THE STOCK MARKET
Compiled by Avanti Samarasekera
THE BOURSE TO THE RESCUE
Rajeeva Bandaranaike outlines the benefits of a stock exchange listing
Q: Why is it important for stock exchanges the world over to seek revenue that’s not necessarily tied to trading? And what are some of these avenues of income?
A: Stock exchanges usually follow a different business model from those of other organisations. They service debt and equity markets, and have a limited number of products from which to derive revenue. For the most part, stock exchanges generate revenue from primary issuances and secondary trading of securities.
As turnover generated from secondary trading is determined by the market, it’s subject to many fluctuations due to changing macroeconomic environments. That is why it’s wise to depend less on trading-related revenue and maintain other sources of income, which will help plan and manage the finances of a stock exchange better.
Typically, stock exchanges derive additional income from revenue from listing fees, the sale of data – both internationally and locally – and listing subsequent issues. Some five or six years ago, the Colombo Stock Exchange (CSE) was 90-95 percent dependent on revenue generated from trading income. Today, it has reduced this dependency to less than 80 percent.
The CSE’s plan is to diversify its revenue streams gradually so that overheads can be covered by non-trading revenue, which will protect it from any volatility in the equity market.
Q: It’s becoming increasingly hard to ignore the public’s call to improve Sri Lanka’s operating environment – especially in terms of integrity, corporate governance and transparency. How do you see those in relevant leadership roles meeting these needs in the coming months?
A: I can comment from a corporate perspective but not from government’s point of view. We all understand the need for good governance, transparency and accountability, on the part of corporates as well as the state.
Good governance has always been part and parcel of being a listed company. This is a key difference between a listed company and unlisted businesses, whether they are state or private.
Therefore, we need to encourage more entities including state-owned enterprises (SOEs) to list so that they’re compelled to follow the rules on corporate governance, and disclosure requirements for accountability and transparency.
Q: So how can the CSE attract more corporate listings?
A: The CSE has a database of companies that we work with, and there are continuous initiatives and dedicated people who keep in touch with potential businesses.
We have also been tweaking our listing process to make it easier for businesses to list.
Previously, organisations had to obtain dual approval for listing – from the Securities and Exchange Commission (SEC) and CSE. This process has been simplified, and authority has been delegated to the CSE to grant listing approvals.
We have expanded the listing criteria to enable organisations at different points of their business cycles to list.
A conducive market environment and valuations also have an impact on listings. The last factor refers to the incentives provided to listed companies. For example, the government provided a tax incentive last year, which encouraged many businesses to list.
All these factors have to work together to encourage enterprises to list.
In 2021, we witnessed one of the best years for the primary market with around 32 new equity and debt issues raking in a capital of nearly Rs. 100 billion, and 21 secondary market rights issues raising 21 million rupees.
Q: What are the CSE’s plans with regard to the financial literacy in the months and years ahead?
A: This is very important. According to a recent study conducted by the Central Bank of Sri Lanka, the level of financial literacy in the country is relatively low. So we have partnered with organisations such as the CFA Society Sri Lanka to conduct financial literacy programmes for young people.
We don’t confine ourselves to programmes about capital markets but follow a broader framework, instead. And we target youth across the island by conducting these programmes in all three national languages – teaching them about the importance of investing and saving, the concepts of risk and return, and financial planning for the future.
Q: What advice would you offer external investors who are contemplating moving into the local market?
A: Sri Lanka has always been a potential market for foreign investors and this should not change.
Over time, there have been periods of outflows and inflows by investors. Currently, there is a large portion of foreign investors – mainly from the US, the UK, Europe, Singapore and Japan. Although we saw some outflows due to the pandemic and economic issues that resulted in a downgrading, we’re now seeing net inflows again.
One can’t expect a substantial increase under current conditions; but once Sri Lanka gains some degree of economic stability, there will be much more confidence in our listed companies.
We recently introduced a new mechanism for local companies to raise dollar denominated equity and debt capital. So there’s now an opportunity for local corporates to reach out to foreign investors and raise dollar denominated capital.
