SEC to strengthen guidelines on top positions at local firms
In a few months’ time, those aspiring to hold high positions at all capital market institutions will have to undergo a litmus test.
This will come when the Securities and Exchange Commission (SEC) will set criteria on who can hold board positions at stockbroking houses, funds, Unit Trusts, etc while they aim to revamp and strengthen the guidelines on fitness and propriety applicable to market institutions and market intermediaries. They aim to expand this to key management personnel at these institutions as well. The fitness and propriety criteria will perform a gatekeeper’s role and this assessment is done when an application is considered for licensing or registration and also on a continuous basis which will consider the conduct of the business and its history of compliance with the applicable laws and regulations, according to SEC officials.
SEC’s 2016 annual report, released on Saturday, said that in line with the Capital Market Strategy 2020 which proposes to enhance and maintain high levels of professionalism among persons engaged in capital market activity, the qualification framework of the SEC designed for stockbroker certification, etc would undergo extensive revision, allowing for multi-tier licensing and continuous professional development for the institutions/persons.
“These new guidelines would drive a positive industry culture encouraging honesty and integrity among the regulatees of the SEC so as to better protect the investing public,” the report said. A SEC official told the Business Times that certification standards will increase with the new syllabuses for brokers. “Fit and proper criteria for directors will be set in addition to the rules now applicable for company directors,” he said.
As an important conduit and enabler of retail investment, unit trusts are pivotal to the Capital Market Strategy 2020 and the SEC seeks to actively engage provident funds and pension funds in diversifying their portfolios and increasing asset allocation to capital market investments, the report said. “Increased participation by such long-term institutional investors can improve market stability and sustainability, as a result of their holding power and ability to act in a counter-cyclical manner.”
Traditionally having significant exposure to government securities, these funds could optimise portfolio returns and extent maturity profiles to provide better asset-liability matching through calculated investment in the market. At present, with the broad-basing of market participation in mind, minimum public holding thresholds apply to listed companies upon initial listing, and enforced thereafter on a continuous basis. The SEC would drive requisite policy formulation for the introduction of short-selling, securities borrowing and lending, and other new products in order to deepen liquidity, the report said.
Many new products
To increase portfolio choice of investors, the SEC is developing a sequencing framework for the introduction of new products ranging from Real Estate Investment Trusts (REITs) and Exchange Traded Funds (ETFs) to Financial Derivatives. “The SEC would enable the introduction of a multi-asset offering for investors by spearheading policy formulation in order to facilitate related rule-making by the Colombo Stock Exchange (CSE),” the report added.
Representations have been made to the Government by the regulator in exploring the potentiality of invigorating the capital market through the listing of State-Owned Enterprises (SOEs) with compelling investment proposition. “Entry by SOEs into the capital market engenders less dependence on state financing whilst enhancing governance standards. The CSE is encouraged to engage with private sector corporate in order to facilitate their efforts to tap the capital market to fulfill funding requirements. The implementation of new listing platforms for issuers of varied size, scale, maturity, and value-recognition needs is underway collaboratively with the CSE,” the report said noting that the Multi Currency Board would enable local and foreign issuers to explore multi currency listings, whilst small and medium enterprises (SMEs) would be provided access via the SME Board.
Interesting foreigners
Foreign investors were the net sellers in the market in 2015 with net sales of Rs. 5.3 billion. Rs 2.2 billion net foreign investment to the market can be considered as one of the highlights in 2016, the SEC report said. The Health Care Sector recorded a growth of 11.6 per cent in the year as against 9.6 per cent negative growth of the All Share Price Index (ASPI). Manufacturing and Stores and Supplies sectors grew by 6.5 per cent and 4.1 per cent respectively during the year. Services and Investment Trust sectors declined significantly by recording a negative growth of 24.8 per cent and 23.6 per cent, respectively.
The Diversified Sector accounted for Rs. 19.7 billion of the total market turnover, out of which Rs 12.5 billion came from foreign investors.
There were three new listings during the year 2016 (People’s Insurance PLC, Orient Finance PLC and Amana Takaful Life PLC) raising Rs. 1.8 billion through the Primary Market. There were 17 corporate debenture issues during the year which raised Rs. 77.9 billion and two delistings during the year.
There were 30 companies with a public holding of over 50 per cent as at 31st December 2016 and 34 companies had a public float of less than 10 per cent. 73 companies were in the category of 10 per cent to 20 per cent. These statistics reveal that still public holding is a serious impediment towards the development of the capital market in Sri Lanka especially in attracting foreign investors. Foreign institutional investors prefer to invest in stocks with a large free float, as they can purchase or sell a significant number of shares without heavily impacting the share price, the report noted.
At the end of 2016 there were 801,685 CDS accounts opened at the CDS out of which only 38,781 accounts have traded at least one transaction in 2016. There were 23,867 accounts that carried out one transaction per quarter. When the stock market was at its peak in 2010 and 2011 there were 78,517 and 117,712 active CDS accounts (minimum one transaction per year).