Despite dip CSE looks to future with great optimism, grit

Despite the first-ever negative return in 2011 in three years as well as continuing bearish run, Colombo Stock Exchange (CSE) Chairman Krishan Balendra has expressed optimism going forward given the planned fundamental transformation as well as other developments. Here is the full text of CSE Chairman Balendra’s review in the 2011 Annual Report, released ahead of its Annual General Meeting scheduled for 28 June.

Mapping the transformative gap

During a vibrant phase of market activity in 2010, we emphasised how the CSE had gained growth momentum. We also addressed the need to reassess strategy in congruence with growth expectations of the Sri Lankan economy as it embraced post-war development.

As a result, the CSE entered year 2011, intent on reassessing its strategic logic and reprioritising the roadmap for transformation into an enduring and sustainable marketplace.

Shifting market dynamics

The year was a turbulent one for international financial markets, punctuated by a plethora of events that resulted in widespread volatility and lacklustre performance in cash equity markets. Reflecting this situation, only a few equity markets recorded positive gains.

In Sri Lanka, the benchmark All Share Price Index (ASPI) closed the year down 8.5% whilst the Milanka Price Index (MPI) fell 25.9% YoY. Market Capitalisation was preserved at just above Rs. 2.2 trillion reflecting minimal change from the previous year.

Our debt platform remains an area which needs pressing reform and where the engagement of the State and private sector is paramount. At Rs. 2.7 billion, the corporate debt market reported an improvement in total turnover supported by growth in corporate debt from a low base of Rs.72.3 Mn in the previous year.

The Urban Development Authority (UDA) debenture (UDA.D0148) accounted for 99% of corporate debt market turnover and was the only instrument available for foreign trading during 2011.

In 2011, Equity Turnover remained over the Rs. 500 billion mark first reached in 2010, sustained mainly by domestic trading. Contribution to Turnover through domestic trading increased to 90% of the total from 81% recorded in the previous year. We have prioritised the implementation of certain structural changes to attract portfolio investment flows as this skewed investor mix is not optimal for the long term development of the Exchange.

Enhancing visibility

The CSE held two investor forums in Singapore and Malaysia, in November 2011. Themed “Invest Sri Lanka”, the Singapore based forum was organised in association with the High Commission of Sri Lanka in Singapore. The forum in Malaysia themed “Invest Sri Lanka: Opportunities in a New Era”, was organised in association with the CIMB Group. These forums presented an opportunity to highlight the potential of post-war Sri Lanka and the attractiveness of select listed corporates from multiple sectors. The events were well attended by specialised funds, other international investors and leading corporates.

Where we are

In the new post-war environment of growth, the CSE is working towards operational improvements with a focus on a development agenda which benefits all its stakeholders. The Chief Executive’s report sets out significant achievements of the CSE and also details the priorities for the coming year.

Our priority is to sustain and improve our core business. Consequently, the CSE began the formulation of a new medium-term strategic plan in 4Q2011, with the aim of strengthening core capabilities and infrastructure.

Unveiling the transformational map

Laying in place a cohesive risk infrastructure, implementing state of the art technologies, enhancing our products, optimising attractiveness as a vehicle that meets domestic demand for investment and capital raising, enhancing Sri Lanka’s position as an attractive destination for foreign investment, restructuring our organisation and processes and improving governance – all these aspects are considered in our transformational plans.

We had already earmarked better risk management as a critical and urgent need. The implementation of the Risk Management System (RMS) was commenced in November 2011. Having completed system development and back-testing activities with the assistance of the National Stock Exchange of India, this margin based RMS has been deployed at the Exchange as at date for training and familiarisation by internal users prior to participant engagement.

In the backdrop of this new RMS, we will also review the manner in which the Delivery Versus Payment (DVP) mechanism can best be introduced to the market.

The ultimate goal is to introduce Central Counter Party (CCP) based post trade services.

I am also enthusiastic about the negotiations initiated by the Exchange and Standard & Poor’s Financial Services LLC in launching a co-branded index. A credible and transparent index would positively impact the market by providing visibility and better pricing and serve us well in attracting the foreign investor. A credible index also forms the foundation for exploring the previously unchartered territory of index linked products as well as cross exchange alliances. These are elements which would in the future help us establish revenue-raising avenues in the context of the Exchange’s business model, particularly relevant for a profit-oriented setting.

During these difficult economic and market climes worldwide, reinforcing investor confidence is of great importance to us. We will in this endeavour continue to work in close contact with the Securities and Exchange Commission of Sri Lanka (SEC) to ensure that our market is fair and transparent with balanced regulation being the pragmatic standard, rather than the imposition of regulatory burden.

We are on track to launch our transformational map in early 2012. The pursuit of these initiatives will enhance the functions of our Exchange and position the CSE as an attractive and user-oriented market.

Acknowledgements

I wish to thank my fellow Board members for their constructive and invaluable contribution over the year. During the year 2011 Ashroff Omar and Dr. Laksiri Fernando resigned from their Directorships. Whilst thanking them, I wish them well in their future endeavours. Nihal Fonseka resigned from his Directorship on 31st March 2012. He served on the CSE Board for ten years and was Chairman of the CSE for a period of five years from 2006 to 2011. Fonseka has contributed immensely to the development of the CSE. I wish him the very best in his future endeavours.

I wish to recognise the management team headed by the CEO Surekha Sellahewa and staff for the commitment and passion that they bring to their work. I am confident that the collective efforts of the management team and staff will steer the CSE forward in its envisaged transformation. To meet the challenges of our transformational map, the CSE will engage and continue to work closely with the Government of Sri Lanka as well as our regulator, the SEC. I thank SEC Chairman Thilak Karunaratne, the Commission Members and the SEC team for their support.

I thank all our stakeholders for their confidence in us. We enter 2012 with great optimism and determination to execute the initiatives that will make fundamental transformation a possibility. We look forward to working closely with all our stakeholders during the coming year to introduce these initiatives.