'Capital market important component of financial sector'
He said that if Sri Lanka is to continue a 8 % annual economic growth
the country needs consistent flows of local and foreign investment. “A
vibrant capital market can facilitate this economic growth by converting
savings to investments and also assisting companies to raise funds. In
reality ours is not a matured capital market yet. The capital market
heavily depends on equity contribution, however at the moment the market
capitalization of Colombo Stock Exchange is below US $ 20 billion and as
percentage it is around 33 % of the GDP,” he added.
Minister Dr Sarath Amunugama
addressing the event |
“ In a comparable economy we would expect market capitalization to be
at least 70 to 80 % of the GDP. Therefore, we have work to do to develop
our equity market further. If we target market capitalization to be 50 %
of the GDP by 2016 which means we need to envisage the market
capitalization of Colombo Stock Exchange to reach approximately 6.5
trillion by 2016.”
The Minister added that the capital market of our country has to
think beyond just equity.“We need to develop our debt market and other
financial instruments such as derivatives. We need to look at new
concepts such as commodity market development. To do all these things we
need to have a vision and a plan.”
The primary reason for small capitalization at the CSE is the fact
that there are only 288 listed companies though there are more than
10,000 registered and operationally active companies in the country.
“We need to identify the reasons for why companies are reluctant to
get listed and encourage them by creating more awareness of the benefits
involved. We must show companies that CSE is an ideal forum to raise
capital and make the listing process less cumbersome. We hope to double
the number of companies listed in the CSE by 2016. The market liquidity
can be increased by increasing the number of listed companies.”
“However, it is also equally important to attract new funds to the
market both local and foreign. Currently less than 1 % of the Sri Lankan
population is actively involved in the market. This number has to be
increased significantly by creating greater awareness of the investment
potential. The Colombo stock market has always given good returns to
investors in the long run far exceeding the returns of conventional
savings methods.”
Following is an extract on the Minister’s speech.
Also the prices of most of stocks are currently quite attractive with
overall forward P/E ratio of the market being less than 15 times.
This is one reason why in 2012 we saw the highest ever net foreign
inflow of Rs.37Bn. These foreign investors have seen the potential of
the market and have entered at the right time. We urge the domestic
funds and investors to study and understand the behavior of the foreign
investors and exploit the opportunity without waiting further.
The development of the Unit Trust industry is important because it is
one of the conduits to mobilize savings of the less sophisticated small
investors. When people are encouraged to save for long run these savings
can flow as capital to industrialists who are in need of capital.
The resulting investments create employment opportunities and
contribute to the economic growth of the country. As I mentioned earlier
Sri Lanka’s capital market primarily evolves around equity.
The corporate Bond market is yet to see its full potential.
One of the priorities we have identified under the 10 initiatives is
developing the corporate bond market by providing the necessary
regulations and infrastructure to safeguard the interest of the
investors and the public.
A well developed bond market can supplement the banking system in
meeting the long term capital requirements of the corporate sector. We
expect the volumes of the bond market to grow substantially to about
Rs.1 Trillion by 2016.
“It is noteworthy that the SEC in its effort to facilitate market
development and ensure that its laws, rules and regulations are in line
international standards is in the process of amending the SEC Act with
the objective of facilitating regulation of Demutualized exchanges,
facilitating the establishment of a Central Counter Party, introducing
civil sanctions and administrative sanctions to deal with capital market
offenders. And we also believe that these provisions will strengthen
investor protection.
Implementation of a robust risk management system, a clearing
corporation and a Delivery vs Payment system will enhance the CSE’s
effectiveness and credibility.
In order to have a more efficient stock market one prerequisite will
be the demutualization of the CSE.
We are confident that demutualization of the CSE will give the
exchange the opportunity to position itself better to respond to the
interests of its stakeholders and become more competitive and customer
driven.
Developing infrastructure of stock brokers and other stakeholders too
will increase the efficiency of the capital market.
In Sri Lanka still has less than 1% of the population invests in the
stock market. One main obstacle to attract investors to the market is
the lack of awareness.
To reap the benefits of the capital market investments every Sri
Lankan needs to be financially literate. The road map to develop the
capital market highlights the significance of educating not only
investors but other professionals involved in the industry.
This awards ceremony to confer Diplomas and Certificates to industry
professionals and other stakeholder will undoubtfully be a milestone in
enhancing financial literacy.
To facilitate this road map to develop the capital market the
Government after consulting all the stakeholders of the capital market
provided significant incentives in the National Budget 2013 by way of
providing a 3 year half tax holiday for new companies that will be
listed on the CSE before December 2013, and maintain a minimum of 20 %
of its shares with the public.
This will encourage companies to list on the CSE and thereby increase
the market capitalization and liquidity. Exemption of withholding tax on
interest income earned from investing in bonds and debentures listed on
the CSE will increase the activities of the debt market. As mentioned
above the Unit Trust industry should be developed as a mean to mobilize
savings of the less sophisticated small investors.
The Budget proposal to permit direct investments in foreign
currencies in Unit Trusts without having to channel through Securities
Investment Account (SIA) and the application of the 10% tax applicable
to Unit Trusts to Unit Trust Management companies will strengthen the
Unit Trust industry.
The Budget proposals also included some other significant initiatives
such as exemption of transfer of shares for margin trading from Stamp
Duty, permitting Stockbrokers to claim a lump sum depreciation for
expenditure on IT infrastructure, branch networking, and such other
capital items and the appointment of a Presidential Task Force to
implement the Capital Market Development Master Plan which will oversee
the entire road map of the capital market development.
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