Director General’s Review
“Like in many other spheres in the country, our capital market has also missed many opportunities and has not performed according to its true potential. In fact, as a country, we have been dreaming of becoming a developed nation cascading with prosperity and benefits. To fulfill that vision, we need to work with commitment and diligence to reach the required competence.”
It is my pleasure to present a summary of our work and to provide an indication of our plan and expectations for the year 2020 and beyond.
Like in many other spheres in the country, our capital market has also missed many opportunities and has not performed to its true potential. In fact, as a country, we have been dreaming of becoming a developed nation, a nation of prosperity, a nation cascading with goodness and goodwill. However, for that purpose, we need to work intently and diligently with required competence, vision and a well thought out plan to provide economic freedom for our generations to enjoy the fruits of our commitment today.
Given the fiscal and monetary constraints our economy is faced with, the pivotal role of the private sector in repositioning the growth trajectory of the country is obvious. Accordingly, the dire need for a robust capital market that will provide impetus to the growth of the private sector is felt more than ever before. The SEC as the apex regulator is entrusted with a profound task of regulating all sectors relevant to create a robust and sustainable capital market.
As Mariana Mazzucato memorably argued in her book ‘The Entrepreneurial State’, it is the duty of the State to take the lead in innovation and economic transformation. In fact, Mazzucato tells us that the meteoric rise of China, South Korea, Singapore, Taiwan and Malayasia were due to the right involvement of State in the business world, not as meddler in the private sector but as a key partner in growth and innovation through a well-designed, consistent and successfully implemented state intervention.
Further, Prof. Ricardo Haussmann of Harvard fame has also remarked that Sri Lanka’s main problem is the inability of the private sector to move from the production of comparatively simple products like apparels into high value added goods and technologically advanced sectors. The success of certain Asian countries was the capacity of their private sector to move from apparels to valued secors such as electronics and indusrial productions, even though they had started with apparel production at the same time as Sri Lanka.
It is disheartening to see investments bypassing us and going elsewhere. I’d say, lessons from the financial and securities law reforms of South Korea, Singapore and Vietnam provide evidence that successful reforms intensify rising inflows of direct investment. Most recently, bolstered by an improving economy and a wave of new listings, Vietnam has been able to draw funds from big foreign investors. Vietnam equities have racked up the best gains in Asia in the recent past, making the Ho Chi Minh Stock Exchange one of world’s best performing bourses. Its turnover has doubled over the past two years although the exchange is still classified as a “frontier’ market.
Analysts say global funds and top investors are drawn to the economic success narratives of these countries, that of intergrating themselves into the global trading system, and positioning themselves as a hub for foreign manufacturing. Interestingly, these countries are now benefitting from the escalation of tensions beween China and the US, whereas top companies consider dual listings and have shifted a lot of production out of China and US and have set up value adding factories and are now contributing to the enhancement of the economies of these countries.
Thus, I would say unless the numerous myths on the conventional views of the Government’s passive role in economic growth and transformation are challenged, we cannot hope to address the structural economic challenges that our country is faced with. Similarly, the SEC can no longer be restricted to its traditional role and conventional approach. It is imperative for the SEC to recalibrate its role with a view to provide impetus to capital formation while striking the right balance between market regulation and market development.
To cut a long story short, my aim is to highlight how the government of those countries have created an enabling environment for the private sector to flourish, and how they have helped their companies to become global players and why we should support our private sector, to reach that level.
In fact, our markets have been waiting for the State to support its growth and expansion but we have been extremely slow to help. For instance, we just introduced Real Estate Investment Trusts (REITs) to the market, which should have been done at least ten years ago.
The Capital Market Can Support National Endeavours.
The CSE has the market infrastructure to support the fundraising requirements of the Government as well, especially in terms of tapping into public markets for funding development projects and the private participation in initiatives of national significance. Very much like private entities, we expect that the Government will also look at versatile and alternative sources of funding in going forward.
Over the years our problem was that we could not sustain a growth rate over 6% continuously for a considerable period of time whereas the success stories in Asia, countries that achieved developed status in the recent past underwent over 7-8% growth continuously for a significant period of time. The Secretary to the President, Dr. P.B. Jayasundara in his recent interview to the Daily FT has expressed his confidence by stating a post pandemic subdued economic environment can be a great opportunity for Sri Lanka to prepare and achieve that elusive 7-8% growth, by becoming smarter, agile and more resilient so as to produce sustainable socio-economic growth.
On the other hand Dr. Jayasundara has stated that from 2021 onwards the Government will get back to the fiscal consolidation path. Therefore, it is the ideal time for our capital market to step in and make every effort to empower the entrepreneurial community in realizing this key goal as the situation has opened up a host of new opportunities.
The Regulation Required to promote Sri Lanka as an International Financial Center
On the regulatory side, enacting the new SEC Act is the highest priority in order to strengthen regulatory powers and market activity. Thus, new Commission is currently engaged in the process of reviewing the provisions of the Bill.
The criticism of the Bill is centered on two impediments; a lack of clarity or ambiguity as to the meaning of the certain provisions, and the impracticality in the range of enforcement sanctions, that there could be problems within the Act, which could pose problems for the SEC to implement the enforcement process. In fact, with the new Act, it should not become more challenging for the SEC to conduct enforcement actions.
Therefore, I believe that the present sensible drafting approach will form a practically workable law, which will enable swift and clear enforecement, that does not unecessarily impede the market activities without a reasonable policy or practical jurisdiction and will clear the criticism attracted to the Bill.
The growth of the securities market as a whole, reflects the trust and confidence placed in a market and in the country as a whole. However, we have seen how a deficit of trust and confidence has affected our markets as we have witnessed a number of issues in the recent past. I would say this is associated with the absence of adequate enforcement actions and lack of professionalism, which has severe remifications to the market and the financial system.
I would also like to stree that, we should never bring down the credibility of the market we regulate, as we need to protect the interests of the investors, at the same time we need to ensure that the SEC strikes a right balance in regulation since over regulation can stifle growth and discourage active stakeholder participation in the market.
On the other hand, in line with our mandate we continue to monitor, mitigate and manage risk with the aim of promoting integrity in the market, as well as making certain that investors are protected through the dissemination of full and accurate information. By guaranteeing disclosure we increase the ability of investors to make informed investment decisions, improve investor confidence, as well as deter management from engaging in improper behaviour. Thus, the SEC will continue to impose stringent rules and undertake rigorous enforcement action against non-compliance.
The Need to Facilitate the Entry of a Strategic Investor
We need to accept the fact that over the last few years the capital market in Sri Lanka was not performing well. Without a doubt our capital market should be positioned to complement the banking sector and support the growth targets of the country. The strengthening deepening of markets has been critical for sustaining rapid economic expansion in many countries and to achieve this end, investor and public confidence as well as the integrity of markets and their participants is essential.
As Charlie Munger says we need to figure out “what works, what doesn’t and why.” In fact, Charlie Munger strikes me as someone who knows his strengths and weaknesses and who found a business partner in Warren Buffet whose strengths complemented Munger’s. Likewise we need to facilitate the entry of a “strategic investor” to the CSE as a shareholder who will be committed to the development of the securities market of Sri Lanka as such collaboration could lead us to the next level.
However, I recognize the value of having a close dialogue with the CSE and our stakeholders. I hope that together, we can foster a culture that goes beyond mere compliance. We are keen to facilitate initiatives with a focus on developing new products and market infrastructure to ensure that the securities market of Sri Lanka competes effectively by boosting fund flows to the country. Our market has essential pre-requisites that investors look for in an investment destination, such as attractive valuations, well governed and strong regulatory framework, modern infrastructure and listed entities that are compliant with International Financial Reporting Standards (IFRS). Therefore, we are optimistic of the potential and resilience in our capital market.
Now Let me present more specific details on some of the initiatives taken by the SEC recently that in effect will transform our securities market.
Re positioning the SEC as a dynamic regulator
- Joint Committee to Digitalize the Core Functions of the CSE
Our market was not in a position to demonstrate its ability to conduct all its core activities during the troubled time, which highlighted the need to digitalize core functions of the stock market without any postponement. Accordingly, a joint committee was appointed by the Chairman of the SEC with representatives of the SEC and the CSE to look into the digitalization of the CSE. By digitalizing, we expect to introduce mechanisms required for the CSE to conduct all core activities of the stock market digitally as well as to enable clearing and settlement electronically. The Commission approved the required amendments to the Stockbroker Rules, Central Depository Systems Rules and Listing Rules recently. The initiative is expected to facilitate end-to-end digitalization of the capital market and bring the local capital market to the fingertips of the investors.
In this regard, the SEC stressed the importance of the support of the entire broker community as brokers need to fulfil their task for the sake of the country with the objective of having a sophisticated securities market on par with global securities markets and also for the overall betterment of the Sri Lankan capital market. In fact, the SEC-CSE Joint Committee deserves much accolades for the tremendous strides achieved thus far, as the prerogative is to sophisticate the market and keep it operational under all circumstances.
- Joint Committee to Broad Base the Capital Market
A joint committee was appointed with representatives of the SEC and the CSE to consider measures that need to be taken to broad base the capital market and to educate and create awareness amongst the general public and to make recommendations in that regard. Furthermore, the committee is expected to encourage companies to use the capital market to raise capital, foster visibility and collaboration regionally and internationally, engage in stakeholder education and awareness with an intention to broad base the investor community and to ultimately facilitate greater public participation in the securities market across all geographical regions of the country and internationally.
On the other hand, CSE, in consultation with the SEC introduced Listing Rule amendments, to make stock market listing a possibility for a wider spectrum of companies. These amendments would create new avenues for potential issuers to meet the requisite eligibility criteria through revenue and cash flow pathways.
- Joint Committee for Dual Listings of Foreign Entities at the CSE
As part of the initiatives taken to increase the size and liquidity in the market and also with the policy direction of the Government of Sri Lanka, the SEC has identified the importance of setting the stage for the country to harness a high economic growth in the short term. Therefore, a joint committee was formed to identify constraints that impede market capitalization, liquidity levels at the CSE and formulate a conducive policy and regulatory capital market framework while paying attention to factors that would enable the securities market of Sri Lanka to gain a competitive advantage amidst the geopolitical tensions occurring between countries such as the USA-China.
This initiative too is expected to broadly facilitate Sri Lanka to elevate itself into the Morgan Stanley Capital International (MSCI) emerging market status.
- Introducing Real Estate Investment Trusts (REITs) to the Sri Lankan Capital Market
The introduction of Listed Real Estate Trusts (REITs) will mark the introduction of a new product to the market after 23 long years from the debut of listed corporate debt securities in 1997. The REIT structure that distributes 90 percent or more of income to REIT unit holders will provide capital to real estate and infrastructure development and to enable small investors to directly benefit from the growth of the real estate sector. The Rules applicable to a managing company and the trustees of REITs is expected to be published in the Gazette and the CSE was instructed to draft Listing Rules to enable listing of REITs.
- Revamping the Securities Exchange (SE) Bill
The draft SE Bill failed to witness the light of day for a considerable period although it had been tabled in Parliament and with the dissolution of Parliament, the process of presenting the draft Bill in the new Parliament will have to begin soon once again. In view of this task, the new Commission is presently engaged in the process of reviewing the provisions in detail. In this regard, we are fortunate to have a Chairman and a Commission having the required legal expertise and intellect, who are concerned to read and take steps to transform the SE Bill to practically workable law and to harmonize it with the context.
- Private Public Partnerships (PPP)
PPPs combine the skills and resources of both the public and private sectors through sharing of risks and responsibilities, which in turn will enhance the competitive landscape and provide immense benefits to the country in many folds. In order to promote PPPs as a mode of infrastructure financing in the country, we have been formulating a viable model to list infrastructure PPPs at the CSE.
- Integrated Central Counter Party mechanism (CCP) and Delivery vs. Payment (DVP)
The SEC firmly believes the country would benefit from having a single CCP rather than having two separate CCP’s and with that in mind, the SEC has made representations to the Central Bank of Sri Lanka (CBSL) to explore the possibility of setting up an integrated CCP mechanism. The operational specifications for implementing a Delivery vs Payment (DvP) was recently approved by the Commission and the CSE is in the process of carrying out system modifications to implement the DvP mechanism as early as in the last quarter of 2020.
- Engaging with Stakeholders
Further, the Chairman and the new Commission conducted a series of meetings with industry stakeholders to obtain their views on developing the capital market and to address the difficulties faced by them. These consultations gave an insight to develop infrastructure and strengthen and simplify regulations.
- Formation of the Policy Research and Analysis Wing
The need to keep abreast with the economic and financial landscape which is subjected to constant change, led to the formulation of a Research and Policy Wing within the Secretariat. The entity is expected to play the role of research and data scientist in developing and proposing economic, market strategies and policies that may benefit the capital market and the country as a whole.
During the year 2019, the SEC pursued a range of initiatives, which will be discussed in detail in the pages that follow. I wish to record my sincere appreciation to the former Chairman, Mr. Ranel T. Wijesinha and the Commission and the former Director General, Mr. Vajira Wijegunawardena for their contributions in 2019.
Comprehensive Audit of the CSE
In the area of supervision, the SEC conducted a comprehensive audit of the stock exchange prior to renewing the licence granted to the CSE for a period of five years by placing considerable emphasis on governance, market operations, procedures and processes. Further, the SEC mandated the fitness and propriety guidelines applicable to Market Intermediaries with a view to protect the investing public and allow only “fit and proper” persons to be licensed.
Facilitating Capital Formation
We worked with the CSE to introduce the Empower Board to list Small and Medium Enterprises in July 2018 for companies that do not meet the eligibility requirements of the Main Board and the Diri Savi Board. Subsequently, we engaged with entrepreneurs through a series of forums conducted around the country to create awareness on listing.
Setting up of a multi- currency Board (MCB) is another key initiative that was taken, where shares of foreign companies can be listed and traded in Sri Lanka in a foreign currency. During the year we explored the possibility of extending the MCB facilities to local companies intending to list debt as well.
Promoting Investments to the Capital Market
In a bid to promote portfolio and direct investments to Sri Lanka, the CSE and the SEC conducted an “Invest Sri Lanka” forum in Singapore which drew an encouraging response. The former Chairman, Mr. Ranel Wijesinha, also launched a series of meetings with heads of foreign Diplomatic Missions based in Sri Lanka to discuss strategies to create more visibility and awareness on investment opportunities in the Capital Market of Sri Lanka.
Handling Complaints and Granting Compensation
Protecting the interest of investors is one of our main regulatory objectives. To achieve this goal, we need to provide retail investors with an effective mechanism to handle their complaints. During the period under review, the SEC streamlined the complaints handling procedure to ensure that it is independent, fair and efficient.
Dialogue with Public Listed Companies and Auditors
We also reached out to stakeholders on a regular basis and sought extensive feedback from them through roundtable discussions on a broad spectrum of issues. During the year, under the auspices of the former Chairman, Mr. Ranel Wijesinha, we engaged in a dialogue with Public Listed Companies, auditors and other stakeholder to ensure that market participants understand their obligations pertaining to compliance, changes to existing laws and current issues in the capital market.
MOU with the CFA Society
During the year the SEC also executed into a Memorandum of Understanding with the CFA Society Sri Lanka to enable the two institutions to work together to promote codes and standards of best practice in the Sri Lankan capital market and work in partnership on initiatives pertaining to investor rights and joint educational initiatives.
Promoting Gender Diversity on Boards of Listed Companies
In view of the proposal submitted to the 2019 National Budget a task force was established to facilitate various initiatives to promote gender diversity in Public Listed Companies.
Empowering Investors and Capital Market Professionals
From a retail investor perspective, the SEC continued to bring more individuals under the financially literate umbrella and conducted many outreach programmes for students, teachers, undergraduates, investors and potential investors throughout the country. In order to upgrade the skills and capabilities of market professionals engaged in the capital market, the SEC through its training and development arm structured a new framework for individuals who wish to start a career in the capital market.
Moving forward, I think it is time we gave 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. The Government’s support for our operational independence has never faltered. This is an essential basis for an international regulator, giving confidence to everyone who conduct, or intend to engage in the capital market. Thus, my sincere gratitude is extended to the Hon. Prime Minister and the Secretary to the Treasury, Mr. Sajith Attygalle for all the support and the confidence placed in the SEC.
As an eminent President’s Counsel, Chairman’s wise counsel and unfailing support is most valuable in every step of our work. I thank him sincerely on behalf of the Secretariat and also on a personal level for the trust and confidence placed on us. I would also like to thank the 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 give a big vote of thanks to my Directors, Senior Management and Staff as I am most fortunate to have their full support to make things happen.
I witness a renewed enthusiasm and rapid movement in the right direction. 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 unleashing the untapped potential of our capital market.