CSE 2002 turnover exceeds Rs. 30.5 billion
CSE Director General’s 2002 review

(continued from April 11)
The Exchange as structured at present offers only one product i.e. equity. The CSE has emphasized the need to diversify its product range and change its focus to that of a commercial organization prior to it being listed. As noted above, the CSE is proceeding with its plans to implement the trading of the beneficial interest in government securities as the first step in its product diversification strategy.

• The Exchange has reiterated that a decision to list the CSE should be based only on commercial factors and not merely as a means to demutualize the CSE. The CSE has reasoned that demutualization can take place independent of a listing through changes to its governance structure.

Marketing Initiatives

The Exchange has been criticized for not been sufficiently proactive in marketing its services. The continually declining price trends since 1997 until the 4th quarter of 2001 due to a multiplicity of reasons did not create a conducive environment to warrant the CSE aggressively marketing its services.

As noted in the Annual Report for 2001, the turnaround in the market prompted the Exchange to take the initiative to launch a marketing communications campaign last year with the objective of creating awareness and interest amongst investors.

We intend to continue with this campaign in 2003 and further enhance its scope to include a planned and focused effort to encourage unlisted companies to list and listed companies to further utilize the capital market to harness funds for investment.

The marketing activities planned for 2003 include, market research studies, seminars and workshops, direct mail campaigns, advertising and public relations activities.

The Exchange will conduct 3 market research studies in 2003. AC Nielsen Lanka will conduct a study on Investor Perception and Habits and Market Behaviour Lanka will carry out a research on "Triggers and Barriers to Listing". In addition the CSE’s Marketing Division will carry out an Investor Profiling Study. These studies would enable the CSE to better focus and target its marketing activities.

The marketing campaign will target both domestic and foreign investors especially non-resident Sri Lankans. The responses received by the CSE on the marketing strategies implemented thus far were positive. The Exchange received over 3000 direct responses to the advertising campaign. The CSE’s advertising campaign won a bronze award in the Investment Category at the SLIM Awards 2002. The Exchange has already put in place a system to track and evaluate the effectiveness of its marketing initiatives in order to better direct the campaign and optimize resources spent.

The CSE has also re-launched its web site to include on-line market information for the benefit of investors.

The web site includes information on listed companies, corporate announcements, market statistics and CSE & CDS rules. The CSE commenced an e-mail service to provide interim financial statements of listed companies to subscribers. The CSE released a new publication, "A Guide to Milanka Companies’ which gives a 5-year summary of dividends, rights and bonus issues of companies included in the MPI. The Exchange has continued its programme of enhancing investor education through seminars and workshops.

Plans have been finalized for the 2nd branch of the Exchange to be opened in Kandy in the 2nd quarter of 2003. Five Member Firms (Bartleet Mallory Stockbrokers, DP Global Securities, HNB Stockbrokers, MMBL Phillip Securities and S C Securities) have confirmed their interest in offering stockbroking services in the proposed Kandy Branch

The Exchange together with representatives of Member Firms undertook a factfinding mission to Jaffna with the objective of offering stockbroking services. The potential in Jaffna for capital market products is immense.

The CSE intends to open a branch in Jaffna once communication facilities and other infrastructure are in place for it to do so. The Exchange is happy to note that Bartleet Mallory Stock Brokers have appointed an agent in Jaffna to offer stockbroking services.

The Exchange is also working on an initiative to offer stockbroking services through commercial banks acting as agents of stockbrokers. This would enable investors easy access to the stock market at an affordable cost.

It is indeed unfortunate that Member Firms have not introduced web based trading as yet. The security systems at the Exchange to facilitate Internet trading have been in place for over 2 years. Even though Internet penetration in Sri Lanka is low, web based technologies would enable stockbrokers to expand their reach nationally and internationally.

Corporate Reporting and Governance

The corporate world has been jolted by news of business failures attributed to fraud. Auditors of companies have come under tremendous pressure in recent times due to their failure to detect fraud and corporate collapse in advance. The remedies recommended to prevent fraud by various regulatory authorities have largely centered on corporate governance initiatives and auditor independence.

The CSE is of the view that ensuring auditor independence per se may not be sufficient to prevent or detect fraud. Statutory audits lack sufficient scope to detect corporate collapse well in advance.

In this context we are of the view that consideration should be given to introducing systems and corporate governance audits in addition to statutory audits. These audits would be more effective in alerting investors and regulators to the potential risks that exists in the business well in advance.

Consideration may also be necessary regarding the adequacy of the content of business reports. At present a company’s financial accounts is the main form in which information is disseminated to investors and shareholders.

Recent studies have shown that financial statements may not portray a company’s potential and risk adequately. In any event financial statements relate to the past whereas investors are more interested in the company’s future potential. Striking a balance in this regard is important. Companies should not be over burdened with information requirements to an extent that the capital market becomes uncompetitive.

Many international exchanges have continuing listing rules based on the principles of corporate governance, the adherence to which is compulsory. The CSE however is considering a different approach whereby the adoption of disclosure standards based on corporate governance principles is made voluntary.

The CSE intends to structure a separate Board on the Exchange for companies that meet a given standard of governance in order to differentiate them from others that do not meet such a criteria. The purpose of this initiative is to make investors aware of companies, which adopt good governance with a view to empowering them to exercise their choice and place a premium on companies that follow good governance practices.

Divisional Reviews Listings and Surveillance

During the year under review the Exchange continued the evaluation of its listing rules. On the feedback received from market participants the rule on "Transfer & Registration of Securities" in Section 5 of the listing rules dealing with Articles of Association was amended.

The Articles of Association of a company constitute a contract between the company and its Members. In this context addressing the rights of debenture holders regarding the transfer and registration of debt securities in the Articles of Association was considered inappropriate.

A new rule was included in section 1 of the listing rules requiring the debenture certificate to include the following endorsement.

"The debentures shall be freely transferable and registration shall not be subject to any restriction save and except to the extent required for compliance with statutory requirements".

The rules relating to staff trades in the member regulations were amended permitting employees, directors, their spouses and nominees of broker firms to trade during trading hours. Previously directors and staff of broker firms could only enter their orders during the pre-open session.

The rules provide for staff orders being treated with lower priority in the event of a conflict with customer orders. The Chief Executive Officer or the Compliance Officer of the Member Firm is required to ensure that a system is in place to avoid any conflict of interest that may arise due to staff trades.

Matara Branch

The daily average turnover of the CSE’s Matara Branch was Rs. 4.8 Mn last year appreciating by over 166% in comparison to 2001 (Figure 14). It is encouraging to note that the contribution to turnover by the Matara Branch has also appreciated, even though marginally, in relation to 2001. When the CSE established the Branch in June 1999, the contribution to total turnover was 0.4%; in 2002 it averaged 3.7%.

The Matara Branch continued its marketing initiatives by conducting more than 60 workshops and seminars, which contributed to raising the levels of awareness amongst investors in the region. The number of new CDS accounts opened through the Matara Branch increased to 880 in comparison to 326 accounts opened in 2001.

We believe that there is further potential to harness new investors in the Southern Province and encourage existing investors to increase their investments, given that the deposit mobilization of banks in the region is substantial. The marketing initiatives of the Matara Branch would be further enhanced in a bid to realize this potential.

Central Depository System

The year 2002 saw a marked increase in the activities of the CDS influenced by the significant interest of investors in both the primary and secondary markets (Figure 15). The number of new CDS accounts opened during the year exceeded 11,000 as against 5,067 in 2001, an increase of 117%. The CDS handled over 62,000 deposits of securities as compared to 24,718 in the previous year.

Clearing and settlement of securities transacted through the Automated Trading System (ATS) does not take place on a DVP basis at present. With a view to minimizing the resulting systemic risk the CDS introduced a procedure to implement de facto DVP on transactions carried out through the "All or None" screen of the ATS. This facility is provided at the request of the selling broker and is available for transactions over Rs.25 Mn.

Our Vision

The vision of the CSE is to ‘Contribute to the wealth of the nation by creating value through securities". There is no doubt that we lived up to our vision in 2002. Much has been achieved in the past year, but much more remains to be done. In the final count it is size, liquidity, products offered and investment funds raised that will determine the effectiveness of the capital market. On all counts the CSE still lags behind.

As noted above, the CSE has taken and will take various initiatives to expand its product and service base with the goal of enhancing its value to both issuers and investors. The CSE’s marketing campaign will be focused on motivating listings and investment. Institutional reforms will ensure the creation of a commercial focus creating an environment for the CSE to be more competitive.

However, the Exchange single handedly cannot shape the future of the capital market. The combined efforts of all stakeholders in the financial system are imperative to achieve the vision of Sri Lanka being the financial hub in the region. The support of the government is vital to accelerate the pace of change. This support can take many forms from private sector friendly policies, legislative enactment, tax incentives, listing privatized entities, coordinating the preparation of a financial sector master plan and more importantly removing obstacles and supporting the implementation of the plan within an agreed time period.

We look forward to building on the gains made in 2002. The potential today if anything is even greater, we are moving ahead with confidence to realize this potential.
(Concluded)