SEC chairman and DG review 2006 challenges and milestones

The Securities and Exchange Commission’s (SEC) Annual Report for 2006 was released this week. The Bottom Line in this issue reproduces excerpts of the reviews of the Chairman Gamini Wickramasinghe and Director General Channa de Silva highlighting the challenges as well as milestones achieved during the year.

10 year Master plan to bolster capital market - Chairman
The new Commission Members appointed by the new government took office in March 2006. The first task of the Commissioners was to take full stock of the status quo of the SEC Secretariat, in terms of what has been accomplished, policy issues, and the challenges ahead.
This in turn formed the basis for new policy directions at the SEC. As one of my first steps in this regard, I called upon Ernst & Young Malaysia to commence a study on the Sri Lankan Capital Market and design a Capital Market Development Master Plan modeled after the successful Malaysian Plan. Their report & recommendations were submitted to the SEC in August 2006.

After having studied and identified the issues & challenges for the Sri Lankan Capital Market vis-à-vis other regional markets such as India, Malaysia and Thailand, we recognised the need and the benefit for the country to accelerate the development of the Capital Market in Sri Lanka. This led the SEC to take a more active role in the development of the Capital Market without neglecting in any way the core roles of monitoring and regulating the Capital Market activities.

We have also embarked on increasing the staff strength of the Secretariat with the inclusion of two new directorates of Financial Services Academy and the Capital Market Development with a dedicated Project Office. Areas where staff strength was lacking was addressed and the decision to relocate the SEC was made. Further, the salary structure of the staff of the Secretariat was revised to reflect the industry standards with a view to attracting and retaining competent professionals to the SEC.

During the year under review we hosted the first South Asian Securities Regulators Forum in Colombo where a Memorandum of Understanding was signed for greater cooperation among South Asian regulators. This helped us renew our friendship with fellow regulators from the region and forge new ties. Globalisation and the increase in capital movements has raised concerns among the international community to establish cooperation of worldwide regulators to combat money laundering activity by organised criminals and terror groups.

In most developed countries, Capital Markets play a pivotal role in efficient mobilisation of savings and channelling them to the most productive areas of an economy. In fact, in most developed and fast developing countries, the funds raised through Capital Markets exceed that of the Banking sector by 2 to 3 times. The traditional banks in those countries derive much of their income from Capital Market activity such as Investment Banking, Advisory Services, Asset Management etc. In Sri Lanka, the traditional intermediation process by banks is inefficient which is reflected in high cost of intermediation.

It is for this reason we are keen to accelerate this disintermediation process in Sri Lanka so that more and more business houses can access lower cost funds through the Capital Market while allowing the saver to reap a higher return for savings. SEC’s goal is to make the Capital Market become the conduit to raising 50% of funding requirements in the country (i.e. on par with the banking sector) from the current 29%.
During the year under review, SEC also initiated a new concept of distributing equity wealth of government and private sector business entities as well as government owned commercially viable real estate using a Mutual Fund structure.

TBL Quote

Dr. Gamini Wickramasinghe Chairman),

In most developed countries, Capital Markets play a pivotal role in efficient mobilisation of savings and channelling them to the most productive areas of an economy. In fact, in most developed and fast developing countries, the funds raised through Capital Markets exceed that of the Banking sector by 2 to 3 times. The traditional banks in those countries derive much of their income from Capital Market activity such as Investment Banking, Advisory Services, Asset Management etc. In Sri Lanka, the traditional intermediation process by banks is inefficient which is reflected in high cost of intermediation. It is for this reason we are keen to accelerate this disintermediation process in Sri Lanka so that more and more business houses can access lower cost funds through the Capital Market while allowing the saver to reap a higher return for savings. SEC’s goal is to make the Capital Market become the conduit to raising 50% of funding requirements in the country (i.e. on par with the banking sector) from the current 29%.

The Fund would be managed by a company fully owned by the government which is to eventually evolve into the investment arm of the government along the lines of Tamasek Holdings of Singapore. This concept was given the green light by the government in the Budget

2007 under the name National Wealth Corporation, later renamed “Jathika Isura” . This concept is expected to increase the market capitalisation and liquidity of the Colombo Stock Exchange while extending an opportunity to the rural populace of the country to own part of corporate Sri Lanka using an innovative financing scheme.I wish to take this opportunity to thank the Commission Members and the staff for their high level of professionalism, enthusiasm and commitment which contributed to strengthening our regulatory framework, increasing enforcement and enhancing confidence in our Capital Market.
I look forward to another year of growth and achievement.

Broad basement of Capital Market with people, country the focus - DG
It gives great satisfaction to report that the Sri Lankan Stock Market was rated as one of the best performing markets in the region in 2006. The growth of 41.62% in the All Share Price Index together with the 51.43% growth in the Sensitive Milanka Price Index for the year reinforced the potential of the Sri Lankan Capital Market. These had resulted in the enhancement of the market capitalisation, which grew by 42.9% during the year to reach Rs. 834 Bn.

We realised that the Sri Lankan Capital Market could be taken to a much higher elevation if certain global best practices were adopted. It was a case of learning new developments from other countries, which had adopted such developmental activities. There was no reason to ‘reinvent the wheel’ as there were success stories from neighboring Asian countries, which had engaged in undertaking a developmental agenda.
After carefully studying global developments it was decided that countries such as Malaysia, Thailand, Singapore and India could offer much value addition and important lessons for the Sri Lankan Capital Market. Therefore we selected and invited the individuals and key personalities who were involved in drafting and executing the Capital
Market Master Plan of Malaysia, to join the Sri Lankan SEC team to lay the foundation to develop a strategic plan for the Securities Market of our country to ensure that our Capital Market is well positioned to meet future challenges.

TBL Quote

Channa de Silva (Director General)

There are 44 developmental activities that have been outlined by this strategic blue print. These developmental activities have now laid a road map for the next 10 years for the Sri Lankan Capital Market. We have segmented the Plan into stages and the first stage of development will include introduction of derivative products to the Sri Lankan Capital Market, listing 10-20 large companies, introduction of an automated surveillance system, creation of the Financial Services Academy, engagement of Employees’ Provident Fund (EPF) and Employees’ Trust Fund (ETF) in greater participation in the Capital Market, creation of a vibrant Debt Market, creation of the National Wealth Corporation which will deploy a mechanism where docile and less productive government assets will be shared with the people of the country without losing control of such assets through a economically rewarding mechanism. This will generate higher returns to the savers of this country and get their involvement in the Capital Market of our country. This will also change the average saver of our country to become an investor in the Capital Market.

Together with the SEC team the Malaysian professionals obtained views of all the Capital Market stakeholders, in developing the Capital Market Master Plan of Sri Lanka.

This resulted in the creation of the ten-year Capital Market Master Plan aimed to provide the market with a clear vision in a rapidly changing environment through an outline of broad objectives and principles. It seeks to ensure that the Capital Market takes advantage of the full potential, and become a catalyst in the national economic growth and delivery of economic value to the people of Sri Lanka to fulfill their needs and aspirations.

It is envisaged that this Strategic Plan would guide the Sri Lankan Capital Market to be an engine of growth, which facilitates economic development, provides an alternative source of funding, with the ultimate objective of ensuring a strong and vibrant Capital Market in Sri Lanka. In addition to the completion of the planning, the year 2006 marked the launch of the first phase of execution of this Plan and it is with pride that I outline the progress made.

There are 44 developmental activities that have been outlined by this strategic blue print. These developmental activities have now laid a road map for the next 10 years for the Sri Lankan Capital Market. We have segmented the Plan into stages and the first stage of development will include introduction of derivative products to the Sri Lankan Capital Market, listing 10-20 large companies, introduction of an automated surveillance system, creation of the Financial Services Academy, engagement of Employees’ Provident Fund (EPF) and Employees’ Trust Fund (ETF) in greater participation in the Capital Market, creation of a vibrant Debt Market, creation of the National Wealth Corporation which will deploy a mechanism where docile and less productive government assets will be shared with the people of the country without losing control of such assets through a economically rewarding mechanism. This will generate higher returns to the savers of this country and get their involvement in the Capital Market of our country. This will also change the average saver of our country to become an investor in the Capital Market.

We have now fast tracked the deployment and introduction of derivatives, since we have found it has the potential to allow investors to diversify their portfolios and hedge their risks whilst boosting the market. With a view to facilitating derivatives trading the SEC is addressing matters relating to a suitable trading system, legal framework and rules, together with prudential supervisory regulations. We are working closely with the National Stock Exchange of India (NSE) in this initiative. We expect to introduce derivatives within a period of one year to the Sri Lankan Capital Market.

In developed Capital Markets Securitisation products account for more than 25% of their Debt Market. In Sri Lanka the lack of proper law and procedure prevents us from engaging in true Securitisation. Therefore we are currently engaged in introducing a new Securitisation law to enable this valuable Debt Market product in Sri Lanka.

This involved stimulating discussion with stakeholders, including industry practitioners in regard to tax, legal and administrative processes enabling the introduction of proposed Securitisation Act. We are currently at the stage of drafting the Act for this important legislation.
The SEC in collaboration with the Unit Trust Association of Sri Lanka has taken the initiative to rejuvenate the Unit Trust Industry through awareness building, developing distribution channels and new products. This scheme recognises the pivotal role that the Unit Trust Industry could play in creating wealth among the masses of Sri Lanka. Currently, SEC is contemplating in financially assisting the Unit Trust Industry to ignite its revival through an aggressive plan.

To ensure good Corporate Governance among listed companies and boost investor confidence the SEC and the Institute of Chartered Accountants of Sri Lanka in consultation with the Colombo Stock Exchange commenced a joint initiative to formulate standards on Corporate Governance. The rules drafted during the course of the year would be made mandatory for listed companies as these standards are to be incorporated into the Listing Rules of the Colombo Stock Exchange.
These will include mandatory requirements for all listed companies pertaining to the appointment of Non- Executive Directors, Independent Directors, formulation of audit and remuneration committees together with enhanced disclosure requirements. This is the first time where Corporate Governance has been made mandatory for all listed companies and we will look at consolidation and enhancement of these requirements to the future.

Having realised the need to have a robust surveillance system to enhance investor confidence and ensure a fair marketplace devoid of manipulation and abusive practices, the SEC conducted a thorough review to identify an appropriate surveillance system. Currently discussions are underway with short listed vendors and software developers for procurement of a system in line with our requirements.
The SEC is currently exploring the possibility of embracing an electronic reporting system to enable listed companies and Market Intermediaries to file reports and other regulatory filings electronically. It is envisaged that this will replace the paper-based reporting system and lead to a more efficient, timely and cost efficient system.

In an attempt to enhance the knowledge of professionals and the public on the Capital Market, a comprehensive business plan was drafted for the establishment of the Financial Services Academy. The FSA is entrusted with the task of promoting training and education and will play a pivotal role in enhancing the level of awareness among a wide-ranging audience. FSA will be involved in many programmes including professional education programmes such as the Diploma in Capital Markets,licensing and certification of Stockbrokers, investor awareness programmes together with conducting of specialised programmes.

The aggressive development strategy adopted through the Capital Market Master Plan, resulted in the need to strengthen the Secretariat and its capabilities. Furthermore, in addition to the Stock Exchange, Stockbrokers and the Unit Trust Management Companies, the SEC has been vested with the responsibility to regulate Market Intermediaries such as Underwriters, Margin Providers, Credit Rating Agencies, Investment Managers, Clearing and Depository Houses.

During the year, we recruited a significant number of competent professionals from diverse disciplines to effectively support our expanding regulatory, enforcement and development role. Out staff cadre grew by 25% over the year. This resulted in SEC initiating action to relocate the Secretariat to the 28th and 29th floors of the World Trade Center, which will offer better working atmosphere and conditions. We have also undertaken the responsibility to amend the SEC Act as well as the Takeovers and Mergers Code in line with current needs of the industry.
A study has already commenced to look at international legislation in this regard. These proposed amendments will strengthen the legal framework of the Capital Market of Sri Lanka.

Our people are our most important resource. In an endeavour to enhance and fully utilise the capacity and abilities of our staff, we provided regular training opportunities both locally and internationally to increase their professional competence. We greatly encourage them to pursue higher studies in order to enrich their knowledge and capabilities. We believe our investment in people will be a key driver that will significantly contribute towards the successful deployment of our future aspirations.
All these initiatives, we believe, will significantly support the enhancement of market capitalisation of Sri Lanka, paving the way to strengthen our intermediary network through reduction of risk together with the broad basement of the Capital Market with the people or our country.