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The government is looking at amending laws to allow foreign investors into the corporate debt market, without liberalising the capital account.
Foreigners are currently restricted to equity investments. They can also invest in government debt through unit trust.rn

rnOver the years, capital market players have been lobbying for a policy shift, as direct access to the government and corporate debt market is likely to lead to more sophisticated demand for gilt paper and quality corporate issues.rn

rnFor starters, a taskforce on Exchange Traded Corporate Bond Markets has recommended that authorities amend laws to allow foreign participation in corporate debt.rn

rnldblquote The recommendation is that to allow foreign investment into rated exchange traded corporate paper by using the SIERA accounts, without opening up the capital account, as it is currently done in the equities market,
dblquote explains Palitha Silva Gunawardene, Chairman of the Taskforce in an interview.rn

rnGunawardene who is also the Director General of the Securities & Exchange Commission (SEC) says a foreign inflow of funds is important, as the corporate debt market is likely to require substantially more funds than the equities market.rn

rnldblquote We could also use this as a mechanism to channel funds for infrastructure developments,
dblquote he said. The Central Bank is expected to give a ruling on it by March this year.rn

rnThe taskforce, which consists of top capital market players, have also made a number of recommendations ranging from tax/legal changes to simplifying procedures to cut transaction costs.rn

rnTo begin with, the much talked of debt securities exchange or DEX, promoted by the Colombo Stock Exchange (CSE), is expected to start off this later this month. The DEX will not only promote exchange tradable corporate debt paper, it will also give retailers a chance to invest in secondary market government bonds.rn

rnTo spur corporate bond market activities, the taskforce has asked Finance Ministry to remove the withholding tax (WHT) anomaly, to encourage quality issuers to come forward and raise debt through exchange traded instruments.rn

rnThe Finance Ministry is shortly expected to give the greenlight, to allow WHT on interest on rated and exchange traded debt instruments, a final tax of 10 percent.rn

rnSuch interest income would be excluded from statutory income in the corporate and personal income tax computation.rn

rnIssuers will also be allowed to set off the WHT collected against the issuers corporate tax payable.rn

rnldblquote We want to ensure that present and future tax environment is neutral, with incentives given to develop an exchange traded bond market through central coordination of the relevant tax authorities,
dblquote he said.rn

rnTo rationalise debt issues, the SEC is looking shelf registration scheme to minimise time and cost of debt issues.rn

rnldblquote A shelf registration scheme allows frequent issuers to register a shelf prospectus with us, by way of a supplementary prospectus that gives specific details of the issue,
dblquote he said. rn

rnThe SEC hopes to review and amend its debt rules by March, to facilitate issuers to come up with a more focused offer document.rn

rnThe CSE has also been set a March deadline to introduce a system of negotiated debt transaction fees, suitable for different user trading levels.rn

rnThe taskforce has also asked the Companies Registrar to remove a clause in the Companies Act which requires firms who opt to raise funds through commercial paper and promissory notes have to issue a prospectus. rn

rnThe Unit Trust industry has been asked to cut their front end and management fees by end next month. A few fund managers have already reduced their fees.rn

rnSri Lankas corporate bond market is still in an embryonic stage, with just over Rs. 25 bn worth of paper issued last year. However, there are hardly any secondary market trades.rn

rnThe government bond market, though is rather active with over Rs. 650 bn worth of paper in circulation. Trading is slightly volatile ranging from Rs. 10 bn to Rs. 25 bn on a weekly basis.rn

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-LBO Newsdesk: LBOEmail@vanguardlanka.comrn