Capital Market Strategy 2020 - SEC Sri Lanka comprehensive transformative plan detailing strategic direction and goals for the Sri Lankan capital market Capital Market Strategy 2020

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Capital Market Strategy 2020

A comprehensive transformative plan detailing strategic direction and goals for the Sri Lankan capital market

Capital Market Strategy 2020

Designed across

two core objectives

of regulation and

capital market

development

Enhances

capital market’s

competitiveness,

resilience and

innovation

Tactical initiatives

yield long-term

benefits across

capital market

stakeholders

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Strategic Considerations

Effective

governance,

enforcement and

compliance

Efficiency and

commercial

orientation of

market

institutions

Extant Market

characteristics

- size, liquidity

and diversification

constraints

Capacity building Market

infrastructure

and technology

gaps

Systemic risk

management

Government

policy and action

Regulatory readiness

and strength

2

Investor

protection

Comparative Market Development Indicators3

25.3 26.8

9.6

81.788.3

234.0

41.0

129.3

89.4

35.227.6

2.29.6

0.5

13.1

68.774.4

8.7

37.6

133.8

9.1

23.7

Sri Lanka Vietnam Argentina Phillipines Thailand South

Africa

Indonesia Malaysia South

Korea

Mexico Brazil

%

Market Capitalisation as a % of GDP

Market liquidity as a % of GDP

Source: The World Bank, Stock Market Capitalization to GDP for World [DDDM011WA156NWDB]. Deflation methodology for Market Capitalisation as a percentage of

GDP : {(0.5)*[Ft/P_et + Ft-1/P_et-1]}/[GDPt/P_at] where F is stock market capitalisation, P_e is end-of period CPI, and P_a is average annual CPI.End-of period CPI

(IFS line 64M..ZF or, if not available, 64Q..ZF).

Frontier Markets

Emerging Markets

Capital Market Snapshot

Number of New IPO Listings/Issues

Note: Market Capitalisation as a % GDP for 2014 and 2015 are based on The World Bank

methodology. See slide 3. Due to unavailability of 2016 data from this source, Market

Capitalisation as a % GDP in 2016 is based on provisional data released by the Department of

Census and Statistics with no deflation basis applied as per the CSE calculation methodology.

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Source: The World Bank,Central Bank of Sri Lanka and Colombo Stock Exchange

Sub optimal liquidity and contribution to GDP by the capital market. Low primary market equity flows.

Equity and Debt IPO Volumes, LKR Bn

Annual Turnover by product , LKR Bn

2.6 0.3 1.9

54.2

83.478.0

2014 2015 2016

Equity IPOs

Debt IPOs

340.9

253.2

7.1 4.76.2 2.7

2014 2015

Equity

Corporate Debt

5.0

2.0 3.0

20.0

25.0

17.0

2014 2015 2016

Equity IPOs

Debt IPOs

Limited product offering. Traditional reliance on Equity.Increased new entrants in the debt market due to recent tax concessions.

29.6

25.323.0

10.98.6

6.4

2014 2015 2016

Market Capitalisation

as a % of GDP

Turnover Velocity

Market Cap to GDP % and Turnover to Market Cap %

5

0.5

1.2 1.1

2013 2014 2015

Unit Trusts Assets Under Management as a % of GDP

Proliferation of Unit Trusts low.

Employee Provident Fund (EPF) and Employee Trust Fund (ETF)

portfolio allocation favours Government Securities.

Capital Market Snapshot Cont.

Source: Central Bank of Sri Lanka, Colombo Stock Exchange

1425.31623.6

1814.9

90.790.0

91.9

88.0

92.0

96.0

0

1000

2000

2013 2014 2015

%LKR Bn

EPF and ETF Assets Under Management

Total Combined AUM of

EPFs and ETFs

EPF &ETF Average Asset

Allocation % on

Government Securities

Increased participation by long-term investors such as

EPFs and ETFs would improve market stability and

sustainability

Anticipates broad-basing of investor participation.

26.0%

1.6%

34.7%

37.7%

2014

Foreign Companies

Foreign Individuals

Local Companies

Local Individuals

Investor Mix 2014 Vs. 2016

41.5%

1.0%31.4%

26.8%

2016

Note: Total market turnover for equity and debt in 2014 and

2016 is LKR 348.0 Bn and LKR 179.8 Bn, respectively.

Economic Snapshot

Source: Department of Census and Statistics ,Central Bank of Sri Lanka, National Budget 2017

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Note: * Provisional data as at November 2016

5.7

7.4

5.4*

2014 2015 2016

Fiscal Deficit as a % of GDP

Note:* 2016 is based on provisional data

11.1 10.29.5*

2014 2015 2016

Export Earnings, USD Bn

4.94.8

4.4*

2014 2015 2016

Growth of Real GDP %

Note: * 2016 is based on provisional data

Domestic

Bank

Borrowings

Domestic

Non-Bank

Borrowings

Foreign

Investments

in T-Bills and

T-Bonds

Total Foreign

Financing

5%

51%

-15%

59%5%

42%

10%

44%

Contributions by Source to Financing the

Budget Deficit, LKR Bn

2016

2017

Enabling Capital Market to Grow and Fund

Real Economy

Fiscal discipline, policy coherence and

credibility and performance relative to

peers create a supportive foundation for

revised sovereign rating.

Need to consider high public debt level

limiting fiscal space.

Public investment approximated 5.1% on

average in recent years.

Continued need to tap private sector for

investment.

Enabling environment for PPP a necessity.

Enabling environment for portfolio

investment a necessity.

Capital Market Strategy 2020 to enable

market to complement the banking

sector and align with funding and growth

needs of national economy.

Investment to GDP

(5 yr average)

33.6%Of which Public Investment

(5 yr average)

5.1%*

GDP growth( 2010-2016)

CAGR 5.8%

GDP growth forecast by

Supra-National Organisations

2017 4.8% to 5.5%

Opportunities for listing of

strategic SOEs across different sectors

Hotels and Travels

Power and Energy

Manufacturing

*At December 2015

Budget deficit as % of GDP

5.4%*

Public Debt as % GDP

76.0%*

*National Budget 2017

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Integrated Strategy

Regulatory and Governance Strategies Development Strategies

Strengthening Regulatory and Governance

Environment

Creating an Enabling Environment for

Capital Formation

Increasing Accountability and Market

Oversight

Deepening Liquidity and Broad-basing

Market Participation

Raising the Standards and Competencies of

Capital Market Participants

Developing Infrastructure and Enabling

New Products

Managing and Mitigating Systemic Risk Building Domestic Capabilities

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Strengthening Regulatory and

Governance Environment

1. Submission of the proposed draft Securities Exchange Act to Parliament

2. Appraisal and revision of the Listing Rules of the Colombo Stock Exchange (CSE)

3. Review of all rules pertaining to market intermediaries

4. Completion of a Country Review of securities regulation by the International

Organisation of Securities Commissions (IOSCO)

5. Review of Corporate Governance Code in line with principles set out by the

Organisation for Economic Cooperation and Development (OECD)

6. Review of the Unit Trust Code

7. Finalisation of the new Takeovers and Mergers Code

8. Formalisation of the legal structure of securitisation

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Increasing Accountability and Market Oversight

1.Procurement of a new surveillance system with advanced functionalities for the

effective monitoring of trading

2.Development of a comprehensive framework of financial surveillance for Listed

Entities

3. Casting duties on supplementary service providers to ensure accountability

4. Enhancing SEC oversight of all capital market institutions and intermediaries

5.Introduction of an effective deterrence mechanism for curbing capital market

misconduct

6. Prompt investigation of market offences

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Raising Standards and Competencies

of Capital Market Participants

1. Enhancement of fit and proper standards for capital market institutions, market

intermediaries, and listed companies

2. Standardisation of documentation pertaining to market participants

3. Review and upgrade prevailing qualification criteria for capital market participants

4. Development of a multi-layered licensing framework to accommodate all asset

classes

5. Evaluation of the feasibility of introducing Global Investment Performance

Standards (GIPS) for unit trust managing companies and investment managers

6. Enhancement of know-your-customer (KYC) requirements applicable to regulatees

of the SEC to address money laundering

7. Categorisation and disclosure of financially-challenged companies

8. Development of guidelines for share valuation with respect to regulatory

requirements

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Mitigating and Managing Systemic Risk

1. Facilitation of the implementation of a Central Counterparty (CCP) mechanism

2. Development of a risk-weighted capital adequacy framework for capital market

institutions and intermediaries

3. Development of a risk-based assessment framework for on-site supervision

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Creating An Enabling Environment

For Capital Formation

1. Creation of a platform for entities with size, scale and liquidity to tap the capital

market

2. Development of the market for corporate debt

3. Introduction of a framework for infrastructure financing via the capital market

4. Establishment of alternative listing boards which cater to new market segments

5.Ascension to the Morgan Stanley Capital International (MSCI) Emerging Market

status

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Deepening Liquidity and

Broad-basing Market Participation

1.Develop the unit trust industry as a channel for small investors to access the

market

2. Increasing the participation of pension funds in the capital market

3. Enabling a conducive environment to attract foreign portfolio investors

4. Formulation of a methodology for the introduction of short selling, securities

borrowing and lending

5. Implementation of higher public float requirements to increase liquidity

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Developing Infrastructure and

Enabling New Products

1. Enhancement of the e-filing system for regulatory reporting

2.Implementation of consistent back office and order management systems

across the stock broking industry

3. Introduction of a standardised digital business reporting platform

4. Formulation of policies and rules for new products such as Exchange-traded

Funds (ETFs) and Real Estate Investment Trusts (REITs)

5.Creation of a platform for the introduction of risk-hedged products

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Building Domestic Capabilities

Exchange Capacity Building

1. Demutualisation of the CSE to enhance efficiency and global acceptability

Community Capacity Building

1.Ensuring the responsiveness of the SEC to

carry out its objectives in an effective,

efficient and timely manner

Enhancement of the financial literacy

and capital market exposure of all

stakeholders in relation to the capital

market

2.

Building the competencies of the regulator

by having measures in place to recruit and

retain a proficient workforce with

unquestionable integrity, appropriate

technical knowledge, and demonstrable

professionalism

Conduct of continuous investor

education and public awareness

programmes which equip investors

with the knowledge required to make

informed investment decisions

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