The entry of the Sri Lanka Telecom shares, the telecommunication giant, raised hopes of the market changing its character and turning into a dynamic international market. By introducing a new sector to the market and increasing market capitalisation significantly, it was expected to move the Colombo Share Market towards being a more attractive one to foreigners.

However this has not happened. The Colombo bourse has probably missed the bus. Why?

The size of the SLT issue and its unprecedented value in the CSE meant that large investors, who based their decision making on the long-term earnings potential, were needed to sustain the demand for the share. This was lacking. A massive Initial Public Offer, such as the Telecom offer, requires either foreign investors or institutions in the country to invest heavily. Neither appears to have occurred.

Foreign investments amounted to only about US$ 4.5 million, much below the expected US$ 10 million.

Sri Lankan institutional investors too shied away from the share. Even Unit Trusts took an insignificant picking. Why? No doubt the speculative instincts of institutional investors got the better of them on the SLT issue. They were expecting some shareholders to trade below the issue price. They therefore expected to pick up shares in the market below the issue price. They were right in their speculation. More precisely, they made the speculation come right by their own action of withholding from purchases in the initial offer. The much expected oversubscribing did not occur.

In contrast small investors in the country from even far off places and Sri Lankans living abroad have bought heavily. Small investors who expected only a fraction of the shares they applied for may have oversubscribed in terms of their credit capacity and may have had to shed their excessive shares even at a loss. This accounts for the share price declining to around Rs. 13.50.

It is quite shocking that institutional investors bought only small quantities of the country's largest share issue that would dominate the market. This is particularly startling, as the telecom share was very sound on fundamentals. SLT has capital and reserves worth Rs. 39 billion, including Rs. 22 billion in retained earnings. SLT reported a 38 percent increase in after-tax profits for the nine months ending September 30, 2002, an increase in net profits from Rs. 1,763 million in 2001 to Rs. 2,425 million. Its revenues rose from Rs. 16,159 million to Rs. 18,579 million, 15 percent higher than during the corresponding period in 2001.

SLT also announced a three percent interim dividend for the financial year 2002. The SLT share even at the issue price of Rs. 15 was a good buy. The intrinsic value of the share has been calculated at around Rs. 27, the most conservative estimate would place it at about Rs. 23. The SLT profits, dividends and its potential growth would ensure the rise in its price over time.

This shows clearly that institutional investors here did not base their decisions on the fundamentals of the SLT share, but took a speculative position based on what they expected would be market sentiments. In the process they themselves created those market sentiments and squandered an opportunity to attract foreign portfolio investments -- an opportunity to be ranked as an international market of consequence.

An important expectation was that Sri Lanka Telecom would be included in the Morgan Stanley Capital Index (MSCI) at its next review at the end of this month. That is now most unlikely. Sri Lanka was removed from the MSCI regional equity indices last year due to the Colombo market's small size.

SLT's IPO of US$ 216.6 million changed that. But the loss in value of the share has lost us the claim. Those responsible for the country's financial development should take the responsibility for weakening a strong claim for SLT and Sri Lanka to be included in the MSCI. We may have lost the opportunity to put our market in the global market place.

The market was unattractive to foreigners owing to its low market capitalisation and its ill liquidity. Before the entry of SLT shares, market capitalisation was around Rs.160 billion. SLT shares at issue raised market capitalisation by Rs. 30 billion an increase of around 18 per cent. It rose to about Rs. 205 billion with the Apollo and the SLT share issue. With the SLT share price falling and an overall decline brought about by the war jitters, the market capitalisation has fallen to Rs185 billion.

In this context it is most improbable that the CSE would be included in the Morgan Stanley Capital Index this month. We can only hope the future holds better prospects. Market capitalisation is still less than US$ 200 million. We are still small, but about twice that of 2000. If Sri Lanka's stock market is to rank among those that foreign investors have an appetite for, more companies need to list on the stock exchange, large privatised enterprises must be listed and a large amount of shares available for sale.

It is important that major privatisations such as Sri Lanka Insurance Corporation and other large state entities be listed in the CSE. Even that will not be sufficient if Sri Lankan institutional investors do not play an important role by investing in these share issues. Their role with respect to the SLT shares was rather discouraging. This does not augur well for the future of share market. They have to play a significant role in strengthening the market by investing more.

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