STOCK MARKET IN SRI LANKA

PRESENTED BY : NITISH KAUSHIKROLL NO. : 776BBA (HONS.) BUSINESS LAW(HONS.)NATIONAL LAW UNIVERSITY, JODHPUR

What is

STOCK

MARKET?

•A Stock Market is an organised place where stocks, bonds, or other securities are bought and sold.

Colombo

Stock Excha

nge (CSE)

•It is the organization responsible for the operation of the stock market in Sri Lanka.

•A company limited by guarantee, licensed by the Securities and Exchange Commission of Sri Lanka (SEC) to operate as a stock exchange in Sri Lanka.

Securities and

Exchange

Commission of Sri Lanka

•The SEC is the statutory body entrusted with the task of regulating the Securities Market in Sri Lanka.

•For the purpose of carrying out its objects the SEC grants licences to the Stock Exchange, Stock Brokers, Stock Dealers and Managing Companies of Unit Trusts as well as register all Market Intermediaries i.e. investment managers, margin providers, underwriters, credit rating agencies and clearing houses.

An introduction to the Colombo Stock Market: Sri Lanka 

The stock market (or Stock Exchange) is a market where securities such as shares, debentures etc. issued by companies are traded. Companies which use the mechanism of the stock market to raise debt or equity capital, commonly enter the stock market through issuing shares or debentures to the public.

Some companies issue new shares through an Initial Public Offering (IPO) while others may opt to sell apportion of the existing share capital, known as an Offer For Sale. In both instances, the investing public subscribes to the issue directly by paying the value of the share to the company. There is another method by which companies enter the stock market without issuing shares to the public, which is known as an introduction.

Companies may also opt to issue debentures (explained later in this booklet) through a debenture issue and issue debentures to the public through a public offer. Once the shares or debentures are allocated to the investors who subscribed, they become shareholders of that company respect of a share issue and debenture holders in respect of a debenture issue. Thereafter these shareholders or debenture holders are free to sell either part of in whole their shares or debentures in the stock market

WHEN WAS A STOCK MARKET ESTABLISHED IN SRI LANKA?

Share trading in Sri Lanka dates back for a century, in 1896 when the Colombo Stock Brokers Association(CSBA) commenced the trading of shares in limited liability companies. Share training however, was formalized in 1985 with the establishment of the Colombo Stock Exchange (CSE).

COLOMBO STOCK EXCHANGE (CSE)?

The Colombo Stock Exchange (CSE) is the organization responsible for the operation of the stock market in Sri Lanka. The (CSE) is a company limited by guarantee established under the Companies Act No. 17 of 1982 and licensed by the Securities and Exchange Commission of Sri Lanka (SEC) to operate as a Stock Exchange in Sri Lanka. The Securities and Exchange Commission of Sri Lanka (SEC) is the government regulator for the stock market in Sri Lanka.

The CSE has 15 member firms (stock broking firms). These member firms act as market intermediaries performing a number of services to investors and companies. All member firms are institutions, subject to the regulations of the SEC, and have to obtain a license annually.

WHAT ARE THE SERVICES OFFERED BY MEMBER FIRMS (STOCKBROKERS)?

Shareholders or investors wishing to either buy or sell securities in the stock market must register with one or more stockbroker companies. The relevant transaction will be attended to by the stockbroker/s of your choice. It is therefore mandatory that investors use a market intermediary to buy/sell shares or debentures in companies listed in the stock market.

Stockbrokers provide a range of services such as the opening of securities accounts in the Central Depository system (CDS), receiving and executing orders to buy or sell securities, offer investment advice on suitable investments, portfolio management, conducting and publishing research on companies, attending to the settlement of transactions and attending to the necessary documentation in respect of any transaction. In addition, stockbrokers also provide services to companies such as sponsoring listing applications for companies, underwriting share issues, advice and facilitating takeovers and mergers etc.

SECURITIES PRESENTLY TRADED AT THE CSE

Ordinary Shares Preference SharesWarrantsCorporate Bonds

Current Financial StatusAs of 26 June 2013, 287 companies are listed on the CSE, representing twenty business sectors with a market capitalization of 2.3 trillion rupees (over US$18.5 billion), which corresponds to approximately 1/3 of the Gross Domestic Product of the country.

There are currently two indices in the CSE:The All Share Price Index (ASPI) The S&P Sri Lanka 20 Index (S&P SL20)

(Milanka Price Index - MPI was abolished after 31/12/2012)

Milanka Price IndexThe Milanka Price Index is one of the principal stock indices of the Colombo Stock Exchange in Sri Lanka. It is composed of a select group of 25 best performing stocks, a list which is reviewed each quarter, as opposed to the Colombo Stock Exchange's "All Share Price Index", which uses all of the ~250 stocks on the exchange to calculate an index value.

TechnologyThe CSE operates 3 main systems:

The Central Depository System (CDS) Automated Trading System (ATS)

(After implementing ATS version-7, The Debt Securities Trading System (DEX) was abolished since ATS-7 provides a platform for both Debt & Equity)The automation of the Exchange commenced in 1991 with the installation of a central depository and an electronic clearing and settlement system for share transactions. The trading activity was automated with the installation of the Automated Trading System (ATS) in 1997.The technology introduced by the Exchange has significantly enhanced the competitiveness of the CSE and has provided a more efficient and transparent market. The CSE is currently in the process of introducing a debt securities trading system for trading of fixed income securities.As a modern exchange, the CSE now offers state-of-the-art technological infrastructure to facilitate an "order-driven trading platform" for securities trading - including shares, corporate debt securities and government debt securities.

At the double, equity market sets out its ambition

One of the most striking predictions made in a recent presentation by the central bank of Sri Lanka is that the stock market is projected to grow to a value of 70% of GDP when GDP reaches $100bn by 2016. That is quite a statement, given that even after the explosive performance of Sri Lankan equities in 2009 and 2010, the market capitalisation still amounted to just $16.3bn as of October 2012. At the end of 2011, market capitalisation was a modest 33.8% of GDP, down from 39.5% at the end of 2010.

The chances of doubling the size of the equity market in the next four years also look ambitious in light of the chequered performance of some of Sri Lanka’s recent IPOs. The largest of these, in November 2011, was the Rp7bn sale of a 25% stake inPeople’s Leasing, Sri Lanka’s biggest leasing company, which generated demand of Rp9.5bn. By November 2012, however, the shares were trading at Rp12.40, sharply down from the IPO price of Rp18 a share.

Suggestions For Further Growth In The Sri Lankan Equity Market (CSE INITIATIVES) A move to require more companies in the financial services sector to list on the CSE. “For example. “there are 19 insurance companies in Sri Lanka, only seven of which are listed on the CSE.”

Encouraging more companies to come to the market would help address the issue of concentration in the Sri Lankan equity universe.

The largest listed company, the John Keells conglomerate, accounts for about 7% of the entire market, while the top 50 companies contribute some 75% of total capitalisation.

Encouraging more listed companies to increase the size of their free float, which in some instances is vanishingly small. Although the minimum initialfree float for companies on the main board is 25%, few companies maintain this minimum, and in some very extreme cases the free float is as low as 1%. For the market as a whole, the free float remains low by international standards, atjust 27%.

Contd.The CSE is also exploring a number of ways of attracting more investment into the equity market by, for example, organising a range of investor awareness programmes for private individuals, fewer than 1% are active investors in equities.

Another recent initiative that the CSE hopes will create more demand for equities among local and international investors is the recent launch of the S&P Sri Lanka SL20 Index, which, says the CSE, paves the way for index-based products such as Exchange Traded Funds (ETFs).

Another positive signal for the market is that overseas investors, who were hesitant about the Sri Lankan recovery story in the immediate aftermath of 2009’s ceasefire, are now net buyers.

CONCLUSIONThere are plenty of signals suggesting that foreign investors are looking for opportunities in the Sri Lankan stock market, which now looks undervalued, on a P/E ratio of below 15 as of October 2012, which compares with 25 in 2010.

Institutional investors considering this market as cheap and are looking to deploy their funds in the stock market.