ADB says committed to help develop Lanka’s capital market

By Shabiya Ali Ahlam

The Asian Devel-opment Bank (ADB) on Tuesday expressed its willingness to help implement reforms to make Sri Lanka’s capital market vibrant and a catalyst to further economic progress in Sri Lanka.

“We are committed to helping implement the capital market reforms to promote the development of equity and debt markets,” ADB Country Director Rita O’Sullivan told a capital markets conference organised by UTO EduConsult Ltd.

“ADB is looking very positively at substantive involvement in the capital market development of Sri Lanka,” Sullivan added, emphasising the context of a wider set of outstanding issues relating to private sector development, including infrastructure financing.

She said ADB’s willingness to support capital market development was part of the bank’s Country Partnership Strategy (CPS) 2002-2016, which identifies catalysing private investment as one of its pillars.

Noting that Sri Lanka has traditionally been dependent on the banking sector to fund its economic development initiatives, the island’s ratio of capital market size to banking assets is recognised to be comparatively low in the region and well below that of developed economies.

Identifying drawbacks in this area, Sullivan opined that limitations prevail in the ability of the capital markets to complement the banking sector in the current development drive, which includes multifarious large-scale infrastructure projects.

Highlighting that capital markets offer greater dispersion of risks, instruments to match investors’ risk appetite, and being able to reduce the cost of funding through adoption, Sullivan said: “Capital market development can extend several advantages in term of providing platforms for matching assets-liabilities maturity portfolio where longer term projects require longer term funding.”

She stressed that additional and indirect benefits of developing this important segment of the island’s financial sector will include enhanced branding and market positioning where listed companies will benefit from perceived stronger corporate governance, which in turn would raise their profile with customers, regulators, and banks.

To have a direct impact on Sri Lanka’s GDP growth rate, Sullivan advised rewarding staff loyalty through employee share options, promoting greater professionalism, and obtaining better pricing on businesses and assets for shareholders as these lead to tangible benefits at corporate level, which would translate into macro level benefits of increasing assets values, standards of living, higher tax revenue, and better wealth distribution.  

Sullivan also acknowledged the 2013 Budget proposal put forward by the Government for the development of capital markets, saying: “It was encouraging to note that 2013 Budget mentioned the capital market development master plan. A proposal to appoint a Presidential Task Force to implement this plan by mobilising all stakeholders involved in the market had also been made in the document.”

Shedding light on the duties of the Security Exchange Commission (SEC) that need to be executed over the next three years, their resonance with its 10 key tasks or projects as its roadmap, which includes the SEC Act amendment and CSE demutualisation, was well appraised.

Sullivan further acknowledged the 2013 Budget was supportive of the developing of capital markets by proposing a three-and-a-half year tax holiday for new companies that will be listed in the CSE before December 2013, while maintaining a minimum of 20% of its shares with the public.

While the Budget is noted to have proposed incentives, such as exemption from withholding tax on interest income earned from investing in bonds and debentures listed in the CSE, Sullivan stated that these measures aimed at well-established companies would encourage them to list their debt in the CSE to raise capital and expand the debt market.

She concluded her remarks by identifying the Budget’s initiative on allowing direct investment in foreign currencies in unit trusts without having to channel them through the Securities Investment Account, aiming to popularise unit trusts amongst small investors and Sri Lankans working and living overseas.

During her presentation, the ADB Country Director also noted that the Colombo Stock Exchange had found new momentum so far this year on the back of renewed foreign investor interest in the market, with capital market inflows in 2012 topping $ 300.

Sullivan opined that the listing at the CSE had been slow but is noted to be steadily improving over the recent years, comparing well among regional peers. Nevertheless, she stressed that a lot more could be achieved in order to move towards fulfilling Sri Lanka’s true potential as outlined in the Master Plan.