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CSE considers branch in Jaffna
By Suren Gnanaraj
The Colombo bourse, for long in the doldrums, has got re-activated this year following the truce between government forces and Tiger terrorists and the peace talks between the two sides. The market has been slowly moving up this year, gaining nearly 30 percent, with a few dips largely on account of profit taking. It reacted coolly to the news that the market watchdog, the Securities and Exchange Commission, was investigating alleged insider dealing by its own chairman as well as the chairman of the Colombo Stock Exchange.

The market dipped again last week as investors were unnerved by the crisis in the Sri Lanka Muslim Congress, whose support is critical to prop up the government in parliament. Investors are worried that the government might fall with the loss of SLMC support, derailing the entire peace process. In this interview, Hiran Mendis, director general of the Colombo Stock Exchange outlines the current state of play in the market and its plans to expand.

How has the stock market reacted this year since the peace process got under way?
The market has reacted extremely positively. In fact, the Milanka Price Index and the All Share Price Index have risen by 30 percent this year. The foreign inflows, which is another index we use, have also increased by Rs. 2.5 billion. As you know, we had three large Initial Public Offerings (IPOs) almost consecutively, which was unprecedented.

This has renewed interest amongst the public in the stock market, and I think the result speaks for itself. All three IPOs were oversubscribed. Apollo was offering 308 million shares, but received 800 million subscriptions. Tess Agro, which was a comparatively smaller IPO, called for shares worth Rs.25 million and at the close had received subscriptions worth Rs.75 million. The SLT results are still pending, but that too was heavily oversubscribed. In November, we have witnessed growth in both the primary and secondary market.

What are the new measures taken by the Colombo Stock Exchange to further attract investors?
We have begun a wide scale marketing and publicity campaign together with Leo Burnett to educate people across the island about the tremendous opportunities and advantages in investing their savings in the stock market, and convince them that it is a better alternative to other investments such as treasury bonds and bills.

Our campaign has also been directed at companies, to list in the stock exchange. There again I think the response that the three IPOs received will encourage more companies to list in the stock market.

Another objective we have our sights set on, is gaining a place in the Morgan Stanley Emerging Market Index, which is the apex market index to attract foreign investors. The CSE lost this index two years ago, due to poor market capitalisation and liquidity.

How much more does the CSE need to do to get into this market index?
We need to improve our market capitalisation and liquidity, which is the key criterion in achieving this market index. At present, Sri Lanka's market capitalisation is 7-8 percent of GDP and is relatively lower than most countries in the world, but following the peace process and the economic recovery in the country, we have the potential to double or treble that figure.

The SLT IPO alone has increased stock market capitalisation by 15-20 percent. But it's hard to specify an exact date as such in terms of when the CSE can obtain this index.

What are the key benefits of listing in the stock market today?
The key objective of listing a company is to raise capital. The cost of raising capital for a company reduces when their share value increases. The other benefit is valuation. The increase or decrease of a company's shares reflects how the public appreciates your company and its performance.

In light of the Richard Peiris Company takeover by Dr. Sena Yaddehige, a majority shareholder, how would you convince companies that they would be safe from such hostile takeovers?
When you list in the stock market, there is a certain amount of responsibility on the part of the company to be constantly vigilant. Like any other market, the stock market too has benefits, gains and losses. But the biggest advantage a company has, is that it holds the right to decide the extent of the public issue to the stock market.

There is no regulation for a company to divest 60 percent of its shares to the public. They have substantial control. There is also the Takeovers and Mergers Code by which listed companies can seek protection.

But companies must weigh the benefits against the risks of listing in the stock market. A listing must be part of the company's overall financial strategy.

What are the recent initiatives taken by the stock exchange in spreading its wings across the island?
We have an Investor Services Exchange in Matara, which we set up three years ago, and we should be in Kandy in another year's time. We also have the necessary infrastructure and security, such as firewalls, to commence trading on the Internet.

We hope to broad base the market through the Internet, because we feel that trading via the Internet is easier, efficient and cost effective. However, we are aware that Internet penetration is low in most areas of the country. We are, however, optimistic, and once communication facilities improve, we intend setting up in Jaffna.

Could you explain the concept of de-mutualising the Colombo Stock Exchange?
Today, the stock exchange could be classified as an association limited by guarantee, unlike a private company, which is limited by shares. The concept of de-mutualising means transforming this association into a company limited by shares.

This means that an association, which previously functioned for the benefit of its members (listed companies, brokers etc.), would now take on a company perspective, where decisions would be taken for the future development of the stock exchange. We would issue shares, and our decisions would now be financially assessed in terms of profits and losses.

The Stockholm stock exchange was the first to adopt this concept, following which the London, Hong Kong and Australian stock exchanges have either already been de-mutualised or are in the process of doing so. The Colombo Stock Exchange first got such an idea in 1999

The reason being that though the CSE has a virtual monopoly in the country we still face stiff competition, because we provide similar services as other financial institutions. We provide an investor with an alternate method of utilising his savings when he deposits his money on shares. Then we make finances available to companies. So we have a challenge in making the stock market more attractive for both parties.

When is this concept going to take effect?
At present, we have consultants from the Asian Development Bank drafting a specific de-mutualising model for the Colombo Stock Exchange, and as soon as that is complete, we would look to make the change.

Do you have any plans to merge with any foreign stock exchanges?
To make the CSE large and competitive, we need to have strategic alliances with other stock markets. We need to create cross listing and cross trading if the CSE is to expand. So far we have had discussions with the Singapore Stock Exchange to form a strategic alliance between the two markets. However, it will take time for these alliances to materialise.

But take for example, EURONEX, a strategic alliance between four European stock exchanges. Each stock exchange operates in its own country, but they function as one stock exchange, allowing a Frenchman to buy stocks of a company in Amsterdam. Instead of remaining fragmented, these European countries have been successful in achieving a competitive advantage over the larger London Stock Exchange.

Given the fact that Singapore is considered the financial hub of Asia, an alliance between the two markets would definitely boost Sri Lanka's potential growth in becoming the financial hub of south Asia. At present, amendments are being made to the law to allow overseas companies to list in the CSE.

The recent SEC inquiry into insider dealing has resulted in a public outcry for more transparency in the stock exchange and the SEC.

What are your thoughts on this?
I would like to state that the CSE is a transparent body that maintains good governance. The Director General executes the CSE's executive functions, while the Chairman and the Board of Directors carry out policy planning. There is a clear separation between the two entities, and in my five years as Director General, no chairman has ever influenced my decision-making.

How do you expect to build investor confidence when the SEC and the chairman of the CSE remain tight-lipped about this controversy?
I would like to state very clearly that the Chairman of the CSE has not been informed of any investigation carried out against him by the SEC. Secondly, I would like to say that the CSE has not remained tight lipped about anything, and we have disseminated whatever information we have received to the public

The statement by our Chairman and the statement issued by Aitken Spence regarding their financial report for the period in question are ample testimony of our actions.

I would also like to state that the inquiry is being carried out by the SEC and therefore you would have to speak to the SEC to find out any information regarding the inquiry or as to why they remain silent.

The SEC is the key independent watchdog body of the stock exchange and its main objective is to protect the rights of investors. If they remain silent on this issue, who are they protecting? And how do you convince the public that the stock market is safe?
This is where the media is so important. The media has to make people aware, that they should educate themselves about the company, in which they want to invest. The media can also do a great deal in making people aware of the new instruments we have to offer and their benefits. Investors should look for good governance of a company, and assess the returns they can make from their investment.

There is speculation that the SEC inquiry will lead to an indirect or direct impact on the future of citizens placing their savings on stocks and shares. What are your thoughts on that?
The investor does not place his money on the SEC or the CSE, but on listed companies. Therefore, the investor must make an educated decision about his potential investment.

What are your thoughts about the future of the CSE?
If the peace process is successful, and the economy maintains its recovery, the market should definitely grow very soon. In fact, when the first round of peace talks began in mid-September, the stock market rose by 14 percent, which is, at present the best month of trading for the whole year.

HSBC returns as primary dealer
The Hongkong and Shanghai Banking Corporation Limited (HSBC) was last week reappointed as a primary dealer in the government securities market after amendments to the existing legislation. The bank that previously had been a primary dealer had to opt out in the year 2000 after changes to the Local Treasury Bills Ordinance and Registered Stocks and Securities Ordinance were effected requiring primary dealers to be incorporated separately as local companies with a capital requirement of Rs. 150 million. This was reversed in March this year.

"We opted out mainly because of the separate entity requirement which was not viable for us as part of a branch operation of a foreign bank" said Sarath Piyaratne, the bank's Deputy Chief Executive Officer - Sri Lanka. However, the bank has been an active secondary market player during the two-year period and views its return as primary dealer as a position that allows it to offer a better service to customers.

This new position enables the bank's treasury and capital markets arm to offer better two-way price liquidity with narrow spreads while being able to introduce new products coupled with its distinguished customer service.

This also allows the bank to deal with not just government securities but instruments such as debentures, pro-notes and commercial papers. The bank also prides itself as the only foreign bank in the local government securities market. "As a foreign bank with primary dealership and expertise around the world, and overseas trained staff we hope to be much more competitive and deliver a high level of customer service" added Piyaratne. (AA)

Privatising Sri Lanka Railways
By Dr. Frank Wingler
The privatisation lobby is developing hopes that selling a major stake of Sri Lanka Railways (SLR)to a private operator might be the panacea to maintain the ailing railway system.

Politicians, Ministers, General Managers have shied away from undertaking important structural reforms because of political reasons. The administrative and political leadership have failed to reform and modernise SLR, to marginalize corruption, nepotism and commission hunting. To give a controlling stake of SLR to foreign private corporations would be a revelation of the inadequacy of the past.

Some of the allocated funds for technical and engineering renovations have been plundered by commission hunters. The rail tracks have been ruined and spoiled by inferior engineering works. Sri Lanka Railways has engineered a self destructive interactive rail-wheel system: The bad and warped rail tracks ruin the rolling stocks and jerking and jumping worn out rolling stock distort the already "dancing" rail tracks.

People get injured or killed on the rail tracks by collisions, crashes and derailments.
Expensive locomotives and coaches, which SLR is already short of, have got ruined or damaged by accidents and derailments. There is no money to purchase the simplest safety devices like speed control units and warning horns, let alone to replace the ruined and worn out rolling stock by new imports.

The repair shops can't cope any more with the repair and maintenance of the rolling stock, damaged by derailments and accidents or worn out during service. There are no spares available to repair the dilapidated brake systems. Dangerous rail defects remain unattended for months. There are even no rails available to replace fractured and broken rails, so that the repair gangs bridge gaps by unauthorised and hazardous methods.

There is no ballast to fill hazardous gaps and potholes under the sleepers. And the GMR said recently to the press he was unable to give a reason for recent derailments (The Sunday Times July 14th, 2002, Page 3).

The gap between operational costs and revenues by ticket sales is becoming bigger and bigger. The tariff system has been unchanged for years. With every new commuter train filled with season ticket holders paying less than three cents per kilometre, the financial losses become bigger. SLR is running on heavy losses and has now become a heavy burden to the government.

Privatisation is now the magic word of the cure of ailing government assets, amongst others the railway, which has been once the pride and joy of Ceylon. Now the exchequer develops plans to sell SLR dirt-cheap to private corporations in order to get rid of the responsibility to restructure and to reorganise it. The commission hunters lie already in wait to catch their shares from lucrative deals with private consultants and corporations.

The main intention of a private operator is to make a profit out of his business and less to serve the socio-economic situation of the Sri Lankan society. The privatisation of British Rail demonstrates what can go wrong and how things drag on without improvements. The British government now has to pump more money into this privatised system than ever before to keep the train transport as a system for the conveyance of people and goods alive.

The same can happen to the Sri Lankan government. Not only the private operators have to be fed but also the commission hunters, already lobbying for privatisation. Privatisation of SLR might become an expensive adventure pleasing the commission hunters and annoying the taxpayers.

To give SLR to private ownership or to give a major stake of control line by line to others might become much more costly for the government than to make the necessary sweeping reforms and adjustments of the administration, engineering works and infrastructure.

A state-controlled railway as a state enterprise is a tool for steering the socio-economic situation and development. This tool should not be given to the hands of private operators who can't care for the overall benefit of the country because they have to make profits.

The SLR has been paralysed like other state assets by unbridled political interference of commission hunters, rampant corruption, poor management, a lack of right vision and discipline and by unqualified engineering works. The government can now no longer afford to provide the crutches to keep this ailing patient hobbling along. The resources have been drained and there is simply no money left to sustain the institution, let alone develop it.

It is an open question under what conditions a private operator is willing to render a profitable transport service on the warped, worn out and unstable rail tracks filled with numerous derailment traps and hidden embankment defects.

To maintain the SLR the government should develop independent qualified controlling institutions with engineers sans corruption and with competence to control and monitor the engineering works for rail tracks, rolling stocks, signalling and infrastructure. A government controlled Strategic Railway Authority is needed.

Privatisation is not always "The Way Forward To Go". If Sri Lanka is short of funds for the transport sector, why not halt the prestigious super highway projects and use the money to control and rehabilitate Sri Lanka Railways under qualified government supervision by means of a strategic Railway Authority?.

ETF launches work improvement teams
The Employees' Trust Fund Board recently launched its latest initiative work improvement through team working sessions. All representative unions will also be actively involved in this initiative, an ETF statement said.

"The processes of improving the quality of work through team effort have been the most effective methods for delivering enhanced performance and superior customer satisfaction. The greatest contribution to improving a work process can only come from those employees who are directly involved in that processes. In this sense, team effort within the organisation will bring about continuous improvement of performance, making such organisation affective, efficient and profitable.

The initiative was planned by ETF consultant R. Reffai and is being conducted by the well-known quality trainer Alahendra Amaradasa," the statement said. "The ingenuity of employees coupled with a knowledge of analytical tools offers vast potential to involve people at all levels in improving the quality of service. "

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