Sri Lanka reaching new horizons

Sunil Karunanayake

The recently released Central bank Annual report records that Sri Lanka’s economy grew by an impressive eight percent in 2010 demonstrating a steady recovery from the setbacks of 2008 and 2009 thus moving the economy to a high and sustainable growth path.

The peaceful conditions in the country in the aftermath of the ending of the three-decade old conflict has dawned a peaceful era resulting in improved investor confidence, favourable macroeconomic conditions and the recovery from the global recession.

Post war recovery also resulted in the Colombo Stock Exchange emerging as one of the best performing markets in the world

The above said positive developments paved the way investor appetite and post war recovery also resulted in the Colombo Stock Exchange emerging as one of the best performing market in the world.

This undoubtedly was a boon to the capital starved business community and many new entrepreneurs seized the opportunity to attract low cost capital for expansion.

The expansion of stock market activity has also attracted quite a few new stock brokers. Capital market activity has certainly matured to an impressive level.

However yet the funding for long term financing seem to be an issue with the reluctance of the Banking sector and one hopes the Bond market will be a reality soon to provide strength to the economy.

On record it could be said that recent IPOs have been a tremendous success with heavy oversubscription thus providing new impetus to capital starved companies to move ahead with adequate capital lowering finance costs.

This is the right direction for Sri Lanka with more wealth and employment created.

Within this environment it is necessary to examine to what extent has the share owning democracy been achieved in Sri Lanka.

Most IPOs were oversubscribed by over 300 percent thus giving a indication to the man on the street that share ownership is getting a rightful broad base.

However it’s disturbing to note that large numbers of small investors were unable to obtain not more than 100 shares with large investors using bank guarantees ensure large stakes for themselves.

Lately it was clearly established that it was this activity that paved the way for heavy oversubscription without any payments being made.

The public appreciates the many right thinking citizens who made representations and the swift manner in which the Securities and Exchange Commission moved as they did in enforcing price bands preventing any calamity like what Bangladesh experienced.

SEC press release on March 10 detailed the new rules effective from March 15 giving due recognition to the retail investors by allocating a minimum of 40 percent to be available to the retail investors for allotment and a minimum 10 percent to be available to unit trusts. This is a very welcome move to provide more access to smaller investors to develop a true share owning democracy a concept of former British Prime Minister Magaret Thatcher.

The decline in Bank interest rates have drastically affected retirees and pensioners driving them to misery in their old age where they have to meet significant amounts of money to meet healthcare needs leaving apart other life’s needs such as children’s higher education and marriage.

With an increasingly ageing population Sri Lanka is bound to run into many issues with increasing poverty of an different class.

It is a well-known fact that the aged may prefer to keep their eager cash resources in most liquid form and also contributing to accumulation of non performing loans.

The Securities Exchange commission intervention to allocate 40 percent to retail investors for retirees who continued to suffer due to limitation of opportunities to seek a reasonable income will be immensely benefitted by this move.

In the absence of income options aged pensioners could become a burden to the dependents as well as to the State. “A well functioning capital market as a supplement to the banking sector will strengthen the financial system through the diversification of credit and investment risk.

The development of the domestic capital market is another priority. The size and liquidity of the stock market has to be increased with the listing of new companies and public sector enterprises.

There is also the need for the implementation of comprehensive public float rules and margining requirements to enhance liquidity and reduce credit risks.

The development of the corporate bond market is necessary in order to meet long term financial needs of the corporate sector, particularly in respect of infrastructure and other long term investments.”

(Central Bank-Financial Stability review 2010)