Two is company

As brokers and CSE gear for complex and elusive demutualisation, SEC’s scope to be widened to regulate another stock exchange

With efforts under way to demutualise the Colombo Bourse (CSE), the Securities and Exchange Commission’s (SEC) scope of regulation and facilitation is to be widened to cover an additional stock exchange.

The Government is planning to amend the SEC Act to the effect that it would be able to licence both a “not for profit” and “for profit” exchange.

At present the SEC Act only stipulates that it can licence a “not for profit” exchange.

The Daily FT learns that the Government’s thinking has been communicated to the SEC by the Finance Ministry whilst SEC in turn had also indicated the development at a meeting with broking community last week.

The current CSE, roots of which could be traced 114 years back, is a company limited by guarantee, established under the Companies Act No. 17 of 1982. Apart from being licensed by the Securities & Exchange Commission of Sri Lanka (SEC), it is mutual exchange and has 15 full members, 6 Trading Members licensed to trade both equity and debt securities.

Some time back the Cabinet approved the “demutualisation” of the CSE and the meeting last week was to crystalise the way forward.

Demutualisation has been on the cards for over a decade. Analysts whilst welcoming the Cabinet nod in principle as a breakthrough however expressed doubts whether the CSE would make demutualisation a reality. Whilst demutualisation has remained elusive and complex for several years, analysts opined that suggestive amendment to the SEC Act in effect means Sri Lanka could end up having two exchanges.

However whilst the new thinking on the part of Government could only be confirmed after the presentation of the 2011 Budget, at last week’s meeting several key issues regarding demutualisation of the CSE were raised.

As per original plans, a demutualised CSE would take the character of a “for profit” exchange with ownership shared (up to a maximum of 5% each — individually or via connected parties) between 15 full members. Thereafter it will be listed with brokers expected reduce their shareholding to less than 51%.

At the meeting the Colombo Stockbrokers Association (CBA) has been asked to come up with its recommendation for the structure of distribution of ownership prior to listing. It was also emphasised that apart from taking the character of “for profit” the new entity should also take care of greater interest of investing public. The SEC has assured that broker recommendations would be considered and the new ownership distribution structure is expected to be equitable.

Independent analysts were of the view that though demutualisation of the current CSE even though may appear complex and difficult, the Government as well as the SEC should fully back it instead of amending the law to create legal space for another exchange.

Reasons cited include relative small size of the capital market as well as the CSE in addition to over 230 companies listed already including premier diversified blue chips. It was noted that after demutulisation the existing Bourse can be dynamic to cater to an expanding listed equities market, with greater number of listings and more investors.

However others noted that Government was thinking long-term hence the new proposal. An element of competition is also likely to make the equities market more robust, it was argued.

Colombo stock market is Asia’s best performing with a return of slightly over 100%. Recently Colombo was also world’s best, a status lost after last week’s dip as part of correction. Its market capitalisation has swelled to Rs. 2.25 trillion (down from Rs. 2.35 trillion in the previous week). It surpassed the second trillion in less than one year whilst the first trillion took several decades.