To tap large scale foreign funds into the stock market - Lanka needs to regain lost status

By Azhar Razak
The Nation, Sunday, 25 August 2013 00:00
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Chairman of the Securities and Exchange Commission of Sri Lanka (SEC) Dr. Nalaka Godahewa last week highlighted on the need for Sri Lanka to regain the lost ‘MSCI emerging market status’ if the country is to attract large scale foreign funds. Outlining that increasing market liquidity would be a critical requirement to support growth, the Chairman noted that out of the 288 listed companies the island currently had, 140 or almost 50% did not have a public float of even 25% whilst at the same time some of the largest listed companies also had very little public float.
“The other issue is the size of the existing listed companies. The market capitalization of 93% of our listed companies is smaller than USD 10 million,” Godahewa, who delivered the keynote address at a CFA Workshop held last week pointed out.
He said the country had lost the ‘emerging market status’ in MSCI index in 2001 as it needed at least three companies with a market capitalization of more than USD 1,033 million with a USD 516 million free float to qualify for MSCI emerging market status and that only one company in our market currently meets that criteria.
“These are the main reasons why our market is not yet attractive to large scale foreign funds. So, we have to approach this problem from different fronts,” Godahewa said in his address titled “Lead the positive change in finance and shaping a trustworthy forward thinking finance industry”.
He, however, noted that the SEC is presently working closely with CSE to encourage more private companies to be listed.
“We have been requesting the Government to list some large state agencies. On the other hand, following the example of many of our global counterparts we are also considering introducing a minimum public float requirement for the listed companies,” the SEC Chief said spelling out six key areas the Commission planned to focus towards developing and regulating the capital market.
Other measures Dr. Godahewa listed were the improvement of infrastructure (introduction of a Central Counter Party, upgrading broker back office systems, enhancing trading platforms particularly to handle debt trading requirements) which he said will be addressed within the next one year, education and awareness for the investor, increasing global participation, enhancing product portfolio and the requirement to further strengthen the regulatory framework.
“I am happy to announce that SEC Commission has now handed over the new SEC Act amendments to the Ministry of Finance to obtain the Cabinet approval. Next it will go to the legal draftsman and if everything goes well within the next six months, the new bill will be presented to Parliament. The new amendments will give more teeth to SEC to take prompt enforcement actions by creating provisions for civil and administrative sanctions following global practices. The act will also provide for the functioning of a demutualized exchange and a clearing corporation. Invariably the amendments to the 25-year-old SEC Act will bring about the policy shift to strengthen enforcement activities, enhance market transparency, increase market efficiency and liquidity, thus supporting the safety and soundness of the financial system,” he further outlined.

It would do lots to gain investors trust if CSE restrict incidents like CIFL where mass scale misinformation/reports are published for investors information.