The Prince of Kandy

Thanks to COVID-19 a lot of things that should have happened in Sri Lanka a long time ago have happened. The Amended Electronic Transactions Act was recognised[i], and a lot of things went into the digital space. The stock exchange has also revamped their website and through guidance has made it easy for firms to migrate, hopefully eternally, to hybrid AGMs. The yesteryear AGMs full of retirees with one share scrounging on complimentary bites and wasting everyone’s time with planted questions is most likely now completely over.

The CSE has also fast-tracked demutualisation, put in place the framework for a delivery vs payment mechanism system, and started pro-active communication at levels that matter. The Securities and Exchange Commission has grown a pair[ii] and looked to pose the question on the central bank’s constructed primary dealer monopoly on the debt markets.

To quote the article;

The SEC Chairman explained to the Governor that there had been an initiative under the Financial Sector Modernisation Project (FSMP) funded by the World Bank to set up an integrated Central Counter Party system (CCP) with regard to settlement of securities. However, later the Central Bank had decided to limit the CCP to only Government Securities and domestic foreign currency transactions in the initial phase.

On Corporate Debt

Debt issuances remain in the confines of a select elite, but the cracks are beginning to show. People are being duped by the current negative real returns at banks and the potential negative real return at the Employees Provident Fund. They will lobby for open markets in the foreseeable future.

Trading of corporate debt on the exchange remains closed. Atrad the system used by most brokerages has not been allowed by regulation to interface with the debt boards. Even Capital Alliance the self-proclaimed leader in debt and a primary dealer does not allow the regular Joe to interface with the system. Only Jafferjee Brothers Stockbrokers allow their clientele to trade on the corporate debt market without interfacing with an advisor.

The Qualified Investor rule, where issuances remain closed to those under Rs 5 million in corporate debt holding, remains a huge deterrent and an unnecessary protective measure to the success of the market. Small-time investors provide liquidity, price discovery, and a higher margin business to the brokerages.

So long as the investor is willing to accept the risks, they should be allowed entry. After all young people working in the industry have been deemed by the regulator to be qualified to do so but would not be able to do so with such a high entry barrier.

Concentration of Issuance

The debt and share issuances through public offerings remain monopolistic. Those acquainted with dynamic models (considering time) would realise how the starting concentrations of holdings would impact the subsequent trading of an instrument. Current practices allow companies considerable power in the instance of over-subscription on how to allocate the shares.

Put simply if a company has an IPO which is oversubscribed 5 times over and then decides to issue shares to the largest bidders then there would be subsequently less day to day trading of the share. If the company decides to allocate shares to the smaller bidders, then there would be more trading of the share. With equity, this form of allocation is understandable as there is an element of control but with debt, it is hard to see the regulators rationale.

We live in a nation of obscene concentrations of wealth. It is the tendency that companies roll over debt. They always have a liabilities side to their balance sheet. In the case of trouble with high concentrations of issuances, powerful people can influence the banking system to pump credit into a company to allow their debt to be paid off and socialise the eventual losses through the banking system.

The paternalism of the exchange

Most people would quite rightly dismiss the endorsement of the exchange. The imbalance in net worth between the regulator/exchange and those being regulated is too vast to be bridged. The SEC with its enforcement track record has dissuaded many from entering the market.

This, however, is beyond the capital markets. We live in a country wherein even the notion of vehicular homicide is not discussed over prolonged periods.

In this vein, the regulator takes on the same thinking as Lankan parents to a daughter and her social life. The same daughter would be allowed every freedom in the West but not so at home because it is not safe. This all results in us not having the same products that they do in the West.

The difference with capital markets

Capital, however, is different from a human being. In the grander scheme of things (life/death) it will not matter. The beauty of the American system is its ability to foster incredible wealth. This success cannot come without concurrent freedom to house spectacular failure.

The US housing market is one of the most volatile. It has crashed multiple times and most recently even took out the pension savings of its allies in Europe. Capitalism on such a scale may not be agreeable to Leftist Lanka but one cannot disagree with the immense wealth stored in the property in New York and California. The powerful in Sri Lanka is currently attempting this in the property developments in Colombo.

American optimism is undeniably one of the greatest forces in the global economy. A recent paper[iii] from the Bank of England finds that the global faith in American credit underpins a major chunk of global trade.

US households do not finance current account deficits with foreigners’ physical saving, but with digital purchasing power, created by banks that are more likely to be domestic than foreign. –

How does international capital flow? Michael Kumhof, Phurichai Rungcharoenkitkul and Andrej Sokol

Forcing the Issue

Take the proposed REIT framework and Empower board. The uptake has been slow. Small companies are not going to have the same level of box-ticking capacity as their larger rivals. If they want to list and someone wants to invest in them why not let them?

Large companies are riddled with fraud it is just that we are unable to see it. The 634,557 that can trade on the CSE like money and want more of it. We are capable of making a risk to reward judgement and don’t want some communist telling us otherwise.

Take the rule that REITs have to pay out 95% of their earnings. In the current market most would want a REIT instrument to reinvest those earnings in more property. If managers don’t act in the interest of shareholders, we get rid of them. Don’t confine companies to what you think is right.

Ombudsman

Shareholders can only get rid of management when there are systems of democracy. The capacity to vote and the obligations of the company to every shareholder here are important.

The proposed ombudsman[iv] should be set up to interface digitally by default. The online stock forums were ranting on how Nations Trust Bank decided to pay their recent dividends by cheque and due to COVID-19 a dividend due on March 19 only got credited in July.

Setting up an easy interface where people can select which company they are complaining on and the common issue they are facing makes everything easy. Daraz.lk and Uber Eats have such systems that require minimal initial interfacing with the complainant. This saves time and resources to deal with the actual meat of the issue. 

Actual digitisation

Making information free

The CSE currently charges a fee of Rs 1000 for access to some information on its site. This information is readily available through other sources (notably any online trading system) and is sometimes even in the Annual Reports uploaded on the site.

Jafferjee Brothers provide a lot of information through their trading portal that is concise, easy to read, and helps in making decisions to trade. This means that people are more likely to make a decision to trade on the stockbroker’s website. Access to the trading portal is free and the broker makes money when people trade.

The CSE could go one step further and upload all available annual reports from even before the early 2000s to the website. This should not cost much and also is useful to long term investors like Warren Buffett. Making sure that accurate financial information is available on Bloomberg and FT.com is also important.

RSS

Enable Really Simple Syndication (RSS) on the CSE site. The information that is already published for free on the exchange requires a market participant to visit the platform to access it. Enabling RSS would mean that without investing in expensive systems the more tech-savvy could enable systems that provide alerts whenever a company a person is interested in makes a disclosure.

The Sri Lankan parliament and Foreign Central Banks have enabled RSS on all updates to their site. This allows the information on their site to be accessed more widely and without people needing to check regularly on a particular page.

People at the CSE and their mindset would think this would reduce the value of your site in terms of advertising and analytics. For instance, TopJobs.lk would never allow an RSS feed to be implemented as that would stop people having to visit their site. Through RSS TopJobs.lk would also be giving it’s rivals access to information in a manner that they can easily republish as their own.

Here it should be clearly reiterated that the CSE IS NOT IN THE BUSINESS OF RUNNING A WEBSITE. Widespread propagation of information from your site is good for the functioning of an exchange. This would increase the potential market participants.

European Single Electronic Format[v]

The European Single Electronic Format is a standard that sets out how financial information should be published. Foreign assistance and domestic implementation are possible for this initiative.

The EU aims to be the superpower of standards. The EU has lots of pension money that could greatly increase the value of our undervalued exchange.

Sri Lankan Accountants should look to convince their listed companies to adopt this standard and at the very least become familiar with something that can get them a job in a foreign company.

Email and voting systems

Everything from the CSE comes through the post. My postman is not happy especially when some incompetent company decides to send a printed annual report. With the amended Electronics Transaction Act this does not seem necessary.

The CSE should set up their own mail servers capable of reaching the 11,741 of us that hold shares in John Keells Holdings. These servers should be trustworthy and not end up sending mail to the spam folder. This would save considerably in postage and improve the quality of communication.

Voting on AGMs can be done digitally. Develop forms and systems at the CDS allowing people to interface easily with their companies.

Make space on the site to upload video

AGMS are now recorded and that makes it possible for them to be uploaded to the site. This allows people not able to access the livestream to see the proceedings of the event. It also helps future investors see the history of the company.

We have a large and proficient English-speaking population which is most apparent in our capital markets. We should look to communicate this internationally and get valuations more in line with a country that has had Test status for decades.

Conclusion

The President is a hands-on leader who likes to see things improving. People will have to show results in a timely fashion. The proposed reforms in this article are easy and in the public interest.

If you are doing things on pen and paper, at physical meetings, and/or slowly you are doing it wrong. The CSE must not be allowed to go back to its old ways and we the market participants should not allow it.

The trading system can now go back to a 9:30 am to 2:30 pm schedule. Not doing so would be an insult to the effectiveness of the COVID-19 taskforce.

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[i] http://www.dailynews.lk/2020/05/27/finance/219417/%E2%80%98no-legal-taboo-holding-agms-digitally%E2%80%99

[ii] http://www.ft.lk/front-page/SEC-Chairman-calls-on-Central-Bank-Governor/44-701656

[iii] https://www.bankofengland.co.uk/working-paper/2020/how-does-international-capital-flow

[iv] https://ceylontoday.lk/news/cse-ombudsman-to-be-introduced-soon

[v] https://www.esma.europa.eu/policy-activities/corporate-disclosure/european-single-electronic-format