Year on the Web

16th March 1997

Optimism returns to the market

Market focus By Analyst

Renewed foreign investments in the CSM has increased the SPI to 630 levels with very large volumes of shares and turnover to back. Average turnover being in the region of 60 million for a day, it was evident that a degree of optimism had returned to the market. Retail investors were mostly picking on bargain counters such as the low priced merchant banking sector. Uncertainty regarding the re-imposition and implementation of the turnover tax under Act No. 69 of 1981 which states that a "Person who has bought and sold shares may be liable to pay Turnover tax", is causing concern in the investment community. As most companies, individuals, foreign investors have not taken this into consideration in their trading activities, the effect of its implementation would be catastrophical to the market. The government on the other hand by implementing this measure would be the recepient of Rs. 8 billion to 10 billion of back taxes (TT). As most companies have not provided for TT in share transactions, if provisions are considered at this juncture, company profits could be wiped out, mainly in the case of quoted companies. Considering TT, the transaction cost for a buy or sell would be 8-10%. Uncertainty of the front-end transaction cost would jeopardise the investor confidence in the market.

NDB works out fresh line for SMIs

Small and Medium Industries (SMIs) in Sri Lanka would continue to receive credit funded by a new foreign credit line, the World Bank and Asian Development Bank halting credit lines for the sector, the National Development Bank has said.The NDB has acted as the apex institution charged with channelling funds to participating credit institutions which ultimately lent to the industries. This will recommence the refinance facility this quarter. The most recent US $ 75 mn SMI scheme jointly funded by the Asian Development Bank and World Bank had ended in mid-1996. The two institutions had then decided not to extend further credit to the sector. Several banks which participated in the scheme had continued to lend to the SMI sector using their own funds. "However there was a significant drop in the flow of funds to the sector since the banks were unable to commit large resources on a long term basis to the sector," NDB Chief Executive Ranjith Fernando said. In 1995 Rs 894 mn had been disbursed to the sector and Rs 981 mn in 1996. The full commitment of the most recent SMI scheme was delayed when ADB and World Bank suspended Bank of Ceylon and the People's Bank from acting as participating credit institutions of the scheme following concerns about their financial stability, but the two banks were later brought into the programme once they were restructured with government bonds. Private domestic banks, the DFCC and regional rural development banks also lend under the SMI scheme. Following demands from industrialists to re-introduce the scheme, the Industrial Development Ministry and the Central Bank had reviewed the issue and given NDB the go-ahead to secure credit lines from other sources. Since the start of the SMI scheme 15,700 projects had been assisted generating an estimated 138,000 employment opportunities. Capital formation is put at Rs 32 bn. After participating in the scheme for 17 years the banks have set up their own SMI departments staffed with experienced personnel, Mr. Fernando said/The scheme provided a definite focus and identity for mobilising the participation of banks to cater to the financing needs of the small and medium industry sector, he added.

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