Maheen Senanayake in conversation with Krishan Balendra, former chairman of the Colombo Stock Exchange
After weeks of trying I was finally able to catch up with Krishan Balendra. On the phone, he cautiously acceded to my request for an interview. Within a day, I steered myself from the wrong 148, Vauxhall Street entrance to his office. We began immediately.
Now that you have relinquished your duties as chairman of the Colombo Stock Exchange (CSE) how do you feel?
I’ve been a director of the CSE since 2005 and I was chairman since June 2011. It is customarily a three year term and with the Annual General Meeting (AGM) on June 5, I stepped down. I have been in the industry for a really long time. My first job was with a investment bank in Hong Kong – UBS Warburg. I started as a research analyst in their stock broking division. I know the industry as I spent four years at UBS in Hong Kong. I did an MBA and came back and joined John Keells.
How did that happen? Your father was with John Keells – did he influence you in any way?
Well he had retired by then. He didn’t influence me really. It’s just that when I looked at the opportunities it seemed like a very challenging role to play.
When did you actually come back?
I came back from my MBA in August 2002.
What would you say about the timing of your return?
One of the reasons was that, that was the year in which the Cease fire Agreement (CFA) was signed. 2001 was the year in which the airport was attacked and it was not such a great year but 2002 was looking very promising. So this really prompted me to come back.
Coming back from Hong Kong, if you still wanted to be in a financial centre, was that the right decision?
Sri Lanka was always home. I went to school in Sri Lanka, I grew up in Sri Lanka and I knew that long term, my strong preference would be to live in Sri Lanka.
You’ve been a director of the CSE for a long time and chairman for three years. How do you see the CSE?
I think that going back 20 years, in the early 90s to be more specific, it was the most technologically advanced stock exchange in South Asia - first to introduce scripless trading and the institution overall is very well structured. The CSE’s rules and regulations are on par with what you would get elsewhere. And it had a team with a lot of experience and who had been in the industry for a very long time. During my term we had this big bull run with the end of the conflict and towards the end of that there was a lot of speculation and the bubble burst. (He laughs) ‘When you have a bubble, it always bursts’. In the last two to three years the market has been in a trough with that exuberance and euphoria coming to an end and the market falling but during the last year or so we have seen the market gradually gaining some strength.
What do you attribute the ‘strength’ to?
Amazingly, or perhaps not so surprisingly, in 2012, 2013 and this year to date we have had a net foreign inflow to the market. While the local participation has declined we have seen the foreigners being substantial net buyers. You also find that overall all the established emerging market funds are invested in Sri Lanka. A recent phenomenon is that all the funds in the world are looking at setting up what are called ‘Frontier’ funds. So you have the funds that are invested in the ‘developed’ markets. Twenty years ago they all took an interest in ‘emerging’ markets, so they set up Emerging Market Funds, but those emerging market funds include markets like Malaysia, Singapore and Thailand which are much larger than Sri Lanka which means that Sri Lanka was just a drop in the ocean. Now they have started ‘Frontier’ funds. These are in countries like Sri Lanka, some African countries, Bangladesh and other new and emerging economies. Within the frame of the `Frontier’ universe, Sri Lanka is certainly a very important market. I think that with all these frontier funds being set up the Colombo market will continue to attract foreign interest.
Sri Lanka unlike other markets such as in the African region or even in South East Asia has a very substantial administrative systems and machinery. Do you think that our infrastructure and particularly at the CSE is a differentiator that attracts foreign interest?
I don’t think it’s that. Finally they will invest if they think that the economy is likely to do well and the companies that are listed in the CSE will grow. Really the Stock Exchange itself provides the trading platform. As long as you provide an efficient well governed platform, it is what they will look out for. If I was to find one weakness in the Stock Exchange trading platform - and this is something that we have been working towards for which now there is an initiative in place - is that we don’t have a ‘guaranteed settlement system’. What that means is that shares are delivered to you only when you make payment. Today you get immediate delivery of shares when they are traded and payment has to be within three days of trading (T+3). So if there is a default there is no central mechanism, except for a very small settlement guarantee fund at the SEC, that guarantees that your trade will be settled. In the more developed markets you do have what is called the Central Counter Party.
Let’s discuss for a moment, that one transaction that was reversed.
That was the first. In the history of the CSE there has never been a default. In that case of the National Savings Bank, it wasn’t necessarily a default because the transaction was reversed. A default is when the transaction has gone through and payment is not made.
What about the role of the broker as the guarantor to the transaction? Aren’t they in fact the guarantors to the transaction?
Yes. The broker is the guarantor. However, with the larger transactions the brokers simply don’t have the necessary and required financial capacity. That is why you have the CCP.
Would you like to talk a little about the CCP and the current initiative to put a CCP in place?
The Central Bank, the Colombo Stock Exchange and the Securities and Exchange Commission is now working towards setting up this national CCP. At a very high level it’s simply a fund that can be used in the event of a trade default to ensure that payment may be made to the party that is not receiving the funds. The market participants contribute to that fund. There are many ways to structure it but at this point in time it is sufficient to say that the market participants will contribute to that fund.
We have almost 300 companies listed. For people to hold a stock in the long term wouldn’t you think that dividends are important? We know that there are companies that are not paying dividends. Can the CSE play any role here?
Well dividends are important. I don’t think that the CSE or the SEC should directly intervene to push companies or force companies to pay dividends. You should really leave that to the market forces. Nowhere have I seen in any other jurisdiction that companies are compelled to pay dividends. The basic market theory is that if a shareholder is unhappy with the dividends, the share price will come down. So the share price will reflect the shareholder sentiment. The other thing you find specially with these foreign portfolio funds that invest in the market is that they are not that focused on the dividend yield but more on the capital appreciation potential. They would rather that companies actually invest the cash in good projects that will show profit growth that will drive the share price.
You say that Sri Lanka appeals as a frontier market. But if you look at some shares, their market prices don’t really reflect the performance of the companies.
Yes. There are two things here. One obviously is the performance of the company; but secondly general investor sentiment. A bull market is when investor sentiment is very positive and you find share prices going up even if companies are not performing. On the other hand a bear market is what we saw in late 2011 and 2012 when share prices declined with the decline of investor sentiment, and this may be the case even if a company is doing well. You really have to look at a company over longer period for consistency when you look at performance and if you do look at a company over a period of say five or six years, then it is very likely that the share has also gone up. Over two to three years you will have the peaks and troughs because its driven by the bull and the bear but it is over the longer term that you really need to check the market response.
How do you see the CSE as a measure of or reflector of the national economic performance?
In fact during the last five years we had a bear run in 2011 and 2012 despite the economy doing fairly well. We have had 6.5% GDP growth in 2012 and 7.3% in 2013 and because the bubble burst you saw sentiment being impacted and share prices going down.
You are also partnering with the SEC on road shows. How do you think initiatives to broadbase the investor net locally has worked?
I would say that apart from some people who are savvy with the market, my personal opinion is that most people should invest in the stock market through Mutual Funds. We don’t have Mutual Funds we have unit trusts in Sri Lanka. What happened in 2011 and 2012 is that individuals were misled by financial advisors and they burnt their fingers. If they invest in unit trusts that are managed by professionals, then they will be in a better position and will not fall prey to such bad experiences.
Let me take you out of your comfort zone. A lot of talk exists in the public space about EPF monies spent on the CSE. Given the social responsibility aspect of a retirement fund, what is your position on this?
Pension funds all over the world, whether run by governments or privately managed, invest in equities. Naturally equities carry higher risks than in fixed income instruments. As a result only a small percentage of their portfolios will be invested in equities. As long as they do their homework and it is professional run, I think it is a good thing that pension funds invest in equities because whilst there is higher risk, higher return is also possible. However, they must take a long term view. Whatever happened here, it is still a very short term over which the debate is going on, whereas over the long term they will see that they will get capital gains and reap the benefits of these investments.
Going back to the astute investor, is there enough of a flow of information for the investor?
Again not as much as in the more developed markets. But one comment that I have heard going back to my days in Hong Kong is that the general disclosure standards in Sri Lanka, in the annual reports, is very impressive. I’ve repeatedly heard that compared to other countries disclosure standards in Sri Lanka are very impressive. And that goes back to what we discussed earlier; where unlike with some countries like in Africa, our capacity and the whole infrastructure in Sri Lanka like the Chartered Institute, the accounting bodies the annual report awards, we are fairly developed and it has been the case for a very long time. Really fund managers have been commenting on the standards and pretty much saying how impressive the disclosure standards of some of the better known companies are.
What are your sentiments about developing the debt market?
The government has given significant tax incentives and that is why we saw a big surge in corporate debentures getting listed in the CSE. I think they will continue to develop and grow. But with respect to derivatives, it is still too early and a lot more has to be done before instruments such as derivatives are introduced. We have a lot more to do with the debt market and the equity markets before we go into derivatives.
Do you think we need to further liberalize the financial controls?
Well, we have to be cautious and one of the things we learnt from the 1997 Asian financial crisis is that if an economy is not developed enough, having an open capital account can create a lot of volatility. So until there is a certain amount of strength in the economy it could be a negative.
What are your sentiments about our economy?
I am very positive. I never thought that overnight we are going to see the country changing. It takes a year or so for people to be comfortable with the idea of the war being over and another two to three years for them to draw up their plans to invest in the new scenario. So that may be why some projects like Shangrila and other large investment projects are beginning to get off the ground (only now).
What about FDI?
Well to attract FDIs into the country, we really need to pick two or three sectors where we have a comparative advantage and develop a policy and then attract investment into those sectors.
Would you like to talk about the ports and logistics sector?
Again Colombo port has seen significant growth in volume over the last ten years. No one will dispute that the Colombo port is the best location for transshipment to South Asia. Eighty percent of our volume is transshipment. This is where the big ships drop off the cargo and the feeder vessels take it essentially to India. India has limited port capacity. From everything I know, they do not have a natural deep water port. Even Cochin has dredging whereas Colombo is a natural deep water port. So given these facts I am confident that our volumes will grow. Our total capacity in the Colombo port is about seven million TEUs. We can become a transshipment hub in South Asia that is small. Singapore is 30 million TEUs, Shanghai is 30 million, Dubai is 15 million.
So what will it take for us to become that?
I think it will happen now.
What about our currency – the rupee?
Well the currency has been stable and if you look at the external account, the last seven to eight months, and we have seen exports growing, imports declining, remittances are growing, foreign portfolio fund investment in the stock market growing, so really unless there is some external shock like oil prices dramatically increasing then the external account is looking very comfortable and the rupee should remain at these levels.
What do you think of what has been happening in the last few days in Aluthgama and Beruwela. Do you think that will have an impact?
The negative publicity will have an effect on tourism, but hopefully it will be only in the short term.
Do you think we could have a commodities exchange?
Yes I think we could ultimately have a commodities exchange.
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