such winners and free such winning companies to go out and compete with global giants to make headway in economic development, which would change the whole complexion of our country; it will convert us to a dynamic entrepreneurial state and will help the country to realise its true potential.

The world economic forum’s global competitiveness report ranked Sri Lanka 51st based on its series of parameters that addressed trust and confidence and efficiency in emerging markets. Malaysia is 9th. Thailand is 31st. In the present context, we have a huge trust deficit. Some of the IMF recommendations are about the trustworthiness and confidence of the systems. It talks at length about the legislative framework required in the context of those recommendations. They have been highlighting all the time shortcomings in the system. We have heard all the time that our legislative and regulatory framework is outdated. Without providing concrete and clear guidance to our regulated community, we cannot get anywhere.

Thus with the introduction of the new regulatory framework we have put all that to rest. The regulatory remit of the SEC was extended and augmented as a matter of priority during the year 2022.

In fact, from the SEC standpoint, we wanted to revise the market and bring more clarity, consistency and predictability to the way the market runs while addressing market misconduct matters swiftly and decisively. Though, I do not consider the number of enforcement actions taken to be an appropriate basis for measuring the success of a regulator, over the last year the SEC took the highest ever number of enforcement actions. The enforcement record comprises several prosecution decisions, compounding and other enforcement measures. Further, during the past year, the surveillance, supervision, and investigations divisions were strengthened where enforcement were taken through a lens of pro-action, prevention and prudence. For instance, surveillance and investigation flagged around 100 instances on day-to-day trading and took enforcement action ranging from including warnings, informing the compliance officers or a higher authority, issuing warnings to investment advisors, suspension of online trading facilities, calling parties to show cause and instituting criminal suits or proceedings. Such pro-active measures proved to be highly effective as it significantly reduced the market misconduct during the year.

With the enactment of the SEC Act No.19 of 2021, it became pertinent that the SEC draft the required Rules, Regulations and Standards to give effect to the Act in an expeditious manner particularly to ensure that the provisions found in the new Act are enforced in an effective manner.

Therefore, we at the SEC developed and drafted the Rules applicable to an Exchange, a Clearing House, a Central Depository (collectively known as Market Institutions) and Rules applicable for Market Intermediaries namely Investment Managers, Credit Rating Agencies, Margin Providers, Managing Companies, Corporate Finance Advisors, Underwriters, Stock Brokers and Stock Dealers. We took steps to publish them in the Government Gazette and I am eternally grateful to the former Chairman, Mr. Viraj Dayaratne for giving leadership to this all-important process.

Further, Unit Trust Code of 2011 was replaced with the new CIS Code and published it in the Government Gazette. The CIS Rules provide avenues to setup a wider array of collective investment schemes that will benefit both the investors and issuers.

These Rules were published after carrying out necessary stakeholder consultations and review. The SEC believes that adopting a consultative approach in formulating rules helped to develop inclusivity among capital market stakeholders.

Moreover, the SEC took steps to publish Guidelines applicable for Supplementary Service Providers i.e. Custodians, Actuaries, Auditors, Trustees, Valuers who provide services to a Market Institution, Market Intermediary, Listed Public Company or to a CIS.

It must be said that these Rules and Guidelines have been introduced to ensure fair business conduct, to protect and safeguard the interest of investors and to mitigate systemic risk in the securities market. It is expected that these progressive Rules and Guidelines will ensure that all market participants have the confidence and the necessary environment to engage in their activities.

The strict lockdown imposed in Sri Lanka as a result of the COVID- 19 pandemic led to the stock market to stay closed for 52 days in the year 2020. This was mainly due to the inability of the stock market to conduct certain core activities digitally. This prompted the SEC to spearhead the digitalization of the end-toend operations of the CSE. The end-to-end digitalization of the stock market was divided into three phases. First two phases were successfully completed and during the year under review, the SEC-CSE joint committee on digitalization completed its third and final phase of the initiative.

I am pleased to say that this initiative has transformed the market into a new height. One of the key milestones of the digitalization was the introduction of the CSE mobile application (App). This has brought the market to the fingertips of the investors. Increased efficiency in information dissemination and the reach has resulted in expansion of the investor base at the CSE.

Some of the key milestones reached in the third phase was the onboarding of foreign individuals (via stockbroker firms) through the mobile app and its ability to request to open Inward Investment Accounts from a licensed commercial bank, e-Offers/ Repurchase, e-Initial Public Offering (IPO) web portal, Margin account openings etc. These new features have created a vast array of investment opportunities to investors and is helping them to channel their investments in a swift manner.

The digitalization initiative has facilitated the market to benefit from enhanced convenience and efficiency and is paving the way for a new era in the stock market. I wish to thank both the SEC and CSE joint committee members for their relentless efforts made in making this initiative a success.

I am pleased to state that we have made significant headway in implementing a CCP to the local stock market. The CCP will ensure that counterparty risk is mitigated while creating a conducive environment to introduce new products such as derivatives.

The SEC together with the CSE established a joint committee to fast track the implementation of the CCP to the local stock market. The SEC- CSE joint committee developed a policy framework to introduce a CCP mechanism. The CSE held industry consultations prior to finalising the framework. Subsequently, the Commission approved the framework and CSE is now in the process of finalising system specifications with the vendor. We are hopeful that the system will be up and running by the end of year 2023.

It is paramount that we create new investment avenues for the investors that will in turn provide opportunities for the issuers to raise much needed capital for their investments. The SEC took steps to establish a joint committee in collaboration with the CSE to fast track the initiative.

The joint committee has categorised introduction of new products into phases. Under phase 1 of the initiative, it is envisaged to introduce a number of new products such as implementation of Regulated Short Selling through Securities Borrowing and Lending, introduction of Green/Blue Bonds introduction of an ESG index, introduction of an OTC platform to carry out REPO transactions on listed corporate debentures, listing of perpetual bonds, expanding the listing framework to facilitate the listing of debt/equity securities issued by state owned enterprises (SOEs), listing and trading of foreign currency denominated debt securities issued by entities incorporated in Sri Lanka, trading of High-Yield corporate debt securities on the OTC platform and the implementation of a XBRL-based reporting platform.

The SEC places emphasis on developing a sustainable market that will cater to both the present and future needs of the investor community. Therefore, it is pertinent that steps are taken to develop the supply side of the spectrum with products that would generate sustainability.

Today, the importance of ESG investing is felt more than ever before. Investors are pursuing ESG related investment strategies. As such, policy framework and the CSE draft Rules in relation to operationalising Green Bonds was finalised with the assistance of Asian Development Bank (ADB). Policy framework for Blue Bonds which is generally considered as a sub set of Green Bonds was also finalised. This would open up avenues for corporates to raise funds for green initiatives.

It is important to promote ESG related practices among listed companies. As such, the SEC, CSE and the Institute of Chartered Accountants of Sri Lanka (ICASL) entered in to a Memorandum of Understanding (MoU) on 24th August 2022 to promote such practices. The MoU is designed to deliver joint awareness in the areas of Integrated Reporting, Corporate Governance, Sustainability, and any other related areas that would be beneficial for corporates and to the users of financial reports/corporate reports.

In furtherance, another MoU was signed between the SEC, CSE and the Chartered Financial Analysts (CFA) Society on 17th June 2022. The MoU encompasses various salient features. Some of the features include establishing a collaborative relationship to promote awareness of ESG among Sri Lankan investors to enhance investor protection, to encourage capital market practitioners to introduce ESG into their investment research and valuation process and to ensure that the professional standards and integrity are maintained in the Sri Lankan capital market.

The Capital Market Development Program (CMDP) was a policy based loan and technical assistance program given to the Government of Sri Lanka by the ADB. Under the CMDP program, the SEC received technical assistance for a number of areas such as drafting regulatory and policy framework to introduce Green Bonds, Equity Crowdfunding and introduction of CIS Code etc. The CMDP concluded during the year under review and I am pleased to state that the CMDP yielded multiple benefits to market participants.

The SEC secured funding from the World Bank under the Financial Sector Modernization Project (FSMP) for several key regulatory and developmental initiatives. The project concluded during the year under review. The project paved the way for many regulatory and development reforms in the market and helped to develop institutional excellence.

I wish to thank the ADB, the World Bank, and our focal point at the Ministry of Finance, Mr. Priyantha Ratnayake, Deputy Secretary to the Treasury for the utmost support given to us in successfully completing these projects. The SEC looks forward to working closely with these multilateral development agencies in the future as well to uplift the standard of the capital market.

Financial literacy is an essential component in developing an investment mindset among the people. The SEC continuously strives to enhance and develop the financial literacy among the investing public. The SEC is working closely with the National Institute of Education (NIE) to include capital market content to the student curriculum. The effort has become fruitful as by the year 2023, it is expected that the capital market content will be included to the national school curriculum from Grade 6 to Grade 9 students. The SEC considers this as a major breakthrough in developing stock market education.

Moving forward, I think it is time we give serious consideration to achieve concrete outcomes on several important fronts by defining realistic timelines.

We are indeed fortunate to enjoy the support and encouragement from the Government. The policy stability and the will of the Government has made our achievements possible. Their support for our operational independence has never faltered. Thus, my sincere gratitude is extended to His Excellency the President and the Secretary to the Treasury, Mr. Mahinda Siriwardena for all the support and the confidence placed on us.

My gratitude is extended to the outgoing Chairman Mr. Viraj Dayaratne PC, and the Commission for their unfailing support and guidance extended at all times. I thank them sincerely on behalf of everyone at the Secretariat and on a personal level for the confidence and trust placed on us.

As an eminent professional, Chairman Mr. Faizal Salieh’s wise counsel and unfailing support is most valuable in every step of our work. I thank him sincerely on behalf of the Secretariat. I would also like to thank the eminent Members of the Commission for their unfailing support, sound advice and collective expertise, at times sacrificing their personal and professional time in the process.

I firmly believe in maintaining a high level of staff engagement, performance and confidence which will be the pillars of achieving the mandate of the SEC. Therefore, I will continue to develop the human capital of the SEC. Finally, let me pay a big vote of thanks to my Directors, Senior Management and Staff, as I am most fortunate to observe their full support to make things happen.

At present, I witness a renewed enthusiasm and rapid movement in the right direction after the unprecedented economic downfall. As Wordsworth said of the enthusiasts who were present at the beginning of the French Revolution, “Bliss was it in the dawn to be alive”. I look forward to build on our successes as I intend to continually review and re-calibrate our approach in regulating our market.