With fiscal and regulatory support in place SEC tells brokers to deliver on numbers

The Securities and Exchange Commission (SEC) last week told stock brokers to start delivering on the broader goal of increasing the investor base given the fact that the capital market has received unprecedented fiscal and regulatory support.

The request was made by SEC Chairman Dr. Nalaka Godahewa when he chaired a meeting with all licensed stock brokers as part of the regulator’s regular stakeholder consultation.

It was pointed out that the capital market has received tremendous support from the Budget 2013 presented by President and Finance Minister Mahinda Rajapaksa last November whilst the SEC itself has accommodated a slew of requests made by the Colombo Stock Brokers Association (CSBA) towards improving the resilience of the Colombo stock market. The SEC had maintained that following turmoil until mid last year, there was greater stability in the CSE and overall capital market is being further strengthened via a 10-point medium term roadmap.

With fiscal...

Given the country’s goal of US$ 4000 per capita income by 2016 capital market strategy has to be aligned with national objectives. It is envisaged that the CSE must look at a market capitalisation of around 60% of GDP from the current 30%. This in effect means doubling the investor base.

The SEC Chairman had emphasised that the country is also heading towards a rebound in the economy this year with forecast of over 8% growth in the medium term along with a low inflation and interest rate regime. For the envisaged growth, a robust capital market for the private sector to use it as a medium to raise fresh funding as well as investors finding it attractive for sound investments with an attractive return is critical.

At present there are slightly over 700,000 Central Depository Accounts (CDSs) of which however only a handful are active in trading.

At the meeting the SEC has provided an overview on how the stock broking industry has performed in general, with indication on how the top and the bottom level firms had faired. Whilst the need for greater awareness and education had been stressed, the importance of activating existing investors was emphasised as well. The latter move is likely to be more immediate whilst the process of attracting new and first time investors could take much longer period.

Under the Government’s 2013 Budget, a range of incentives were offered for capital market development. They included 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; exemptions from withholding tax on interest income earned from investing in bonds and debentures listed in the CSE; allowing of direct foreign currency investments in unit trusts without having to channel them through Securities Investment Accounts (SIA); application of the 10% tax applicable to unit trusts and unit trust management companies in order to strengthen the management of unit trusts; exemption from stamp duties for share transfers for margin trading; authorisation for 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.

The capital market’s 10-point roadmap includes a demutualisation of the CSE; in order to expedite the SEC Act amendments.

Strengthen risk management systems (RMS, CCP, DVP  Risk based capital/supervision, broker back-office); develop the corporate debt market; develop new products (derivatives, ETF, commodities); develop unit trusts; intensify education and awareness; list large companies (public and private); attract new funds (foreign and local) and develop Infrastructure (trading , back-office systems etc).