By Chandeepa Wettasinghe
Prime Minister Ranil Wickremesinghe urged the country’s expanding middle class to become owners of the economic wealth creation by actively investing in the stock market.
Sri Lanka’s stock exchange has an extremely concentrated stock ownership confined only to a selected club but when a country develops, the growing middle income earners want to become owners in the companies which drive that growth for a higher return through a diversified investment portfolio.
“I want to see an expansion in the shareholding in this country. The middle class must have a stake. I’m not satisfied. In the past few years the stock exchange has led to a concentration of ownership,” said Wickremesinghe speaking at the Colombo Stock Exchange’s (CSE’s) 30th year anniversary celebrations.
There are only little over 700,000 Central Depository System (CDS) accounts for a population of 21 million, but the active accounts are much lesser.
This demonstrates the extremely low participation by the Lanka’s population in the capital market.
However, it is imperative to establish a well regulated market place before the masses are invited to become stock owners.
The new Securities and Exchange Commission (SEC) Act is now in the making which gives teeth to the regulator to come hard on the market offenders.
Meanwhile the CSE, Chairman Vajira Kulatilaka stressed the significance of a sizable market capitalization of the country’s capital market in relation to the Gross Domestic Product (GDP).
“One of the requirements of a stock exchange is to have market capitalization to GDP ratio to improve. We need to get into about 60 percent. That will make our market more visible for investors in the world,” he said adding that this would be achieved through attracting more domestic investors to the bourse.
The CSE received a setback recently, with a slew of companies announcing their intentions to delist from the stock exchange due to the minimum public float rules set to come into effect next year.
“We’re trying to increase the issues in the market. We’ll get increased initial public offerings through the new SME (small and medium enterprise) Board,” Kulatilaka further said.
He added that the memorandum of understanding signed with the Maldives to list Maldivian companies in CSE, as well as the government’s decision to list state-owned entities on the stock exchange will add to the market capitalization.
Kulatilaka said that the SME board and the dollar debt listing options which received the green light in the budget 2016 require further approvals before implementation.
“The SME board is very easy to implement. We don’t see any problems in getting approval for that. But the dollar debt listings require approval from the Securities Exchange Commission and the Exchange Control. But since there’s no conversion, there’s no impact on the reserves. If at all, the reserves will benefit,” he said.
He added that the management is also trying to reduce the risk of investing in the bourse.
“We are trying to reduce and manage the risk of CSE. This is where we are lagging,” he said.
He said that some risks have been mitigated by implementing the new Central Depository System, Central Counterparty Clearing system and the Global Industry Classification Standard.
Kulatilaka said that he wishes to see new investors engage in more unit trusts and debt and that new products such as infrastructure funds, derivatives trading and real estate investment trusts should be developed as well.
Contingent liability bill in the offing to deal with surprise debt
The government will be enacting a ‘contingent liability bill’ next year to provide a safety net against unforeseen debt which might have been taken by the past regime but not recorded in the books of accounts, the Prime Minister said.
“We still don’t know how much of debt has been left behind by our predecessors. So we may have to bring a contingent liability bill to the parliament sometime next year,” he said.
Interest on known borrowings for 2015 is estimated to reach Rs. 492 billion and Rs. 520 billion in 2016, the budget showed. The Finance Minister, Ravi Karunanayake had said in the budget speech that shortcomings in the budget were due to the increased commercial debt opted for by the past regime, and that his ministry is investigating whether there are any other off-balance sheet borrowings, which are not recorded.
Wickremesinghe said that parliament would decide the methods of financing any such surprises.
“Parliament will make recommendations and decide on how additional revenue is to be raised to pay for this expenditure,” he said.
Wickremesinghe’s decision to involve parliament in the decision making process may prove to be positive, after the bond scandal which occurred early this year.
President Maithripala Sirisena may have had a hand in reaching this decision, after he publicly suggested Central Bank Governor, Arjuna Mahendran to step down due to the scandal. However, if the new legislation is not properly drafted, it may provide the current or future governments with loopholes for unnecessary borrowings, pushing Sri Lankan citizens further into debt.
The current regime had gone for numerous bond and treasury bill issues to roll over past debt and to finance the increased consumer demand achieved through handouts in January’s interim budget.
The government is already gearing up for international borrowings exceeding US $ 1.5 billion to achieve the US $10 billion foreign reserve limit set in the interim budget, the Central Bank said.
The state opted for a US$ 1.5 billion bond to shore up the reserves to US$ 8 billion last month.