Sri Lanka needs a proper clearing house for its equity market, as the Colombo Stock Exchange's existing Central Depository System (CDS) doesn't allow investor netting, which shows an investor's history of trades across multiple CDS accounts. This will also prove especially important as the local commodity and derivative markets grow in scope. Further, a clearing house will make broker swapping, where a share portfolio can be moved from one stockbroker to another, much easier as there will be no need for additional paperwork.
The local stock market is overvalued, and has few investible Exchange Traded Funds (ETFs). The problem is that ETFs are difficult to maintain because of limited liquid stocks.
The above comments were made by Dr. Naveen Gunawardane, the Head of Investment Banking at Sri Lankan investment bank Capital Alliance, which recently partnered with the Sri Lanka Press Institute to carry out an educational session on capital markets.
In addition, the country should also introduce the practice of shorting, or short selling, which allows borrowing a stock from a broker and selling it and then buying it back at a later date, hopefully at a lower price, and returning to the broker. While currently not allowed here, it will ultimately add to the local market's stability.
In Sri Lanka, the equity market consists of predominantly retail investors, with only a handful of institutional investors. A lot more institutional investors are needed for greater stability. Additionally, while there are two ways to raise capital in the local market, debt has to be paid back, but equity is permanent capital which makes it the better option for local companies which they need to access.