SEC Chief recaps most challenging and successful 2010

Securities and Exchange Commission (SEC) yesterday released its Annual Report for 2010 in which Chairperson Indrani Sugathadasa described the year as most challenging. Here are excerpts from her review in the 2010 Annual Report:

Sri Lanka today stands at a juncture of key, unparalleled and unprecedented opportunity. Three decades of terrorist activities distorted Sri Lanka’s economy, hindered development and reduced the country’s potential growth.

However, since the end of the conflict in May 2009, the country’s economic fundamentals have improved significantly. The political and economic stability established in the country have pervaded all sectors recording growth as never before.

With the peace dividend filtering in, the economy grew at 8% in 2010. With this backdrop, Sri Lanka’s capital market has developed speedily and more extensively in the last two years than any other period in history.

The Colombo Stock Exchange (CSE) emerged the second best performing stock market in the world in 2010 for the second consecutive year. The market created history by establishing new records in almost all aspects of trading from indices, total market turnover to market capitalisation in 2010.

Stock markets have the potential to be powerful engines of economic growth in developing nations and could play a central role in the growth of a country’s industry and commerce that eventually affects its economy to a great extent.

The stock market provides companies the platform to raise capital to expand their businesses. Investors are able to buy shares of public offerings and the money that is raised from the investors is used by the company to expand operations. All of this leads to increased economic activity which helps drive the economy.

In a relatively short span of time, the role of Sri Lanka’s capital market in funding and mobilising savings has become more comparable to that of the banking sector. The capital market has also firmly established its profile as an indicator and facilitator of growth within the Sri Lankan economy.

This unprecedented growth of the market has resulted in attracting a large number of new investors and issuers to the market. The role of the Securities and Exchange Commission of Sri Lanka (SEC), in protecting the investor, preventing systemic crises and promoting the market has enhanced greatly over the last two years due to the resounding growth in the market.

We believe that the foundation to establish a robust and efficient capital market is creating an effective securities regulatory regime. An effective securities regime will ensure that the market is operated efficiently and fairly, and in turn, it will enhance investor confidence. Also a well regulated market has the potential to encourage additional investors to partake and contribute to further development of the economy.

The SEC implemented several initiatives in 2010 to accomplish an effective regulatory regime. Some of those initiatives include issuing licences to new market intermediaries, directing the CSE and the Central Depository Systems (Pvt) Ltd. (CDS) to implement a system of full dematerialisation of all listed securities, completing the regulatory framework for exchange traded funds, updating the Code for Unit Trusts and finalising the rules pertaining to Employee Share Option Plans.

Also the SEC directed the CSE, CDS and all licensed stock brokers to remove the two band fee structure and to have one band for transactions and also to reduce the transaction cost.

Changes were made to the Automated Trading System Rules (ATS) with a view to develop the market microstructure.

With the aim of enhancing the surveillance function, the SEC procured a state-of-the-art surveillance system in 2010.

We are confident that the proposals included in the National Budget for 2011 will provide further impetus to the development of the capital market of Sri Lanka. The Budget incorporated many important proposals the SEC had made thus eliminating the impediments that prevailed in the market. We are grateful to President Mahinda Rajapaksa and the Secretary to the Treasury, Dr. P.B. Jayasundera for incorporating SEC’s proposals in the Budget.

In July 2010, the SEC introduced the much-debated ‘price band’ to arrest volatility in the market. The price band came into effect after prices of certain stocks were seen rising without being backed by sound fundamentals.

Imposing a price band was a policy decision of the SEC with the intention of effecting certain changes in the system.

These reforms are indeed reflective of the positive steps that SEC has taken to bring about a strong level of confidence as well as add further liquidity into the market. Without these regulations and shareholder protection, only a few people would have been willing to invest in stocks. We believe that one of the main responsibilities of the SEC is to enhance investor confidence drawing more people to be part of the investor community.

The SEC has formulated a three-year plan consistent with the Government’s strategic priorities and endeavoured to ensure that the SEC continues to play a significant role in the securities regulatory landscape.

We have recognised five key strategic goals, namely, facilitating improvements in the capital market infrastructure, facilitating improvements in liquidity and introduction of new products in the capital market, encouraging and facilitating the widening and broadening of issuer base, facilitating widening and broadening of the investor base, and enhancing SEC’s performance through effective alignment and management of human, information, and financial capital.

Sri Lanka has extensively improved its economic fundamentals following the end of the war against longstanding terrorism. The Government has already taken measures to improve the business environment and build on its ranking to compete globally.

The Government’s stability has given investors a positive outlook. With this backdrop, the Colombo Stock Market will have a bearing on the economic activity through the creation of liquidity and influencing corporate governance.

Liquid stock markets make investments less risky and more attractive. High level of liquidity at the Colombo Stock Market will facilitate investment, promote efficient allocation of capital, and stimulate long-term economic growth. The SEC has already taken steps to facilitate liquidity by providing a new regime of regulations.

The year 2010 was indeed one of the most challenging years for the SEC. There are many who supported us during this period. We are grateful to all of them.

Let me reiterate our resolve to build our capital market and set it on a strong foundation over the next few years to complement economic growth and place Sri Lanka as ‘The Emerging Wonder of Asia’.