CSE’s Chief Executive Rajeeva Bandaranaike says several new products will soon be available to issuers and investors. Underlying their launch will be the CSE’s cutting edge tech platform
The turnaround in Sri Lanka’s stocks may have several reasons; from the upward re-rating of the market, new investors, low interest rates, listed companies doing better than forecast despite Covid and an expectation that corporate profits will boom over the next few years.
Up to May 2021, issuers have raised Rs66 billion in the market, which included three equity IPOs, eclipsing the Rs60 billion in new equity raised in 2020. Mid-sized firms which have traditionally depended on banks are now exploring public markets due to the attractive valuations and the long-term nature of equity compared to bank borrowings.
Greater investor and issuer participation on top of the rise in share prices has got the Colombo Stock Exchange and the securities regulator, the SEC, accelerating the launch of several new products. Underlying the exchange’s ability to launch these products is its technology backbone. Its technology has made it possible for the market to operate remotely, that is, not just the CSE but the entire ecosystem.
Colombo Stock Exchange’s Chief Executive Rajeeva Bandaranaike says the exchange is moving quickly, exploring new partnerships to offer an expanded choice of products so issues and investors can make the most of the capital market to support the next stage of economic expansion.
Can you tell us how the market has performed since the outbreak of the pandemic, to set the stage for this conversation?
Despite the challenges of the pandemic, the stock market has done quite well. We had a setback after the first lockdown of 2020 when the market declined. Stock prices fell 25%, and the S&P SL 20 index fell by around 33%. But the market recovered. In fact, it recovered very sharply. The All Share index ended the year up 48% and the S&P Index by 35%, from the post-pandemic low.
So far this year, both indices are in positive territory. Year to date (late May 2021), the All Share Index is up 11%, and the S&P index is up over 15%. Despite the impact of the pandemic, shares have performed well. Encouragingly we’ve also seen that trading volumes have been significant in 2020 and so far in 2021. In 2019 we saw around 5,000 daily transactions and this doubled in 2020. Today it’s up almost fivefold from 2019 levels to between 22,000 to 25,000 trades a day. So, across the board, we’ve seen volume increases, more investor participation, and the market indices and share prices are also up.
What do you think are the forces that will impact or shape how the market performs in the next one or two years?
Let’s look at a few factors. We’ve seen record-breaking profitability at some listed companies. Most listed companies have navigated the pandemic well. They’ve evolved to come out on top. For example, the highest ever quarterly profits on a consolidated basis were reported in the last quarter (March quarter 2021) and we have seen a 5% growth in the annual company earnings last year.
The investor base has widened too. There’s been a 70% increase in the number of new investor registrations, clearly one of the reasons for the higher volumes.
Our stock valuations, or the market price to earnings ratio, is still attractive at 11.6-times in comparison to some other markets in the region. Our market dividend yield, of around 2.6% annually is higher in comparison. Higher profitability and relatively lower valuations make the market attractive. One of the key reasons for this kind of sustained interest is the low interest rate environment, which has encouraged high net worth and retail investors to look for alternatives to fixed income or fixed deposits. I think the stock market is the direct beneficiary of that low interest rate environment.
All this, coupled with an investor-friendly regulatory regime, will further propel the market. For example, if you look at taxes that can normally apply to a stock market, Sri Lanka has no capital gains tax, no stamp duty, and no tax on dividends.
On the regulatory side, our listed companies are compliant with the international accounting standards and we have fairly sound corporate governance rules and a robust corporate disclosure policy that are up to international standards. The market’s ease of entry and exit for foreign and local investors are also notable.
If you take a holistic view; due to the higher liquidity the market is easier now to enter and exit without much impact on price, unlike the earlier illiquid market environment. Overall, there is every reason to have a positive outlook for the next year.
Our stock valuations, or the market price to earnings ratio, is still attractive at 11.6-times in comparison to some other markets in the region
There have been a couple of successful IPOs in 2021, and also rights issues. Did this outcome surprise you? What’s the outlook for the rest of the year for more capital raising in the market?
I think it’s important to consider what is driving new listings. It’s something we all know, and that’s demand. There is now an appetite for equity and companies are starting to look at the capital market again for IPOs. We’ve already had several IPOs this year, and they were all oversubscribed on the opening day. So far this year, over Rs5 billion has been raised in equity capital alone.
If you consider the rights issues, together with the IPOs, then over Rs66 billion has been raised in the market, and that’s just in the first five months of 2021, surpassing the total amount of capital raised in 2020, which was about Rs60 billion. I keep going back to valuations. I think the attractiveness of valuations at 11.6-times earnings is one of the key reasons for companies to be looking at the market. Earlier, they were unable to get the price that they wanted.
When we observed that there was potential to re-activate the primary market, we did three things. One, we expanded our listing criteria to enable more companies to list. We have expanded the criteria beyond profitability.
So apart from profits and net assets, now we will look at a company’s revenue and size, and also its positive operating cash flows, and select one of those criteria to be eligible to list. We have widened the listing criteria enabling a larger segment of companies to make primary offerings.
We also created a separate board for SME companies, with different listing criteria. Further, we are also working on multi-currency listings for foreign companies, as well as local companies that want to raise dollar-denominated debt and equity.
Since positive operating cash flow is a qualification criterion, it will possibly enable companies like tech firms, which may not be profitable currently, but have a good revenue base and potential for the future, to also opt to list.
The second thing that we did was revamp the listing approval process. We worked with the Securities and Exchange Commission to eliminate the dual approval process for listings. It’s now a one window concept, making the process easier and much faster for companies. The listing application was approved in just three weeks for the year’s first IPO.
Third, we have established a new issuer relations unit that will canvass and promote new listings. They are identifying potential companies and working with those companies and the investment banks to help them through the process of listing. We have an enabling environment with the right valuations, and we’re putting together a strategy to make it easier for issuers.
Particularly in the U.S., we see a new arrangement that makes it easier for companies to go public called Special Purpose Acquisition Company (SPAC). Can similar structures now be explored in Sri Lanka with the changes to regulation that have happened recently?
The Securities and Exchange Commission has already completed some preliminary work in that direction. At the SEC’s request, we too are preparing a policy document on how we can enable SPACs in Sri Lanka. It’s something to tread cautiously around as there are some risks.
Both the CSE and the SEC have completed a fair bit of work on it. We will probably announce a public consultation soon on a proposed set of rules and the regulatory framework.
CSE has always been a leader in technology in this part of the world. What are the next steps in the evolution of the CSE?
Technology is an enabler, and we certainly will leverage technology for the convenience of our stakeholders. Our next phase is accelerating the digitization journey we’ve started. What we’ve achieved so far was evident during the Covid-19 pandemic when we had no choice but to operate the market remotely. When I say operate the market remotely, I mean the entire ecosystem, not just the stock exchange but stockbrokers and all other market intermediaries.
The Securities and Exchange Commission of Sri Lanka (SEC) established a joint SEC /CSE committee and gave the direction and leadership to a market-wide digitalization initiative to launch a Mobile app that facilitated digital onboarding of Investors which has proved to be an outstanding success since its launch. This has resulted in an increase of 70% in new investor accounts and contributed to increased retail investor participation and market volumes and more importantly ensured continued market operations during the lockdown.
After the first lockdown, we put in place the technology and the processes to enable the market to operate seamlessly. There were several challenges we had to overcome. Currently, we possess the ability to operate the market completely remotely when it becomes necessary. Of course, it’s not without challenges, because not all investors are, for example, willing to operate electronically. We need to be mindful of investors who may be less willing to adopt technology because we need everybody in the ecosystem.
The second significant change is our enabling the onboarding of investors digitally through a mobile app and that has facilitated an increase in the number of accounts. Now anybody from any part of Sri Lanka, without visiting a stockbroker physically can open a CDS (Central Depository System) account, obtain internet trading facilities, conduct trading activity and make settlements all seamlessly and electronically.
We’ve made an online connection to the Department of Registration of Persons, so when somebody submits an application, we dial into the department database to verify the identity online before the CDS account is authorized. All the agreements and documents are digitally signed. It’s a completely seamless process. I think that’s a leap we took in terms of digitizing the market.
The third phase is what we call the CDS e-connect. We are currently working on this. When it’s completed, it will allow investors greater control of their CDS accounts. For example, if somebody needs to change the listed postal address on their CDS account, they will be able to by logging in to the system directly. With the necessary supporting documents, you can change your address yourself or, for example, change your bank account number, or if an investor requires to transfer a part of their portfolio from one broker to another, it will be possible with the press of a button.
On top of this, we are looking at enabling e-IPOs. That’s an IPO done completely electronically. Electronic voting at company annual general meetings is also an area we are working at. The aim here is to improve ease of operations, efficiency, transparency and opportunity for greater shareholder participation.
A direct debit system for settlement of secondary market transactions is also being explored. This can enable investors to debit their bank accounts to settle their stockbroker. We hope to work closely with the Central Bank, Lanka Clear and the commercial banks to achieve this.
What’s the CSE’s strategy with technology? In the past, the exchange has been a tech leader in this part of the world?
From a strategic point of view, we are exploring ways to better utilize the technology we possess to add more value to investors and stakeholders.
One thing we’ve done consistently over the years, in good times and bad, is to have invested in technology. We are now reaping the benefits, and we also have a great technology partner who provides us with knowledge transfer as well. That makes it possible for us to look at a range of new products.
Several new products will be launched soon. One of them is REITs (Real estate investment trusts) for which the legal framework was done recently. We are working on a product for gold investments. Another is an OTC market for corporate debentures to activate trading in the secondary market and for this, the rules have already been drafted. Mortgage-backed securities and stock borrowing and lending are two other products that we are looking to introduce.
Besides technology investments, we are also exploring new partnerships to give stakeholders a wider choice of products, so that both investors and issuers can get the best of a capital market.
Sri Lanka is a small market, so we need to be more innovative. I think as a result of the work we have done over several years, new products are about to be unveiled at a time when the environment is right, when there are volumes and when market intermediaries are also ready to invest.
One thing we’ve done consistently over the years, in good times and bad, is to have invested in technology. We are now reaping the benefits, and we also have a great technology partner who provides us with knowledge transfer as well
What has it been like leading such a critical piece of economic infrastructure as the stock exchange during a very disruptive time?
You need the vision and have the strategy in place. You need to know where you want to go and if you know that, then a lot of the other things will fall into place. Besides that, a key component is the people; you need to have the right people with the right skills, doing the right jobs. Again, we have the advantage of having put together an excellent team over a long period.
We have looked at succession planning, and have a second layer in place. We’ve given a lot of thought to the people as part of the business. I think we have been quite fortunate to have a Board of Directors with great depth able to give the right guidance and direction. Besides that, they bring all-important domain knowledge as well to shape our strategy and direction.
We also have the benefit of a supportive regulator, an approachable and market-friendly regulator who is open to development activity and open-minded so that a lot of collaboration can take place. For example, the regulator gave leadership to the digitization initiative, established a special task force to fast track it, and established the rules very quickly.
We also have support from the government. We have a dedicated minister, a State Minister of Capital Markets for the first time.
With all that in place, the leadership job becomes much easier, because you have the enabling environment and support systems in place for you. But Covid has been challenging. Due to Covid, we have had our share of problems, including losing our head of software development.
Besides maintaining 100% uptime, and despite the travel restrictions, the leadership team must also concentrate on strategy, drive innovation and keep the development happening. It’s an extremely challenging period, but I think it also brought out the best in people. Because when you’re challenged, then you’ve got to start thinking out of the box. Further, we have been operating completely remotely without anybody physically present at the exchange.
We have put in a lot of long hours, had plenty of discussions and did a lot of hard work. It’s the role of the leadership to provide clarity about what you want and where you want to go. And if you get that right, charting the course becomes that much easier.
Besides technology investments, we are also exploring new partnerships to give stakeholders a wider choice of products, so that both investors and issuers can get the best of a capital market