Saturday Dec 14, 2024
Saturday Dec 14, 2024
Wednesday, 24 June 2020 00:00 - - {{hitsCtrl.values.hits}}
This article is in solidarity with our capital market which is yet ‘fighting below, its weight class’ –an analogy I have frequently made. The market is moving upward and necessarily so. What we need now, is a deeper, stronger, sustained belief in our market. 
Technically, there is a sound basis for that belief, and these writings will attempt to articulate that. The ‘Sri Lankan’ investing community on and offshore, in solidarity with the country’s quest to move beyond COVID-19 and regain normality, should I think demonstrate tangible interest in our market. We need not be intimidated by net ‘foreign’ outflows, which are characteristic of the ‘Frontier Market’ we are categorised as.
It will be a delight to see the foreign portfolio investor, whether individual or institutional, follow us, rather than the other way around. It is only then, that we will have come of age, as an indigenous investment community and a capital market.
Rule changes at Hong Kong’s, Hang Seng, a thought for us
I write on the morning of 16 June, as I read the CNBC news item which said: “The 50-year-old Hang Seng index (HSI) will for the first time allow companies with primary listings overseas, as well as those with dual-class shares, to be included in the benchmark index. Though companies listed in the US, can have a secondary listing on the Hong Kong Stock Exchange, until the latest rule change, they could not be included in the benchmark HSI.”
‘Listing Emigration’ works!
US investment bank Jefferies, says that 31 Chinese companies currently listed in the US could potentially flock to Hong Kong and this ‘listing emigration’ could attract up to $ 557 billion to the Asian financial hub. The US Senate also passed a bill last month, which could ban many Chinese companies from listing on American exchanges. That could drive many of them to instead list at home – on Mainland Chinese exchanges, or in Hong Kong, analysts have said.
Jefferies points out that the HSI ‘hardly represents’ Hong Kong anymore, with companies within the index deriving the bulk of their revenues from Mainland China. As a start, three Chinese tech stocks – e-commerce giant Alibaba, phone maker Xiaomi and food delivery giant Meituan – are set to reap the benefits of being included, according to a report by Morgan Stanley last month. Other Chinese companies have also announced their intention to delist from the US, such as tech giant Baidu.
Building substance into our capital market – an imperative
The CNBC news item reminded me of the intellectually challenging, open and frank discussions I regularly had with many divisional directors of the SEC, to help build, much needed ‘substance’ into our capital market. We discussed the need for the CSE to be innovative, relevant, and up-to-date, side by side with the need for us at the SEC, to have robust but aware, fair, effective and progressive regulation. We designed and implemented several initiatives. There were many, commission approved or directed initiatives, pending implementation, when the Government changed.
New listing criteria/guidelines, should be rolled out
Among those that were to be rolled out were, the long overdue new listing criteria we evaluated from multiple perspectives. We approved the new listing criteria and guidelines for public consultation, almost 8-10 months ago. We gave adequate time for feedback, critique and suggestions. Hence the CSE and the SEC must take this to a finish, with greater vigour and vitality, if we are to progress from a ‘Frontier Market’ to an ‘Emerging Market’, which requires among other things, a higher market capitalisation. It is in that regard, that the roll out of the new listing criteria, and what the Hang Seng has done, may be relevant.
The Multi Currency Board (MCB) must be activated
We granted approval to the CSE to launch a Multi-Currency Board (MCB), a long time ago. This was to provide a platform for foreign issuers and local companies, to raise equity and debt capital in foreign currency. The MCB was expected to draw potential listings from the Maldives, China and the region. The CSE had discussions with Maldivian authorities and even visited them for this specific purpose last year. I wonder what is holding this up.
Dual listings and MOUs with LSE must be leveraged
We pushed hard to seek dual listings and the CSE signed a memorandum of understanding (MoU) with the London Stock Exchange (LSE), at an event in London, at which, I was also present. I was happy when Sri Lanka was able to list International Sovereign Bonds (ISBs) for the first time on the LSE in London and must place on record, our appreciation of the many hours on many days that Governor Coomaraswamy gave us, including poya holidays and weekends, to help make this happen.
The long approved AON Board – a potent medium, gathering dust!
The All or Nothing Board (AON) of the CSE, approved by the SEC, long ago, is a credible, open and transparent medium through which 100% state owned, or partly state owned entities can discover price/value. The political community will have to get real and responsible, with regard to divestments, listings and part listings of SOE’s after the elections. Thus, all political parties, their candidates and manifestos, should avoid ‘unsustainable’ rhetoric, during these one and a half months. Vote getting pledges, will only further constrain the growth and stability of these SOE’s and perpetuate mediocrity of our debt ridden, national balance sheet, whilst robbing the capital market of the ‘meat’ or the substance it needs. This will be a win-win, for any incumbent Government.
On-site insights and hands-on practical experiences
I say the above with responsibility, having on-site insight into and hands on practical experience in, diagnostic assessments, valuation and bidding for privatisations, whole or part listings, during the COPED – Commercialization of Public Enterprise Division days of President Ranasinghe Premadasa, PERC – Public Enterprise Reform Commission days of President Chandrika Kumaratunga, the subsequent period under President Mahinda Rajapaksa, and the merits and demerits, risks and safeguards relating to the policies, strategies, modes and methodologies during each era.
Absence of fiscal space vs. potential realisable richness
The Ministry of Finance, which owns the shares, of the relevant entities, desperately needs the fiscal space. Bank of Ceylon, about which I am singularly confident, is just one prospect. Asset rich, SLIC, the already listed Lanka Hospitals (LH), in which SLIC has a majority stake, and the other GOSL connected stakes in LH, the Hyatt, the Hilton, 70% of People’s Leasing, and People’s Bank itself, are only a few. I handed over a long list of such target prospects, to both Ministers of Finance, between 2015 and 2019. The shackles, some self-inflicted, need to be undone. Awareness among the voting community has to be built.
A proactive role for multilaterals and the IMF
Since nothing was happening with regard to the above, I requested the ADB, to assign an experienced, capital market specialist with a track record in listings/part listings in South Asia or South East Asia, to work with us at the SEC and liaise with/advise the Ministry of Finance. This idea was readily taken on board but a local expert was resourced for this purpose and I think assigned to the Ministry of Finance. These will be good pre-election months to prepare to hit the ground running, after elections, when a Cabinet and the Parliament is installed and the needed approvals can be obtained.
The Empower Board for SMEs launched in July 2018, needs listings
We are an emerging economy, and the long felt need to provide SMEs access to equity via the CSE, was not only understood, but within four weeks of the new commission being installed in 2018, we finalised the strategy, the structure, guidelines, a coalition of stakeholders, sponsors, were identified, and we rolled out many awareness sessions and marketing initiatives. We launched the Empower Board at the BMICH (not even at, yet state owned Hilton) particularly because it is not a five-star, (given five stars are not necessarily compatible with SMEs!). We connected the accounting and banking community with this initiative on many occasions in Colombo and we need to see far greater proactivity on their part for their clients and customers.
Accountants, bankers, and Ken Balendra
I joined the SEC/CSE teams, to Matara and Jaffna to help in marketing the Empower Board and must say our teams worked hard. It was encouraging to see, Ken Balendra, former Chairman of John Keells and the SEC and many other institutions, who I have known personally for decades and have worked with, showing more interest than accountants and bankers. He called me on many occasions, to introduce potential SME PLCs and even sent me an article he had done for the LMD, in support of new listings! An entity that he introduced, may well be among the first SME PLCs!
The diplomatic community must be engaged with dignity
The CSE in particular, together with the SEC, must engage the diplomatic community, to build awareness among the many diplomatic missions, who then in turn, convey a message to their home country. A couple of months after the tragic Easter Sunday events, I am happy, I received the cooperation of several directors and managers at the SEC to launch this initiative, which we termed ‘Showcasing the Attractiveness of the Colombo Stock Exchange and the Potential for Foreign Portfolio Investment’. We wrote to the diplomatic community, supplementing my letter, with videos and presentation material.
Ambassadors, High Commissioners and Honorary Consuls
We visited the US Ambassador, Alaina Teplitz, who had only been sworn in, less than a year before. She assembled a wonderful team of persons from the Economic and Commercial sections. High Commissioner David Holly, from Australia visited us, a few weeks after he presented his credentials and very specifically discussed the potential of many Australian pension and other funds as sources of foreign portfolio investment into our capital market. The Seychelles, High Commissioner Conrad Meric, also visited us, and invested quality time to learn of the structure of our market.
James Dauris, the British High Commissioner, who was completing his term, and had a tight schedule he said, yet found time to write an encouraging letter, instructing a team to look into how best the High Commission, could showcase Sri Lanka. My letter referred to the country as a destination, for trade, tourism, foreign direct and foreign portfolio investment. Among the replies, there was of course, a negativist. He was a homegrown, locally based, Sri Lankan Honorary Consul, whose political bias and sarcasm was apparent. However, while he was not green, I was neither green, nor blue, nor red nor saffron, and thus, he certainly did not take away from my passion or make my weather!
Pillars of competitiveness, must be marketed-IFRS et al
The political climate, macroeconomic fundamentals, fiscal policy and investment incentives are important. However, in a capital market context, key pillars or essential ingredients such as a robust regulatory framework, international standards of accounting and auditing, a mature and resilient corporate community, fairly well entrenched corporate governance practices, technology infrastructure, etc. need to be considered. Sri Lankan Listed Companies are fully compliant with International Financial Reporting Standards (IFRS). The application of these standards serves to improve transparency, the quality of reported earnings and enhances the comparability of financial statements.
The EPF – A passive onlooker or a proactive participant
Once burnt or abused, the EPF should not be permanently disabled. On more than three occasions within a 12-month period, I took key persons of the SEC and CSE and had the usually cordial, mutually respectful, meetings with Governor Coomaraswamy, with regard to the EPF getting back into the market, in a meaningful sustained manner, rather than in a cosmetic, overly cautious manner. Many safeguards were being built, completed and tested, the then Governor, said.
The Monetary Board of the CBSL, confidence and conflicts
The Monetary Board of the CBSL must now have confidence in the community it operates in and in the banking sector, which it regulates, which in turn comprises the bulk of the stock market, as well as in the monetary policy and the macroeconomic fundamentals, the shaping of which is within its own jurisdiction. It must now perform a real and responsible role in the growth and development of the capital market of the country.
If the EPF believes it has people in place in the investment committees, as we were told many times, and who have been trained, ‘capacity and competence’ built, but who have neither the courage and nerve, nor the confidence, to work within safeguards which are fundamental in any institution, then they must be replaced with people who can! I am sure that the conflict of interest the CBSL-Monetary Board has, with supervision of Banks on the one hand, and investing in them on the other, may have been addressed by the necessary ring fencing, or Chinese walls or whatever else.
The special audit of the CSE and many next steps
There is a long list of “to do’s” we identified and which the SEC, CSE, brokers and other stakeholders, must address in earnest. The comprehensive audit of the CSE, in which we enhanced the scope, coverage, methodology and outcomes, regarding CSE’s ‘Regulatory Effectiveness’ and the ‘Capital Market Development Adequacy’, may require attention. With regard to institutional security and stability, the SEC and CSE must focus on building a more robust internet and cyber secure infrastructure. I must thank fellow commissioner Jayantha Fernando for acceding to my many requests relating to the latter. More needs to be done in this area.
Investor sentiment need not await General Elections
The traditional investment strategy will be to await perceived greater stability, post the General Elections. If that is the case, by deduction, it means that the market will do even better then. 40 plus years after we opened the economy, and several elections and new parliaments later, will any
Political party, or coalition, or an opposition, be in conflict with a conducive environment for business. Unlikely. If so, there is a sound basis to invest now, when the market is not adequately or overly priced. Sri Lanka is not a new kid on the block. Our capital market is three plus decades old, our corporate community has shown how it has weathered many a storm for decades, as I said in Singapore, two weeks after the 2019 Easter Sunday debacle or after the October 2018, constitutional crisis.
Much work is in store, when parliament reconvenes
The new SEC bill, which was all ready to go, but whose passage was twice impacted by a prorogation of Parliament and other setbacks, and which expands what I term the scope, coverage and effectiveness of the SEC and provides better safeguards for investors, must be taken forward. Sustaining credible deterrence, through timely, effective investigation, enforcement and where appropriate litigation, is necessary.
The consultations with the office of the Attorney General must be regular since, the complexity, and the ever-evolving technological challenges of a capital market can be overwhelming. The Demutualisation bill, is ready to go. I would urge the SEC to also wrap up the pending work we began with regard to upgrading the Take Overs and Mergers Code, and to be in a state of readiness to have all this formally approved, passed, gazetted, when parliament reconvenes.
Demutualisation of the CSE and a strategic investor
This is long overdue. We committed to advance the capital market of Sri Lanka, in order to be on par with jurisdictions in the developed world. The SEC formalised legislation to facilitate is. The legislation provides for the introduction of a ‘Strategic Investor’ such as a regional or international stock exchange and/or a multilateral or bilateral development partner, with an established record of developing the securities market in jurisdictions they operate in, which shall inter alia contribute to the development of the Demutualised CSE and the securities market in Sri Lanka.
Towards board diversity and women’s participation
The SEC was in a state of readiness to implement programs to encourage ‘Board Diversity’. The 2019 budget proposals of the Government encourage women’s participation on Boards, and in a press release I said, “It is the prerogative of Boards of Directors to invite persons to the Boards of Listed Companies. They must therefore identify with the merits of ‘Board Diversity’ and set in motion progressive measures, incorporating eligibility and qualifying criteria, fit and proper tests and other methods to develop a rich resource of potential women candidates. In doing so, I said that I had no doubt that the large number of available women professionals will certainly surface.
The dialogue with stakeholders must continue
We had successful sessions of ‘stakeholder dialogue’ with Public Listed Companies, with Auditors, with the Sri Lanka Accounting and Auditing Standards Monitoring Board, with brokers, credit rating agencies, with Unit Trusts and others. It may be useful to maintain the momentum of these.
These are only a few thoughts, in solidarity with our capital market.
(‘The Thought Leadership Forum’(TLF), which was launched in the Daily Mirror in November 2005, during the Presidential Election that year by Chartered Accountant and Independent International Management Consultant, Ranel Wijesinha, appeared each week in all successive versions of the paper including todays Daily FT until about 7 years ago. This column is being re-launched today. Ranel Wijesinha, was Chairman of the SEC, between June 2018 and November 2019, a Commissioner of the SEC, from March 2015 to January 2018, as well as a Commissioner of the SEC, in an ex-officio capacity between 2000 and 2001, when he served as President of CA Sri-Lanka.)
