Importance of capital market development

Governor of the Central Bank, Chairman Securities and Exchange Commission, other Government officials, distinguished invitees and students, I am happy to address the Convocation of CMET for the second time during the last five years and I am particularly happy to see the recipients of certificates today is one of the highest in history numbering over 800.

At a time we are actively seeking a vibrant capital market in the country it is indeed a pleasure to see more people getting qualified in the field of finance which will directly and indirectly help raising the overall capital market literacy of the society.

The capital market as you are aware is a very important component of the financial sector which supplements the role of the banking system in the economic developments of our country.

The economy of Sri Lanka has been showing progress in a number of areas in the recent past particularly after the end of the war. We have been recording 7-8% growth in GDP reaching a per capita income of US$ 2,836 as at end 2011 which is projected to reach US$ 4,000 by 2016. Inflation has reduced to single digit and is currently around 7%. Budget deficit has reduced to 6.8% of GDP while Debt: GDP ratio has reduced to 78.5%. The social economy indicators which reflect the quality of life has improved significantly with unemployment reducing to 4.2% in 2011 and poverty reducing to 8.9%. These figures have improved further in 2012.

In our overall economic development plan under the ‘Mahinda Chinthana – Vision for the Future,’ we have identified a five hub model for economic development. We would like to see Sri Lanka evolving as a regional hub for shipping, aviation, commerce, energy and knowledge.



In our efforts to develop Sri Lanka as a commercial hub there are many areas that need our focus. The capital market development is one of the key challenges in that regard. If you are to continue near 8% economic growth annually we need consistent flow of local and foreign investments. A vibrant capital market can facilitate this economic growth by converting savings to investments and also assisting companies to raise funds.

In reality ours is not a matured capital market yet. The capital market heavily depends on equity contribution at the moment yet the market capitalisation of Colombo Stock Exchange is still below US$ 20 b and as percentage it is around 33% of GDP. In a comparable economy we would expect market capitalisation to be at least 70-80% of GDP. Therefore, we have work to do to develop our equity market further.

If we target market capitalisation to be 50% of GDP by 2016, we need to envisage the market capitalisation of Colombo Stock Exchange to reach approximately 6.5 trillion by 2016. The capital market of our country has to think beyond just equity. We need to develop our debt market and other financial instruments such as derivatives, futures. We need to look at new concepts such as commodity market development.

To do all these things we need to have a vision and a plan. I am pleased to announce that the Government has now identified 10 key initiatives which will form the basis of our capital market development roadmap for the next two to three years.

The ten initiatives include:

1.Listing more companies both private and public

2.Attracting new funds both local and foreign to increase liquidity of the market

3.Developing the unit trust market further as a vehicle for small time investors

4.Developing the corporate debt market.

5.Helping new investments and expansions of businesses.

6.Amending the 25-year-old SEC Act to be in line with modern-day capital market requirements.

7.Demutualising the Colombo Stock Exchange to make it more innovative and aggressive.

8.Modernising the infrastructure such as trading, back office systems, etc

9.Strengthening the risk management systems.

10.Intensifying capital market education and awareness

The primary reason for small capitalisation at the CSE is the fact that there are only 288 listed companies though there are more than 10,000 registered and operationally active companies in the country.

We need to identify the reasons for why companies are reluctant to get listed and encourage them by creating more awareness of the benefits involved. We must show companies that CSE in an ideal forum to raise capital and make the listing process less cumbersome. We are hoping to increase to double the number of companies listed on CSE by 2016. The market liquidity can be increased by increasing the number of listed companies.

However, it is also equally important to attract new funds to the market both local and foreign. Currently less than 1% of the Sri Lankan population is actively involved in the market. This number has to be increased significantly by creating greater awareness of the investment potential.



The Colombo stock market has always given good returns to the investors in the long run, far exceeding the returns of conventional savings methods. Also the prices of most of stocks are currently quite attractive with overall forward P/E ratio of the market being less than 15 times.

This is one reason why in 2012 we saw the highest ever net foreign inflow of Rs. 37 b. These foreign investors have seen the potential of the market and have entered at the right time. We urge the domestic funds and investors to study and understand the behaviour of the foreign investors and exploit the opportunity without waiting further.

The development of the unit trust industry is important because it is one of the conduits to mobilise savings of the less sophisticated small investors. When people are encouraged to save for long run these savings can flow as capital to industrialists who are in need of capital. The resulting investments create employment opportunities and contribute to the economic growth of the country.

As I mentioned earlier, Sri Lanka’s capital market primarily revolves around equity. The corporate bond market is yet to see its full potential. One of the priorities we have identified under the 10 initiatives is developing the corporate bond market by providing the necessary regulations and infrastructure to safeguard the interest of the investors and the public.



A well-developed bond market can supplement the banking system in meeting the long-term capital requirements of the corporate sector. We expect the volumes of the bond market to grow substantially to about Rs. 1 trillion by 2016.

It is noteworthy that the SEC in its effort to facilitate market development and ensure that its laws, rules and regulations are in line international standards is in the process of amending the SEC Act with the objective of facilitating regulation of demutualised exchanges, facilitating the establishment of a Central Counter Party, introducing civil sanctions and administrative sanctions to deal with capital market offenders. We also believe that these provisions will strengthen investor protection. Implementation of a robust risk management system, a clearing corporation and a delivery vs. payment system will enhance the CSE’s effectiveness and credibility.

In order to have a more efficient stock market, one prerequisite will be the demutualisation of the CSE. We are confident that demutualisation of the CSE will give the exchange the opportunity to position itself better to respond to the interests of its stakeholders and become more competitive and customer driven. Developing infrastructure of stock brokers and other stakeholders too will increase the efficiency of the capital market.



In Sri Lanka, less than 1% of the population invests in the stock market. One main obstacle to attract investors to the market is the lack of awareness. To reap the benefits of the capital market investments every Sri Lankan needs to be financially literate. The road map to develop the capital market highlights the significance of educating not only investors but other professionals involved in the industry. This awards ceremony to confer diplomas and certificates to industry professionals and other stakeholder will undoubtedly be a milestone in enhancing financial literacy.

To facilitate this road map to develop the capital market, the Government, after consulting all the stakeholders of the capital market, provided significant incentives in the National Budget 2013 by way of providing a three-year half-tax holiday for new companies that will be listed on the CSE before December 2013, and maintain a minimum of 20 % of its shares with the public. This will encourage companies to list on the CSE and thereby increase the market capitalisation and liquidity.



Exemption of withholding tax on interest income earned from investing in bonds and debentures listed on the CSE will increase the activities of the debt market. As mentioned above the unit trust industry should be developed as a mean to mobilise savings of the less sophisticated small investors. The Budget proposal to permit direct investments in foreign currencies in unit trusts without having to channel through the Securities Investment Account (SIA) and the application of the 10% tax applicable to unit trusts to unit trust management companies will strengthen the unit trust industry.



The Budget proposals also included some other significant initiatives such as exemption of transfer of shares for margin trading from stamp duty, permitting stockbrokers to claim a lump sum depreciation for expenditure on IT infrastructure, branch networking, and such other capital items and the appointment of a Presidential Task Force to implement the Capital Market Development Master Plan, which will oversee the entire road map of the capital market development.

Let me conclude by extending my congratulations to all the award recipients and wish you well in all your future endeavours. Thank you.