Getting back into MSCI Emerging Market Index, top priority: Rajeeva

17 December 2013 05:26 am - 0 - {{hitsCtrl.values.hits}}

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By Indika Sakalasooriya
Mirror Business met with Rajeeva Bandaranaike who assumed duties as the Chief Executive Officer (CEO) of the Colombo Stock Exchange (CSE) last month. Bandaranaike is no stranger to the CSE as he worked at the place for 19 years holding various senior capacities. He served the CSE from July 1992 to June 2011 and held the positions of Head of Clearing and Settlement and Head of Business Development. After quitting the CSE in 2011, he served as the CEO of People’s Merchant Bank PLC and subsequently as the CEO of Orient Finance PLC.

Q: How does it feel to be back?
It’s good to be back. I was out for a two and a half years and that experience has been worthwhile since now I very well understand the perspective of a listed company better, having worked in two organizations that were listed.
Now I think I can appreciate and understand better than earlier of the issues and challenges a listed entity would face. So I think on this side of this fence—when you are formulating policy— I can better appreciate the concerns of a listed entity. To that extent, the period I did serve a commercial entity, I was able to gain firsthand experience in running an organization which is profit based. So all in all the experience was good but of course it’s good to be back in the familiar territory.

Q: What are your immediate priorities?
The market is now in a very progressive state. First I’m taking stock of what happened in the last two and a half years to find out where we are now and find out what needs to be done in terms of prioritizing. As you know the SEC has embarked on this 10 point initiative which I think is a very progressive step in developing the capital market. The SEC is working very closely with the CSE in implementing some of this. What I see now is that some progress is really happening in the market as some of these initiatives are with time frames.

One initiative that is on is the handling of settlement risk. We are thinking of setting up a clearing corporation. So that probably is a priority area. Once you set up a Central Counter Party (CCP) in a delivery vs. payment environment, it will drastically reduce the settlement risk and pave way for us to even go for new instruments. It will be a precursor to any new instruments that can be introduced in the market.

The other one is getting new investors—both retail and foreign. There are initiatives in that direction as well. Investor education is a must for retail investors. Investor education builds confidence and improves sentiment. Both the SEC and the CSE are carrying out investor education programmes for those retail investors who have the time to invest in investor education. For others who do not have the time, we are recommending unit trusts. The unit trust industry in the country was not aggressively promoted. In all our investor awareness activities, we are taking representatives of the unit trust industry to talk to prospective investors.
In the meantime, there are separate programmes to attract foreign investors like foreign roadshows. One area of high priority is to explore how we can get ourselves back in the MSCI Emerging Market Index within the next couple of years. By virtue of getting ourselves back in this index, there are fund manager who will park their investments. We are on this index in the year 2000. We were taken off of it due to a major terrorist attack which negatively impacted on our indices and the market cap.
Demutualization of the Stock Exchange is also on the cards. We hope that it will take place within the next couple of years along with the implementation of CCP.

Q: CSE is a disclosure-based market. But there is this allegation that sometimes disclosures by listed companies are not forthcoming, specially with regard to related party transactions. It is evident that some of the listed firms are using regulatory loopholes to do this. Most of them tend to go with the letter of the law than the spirit of the law.
At a high level, if we compare our listing rules with any other jurisdiction, I think we are really up there. In terms of disclosure, fairly timely information does flow in. I’m not really aware of any regulatory loophole where listed companies could carry out delayed disclosures. But if there are instances we would definitely look at it and if tightening up of the rules is needed, we will do it.

Q: What is your opinion on increasing the free-float? The SEC has put out a consultation paper with regard to this.
One of the key issues with our market is the lack of liquidity. So we need to increase liquidity. We are trying to get more listed companies into the market, both state enterprises and private companies. We have set up an issuer relations unit and the SEC also has a separate team working on new listings. So on one hand we need get large privately held players into the market and increase the number of listed companies, so that the investors have a better choice.

The second part of this is to encourage the companies which are already listed to release more of their shares into the public domain. The moment you do that, I think it will remedy a number of issues we have in the market in terms transaction costs—the price of entering and exiting the market, it has impacted on price ultimately. And your price discovery mechanism will get far more efficient when the market is more liquid. It will also impact on us getting into the MSCI Emerging Market Index. A lot of things are actually tied to the liquidity, which is a key concern not only to us but all the frontier markets. So now we see how we can encourage and not force companies to increase their public float. I hope we would be able to achieve this in the early part of next year.

Q: How would the local units of the multi-nationals respond to this?
We would love to see those companies being more liquid because their shares are excellent shares to have. The discussions with these companies are currently underway and hope for the best.

Q: There was this talk about setting up a separate board to encourage Board of Investment (BoI) companies to list. Can you give us an update on it?
There is some progress and we discussing the mechanics as to how this can happen. We are thinking of a separate board for these companies, but I think its bit premature to comment on it. We are currently working out the mechanisms of how to accommodate a separate set of requirements for these companies. Right now we are diligently working with the SEC and the BOI with regards to this.

Q: How many new listings you are looking at in 2014?
I can’t give a number. I’m sure the tax incentive introduced in 2013 budget and continued in 2014 budget will encourage companies to list.

When you look at a new listing, it will take window of about two to three years for a company to do it. You can’t suddenly come in and list your company, because changes are need to be carried out within the company in terms of management, governance etc. You may not be able to see instant results, you need to give it bit more time.

Q: What are key hindrances for large private companies—for example say Ceylong Biscuit, Brandix or MAS going public?
I don’t think there are hindrances as such. What I think is the company has to decide itself what is the most opportune time in terms of their business strategy to list. However much we may want them in the market, it will ultimately depend on the business strategy and the timing of the company when they want to list. Eventually all of these companies will list and it’s just a matter of when.

Q: How successful have foreign road shows been? Have you quantified the foreign investments materialized from them?
In fact we are quantifying it now. Most of our investments channel through Singapore or Hong Kong and we’ve had road shows in these cities. So we need be out there because all markets routinely go and meet fund managers. And I think the model of taking the listed companies there and having one-to-one discussions with fund managers is quite effective. You need to expose our companies to foreign fund managers.

Q: From fund managers’ side, do the people who are at the very top—those who can make a decision—attend these roadshows to listen the Sri Lanka’s case?
Yes. The big names in Singapore always attend and it’s same with Hong Kong. I think our roadshows have always attracted the right fund kind of fund managers—who would move to a frontier market like Sri Lanka. Those one-to-one meetings the listed companies have with foreign fund managers have proven very effective. These are hot money flows—they come in and go out. Therefore you have carry out these roadshows on a regular basis.

Q: Foreigners account for 30 to 40 percent of the CSE’s turnover. What is your target for 2014?
Well, we would like to maintain this balance between local and foreign at 60:40. At present foreigners account for 36 percent of the turnover.

Q: The end of the war rerated the market in 2009. But now the euphoria has subsided and the market underwent a painful correction. From where do you think the next growth phase would come?
I think it’s a combination of factors. I’m sure more liquidity through increased free float requirements and foreign inflows will trigger it. As we all know, markets are cyclical.

Q: Brokers have written to the CSE asking for a brokerage fee hike. Given the high number of brokerages and the low turnover levels, it is evident that the brokers are finding it difficult to survive. What is the CSE’s stance on this?
With market expansion we see more companies getting licenses. Unfortunately this year we have see the turnover levels dropping. We have to look at means and ways of how turnover levels can be increased. That’s the only way we can make the market grow.
I think the broking side, I’m sure they will find measures themselves how to sustain right through this difficult period. The brokers have made a request the CSE with regard to a possible brokerage hike and that is currently being considered.

Q: But isn’t the CSE is among those already having higher brokerage fees? Wouldn’t this discourage investors to come to the market?
Well, I wouldn’t say that will be the only criteria investors will look at in making an investment. I think in attracting investors, the bigger issues are settlement risk, free float and other market infrastructure related things. But so far no decision has been reached either way with regard to a brokerage fee hike. We have to strike a balance between being competitive and facilitating all the market stakeholders. So at this juncture, I’m unable to comment any further.

Q: The 2014 budget directly has asked banks and finance companies to consolidate. Don’t you think that this is the way forward for the brokerages as well?
The focus should grow the market—how can we develop our US $ 20 billion market to US $ 40 billion. But if somebody wants to merge or consolidate, we would encourage them to do so. In any industry it happens. That’s the natural evolution.

Q: Sri Lanka is taking a lot flack from specially the Western world with regard to human rights and various other governance issues. Has this in any way acted as a hindrance for those foreign investors who want to come the CSE and invest?
Not really. Particularly we can see the response from the foreign road shows we have been. I don’t think that has been a concern at all as far as the portfolio managers are concerned. I think they are more concerned about the returns and the governance of the companies they invest in. it has not been a deterrent.

(Pic by: Pradeep Pathirana)

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Getting back into MSCI Emerging Market Index, top priority: Rajeeva

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