The financial market recently saw the appointment of veteran investment banker Vajira Kulatilaka as the Chairperson of the Colombo Stock Exchange (CSE).
With the capital market currently being at a tipping point, CSE’s new Head is tasked with the responsibility of ensuring that the growth moves in a positive direction, which is vital for the economy. However, the new Chief, who succeeded Krishan Balendra to the post, is confident in his ability to take the capital market to the level it ideally should be.
To gain fine insights on the plans Kulatilaka has with regard to steering his newly-acquired ship towards success, the Daily FT met up with the CSE Chief for an interview where areas such as current status of the capital market, challenges and threats, room for improvement, and other key aspects were discussed.
Following are excerpts of the interview:
With the capital market currently being at a tipping point, CSE’s new Head is tasked with the responsibility of ensuring that the growth moves in a positive direction, which is vital for the economy. However, the new Chief, who succeeded Krishan Balendra to the post, is confident in his ability to take the capital market to the level it ideally should be.
To gain fine insights on the plans Kulatilaka has with regard to steering his newly-acquired ship towards success, the Daily FT met up with the CSE Chief for an interview where areas such as current status of the capital market, challenges and threats, room for improvement, and other key aspects were discussed.
Following are excerpts of the interview:
By Shabiya Ali Ahlam
Q: How does it feel being appointed CSE Chairperson?
A: There is always happiness when you achieve something but on top of that there is huge responsibility. This is because the capital market is at a tipping point at the moment with the country growing and private sector development. In this, the capital market has to play an important role. We have to cater to that need, if not there will be issues in capital formations. Therefore it is imperative we grow and for this we are getting together to get that job done, that is getting the capital market ready for something big. Getting about that is a huge responsibility.
Q: In the current context, how do you see the status of the capital market?
A: There are many weaknesses but we have achieved a lot. In 1992 we were the eighth in the world to get a Central Depository System (CDS). We were ahead of many capital markets in that sense. Unfortunately the country went through a bad period which made us fall behind. We need to accept this and realise that we need to leapfrog in many areas such as risk management, infrastructure, market development and product development. All this has to be done to make the capital market reach its real potential.
Q: Being appointed Chairman, what are the immediate and long-term issues you will be dealing with?
A: An immediate issue is to upgrade the risk management side. We are yet to implement global standards in that regard. The second is the need to have some instruments coming in. When we try to sell to foreign markets, they question the availability of some products that are highly popular in the world, especially with regard to derivatives. So those are the short- and long-term requirements we need to fulfil to make the market world class. If we fail to do that, we are doing the country’s growth potential a disservice.
Q: Do you think confidence has returned to the stock market since the difficult years in 2011 and 2012? Why aren’t retailers active in the market?
A: That was quite unfortunate. We have stockbrokers, the CSE and the Securities and Exchange Commission (SEC) selling and convincing that it is the right time to buy. When the market was at 4,500 points, we went around promoting, when it was 5,000 we did so again but retailers didn’t activate. They want the market to run well before they get in. This should not have happened. However, I am sure that retailers will get active soon. It will happen eventually. Some retailers were negatively impacted due to the downturn, but they will wake up. If you take any upward cycle, it is observed that initially it was foreigners who ran it. This has been the case since 1992.
The retailers should have come when it is 4,500, but now it is standing at about 6,000. Nevertheless, there is value and I am certain they will get activated soon.
Q: So are you saying that confidence has returned or that it is returning?
A: It is returning. Retail confidence is usually linked to momentum so it is coming out.
Q: It is said that interest rates below 8%, the price earnings ratio standing at 11 and an economic growth rate of 7% is a powerful combination that would make 2014 a turning point in the capital market. Would you agree?
A: I would like to establish that the capital market is not really a share market. It includes the debt and derivative market as well. The latter is what we are lacking. The debt market is observed to be picking up and that is where there is huge potential. Anywhere in the world the debt market is bigger than the share market.
Talking about the share market, yes companies are growing, so is the GDP. Unfortunately the GDP is not reflected in the capital market. For this there needs to be more listing happening for the reflection to take place. Whatever is there, the companies will grow, interest rates are low, but the debt market will grow. That is where most activities will take place.
Q: Where is the room for improvement? Who should do what?
A: Risk management needs improvements. The Central Counter Party (CCP) has to come here and for that we are working very hard with the Central Bank as well to bring in the necessary risk management systems. That is a must since when the market becomes bigger, risk has to be properly managed and we have to have global standards. That is the main area we should work on.
The other is in instruments. Hedging derivates does not necessarily mean speculation. There are lots of benefits that can be brought through derivative instruments. In India, for instance, farmers go to the extent of finding out what futures are like. Such level of importance is given to the derivative market.
Another area that we have to focus on is institution building. We need to carry out training and bring in new blood. There are lots of foreign-qualified students who are coming back and these are important management sources for the country. This is good since it will allow having fresh talent in stockbrokers, primary dealers and CSE. New technology will come through them so it is important to build institutions.
Q: How does it feel being appointed CSE Chairperson?
A: There is always happiness when you achieve something but on top of that there is huge responsibility. This is because the capital market is at a tipping point at the moment with the country growing and private sector development. In this, the capital market has to play an important role. We have to cater to that need, if not there will be issues in capital formations. Therefore it is imperative we grow and for this we are getting together to get that job done, that is getting the capital market ready for something big. Getting about that is a huge responsibility.
Q: In the current context, how do you see the status of the capital market?
A: There are many weaknesses but we have achieved a lot. In 1992 we were the eighth in the world to get a Central Depository System (CDS). We were ahead of many capital markets in that sense. Unfortunately the country went through a bad period which made us fall behind. We need to accept this and realise that we need to leapfrog in many areas such as risk management, infrastructure, market development and product development. All this has to be done to make the capital market reach its real potential.
Q: Being appointed Chairman, what are the immediate and long-term issues you will be dealing with?
A: An immediate issue is to upgrade the risk management side. We are yet to implement global standards in that regard. The second is the need to have some instruments coming in. When we try to sell to foreign markets, they question the availability of some products that are highly popular in the world, especially with regard to derivatives. So those are the short- and long-term requirements we need to fulfil to make the market world class. If we fail to do that, we are doing the country’s growth potential a disservice.
Q: Do you think confidence has returned to the stock market since the difficult years in 2011 and 2012? Why aren’t retailers active in the market?
A: That was quite unfortunate. We have stockbrokers, the CSE and the Securities and Exchange Commission (SEC) selling and convincing that it is the right time to buy. When the market was at 4,500 points, we went around promoting, when it was 5,000 we did so again but retailers didn’t activate. They want the market to run well before they get in. This should not have happened. However, I am sure that retailers will get active soon. It will happen eventually. Some retailers were negatively impacted due to the downturn, but they will wake up. If you take any upward cycle, it is observed that initially it was foreigners who ran it. This has been the case since 1992.
The retailers should have come when it is 4,500, but now it is standing at about 6,000. Nevertheless, there is value and I am certain they will get activated soon.
Q: So are you saying that confidence has returned or that it is returning?
A: It is returning. Retail confidence is usually linked to momentum so it is coming out.
Q: It is said that interest rates below 8%, the price earnings ratio standing at 11 and an economic growth rate of 7% is a powerful combination that would make 2014 a turning point in the capital market. Would you agree?
A: I would like to establish that the capital market is not really a share market. It includes the debt and derivative market as well. The latter is what we are lacking. The debt market is observed to be picking up and that is where there is huge potential. Anywhere in the world the debt market is bigger than the share market.
Talking about the share market, yes companies are growing, so is the GDP. Unfortunately the GDP is not reflected in the capital market. For this there needs to be more listing happening for the reflection to take place. Whatever is there, the companies will grow, interest rates are low, but the debt market will grow. That is where most activities will take place.
Q: Where is the room for improvement? Who should do what?
A: Risk management needs improvements. The Central Counter Party (CCP) has to come here and for that we are working very hard with the Central Bank as well to bring in the necessary risk management systems. That is a must since when the market becomes bigger, risk has to be properly managed and we have to have global standards. That is the main area we should work on.
The other is in instruments. Hedging derivates does not necessarily mean speculation. There are lots of benefits that can be brought through derivative instruments. In India, for instance, farmers go to the extent of finding out what futures are like. Such level of importance is given to the derivative market.
Another area that we have to focus on is institution building. We need to carry out training and bring in new blood. There are lots of foreign-qualified students who are coming back and these are important management sources for the country. This is good since it will allow having fresh talent in stockbrokers, primary dealers and CSE. New technology will come through them so it is important to build institutions.
“I personally think that listing is need-based. You cannot force people to list or delist. When you are growing and need capital, companies will come to the market. I feel that when companies are forced to list, they will not adhere to governance requirements. It is only natural that when forced, rules are not obeyed. It is good to wait for the need to arise, which will eventually come when companies are growing
Long-term investors like EPF should be allowed to come into the capital market since that is the only way the capital market can grow. Where will the capital market get long-term funds if those such as EPF do not come in? It is imperative they come in
From 2004 to 2008 the world was thriving and was flooded with dollars. Unfortunately Sri Lanka was engaged in the war. When it came out of the war, the world was in recession. We are unfortunate that way
Now, things are synchronising. Japan and America are growing and India will grow. India growing is good for Sri Lanka since there will always be spill-over effects. I think there is lot of synchronising happening in terms of growth and capital market will have to play an important role in that. We are gearing up for that. There is still more to do but we are getting ready for it
– CSE Chairperson Vajira Kulatilaka”
Q: So we need change?
A: Not change, really. We neglected this to a certain extent during the bad period the country was going through. During the war it was difficult to plan. No stockbroker wanted to bring in highly-paid staff simply because the situation was unpredictable. Now that period has passed and plans can be made afresh.
Q: What is the foreign investor appetite in Sri Lanka? Is it at the required levels? What measures planned to boost liquidity in the market?
A: One measure the SEC has taken is to put in a 25% public float. This is good to increase liquidity. There are many new IPOs taking place, which is also good.
There is nothing called best status of foreign investor appetite, nevertheless it is improving. We have to do more, which is why we are conducting road shows frequently and following up. We started with India, then Dubai, Hong Kong, Singapore, London and New York. We have covered the hearts of capital markets.
Our aim is to attract and gain the attention of the people. More and more foreigners are coming into the country, and that too new ones. When they come in, activities will improve.
The debt side is where there is talk going on with regard to investing, but it has yet to take place. The 8% exchange rate and this stability is great to have.
Q: What specific initiatives will CSE take to expand listings – both equities and debt especially in the context of many firms delisting with minimum float being a requirement?
A: It is not many who are delisting. I personally think that listing is need-based. You cannot force people to list or delist. When you are growing and need capital, companies will come to the market. I feel that when companies are forced to list, they will not adhere to governance requirements. It is only natural that when forced, rules are not obeyed. It is good to wait for the need to arise, which will eventually come when companies are growing. They cannot continue to turn to banks and debentures; they will have to turn to equity.
There may be a few who feel there is no need to remain in the market and will delist and some may come back. The delisting is not something that is uncommon in the word. It is only a handful that are delisting and those are the smaller illiquid companies.
The good thing about regulation is that listed ones will submit plans on how the float will be increased. Once that takes place, we will be qualified to go for various indexes.
It is a transition phase that we are going through. We brought in a rule; some are delisting, listed ones have to give a plan, and when they adhere to that, I am sure the market will benefit.
Q: There has been some criticism about investments in equities by State funds such as EPF, especially with the value of some of their holdings being down. Can you comment on the need for long-term funds to invest in the market?
A: Again, I would define the capital market as debt and equity. On the debt side nothing much has happened. Remember that debt cannot be taken to the grassroots level and its benefits will come only through big funds. The EPF is one such where millions will benefit by going for corporate debt. So on the debt side, there is no question that by coming in it will benefit the capital market because it has long-term funds. It is always good to get them to invest.
Looking at equity, it fluctuates. I personally think that long-term investors like EPF should be allowed to come to the capital market since that is the only way the capital market can
grow. Where will the capital market get long-term funds when those such as EPF do not come in? It is imperative they come in.
Q: The CSE has about 29 stockbrokers in operation and this number is observed to be high since it makes it difficult for all to sustain business. What is your take on this?
A: Weaker parties suffer when the market goes down. If you had questioned the stockbrokers a month ago, they would have poured out their problems, but today when you ask them, a different story is what you will hear since the market is growing. After a month or so, they will say they have no problems.
However, in a bad market 29 stockbrokers is a bit much, but in a good market it is hardly enough. The period we gave licenses to 19 brokers was very good. It is not us who went behind them; it was they who came to us with many applications. We even had to reject some. Soon after that it was unfortunate that the market collapsed and went through a correction. That is where the problem started.
Q: You are saying that the CSE is not cluttered?
A: If there is about Rs. 2 billion turnover per day, then it is certainly not cluttered. If it is at Rs. 500 or Rs. 600 million, then it is too much. We need to have a per day turnover of Rs. 2 billion.
Q: There was a proposal put forward by several brokers requesting temporary deactivation of operations. How has this been handled?
A: It was requested but no one got it. No stockbroker was deactivated.
Q: What further reforms are being planned in capital markets?
A: There are a couple of reforms in the pipeline. In addition to the CCP on the risk management side, there are new investment avenues that are planned, one such is REEDs. We are also planning on more index funds, it is important since such are not available here.
Q: What is the progress of CSE’s demutualisation?
A: There are ups and downs, but it is progressing. We are currently working on the share allocation. There are legal requirements where the Act has to change and be passed, we are working on those areas. We are keen on doing it.
Q: As CSE Chairman, what would you list as your biggest challenge and threat to capital markets?
A: The biggest challenge is to bring it up to world standards. We are doing a lot but have to manage risk levels and give a work class introduction for people to trade on. That we can do only through technology, risk management and building people. Developing these three is a challenge.
In terms of threats, I would say we ourselves are the only threat. World over people get confidence in the capital market, especially the share market, when there is stability for a longer period. And when I say stability I mean economic, political and social stability. We have the ingredients to have all but there are some hiccups. The incident that took place mid last month was one of those. When such event takes place, people tend to rethink their decisions and if they are in the right place. Foreigners will think whether they are in the right country, others will think whether they are in the right asset class.
All countries that developed the capital market did so through stability. We have economic and political stability but social stability has yet to come in. If such events escalate it will be a big problem.
Q: What ideal roles should stockbrokers and other intermediaries play in making Colombo a dynamic market?
A: Institutional building has to take place. Research has to improve and selling has to improve. We need to bring in responsible salesmanship. This all happens if the stockbrokers have money, they have to do well. When the market improves, they will put in more and more efforts; once that happens, we can get the marketing part right.
The CSE together with the SEC is spending a lot of money to show the world the local capital market. On top of that, if stockbrokers themselves start selling, I think we can make a huge difference. They should be able to take over this role in the future. We can support to some extent in terms of preliminary work where the focus will be on image and brand building. The stockbrokers should be able to open branches overseas. That is where we should be, not here in Sri Lanka.
Q: How long do you suppose it will take to realise this vision?
A: It would have happened if 2009 and 2010 had continued, at least in terms of turnover levels. It then can be pushed. India is doing this, their stockbrokers are in Singapore. Similarly, in Sri Lanka, more and more brokers should venture out and start selling. We have not done this well.
Q: How is the progress of the CSE collaboration with the SEC in terms of realising the 10-point common agenda?
A: The SEC and CSE have been working together for about 22 years. We are collaborating well and have common goals. We know that for us to trade and thrive, and for the SEC to regulate, there needs to be a market. All 10 points we are closely working with and some of those results are already out. The corporate bond market was one that we developed where rules were brought in. Now we are licensing intermediaries. Debt trading and the way it is looked at is totally different as to how equities are treated. We need different types of people to sell and promote this. Overall we are working closely and the results can be seen one by one.
Q: Is there any message you would like to give?
A: From 2004 to 2008 the world was thriving and was flooded with dollars. Unfortunately Sri Lanka was engaged in the war. When it came out of the war, the world was in recession. We are unfortunate that way.
Now, things are synchronising. Japan and America are growing and India will grow. India growing is good for Sri Lanka since there will always be spill-over effects. I think there is lot of synchronising happening in terms of growth and capital market will have to play an important role in that. We are gearing up for that. There is still more to do but we are getting ready for it.
Pix By Lasantha Kumara
Long-term investors like EPF should be allowed to come into the capital market since that is the only way the capital market can grow. Where will the capital market get long-term funds if those such as EPF do not come in? It is imperative they come in
From 2004 to 2008 the world was thriving and was flooded with dollars. Unfortunately Sri Lanka was engaged in the war. When it came out of the war, the world was in recession. We are unfortunate that way
Now, things are synchronising. Japan and America are growing and India will grow. India growing is good for Sri Lanka since there will always be spill-over effects. I think there is lot of synchronising happening in terms of growth and capital market will have to play an important role in that. We are gearing up for that. There is still more to do but we are getting ready for it
– CSE Chairperson Vajira Kulatilaka”
Q: So we need change?
A: Not change, really. We neglected this to a certain extent during the bad period the country was going through. During the war it was difficult to plan. No stockbroker wanted to bring in highly-paid staff simply because the situation was unpredictable. Now that period has passed and plans can be made afresh.
Q: What is the foreign investor appetite in Sri Lanka? Is it at the required levels? What measures planned to boost liquidity in the market?
A: One measure the SEC has taken is to put in a 25% public float. This is good to increase liquidity. There are many new IPOs taking place, which is also good.
There is nothing called best status of foreign investor appetite, nevertheless it is improving. We have to do more, which is why we are conducting road shows frequently and following up. We started with India, then Dubai, Hong Kong, Singapore, London and New York. We have covered the hearts of capital markets.
Our aim is to attract and gain the attention of the people. More and more foreigners are coming into the country, and that too new ones. When they come in, activities will improve.
The debt side is where there is talk going on with regard to investing, but it has yet to take place. The 8% exchange rate and this stability is great to have.
Q: What specific initiatives will CSE take to expand listings – both equities and debt especially in the context of many firms delisting with minimum float being a requirement?
A: It is not many who are delisting. I personally think that listing is need-based. You cannot force people to list or delist. When you are growing and need capital, companies will come to the market. I feel that when companies are forced to list, they will not adhere to governance requirements. It is only natural that when forced, rules are not obeyed. It is good to wait for the need to arise, which will eventually come when companies are growing. They cannot continue to turn to banks and debentures; they will have to turn to equity.
There may be a few who feel there is no need to remain in the market and will delist and some may come back. The delisting is not something that is uncommon in the word. It is only a handful that are delisting and those are the smaller illiquid companies.
The good thing about regulation is that listed ones will submit plans on how the float will be increased. Once that takes place, we will be qualified to go for various indexes.
It is a transition phase that we are going through. We brought in a rule; some are delisting, listed ones have to give a plan, and when they adhere to that, I am sure the market will benefit.
Q: There has been some criticism about investments in equities by State funds such as EPF, especially with the value of some of their holdings being down. Can you comment on the need for long-term funds to invest in the market?
A: Again, I would define the capital market as debt and equity. On the debt side nothing much has happened. Remember that debt cannot be taken to the grassroots level and its benefits will come only through big funds. The EPF is one such where millions will benefit by going for corporate debt. So on the debt side, there is no question that by coming in it will benefit the capital market because it has long-term funds. It is always good to get them to invest.
Looking at equity, it fluctuates. I personally think that long-term investors like EPF should be allowed to come to the capital market since that is the only way the capital market can
grow. Where will the capital market get long-term funds when those such as EPF do not come in? It is imperative they come in.Q: The CSE has about 29 stockbrokers in operation and this number is observed to be high since it makes it difficult for all to sustain business. What is your take on this?
A: Weaker parties suffer when the market goes down. If you had questioned the stockbrokers a month ago, they would have poured out their problems, but today when you ask them, a different story is what you will hear since the market is growing. After a month or so, they will say they have no problems.
However, in a bad market 29 stockbrokers is a bit much, but in a good market it is hardly enough. The period we gave licenses to 19 brokers was very good. It is not us who went behind them; it was they who came to us with many applications. We even had to reject some. Soon after that it was unfortunate that the market collapsed and went through a correction. That is where the problem started.
Q: You are saying that the CSE is not cluttered?
A: If there is about Rs. 2 billion turnover per day, then it is certainly not cluttered. If it is at Rs. 500 or Rs. 600 million, then it is too much. We need to have a per day turnover of Rs. 2 billion.
Q: There was a proposal put forward by several brokers requesting temporary deactivation of operations. How has this been handled?
A: It was requested but no one got it. No stockbroker was deactivated.
Q: What further reforms are being planned in capital markets?
A: There are a couple of reforms in the pipeline. In addition to the CCP on the risk management side, there are new investment avenues that are planned, one such is REEDs. We are also planning on more index funds, it is important since such are not available here.
Q: What is the progress of CSE’s demutualisation?
A: There are ups and downs, but it is progressing. We are currently working on the share allocation. There are legal requirements where the Act has to change and be passed, we are working on those areas. We are keen on doing it.
Q: As CSE Chairman, what would you list as your biggest challenge and threat to capital markets?
A: The biggest challenge is to bring it up to world standards. We are doing a lot but have to manage risk levels and give a work class introduction for people to trade on. That we can do only through technology, risk management and building people. Developing these three is a challenge.
In terms of threats, I would say we ourselves are the only threat. World over people get confidence in the capital market, especially the share market, when there is stability for a longer period. And when I say stability I mean economic, political and social stability. We have the ingredients to have all but there are some hiccups. The incident that took place mid last month was one of those. When such event takes place, people tend to rethink their decisions and if they are in the right place. Foreigners will think whether they are in the right country, others will think whether they are in the right asset class.
All countries that developed the capital market did so through stability. We have economic and political stability but social stability has yet to come in. If such events escalate it will be a big problem.
Q: What ideal roles should stockbrokers and other intermediaries play in making Colombo a dynamic market?
A: Institutional building has to take place. Research has to improve and selling has to improve. We need to bring in responsible salesmanship. This all happens if the stockbrokers have money, they have to do well. When the market improves, they will put in more and more efforts; once that happens, we can get the marketing part right.
The CSE together with the SEC is spending a lot of money to show the world the local capital market. On top of that, if stockbrokers themselves start selling, I think we can make a huge difference. They should be able to take over this role in the future. We can support to some extent in terms of preliminary work where the focus will be on image and brand building. The stockbrokers should be able to open branches overseas. That is where we should be, not here in Sri Lanka.
Q: How long do you suppose it will take to realise this vision?
A: It would have happened if 2009 and 2010 had continued, at least in terms of turnover levels. It then can be pushed. India is doing this, their stockbrokers are in Singapore. Similarly, in Sri Lanka, more and more brokers should venture out and start selling. We have not done this well.
Q: How is the progress of the CSE collaboration with the SEC in terms of realising the 10-point common agenda?
A: The SEC and CSE have been working together for about 22 years. We are collaborating well and have common goals. We know that for us to trade and thrive, and for the SEC to regulate, there needs to be a market. All 10 points we are closely working with and some of those results are already out. The corporate bond market was one that we developed where rules were brought in. Now we are licensing intermediaries. Debt trading and the way it is looked at is totally different as to how equities are treated. We need different types of people to sell and promote this. Overall we are working closely and the results can be seen one by one.
Q: Is there any message you would like to give?
A: From 2004 to 2008 the world was thriving and was flooded with dollars. Unfortunately Sri Lanka was engaged in the war. When it came out of the war, the world was in recession. We are unfortunate that way.
Now, things are synchronising. Japan and America are growing and India will grow. India growing is good for Sri Lanka since there will always be spill-over effects. I think there is lot of synchronising happening in terms of growth and capital market will have to play an important role in that. We are gearing up for that. There is still more to do but we are getting ready for it.
Pix By Lasantha Kumara
www.ft.lk
very thoughtful answers and looking forward to see his walk the talk. Also his comment on "It is only natural that when forced, rules are not obeyed. It is good to wait for the need to arise" is excellent. Patience pays.
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