Interview: Rajeeva Bandaranaike

What measures can be taken to reach the CSE’s market capitalisation target of $50bn?

RAJEEVA BANDARANAIKE: Given the government’s current GDP growth projections, the country’s capital markets will have to play a significant role in acting as a catalyst for raising funds. We estimate that 25-30% of funding requirements in the future will come through capital markets. In 2015 over Rs100bn ($750m) of equity and debt capital was raised on the CSE. Although this is a record high for raising funds through the CSE, we still need to boost this figure over the coming years to ensure that progress continues to be made on capitalisation. A higher number of larger capitalised companies, both from the private and public sectors, should start raising funds on the stock market.

If we manage to have larger capitalised institutions listed on the CSE, the size and liquidity of the stock market would also improve and help us to work towards the market capitalisation target of $50bn. I believe that the government has made a decision to list state-owned enterprises and also to divest government holdings in identified state institutions. We look forward to working closely with the government on this initiative. The larger private companies, too, would naturally want to list when the valuations are right, and there is a push for investment within the economy when internally generated funds would be insufficient to fund their expansion and growth.

The listing rules are designed to facilitate companies to list with minimum inconvenience. Indeed, our listing fees are some of the cheapest in the region. We are upgrading the process for initial public offerings (IPOs) so that issuers can bring their IPOs more speedily to the market using mechanisms such as electronic applications, direct debits to bank accounts and the ability to do an IPO through a book-building process. Further to this, we have restructured the listing boards by introducing an alternate market to the main market and hope to attract listings for small and medium-sized enterprises (SMEs) through a specialised SME Board and dollar listings through a dollar board for foreign companies.

How vulnerable are Sri Lanka’s capital markets to a tightening in global financial conditions?

BANDARANAIKE: The factors affecting foreign investment in our market are quite different than in other parts of the world. Most foreign institutional fund managers use Sri Lanka as a means to diversify their portfolio, as there is a negative correlation between our market indices and those of other major markets indices, and this has in turn provided an ideal diversification opportunity.

Of our total turnover, only 30% is foreign, and the balance is spread between local institutions and individuals. We believe this is a good mix, and the balance has been constant for several years now. The other positive factor is that most of the foreign institutional investors have been long-term investors in Sri Lankan companies, and they have a good understanding of the growth potential in Sri Lanka. As a result, the Sri Lankan stock market remains relatively insulated from fluctuations in the global financial situation.

What scope is there for new products on the CSE?

BANDARANAIKE: The CSE is going through the process of setting up a central counterparty for securities trading, which will in turn pave the way for the establishment of a financial derivatives market. At the same time, it is of course understandable that market liquidity issues in Sri Lanka remain to be addressed, while knowledge gaps in the sector must also be filled.

We have established a products team and industry consultative committee to help us design new products for the market. Other than derivative products, the new products include real estate investment trusts, exchange-traded funds, structured warrants and the development of the corporate debt market.