Stock market in srilanka

[A STUDY OF SHARE MARKET] April 4, 2014
NATIONAL INSTITUTE OF BUSINESS MANAGEMENT 1
Introduction
The rapid development in the stock market during the past few years has attracted a
large number of investors to the stock market as an alternate way of investment. The
contribution of the stock market to the economy has been heavily debated.
After finishing the module “Financial Management” I have been asked to fulfill a
report about the Share Market from the knowledge that I learnt at the university with
regard to Financial Management module as the end semester assignment. So it’s one
of the best chances I have got to study about the share market in Srilanka as it gave
me the practical knowledge as well as theoretical knowledge in best level.
So with that, I am pleased to present about Share Market. As this report is providing
you an introduction to the stock market by studying this report you would be able to
understand what is share market and it’s situation in Srilanka and it will enhance the
knowledge about the capital market in Sri Lanka.

Objectives
To analyze the experience of Share Market in Sri Lanka.
To study about Share Market.
To cover my assignment of writing an analytical report on Share Market.
To confirm my knowledge which I learnt by Financial Management module.
To write a report in proper way according to its formal format.

An introduction to the Colombo Stock Market: Sri Lanka
The stock market (or Stock Exchange) is a market where securities such as shares,
debentures etc. issued by companies are traded. Companies which use the mechanism
of the stock market to raise debt or equity capital, commonly enter the stock market
through issuing shares or debentures to the public.
Some companies issue new shares through an Initial Public Offering (IPO) while
others may opt to sell apportion of the existing share capital, known as an Offer For
Sale. In both instances, the investing public subscribes to the issue directly by paying
the value of the share to the company. There is another method by which companies
enter the stock market without issuing shares to the public, which is known as an
introduction.
Companies may also opt to issue debentures (explained later in this booklet) through
a debenture issue and issue debentures to the public through a public offer. Once the
shares or debentures are allocated to the investors who subscribed, they become
shareholders of that company respect of a share issue and debenture holders in respect
of a debenture issue. Thereafter these shareholders or debenture holders are free to
sell either part of in whole their shares or debentures in the stock market.
Establishment of the Stock Market In Sri Lanka
Share trading in Sri Lanka dates back for a century, in 1896 when the Colombo Stock
Brokers Association(CSBA) commenced the trading of shares in limited liability
companies. Share training however, was formalized in 1985 with the establishment of
the Colombo Stock Exchange (CSE).

Colombo Stock Exchange (CSE)
The Colombo Stock Exchange (CSE) is the organization responsible for the operation
of the stock market in Sri Lanka. The (CSE) is a company limited by guarantee
established under the Companies Act No. 17 of 1982 and licensed by the Securities
and Exchange Commission of Sri Lanka (SEC) to operate as a Stock Exchange in Sri
Lanka. The Securities and Exchange Commission of Sri Lanka (SEC) is the
government regulator for the stock market in Sri Lanka.
The CSE has 15 member firms (stock broking firms). These member firms act as
market intermediaries performing a number of services to investors and companies.
All member firms are institutions, subject to the regulations of the SEC, and have to
obtain a license annually.
The Services Offered By Member Firms (Stockbrokers)
Shareholders or investors wishing to either buy or sell securities in the stock market
must register with one or more stockbroker companies. The relevant transaction will
be attended to by the stockbroker/s of your choice. It is therefore mandatory that
investors use a market intermediary to buy/sell shares or debentures in companies
listed in the stock market.
Stockbrokers provide a range of services such as the opening of securities accounts in
the Central Depository system (CDS), receiving and executing orders to buy or sell
securities, offer investment advice on suitable investments, portfolio management,
conducting and publishing research on companies, attending to the settlement of
transactions and attending to the necessary documentation in respect of any
transaction. In addition, stockbrokers also provide services to companies such as
sponsoring listing applications for companies, underwriting share issues, advice and
facilitating takeovers and mergers etc.

Securities Presently Traded At the CSE
Ordinary Shares
Preference Shares
Warrants
Corporate Bonds
Ordinary Shares
Any shares that are not preferred shares and do not have any predetermined dividend
amounts. An ordinary share represents equity ownership in a company and entitles the
owner to a vote in matters put before shareholders in proportion to their percentage
ownership in the company.
Ordinary shareholders are entitled to receive dividends if any are available after
dividends on preferred shares are paid. They are also entitled to their share of the
residual economic value of the company should the business unwind; however, they
are last in line after bondholders and preferred shareholders for receiving business
proceeds. As such, ordinary shareholders are considered unsecured creditors.
Preference Shares
Company stock with dividends that are paid to shareholders before common stock
dividends are paid out. In the event of a company bankruptcy, preferred stock
shareholders have a right to be paid company assets first. Preference shares typically
pay a fixed dividend, whereas common stocks do not. And unlike common
shareholders, preference share shareholders usually do not have voting rights. Also
referred as preferred stock.

Advantages of Investing In Shares
Given below are some of the principle advantages in investing in shares as compared
with investing in other types of investments.
1. Shares quoted on a stock market are generally liquid. That is, they can be sold
easily and the investor can get his or her cash back in a few days.
2. Shares are a good investment in an inflationary environment, since share prices
increase to protect investors from the effects of inflation.
3. In the longer term, shares have ensured a higher return to investors.
4. Presently the capital gains made from the sale of shares are tax-free.
Warrants
A certificate that give the right to buy shares at a stipulated price within a specified
time.
Corporate Bonds
A debt security issued by a corporation and sold to investors. The backing for the
bond is usually the payment ability of the company, which is typically money to be
earned from future operations. In some cases, the company's physical assets may be
used as collateral for bonds.
Corporate bonds are considered higher risk than government bonds. As a result,
interest rates are almost always higher, even for top-flight credit quality companies.
The Advantages In Investing In Bonds
The Zero Default Risk is the greatest attraction for investments in Government debt
securities, treasury bills and bonds so that it enjoys the greatest amount of security
possible. The other advantages of investing in Government debt securities are:
• Government guarantee for repayment of interest and principal sum invested.
• Higher leverage available in case of borrowings against government debt securities.
• Greater diversification opportunities
• Adequate trading opportunities with continuing volatility expected in interest rates

The returns earned on the government debt securities are normally taken as the
benchmark rates of returns and are referred to as the risk free return in financial
theory. The Risk Free rate obtained from government debt securities are often used to
price other debt instruments issued by companies.
Current Financial Status
The CSE has generated a total turnover of Rs. 200.5 Bn for 2013 in comparison to Rs.
213.8 Bn during the same period in 2012. The market value of listed companies or
Market Capitalization of the CSE stood at Rs. 2,459.9 Bn as at the end of 2013
reflecting an increase of 13.5%.
The CSE has shown a decline in the level of market liquidity, as measured by the
Turnover Velocity. Turnover Velocity is calculated as Turnover divided by Average
Market Capitalization. Turnover Velocity decreased from 9.8% in 2012 to 8.7%
during 2013.
During the year 2013 the CSE was a significant source of finance for listed companies
and helped raise a total of approximately Rs. 68,756.7 Mn from Equity and Debt
Initial Public Offerings (IPO) and Rs. 25,493.8 Mn through Rights Issues.

The Central Depository System (CDS)
 The CDS provides depository facilities and clearing services for securities
traded on the CSE.
 The CDS is a 100% owned subsidiary of the CSE.
 A Board of Directors constitutes the CDS's policy-making body.
 The Board consists of nine Directors. Five directors are elected to office by the
members of the CSE and four directors are nominated by the Ministry of
Finance.
The CDS is the clearing-house for share transactions. When you buy shares, the
shares purchased will be transferred into your CDS account. Similarly before you sell
shares, those shares must be lodged in your CDS account. When the sale is concluded,
these shares will be taken out of your account and transferred into the buyers account.
The CDS is also a depository. All the shares or debentures you deposit in the CDS
will be held by the CDS in your name. The CDS provides your details to the company
that you are shareholder or debenture holder of so that such companies would be able
to dispatch corporate actions such as dividends etc and also send you notices and
annual reports etc.

Sectors of the Colombo Stock Exchange
 Banks, Finance and Insurance
 Beverage , Food and Tobacco
 Chemicals and Pharmaceuticals
 Construction and engineering
 Diversified Holdings
 Footwear and Textiles
 Health care
 Hotels and Travels
 Information Technology
 Investment Trusts
 Land and Property
 Manufacturing
 Motors
 Oil Palms
 Plantations
 Power and Energy
 Services
 Stores and Supplies
 Telecommunication
 Trading

Market Indices in CSE
 All Share Price Index (ASPI)
which comprises all listed companies on the market.
 Milanka Price Index (MPI)
which is based on 25 selected companies.
 Total Return Index (TRI)
All Share Price Index (ASPI)
All Share Price Index is used to measure the movement of share prices in all the listed
companies. The base year for this index is 1985.
BMC = Number of shares at Base year (1985) x Base Market Price
ASPI movement and share volume (Jan 2008-Dec 2013)

Milanka Price Index (MPI)
The Milanka Price Index is one of the principal stock indices of the Colombo Stock
Exchange in Sri Lanka. It is composed of a select group of 25 best performing stocks,
a list which is reviewed each quarter, as opposed to the Colombo Stock Exchange's
"All Share Price Index", which uses all of the ~250 stocks on the exchange to
calculate an index value.
Total Return Index (TRI)
Total Return Index is calculated for both MPI and ASPI
Technology
 The Central Depository System (CDS)
 Automated Trading System (ATS)
(After implementing ATS version-7, The Debt Securities Trading System (DEX) was
abolished since ATS-7 provides a platform for both Debt & Equity)
The automation of the Exchange commenced in 1991 with the installation of a central
depository and an electronic clearing and settlement system for share transactions.
The trading activity was automated with the installation of the Automated Trading
System (ATS) in 1997.
The technology introduced by the Exchange has significantly enhanced the
competitiveness of the CSE and has provided a more efficient and transparent market.
The CSE is currently in the process of introducing a debt securities trading system for
trading of fixed income securities.
As a modern exchange, the CSE now offers state-of-the-art technological
infrastructure to facilitate an "order-driven trading platform" for securities trading -
including shares, corporate debt securities and government debt securities.

Suggestions for Further Growth In The Sri Lankan Equity Market (CSE
Initiatives)
A move to require more companies in the financial services sector to list on
the CSE. “For example. “There are 19 insurance companies in Sri Lanka, only
seven of which are listed on the CSE.”
Encouraging more companies to come to the market would help address the
issue of concentration in the Sri Lankan equity universe.
The largest listed company, the John Keells conglomerate, accounts for about
7% of the entire market, while the top 50 companies contribute some 75% of
total capitalisation.
Encouraging more listed companies to increase the size of their free float, this
in some instances is vanishingly small. Although the minimum initial free
float for companies on the main board is 25%, few companies maintain this
minimum, and in some very extreme cases the free float is as low as 1%. For
the market as a whole, the free float remains low by international standards, at
just 27%.

Conclusion
The CSE is also exploring a number of ways of attracting more investment into the
equity market by, for example, organising a range of investor awareness programmes
for private individuals, fewer than 1% are active investors in equities.
Another recent initiative that the CSE hopes will create more demand for equities
among local and international investors is the recent launch of the S&P Sri Lanka
SL20 Index, which, says the CSE, paves the way for index-based products such as
Exchange Traded Funds (ETFs).
Another positive signal for the market is that overseas investors, who were hesitant
about the Sri Lankan recovery story in the immediate aftermath of 2009’s ceasefire,
are now net buyers.

References
CSE_Guide_Book_English (1)
https://www.google.lk/#q=wikipedia
file:///C:/Users/HP/Downloads/Colombo%20Stock%20Market%20%20How%
20to%20buy%20Shares%20in%20Colombo%20Stock%20Exchange%20%28
CSE%29%20%281%29.htm
file:///C:/Users/HP/Downloads/Investing%20in%20Shares%20~%20Colombo
%20Stock%20Exchange%20(1).htm

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