SL Capital market bracing for transparency, innovation and facilitation
Mr. Faizal Salieh
The Sri Lankan capital market is steering for further digitalisation and innovative solutions, revamping rules to address emerging and potential risks in the market, enhancing transparency, safeguarding public interest and investor protection, and encouraging market participation.
The Multi-Currency Board set up to facilitate foreign companies seeking dual listings in Sri Lanka, is set to see Maldivian firms come into the bourse.
Following the MOU signing in the Maldives, the Colombo Stock Exchange (CSE) had meetings with Maldivian listed companies, including Amana Takaful, Centurion, Maldives Islamic Bank, Maldives Transport, Dhiraagu, and Maldives Tourism. Discussions continue, with at least two companies expected to list on the Colombo bourse soon, Faizal Salieh, Chairman Securities and Exchange Commission (SEC) told The Sunday Times Business in an exclusive interview recently.
He also acknowledged, however, that despite potential advantages like investor access and funding diversification, limited interest persists due to economic factors, exchange rate fluctuations, and capital transfer restrictions. “We remain optimistic that dual listings will gain traction in the future when these restrictive factors get addressed in due course.”
ESG rating
The SEC will introduce an ESG rating system and index to highlight sustainable companies to attract institutional investors. Mr. Salieh noted that the unit trust industry needs innovation and growth, moving beyond basic money market products. “We’ve emphasised this to intermediaries and will evaluate them thoroughly during license renewals.”
Businesses should typically lean on the capital market for their long-term funding requirements, but they have mostly relied on short-term bank borrowings for this purpose, he noted, further adding that this creates a misallocation of capital in the financial market between the banking space and the capital market space and elevates the balance sheet risk of banks. “We’ve initiated discussions with the Central Bank on this aspect and will explore prudential methods to re-balance the capital allocation and systemic risks between the two markets.”
Several amendments were made to the SEC Act in 1991, 2003, and 2009 to address gaps and outdated provisions, but a significant enforcement deficit persisted for a long time, negatively impacting the SEC’s reputation and leading to the stock market being labeled a ‘pump and dump’ market.
“The new SEC Act No. 19 of 2021 marks a key step in securities legislation reform, acknowledging market changes and the need for strong regulations. Enhancing market supervision and surveillance is a top SEC priority under the Act, emphasising institutional independence and broader regulatory powers.” We rapidly cleared a large backlog of pending investigations and converted them into appropriate enforcement actions, Mr. Salieh added.
Catching rogues
Enforcement statistics from Jan. 2023 to date by the SEC include 31 notices to action, 05 compounding/settlements, 26 warnings/cautions/suspensions, and 29 administrative sanctions (financials). “We are closely monitoring the use of social media by bad actors to manipulate the market and have taken firm action against the abusers,” Mr. Salieh added.
New challenges arising from market growth and risk will guide needed regulations in the capital market. Regulations prioritise transparency, public interest, investor protection, and market participation. “Every rule we write is based on a principle. So, the rule-making process is that principles drive rules, and rules address risks,” Mr. Salieh stressed.
Noting that the 4 per cent stamp duty and 30 per cent Capital Gains Tax hinder REIT potential, he said, adding that the SEC will work to resolve these issues.
While making strides in certain areas, the capital market still falls short compared to regional peers in size, liquidity, diversity, innovation, competitiveness, performance, and stability. “The market is skewed towards few HNW (top) investors; very limited independent research is being done; there are too many brokers for a market of this size and their investment advice is not always based on business fundamentals,” he said noting that sustained efforts to enhance the regulatory framework, governance standards, market infrastructure and innovation, market discipline, transparency and integrity, and improve overall economic conditions are crucial to strengthening the capital market and attracting more foreign and local investments.
Digital Transformation, Modernisation of Market Infrastructure and enhanced Market Accessibility are crucial steps to broad base the markets. Key items for 2023-2025 Capital Market Reforms: regulatory and market capacity building, SEC digital transformation, CSE demutualization, real-time surveillance, SOE listings, multi-currency board, derivatives exchange, new products, and enhanced market literacy.
The Demutualization Bill, which was stalled in the legislature since 2018, was revived in 2024 and is progressing with renewed traction after a fresh agreement was reached between the SEC, government and the stockbrokers.
Despite the SEC and the CSE introducing many capital market instruments, there seems to be no real appetite. Mr. Salieh noted that the capital market has been sailing through waves of uncertainty in recent times with appetite in the capital markets severely restrained by the economic crisis, the subsequent domestic and external debt restructuring issues, the IMF reviews and disbursements, some misplaced political statements made within and outside Parliament, and now the Presidential elections.
“That said, a liquid market is essential for the success of new instruments. Investors favour stocks and bonds over new complex instruments. Market sentiment affects willingness to explore new investments. SEC and CSE are conducting awareness campaigns on new options.”
High interest rates with fixed income yields of around 20 per cent caused a general investor aversion to risky asset classes despite their potential for high returns and deterred investments in the capital market. Recent policy rate reductions should encourage investors to the securities market, Mr. Salieh added.
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