Foreign investor attraction and market free float

Sri Lankan stock market needs foreign participation to ‘take off.’ This is what we have been hearing since the end of the 30 year long war with what claimed to be the world’s most brutal terrorist organisation.
Director General of Sri Lanka’s Securities and Exchange Commission (SEC) giving a statement to Bloomberg wire soon after the war victory said, “Sri Lanka is looking at fund managers like George Soros and Mark Mobius to take the county’s equity market to the ‘next level.”
Like the SEC Director General, we all like to have the support of George Soros and Mark Mobius for our tiny little market. But does the Colombo Stock Exchange have the capacity to serve the requirements of these fund managers? Do the free floats of even the top ten companies in the bourse allow foreign investors to make a substantial investment?
These questions can be answered by analysing what these most sought after foreign fund managers and investors had to say about Colombo bourse after their low key visits to Sri Lanka. “The problem here is there are not enough shares listed. As you know many of the big companies and conglomerates are family controlled and families don’t want to sell shares. So as a result, you have very few people selling shares and the free float is not very big. So that is a real problem.”
This was what famous Investment Guru and Templeton Chief Executive Mark Mobius had to say when he embarked on a fact finding mission to Sri Lanka two weeks back.
Meanwhile, Jim Rogers, the famous investor who had been bullish about emerging markets for the last few years, and who shifted both his investment focus and residence to Asia, was seen talking about the numerous opportunities the Sri Lankan market would offer in a post war scenario.
Later he made a quiet discreet visit to Sri Lanka and was reported to have met a few key officials from the CSE and the SEC. However since then, we have not been able to hear from Jim Rogers.
Then what is the reason for these two world famous figures to maintain a kind of passive attitude towards our market? Haven’t they experienced the hospitality of the people of Sri Lanka for which we are well-known? Or is our market is going in the wrong direction?
Real investments
There is no doubt that the Colombo bourse is on the correct path. But there is a lot we have to do from our part to transform these fact finding missions by globally recognised fund managers and investors, into real investments.
The statements and the implications by these fund managers and investors should be enough for the market regulators and other relevant authorities to realise that the Colombo bourse has the fundamental flaw of low free float that needs to be addressed soon to make the market attractive for foreign investors.
However despite this, officials of the Colombo Stock Exchange (CSE) and the representatives of local stockbroking firms are instead currently engaged in a road show in Singapore to promote the country’s equity market to foreign fund managers and investors.
Of course, doing road shows to promote the market is undoubtedly a good thing. But what would happen when a foreign investor who is impressed by the potential of the Colombo bourse, comes to Sri Lanka to buy shares? If he wants to do substantial investments in the country’s top ten blue chips, do these companies have the required free floats to meet his demands?
In the last few years, India has been facing the same problem. Indian markets were not able to attract foreign interest as much as they anticipated, due to the lack of liquidity in the market. In a bid to overcome this situation, in the latter part of 2008 the Indian Parliament at the request of the market regulator, put forward a draft proposal, asking all listed companies to ensure minimum public holding of 25 percent while listing, and subsequently. The regulator correctly perceived this as a measure to boost the liquidity in the market and fence stock price manipulations.
Even though in Colombo Stock Exchange’s amended listing rules, there is a provision which says if a company intends to go public it should offer a minimum public holding of 25 percent out of its total shares, there’s no such provision which states that the company has to maintain either the same or a certain stipulated holding as public float subsequent to the listing.
Like India had correctly done, Sri Lankan market regulators and relevant authorities also have to correct the structural and fundamental imperfections of the market before thinking of flooding the market with foreign investors. After all, the ox is always followed by the cart and not the otherwise, unless the cart is made to reverse. One must remember that a beautiful long lasting house is only built on a strong foundation.
Jumbled priorities
A popular saying among the Sinhala speaking community is, ‘why does the donkey perform the work which should be undertaken by the dog?’ We like to ask the same question from the SEC. Why has the SEC burdened itself with the work that should be officially undertaken by the CSE?
Being the regulatory body, marketing and promoting the market and organising road shows abroad should be the last priority in the work list of SEC. But what is happening now implies that the SEC has got its priorities jumbled up.
We have no criticism if the SEC does all these extra curricular activities which are apparently not in its scope, if the responsibilities that fall strictly under SEC are not being neglected.
While giving a helping hand to the CSE in good faith to promote the market and attract investors, if the SEC is also at the same time taking necessary action against the unregulated market advisor whose recent advice might have caused people to actually lose a considerable amount of money, we have no criticism. If prompt actions are being taken against companies in the default board, we have no criticism. If investigations are carried out to ensure the good practices by the stockbrokers, we have no criticism. Finally, if this criticism is taken in the spirit of constructive criticism, we have no criticism.