Capital Market

The following excerpts from The Report: Sri Lanka 2016, published by the Oxford Business Group, offers a conversant and independent view on the Sri Lankan capital market.

The operator of the Stock Market in Sri Lanka

The Colombo Stock Exchange (CSE) is the operator of the stock Market in Sri Lanka. From the perspective of the exchange industry, the CSE currently focuses only on cash markets in equity shares, warrants and closed-end funds in the equities market together with corporate debt securities in the debt market. Its current investor base has a 29.4%: 70.6%% mix of foreign to domestic investment in the equities market. The exchange strives to increase its global reach through concerted efforts to bring Sri Lanka to the international platform.

Deep History

The Colombo Share Brokers Association was founded in 1896 and in 1904 this became the Colombo Brokers Association (CBA). A formal stock exchange, the Colombo Securities Exchange, was founded in 1985, with it rebranding as the Colombo Stock Exchange (CSE) in 1990.

The capital markets in the country have advanced quickly, even during the tumultuous civil war. For example, Sri Lanka’s largest-ever initial public offering (IPO), Malaysian telecoms firm Dialog, listed on the exchange in 2005 during the height of the conflict.

The IPO increased the bourse’s market capitalisation by 20%. The CSE has continued to upgrade its infrastructure, introducing an automated electronic clearing and settlement system – the Central Depository System (CDS) – in 1991. The CSE then introduced its Automated Trading System (ATS) in 1997, and automated surveillance was added in 2008. The regulator itself was established in 1987.

Post-War

Cheap money in the aftermath of the 2008 global financial crisis, and the end of the civil war, led to a boom in the financial markets in Sri Lanka, taking the benchmark Colombo All-Shares Index from a 2008 low of about 1500 to a 2011 high of nearly 7800.

Delivery Vs Payment - Establishment of a Central Counter Party

Marking a major development in the post-trade market in the country, the CSE is in the process of creating a central counterparty (CCP) to guarantee settlement of Equity and Corporate Debt securities traded on the exchange, which largely addresses a key risk prevalent in the Colombo Stock Market.

Technical Developments

In 2014, the exchange upgraded the CDS. The new system allows for improved trading of corporate debentures, permits the servicing of more asset classes, and makes the overall architecture more robust and scalable. The exchange has also established broker back - office systems and order management systems to improve market infrastructure.

In early 2016 the CDS partnered with LankaPay, the national payments system operated under the guidance of the Central Bank of Sri Lanka. LankaPay will be digitising the cash settlement leg of the cycle, providing certification authority capabilities for the country’s three settlement banks, eliminating the need for physical signatures, hand delivery and physical documentation.

Improving Value Proposition

The CSE has a vision, and it is ambitious; it has set a goal of $50bn market capitalisation. As of early 2017, the market capitalisation was $18 bn, which represents around 24.3% of GDP.In addition to increasing the market size, the CSE also has ambitions to improve surveillance and governance, develop new products, reduce risk, strengthen market infrastructure, grow the investor base and develop institutional capabilities.

The CSE is systematically working on enhancing its cash market product offering, both in equity and debt, whilst setting the foundation for the introduction of more sophisticated products in the future. It intends to provide a broader set of investment options to investors and access to varied platforms for issuers through diversification. The exchange is presently in the process of improving the equities listing franchise by initiating the Alternate Markets Segment (AMS) through which it intends listing inclusiveness for small and mid-size corporates via the SME Board; the AMS will include the listing of dollar denominated equities paving way for cross listings by foreign issuers. A range of multi-currency equities, structured warrants and exchange traded funds are set to be introduced.

The adoption of the adopted the four-tiered, hierarchical industry classification system GICS (Global Industry Classification Standard) also enables market users to capture and assess standardised industry data, in line with a widely accepted norm.

International Interest

The Sri Lanka story is compelling to investors, given the end of the civil war and the change in administrati

on in 2015. It is also interesting because Sri Lanka’s economy is very different when compared with others, both locally and globally, and the market might be attractive because of this lack of correlation.

Sources:
Oxford Business Group, The Report: Sri Lanka 2016 - Visit http://bit.ly/2loEKXy for more information
 

 



 


 

 
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