Emerging scenarios for the Colombo bourse

The Colombo stock exchange gathered momentum in its forward march in the last three decades of the 20th century.The exchange was housed at the Mckinnon & Mackenzie building near the Colombo port and the famous Grand Oriental Hotel known earlier as Taprobane Hotel.

Prior to the dawn of the last decade of the 20th century,the activity at the Colombo bourse was dominated by a number of high net worth individuals, a few corporate entities and a relatively lower number of retailers.

The brokers had to shout at full throat to bid for the required quantities for their clients. Further, the issue of share certificates took a much more than expected times.

As a result, the investors were unable to sell their shares during market rally times in the absence of share certificates. Those days the share certificates had to be lodged with the brokers prior to the sale by an investor. Another major obstacle was that the investor was able to know the quantities purchased by their brokers on the following day only as they were not in a position to stay at the bourse itself and execute the purchase through their brokers.

Certain parties fraudulently printed share certificates and sold those shares in the market to unsuspecting purchasers. This happened in the case of high value shares. The number of stockbrokers were limited at that time and there was share price manipulations to a great extent. The turnover levels were also much lower.

With the shifting of the Colombo stock exchange to its present location at the world trade centre in the mid nineties, we witnessed a rapid growth of the market with the increase in numbers of retailers, foreign investors, local instituitional funds and others who saw opportunities and the potential of the Colombo bourse.

However, the bourse had to meet the full impact of two major bomb explosions in the vicinity of their premises, namely the Galadari Hotel car park and the major one at the central bank premises. As a result, the brokers had to function under very non conducive environments in carrying out their activities. As investor confidence was shattered with fear psychosis entering their minds both in terms of visiting their brokers and the chances of making a reasonable rate of return.

On the positive side, the stock exchange initiated a number of value addition measures to the Colombo bourse such as the commencement of the CDS (central depository system)system, the issue of monthly CDS statements to investors, permission to trade on margin trading basis, setting specific time limits for settlements, recruitment of experienced staff cadres especially investment advisors/client service managers, publication of investor education leaflets/brochures, conducting of training and awareness sessions/workshops in Colombo and outstation cities to broaden the base of investors, commencement of SIERRA accounts to facilitate investments of foreign investors.

During bearish times market attracted many institutional investors, both local and foreign to prop up turnovers. Local unit trusts and gilt edged funds started pouring into the bourse. This had a chain effect of drawing more retailers into the market.

The investors opened multiple accounts with a number of brokers some in their individual accounts and others in the name of their personal corporate business accounts. All in all the number of CDS accounts increased rapidly. The market had rallies on a number of occasions, namely, at the end of 1989 insurgency activities, sale of regional plantations in late 1991& especially during the last two years of the 17 year UNP rule as a result of the country showing steady GDP growth rates due to a number of privatisations carried out by the government. The bourse was affected by the Tsunami, political regime changes, escalation of north east hostilities,1997/8 asian financial crisis etc. . The market took a steadily upward movement path with the total ending of north/east hostilities and steadily climbed up reaching great heights. The ASPI reached 7,800 levels a few years back due to heavy profit taking by the investors. The market then headed for a correction later and is now on a consolidation stage.

The all share price was at 1,378 point level in march 1994 and has grown to its present level of 6,100 indicating the growth of the stock market from 1994 upto now. The market is now heading for higher grounds and very much will depend on the corporate results achieved by the listed companies for financial year ending 31 march 2017.The annual reports and annual general meetings are usually due from the end of may 2017 in respect of the financial year ending March 31,2017.

Credit should go to the stock exchange and securities and exchange commission authorities for propelling the market through many rough seas from time to time. Certain circumstances specifically the external ones are beyond their control and still they have managed to hold the bourse to steady and reasonable levels. Value addition measures recently decided by the CSE and SEC augurs well for the future development of the bourse.The bourse is now attracting investors from many countries.

The SEC organized many road shows and promotional activities overseas and have developed healthy relationships with overseas fund managers. Over the years. The overseas fund managers regularly visit Colombo to ascertain facts and evaluate results and progress made at our bourse before convincing the equity investors back home.

Looking into the plans and vision of the Colombo stock exchange for the next financial year due to start on 1 April 2017,the board of directors have decided on a number of initiatives to bolster the market with the following objectives in mind.

1.Improving the daily and annual turnover of the market

2.Improving the liquidity of the market

3.Enhancing of the investor confidence in the market

4.Augmentation of the levy collections for the inland revenue

5.Steady rise in market capitalisation

6.Overall value addition to the market

7.Initiation of more initial public offerings into the market

8.Direct contribution to the economic growth strategies of the government

10.Enforcement of strict compliance measures pertaining to the listed companies Some of the specific measures are enumerated below.

1.Veryshortly,the Colombo stock exchange will be holding road shows, fund manager

conferences, seminars & presentations in Australia and New Zealand targeting especially the large srilankan population in these countries in addition to country specific funds, business groups, etc.. Both countries and srilanka belong to the commonwealth and enjoy excellent bilateral ties in addition to cricketing and rugby ties.

2.The opening of the dollar board, initially for the investors of the SAARC region. The relevant memorandum of understanding has already been signed with Maldives.

3."AON" trading-This refers to All or None basis where strategic parcels are offered in respect of listed companies. This will be a very transparent mode of "real time bidding". The CSE is confident that the turnover levels and liquidity of the market will improve with this initiative.

4.roposed shifting of the Colombo stock exchange office in Hambantotato the town of Ambalantota As Ambalantota is closer to many business towns like Tangalle and Embilipitiya

5.oad shows and promotions in specific countries who are keen to invest in the Colombo bourse in liaison with srilankan diplomatic missions abroad and overseas diplomatic missions in srilanka.

Some of the core statistics pertaining to the Colombo stock exchange in recent times are highlighted below for the benefit and information of investors and the corporate sector.

1.The CSE has been contributing to the treasury by way of STL(share transaction levy). Quantums of STL remitted to the inland revenue during the past five years are shown below.

2.Foreign and local investment levels 2017 (upto 7 march) 2016

A. Daily average Turnover (Rs.Millions) 676.9 737.2

B. Contribution to Total Market Turnover

Foreign 48% 42%

Local 52% 58%

C. Break up of Foreign Turnover

Foreign companies 46.8% 41%

Foreign Induviduals 1.2% 1%

D. Break up of Local Turnover

Local companies 32.5% 30.9%

Local Individuals 19.5% 27.1%

E. Foreign Trading Activities January 2017 February 20177 days upto7 march 2017

Purchases (Rs. Million) 5,507.6 6,488.8 2,590.5

Sales (Rs. Million) 7,164.6 4,902.2 1,360.8

Net Foreign Flow (Rs.Million) (1,656.9) 1,586.6 1,239.7

On a positive note for 2017, upto March 7 the Colombo bourse recorded a net foreign inflow of

Rs.1,169.4 million.

The present market capitalization as a percentage of GDP is around 28% and the CSE is hoping to achieve a level of around 50% in around 3 to 4 years. Very recently, the FITCH ratings upgraded the "B+" CREDIT rating for Srilanka to "Stable" from "Negative". This upgrading will assist the Colombo stock exchange in their future promotions immensely in both overseas and srilanka.

From an investor point of view the following recommendations are presented below for Implementation by the brokers in a collective capacity for a clear picture of daily transaction summary.

1.Daily electronic and print media should also highlight the major contributing stocks for the daily Turnover in addition to the top gainers and top losers for the benefit of investors.

2.Some countries publish P/E ratios in daily newspapers alongside the individual stocks when presenting the price movements of individual stocks. As a result, a demand will be created for stocks with lower P/E ratios

3.Some listed companies take an unusually longer time for submission of annual audited accounts to the exchange followed by the annual general meetings. Some companies also report lower profitabilities lower than the total of figures disclosed in quarterly accounts, after the audit. Thestockbrokers should educate the investment advisors to make a concise and clear explanation to their clients explaining reasons as some clients purchase shares based on quarterly results.

4.Daily market summary should be presented under business news in all major television and radio channels in their prime time news bulletines in all languages. This measure will lure more investors to the market including households and self employed.

On the part of listed companies, they should regularly engage in fruitful CSR initiatives to win the confidence of the general public at large and also to send a strong signal to the investing community as to their good work for community development.

The stability of the stocks and the market as a whole will depend very much on the following factors as well which are beyond the control of CSE and its management.

1.Interest rates of the country

2.GDP growth

3.Strength of rupee

4.Tax policies of the ruling government

5.Level of public savings

6.International image of our economy abroad

7.Local& Foreign debt levels of the country and debt servicing requirements

8.Level of inflation

9.Trade union action in different industries of the country

10.Transaction costs

11.Level of foreign investor sales and net foreign flows to the bourse

12.Instituitional & retailer interest

13.Security situation of the country

14.Infrastructure obstacles such as power shortages in the country

15.Political instability

In a new development, stock brokers are now required to report their capital adequacy ratios to the securities & exchange commission(SEC) & Colombo stock exchange(CSE) daily compared to the past practice of reporting net capital positions at the end of each month.

Education of the investors, especially the retailers is also of paramount importance. They should realize that the bourse is not a gaming board where they can make gains as they wish.

They should firstly look for a return in excess of the prevailing bank rates. Secondly, the investors should carry out a detailed research and find out which way the shares they bought are heading with the assistance of their brokers aided by quarterly and annual results, dividend streams expected together with market sensitive news.

Based on these facts, the investors should decide on the dates of sales and prices so that they can receive a return rate exceeding the prevailing bank interest rate. Share purchases based on speculation should be discouraged as far as possible unless the investors possess sufficient holding power.

Attraction of international funds depend very much on us interest rates and the decisions of the Federal Reserve. In addition global depressions, terrorist attacks, international energy prices and IMF predictions also play their parts from time to time.

 

(The writer could be reached via

[email protected]


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