An overview of new Securities and Exchange Commission Act
By Viraj Dayaratne PC
Chairman Securities and Exchange Commission of Sri Lanka
The new Securities and Exchange Commission Act No. 19 of 2021 (‘the Act’) has been certified by the Speaker on 21st September 2021 and has thus become law. It repeals and replaces the Securities and Exchange Commission Act No. 36 of 1987.
The Act which has been in the pipeline for a considerable period of time contains well thought out provisions which have factored in latest developments in securities markets around the world and adheres to principles and standards propounded by the International Organization of Securities Commissions (IOSCO). It enables robust regulation whilst facilitating market development and will cater to both the present as well as future needs of Sri Lanka’s securities market.
The process of drafting the Act
The process of drafting a new law began in the year 2007, consequent to a gap analysis and extensive research carried out on the laws of other jurisdictions. The initiative received technical assistance from the World Bank as well as experts in Sri Lanka. The first draft had been completed in 2013 and approved by the Commission at the time. Since that had not been proceeded with, improvements had been made to that draft by the subsequent Commission and having received Cabinet approval, the Bill had been tabled in Parliament in 2018 but was not taken up for debate. Further changes had been made to that Bill by the previous Commission during the 2018/2019 period. In finalizing the Act, whilst retaining the core provisions found in the previous versions, the present Commission has taken steps to eliminate ambiguities and grey areas in order ensure that there will be no difficulties in its application and implementation. It must be acknowledged that there have been numerous consultations with all stakeholders as well as the public in this long drafting process and their contributions have been of immense assistance in the formulation of this law.
The structure of the Act
The SEC Act comprises of seven Parts which are further divided into a number of Chapters. A significant feature is that at the beginning of each Part, the ‘object and purpose’ of that particular Part is described in broad terms. This gives an indication of what is sought to be achieved through the provisions contained in such Part.
Part I deals with preliminary matters such as the application and objects and purpose of the Act, establishment of the Commission and its powers, duties and functions as well as matters pertaining to the Director General and staff of the Commission. Part II titled ‘Markets and Market Institutions’ provides for the establishment of Exchanges, Clearing Houses and a Central Depository. Part III titled ‘Issue of Securities’ deals with Public Offer of Securities, Market Intermediaries and the Protection of Clients’ Assets. Part IV deals with ‘Trade in Unlisted Securities’. Part V titled ‘Market Misconduct’ deals with Prohibited Conduct and Insider Trading. Part VI contains provisions in relation to the finances of the Commission and Part VII provides for general matters such as the implementation of the Act and punishments and enforcement mechanisms.
The salient features of the Act
The Act contains many salutary provisions that will ensure efficiency, predictability and consistency in the regulation of the country’s securities market. Further, it enables the use of state of the art infrastructure and provides for the different fund raising requirements of issuers whilst the ability to introduce a variety of products offers investors a wider choice depending on their risk return characteristics.
Markets and Market Institutions
Part II which is specifically dedicated to Markets and Market Institutions is an important part of the new law since the provisions contained therein are expected to ensure that these vital institutions perform their functions properly which in turn will help the effective and efficient functioning of the securities market as well as help mitigate systemic risks.
These provisions stipulate in great detail the rights and duties of an Exchange, a Clearing House and a Central Depository, the requirements that have to be fulfilled if a license is to be obtained, when a license may be cancelled and the right of recourse if a license is cancelled, the effect of the Rules of these market institutions, appointment of directors, duties of an auditor etc.
An important feature is that a licensed Exchange can list its securities on its own Exchange. There is recognition of a Clearing House acting as a Central Counter Party (CCP) and a CCP has been defined. Further, detailed provisions dealing with default rules and proceedings have been included in order to cater to situations where a clearing member is unable to meet its obligations regarding unsettled market contracts. The default proceedings have been designed to bring about finality to trades.
It is also pertinent to note that the Act has redefined ‘Market Intermediaries’ and has added a few more categories of persons. They are‘corporate finance advisor’, ‘market maker’, ‘derivatives broker’ and ‘derivatives dealer’. The introduction of market makers is important since that will ensure continued and efficient exchange of securities between buyers and sellers.
As in the case with market institutions, their duties, requirements that have to be fulfilled if a license is to be obtained and renewed, grounds on which a license may be refused, suspended or cancelled, trading in securities by market intermediaries, duty of an auditor etc. have been spelt out in great detail.
Market intermediaries play a pivotal role in the functioning of the market. Since they operate at the forefront of the market and thus are directly in contact with investors, it is imperative to ensure their credibility. Towards achieving this and to ensure that they conduct their functions more efficiently, certain requirements have been identified under the head of ‘Protection of clients’ assets’. They require that market intermediaries disclose certain interests they have in securities, establish and maintain certain internal procedures and processes and conform to business conduct that the Commission may spell out by way of rules. These are meant to minimize their own risk and exposure and to monitor compliance and are neither new obligations nor measures that will result in additional effort or expenditure to them. Such requirements exist even at present in the form of rules and standards introduced by the Commission from time to time. In contrast to the previous Act, the Act has incorporated these specific requirements in relation to market intermediaries in the body itself.
In addition to market intermediaries, the Commission can, by way of rules, require the registration of those who ‘deal with clients for and on behalf of a market intermediary’. The Act has also recognized ‘Supplementary Service Providers’ such as actuaries, custodians, trustees and valuers on whom the Commission may exercise supervision in the future thereby fortifying public confidence.
Issue of securities and maintenance of good corporate governance practices
Part III deals with ‘Issue of Securities’ and the purpose of this Part amongst others, is to ensure timely disclosure of financial information by listed public companies and compliance with best corporate governance practices.
In order to ensure accountability of funds solicited from the public, the Commission will be entitled if it considers that such a step is necessary, to make Rules that will require unlisted companies to obtain its approval prior to certain types of public offers. Such requirement may be introduced taking in to consideration ‘the volume of securities, class of securities, the number and type of investors, the nature of the issuer or the nature of the securities market’.
Based on disclosures made to the public, if any wrongdoing is detected, the Commission or the market institutions will be entitled to call for information from listed companies. The Commission has been empowered to take any enforcement action that is considered appropriate if ‘after due inquiry or investigation’ it is found that the listed company has contravened or failed to comply with any provision of the Act, regulations, rules or directives. Here again it must be stressed that this is part of oversight that is presently carried out by the Colombo Stock Exchange and the Commission through its corporate affairs division to ensure compliance with the Listing Rules and is nothing new. What has been done is to have these provisions specifically included in the Act in order to ensure adherence to best corporate governance practices.
It will be necessary for a person to obtain the approval of the Commission prior to accepting appointment as a director, chief executive officer or chief regulatory officer of a market institution and the grounds upon which such approval will not be granted have been spelt out. Further, directors or the chief executive officer of a listed company are required to comply with the fit and proper criteria specified by the Commission by way of rules made by it or the rules of an Exchange which have been approved by the Commission. Another new feature is that Auditors of listed companies, market institutions and market intermediaries have been obligated to report certain irregularities that he becomes aware of ‘during the ordinary course of the performance of his duties’. As to what they are and to whom it has to be reported have been specifically stated.
It must be appreciated that these requirements have been introduced in order to ensure proper corporate governance in the said institutions and to mitigate systemic risk considering the pivotal role they play in the securities market. At a time when most of these practices have been embraced by the business community as part of the corporate governance framework that is being presently finalized, they cannot be construed as impediments to the smooth conduct of their businesses.
Main Market Offences
Part V of the Act which encompasses the main market offences could be considered as a progressive step taken towards the regulation of the securities market of the country. This Part has been divided into two Chapters containing ‘Prohibited Conduct’ and ‘Insider Trading’.
Five different offences have been identified under Prohibited Conduct. They are ‘false trading and market rigging’, ‘stock market manipulations’, ‘making false or misleading statements’, ‘fraudulently inducing persons to deal in securities’ and ‘use of manipulative and deceptive devices’
The most significant introduction to this category of offences which is commonly known as market manipulation are the two offences found respectively in Sections 130 and 131 respectively. Whilst Section 130 precludes a person from making a statement or disseminating information that is false or misleading in a material particular which is likely to have an effect of raising or lowering the market price or volume of securities, Section 131 precludes a person from inducing or attempting to induce another person to trade by making or publishing any statement or by making a forecast that is misleading, false or deceptive.
As to what conduct is prohibited has been spelt out with utmost clarity. It therefore is not difficult to understand as to what ingredients have to be present to establish the commission of an offence under this Part.
All aspects pertaining to insider trading have been described with precision. As to when a person is considered to be an ‘insider’ has been clearly defined and what exactly such person is prohibited from doing has been spelt out with certainty. In addition, as to what would amount to information, when such information is generally available, what would be information which has a material effect on price or value of securities, when will a person be considered to have procured another, when information is deemed to be in possession as well as specific exceptions and defenses available in respect of a charge of insider trading have been outlined in great detail.
These elaborate provisions have been included with the intention of taking away any uncertainty or ambiguity and to clearly demonstrate as to what conduct is permitted and what is prohibited so that those involved in the activities of the market are fully and well aware of the framework within which they ought to operate. Further, the fact that the commission of any such offence would give rise to the imposition of stringent penalties is intended to act as a deterrent and not as a means to stifle or discourage the activities of market participants.
Unlike the previous Act where charges were to be filed in the Magistrate’s Court, henceforth these offences are to be tried in the High Court and any person convicted of such offence would be subject to a penalty which could be either a fine of not less than ten million rupees or to imprisonment for a term not exceeding ten years or to both such fine and imprisonment.
Healthcare, Consumer and Agri propel Sunshine Holdings’ strong FY23 performance
Diversified Sri Lankan conglomerate Sunshine Holdings (CSE: SUN) recorded resilient revenue growth in a challenging macroeconomic environment, reporting notable top-line growth during the year ended 31 March 2023. Group’s Healthcare and Consumer sectors led growth while healthcare segment remained the major contributor to total Group revenue in FY23.
Sunshine recorded a consolidated Group revenue of Rs.51.9 billion for the year ended 31 March 2023, an increase of 61.3% over last year. Profit after tax (PAT) for the period in review was contracted by 28.0% to Rs. 3.6 billion. The gross profit improved by Rs.3.3 billion, up 31.9% YoY, compared to the previous year, driven by revenue growth. Gross profit margin for the period stood at 26.0%, a contraction of 580 basis points against the corresponding period last year.
The Group’s Healthcare business emerged as the largest contributor to Sunshine’s revenue, accounting for 46.1% of the total, while Consumer Goods and Agri Business sectors of the group contributed 36.6% and 16.9% respectively of the total Group revenue. The Group EBIT closed at Rs. 7 billion, an increase of 23.0% YoY.
Commenting on the results, Amal Cabraal, Chairman of Sunshine Holdings said, “The Group had to face and overcome tough economic factors and adverse market conditions which persisted throughout the year. These headwinds impacted some of the core sectors, and are expected to continue to do so in the short to medium term.”
However, Cabraal highlighted the Group’s commendable response to these challenges, adding, “Through robust cost management initiatives and process reengineering efforts, supported by the integration of digital technologies, Sunshine has delivered a strong performance in FY23. Despite the difficulties, the Group has displayed resilience, and takes an optimistic outlook on fortifying operations to further strengthen overall performance.”
Cabraal further emphasized that “Every possible measure has been taken to ensure business sustainability and continuity in the upcoming months.”
Healthcare sector recorded a revenue of Rs. 23.9 billion during FY23, a significant increase of 36.7% YoY backed by the improved performance in Pharmaceutical, Medical Devices and Manufacturing segments. EBIT for the sector was Rs. 3.0 billion with PAT of the sector increased by 13% YoY. Lina Manufacturing, the pharma manufacturing business, commenced commercial operations in the Metered Dose Inhalers (MDI) plant in July 2022, which was a significant milestone for the business.
Consumer Goods sector reported a 135.6% YoY increase in revenue to close at Rs. 19 billion in FY23. The revenue increase was predominantly driven by the addition of export business. The consumer brands Zesta, Watawala, Ran Kahata and Daintee continued to grow market shares, despite challenging consumer sentiment.
Agribusiness sector revenue increased by 35.4% YoY during FY21/22 to Rs. 8.8 billion, driven by the increase in palm oil NSA. PAT of the Agri sector closed at Rs. 2.3 billion for FY21/22, down by 33.6%.
ADB budget support loan doesn’t elicit positive response from bourse
By Hiran H.Senewiratne
The CSE did not react positively yesterday to the Asian Development Bank’s approval of a US$ 350 million loan as budget support, as part of Sri Lanka’s economic stabilization program, together with the rupee’s appreciation against the dollar, market analysts said.
“The ABD is supporting a series of policy reforms which are required to stabilize the economy and to spur growth. Budget support loans ease cash flows of the government and do not involve imports of goods. This has created some limbo for investors, market analysts said.
Consequently, shares edged- down in mid- day trade and ended on a negative note. The main All- Share Price Index was down by 118.97 points, while the most liquid index S&P SL20 was also down by 41.3 points.
Turnover stood at Rs 516 million without any crossings. In the retail market, top seven companies that mainly contributed to the turnover were, Dialog Axiata Rs 73.7 million (7.2 million shares traded), Lanka IOC Rs 54.42 million (426,000 shares traded), Expolanka Holdings Rs 51.7 million (382,000 shares traded), Prime Lands Residencies Rs 25.1 million (3.11 million shares traded), Browns Investments Rs 21.3 million (4.3 million shares traded), Hemas Holdings Rs 18.8 million (298,000 shares traded) and Elpitiya Plantations Rs 16.2 million (164,000 shares traded). During the day 38.3 million share volumes changed hands in 11000 transactions.
The rupee opened at Rs 296.50 /297.50 against the US dollar in the spot market yesterday, while bond yields were up, dealers said. The rupee closed at Rs 296.00 /297.50 to the US dollar on Friday after opening at around Rs 302.80/303.10.
Sri Lanka’s rupee is appreciating amid negative private credit which has reduced outflows after the central bank hiked rates and stopped printing money.
In the first year of an IMF program, a pegged central bank usually collects reserves and mops up liquidity generated from the purchases or there is a balance of payments surplus.
HNB reopens Student Savings Unit at St. Joseph’s College
Reaffirming its commitment to fostering financial literacy among students, Sri Lanka’s leading private sector bank HNB PLC, announced the reopening of its Student Savings unit at St. Joseph’s College, Colombo.
The reopening comes as part of the bank’s continued efforts to instil the habit of saving among young minds. The event was graced by the esteemed presence of St. Joseph’s College Rector, Rev. Fr. Ranjith Andradi, and the Managing Director/CEO of HNB, Jonathan Alles, Executive Director and Chief Operating Officer Dilshan Rodrigo who are distinguished past pupils of the College, along with Deputy General Manager- Retail and SME Banking Sanjay Wijemanne, Assistant General Manager, Network Management and Business Development Supun Dias and Head Office Branch Chief Manager, Dilanka De Silva.
During the ceremony HNB Managing Director/CEO, Jonathan Alles expressed his delight, stating, “We are extremely pleased to be a part of this momentous occasion, celebrating the reopening of the Student Savings Unit at St. Joseph’s College. Through this Unit, we aim to empower students with a deeper understanding of saving and the value of living within their means. By developing this essential life skill, students will be well prepared to fund their higher education and make other important investments in the future.”
The Unit will mainly offer student access to the wide range of savings products and investment plans available for minors. Moreover, the bank aims to create a digital payment ecosystem for the school also offering members of the staff and the Old Boys Association with exceptional services and benefits.
St. Joseph’s College Rector Rev. Fr. Ranjith Andradi, expressing his pride in the partnership, stated: “We are proud to be associated with HNB in reopening the Student Savings Unit. This initiative not only imparts valuable lessons in investing and saving but also instils a strong sense of financial management in our students. We believe this partnership will contribute to their progress and success.”
The Student Savings Unit, introduced by HNB in 1994, has played a pivotal role in promoting financial literacy among students. With 162 units established across Sri Lanka, HNB actively engages students in managing mini-banks within their schools, fostering leadership and financial responsibility. Each year, HNB provides comprehensive training to over 1,000 students, empowering them to become financially savvy individuals.
HNB is rated A (lka) by Fitch Ratings and was awarded the esteemed title of ‘Sri Lanka’s Best Corporate Citizen’ for 2022 by the Ceylon Chamber of Commerce. Other major accolades include being ranked among the Top 1,000 Banks in the World for six consecutive years by the acclaimed UK based “The Banker Magazine”, being adjudged the ‘Best Retail Bank in Sri Lanka’ for the 13th occasion by the Asian Banker, as well as securing a Top 5 position on Business Today’s Top 40 rankings for 2022.
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