Business Times

Time to list state enterprises: Capital market expert

A capital market expert says the government should consider listing suitable state owned enterprises, to boost the Colombo stockmarket. Former Director General of the Securities and Exchange Commission, Channa de Silva, says the stock market needs more large scale companies to come on board - to generate volumes to cater to large scale foreign investors. State owned enterprises, that are well managed and making profits, are seen as a good option that will benefit investors, government and the stockmarket.

Channa de Silva

“The government should consider listing some of the better managed, profit-making state owned enterprises. This will increase the market capitalisation of the Colombo Stock Exchange, and because the market’s price to earning ratio is now quite high, the government will get a high value for its shares as well. The government can also consider employee share options,” Mr de Silva told the Business Times after a presentation on the stock market, at the Sunday Times Business Club, this week.
State enterprises like SriLankan Airlines Catering, SriLankan Airlines, Shell Gas and many others, says Mr de Silva, can be considered for listing on the Colombo Stock Exchange. This move is expected to expand the market and make it more attractive to bigger players.

“Colombo is now one of the best performing stock markets in the world. So there is a lot of interest by big investors. But we need to address supply side limitations. The need now, is for more large and medium sized companies to come and list. State enterprises are one possibility,” says Mr de Silva.
The fact is, the Colombo Stock Exchange, despite its tigerish behaviour post-war, is still too shallow for the big fish. Although Sri Lanka would like shoals of big investors to come in, Colombo just does not offer enough bait to feed the big fish.

“Big investors need large volumes. But in Sri Lanka we don’t have enough large companies listed, to offer that kind of volumes. The free float is also very limited. Currently owners of listed companies hold onto the majority of shares and do not trade these shares. Some companies offer less than 10% of shares for trading. So the volumes available to trade are very limited,” explained Mr de Silva.
Another factor is that the Colombo stockmarket’s price to earning (P/E) ratio is now at 22.5. This is high compared to most countries. It translates into Colombo being a rather expensive spot to invest in, although it also indicates high value potential.

“At this point share prices should not increase significantly because then the market will get over heated. So this situation is good for long term investors, who will hold onto their shares for a reasonable period of time, like one year or more,” said Mr de Silva. But this means Sri Lanka now needs to attract a different calibre of investors, compared to the war times. During the years of war, the Colombo market generally had P/Es of below 10. So foreign investors were mainly those that bought in because the market was cheap, and sold out quite soon when the prices climbed.

“What we need now are local and foreign investors who will invest in the long term,” says Mr de Silva.
Given this backdrop, the time is seen as ripe for state owned enterprises to come into the stock market. Listing state enterprises will give more choices to investors while the high market P/E is expected to give the government good value for its shares. Listing is also expected to improve governance aspects of state enterprises, as they will have to give a regular and timely account of themselves under stock market regulations.

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