June 21, 2011 (LBO) – Sri Lanka’s corporate bond markets needed price transparency, a ‘champion’ to push for trading infrastructure and formal regulation of intermediaries may also be needed, market participants have said. Maninda Wickramasinghe, head of Fitch Ratings Lanka, and an a former head of a bond house said the corporate bond market needed platform for trading and price transparency.
The Colombo Stock Exchange had ‘DEX’ debt trading platform but only a few firms had gone through the formal listing process and trading was sporadic in the regulated market.
“If it is not DEX it has to be something else,” Wickramasinghe told a forum on capital market development.
“It has to be one trading environment. If there is more disclosure, visibility on price formation these markets can be more active and accessible.”
Though the listed debt market was small, Sri Lanka’s over-the-counter (OTC) market was more active, though there was no depository and no trading platform.
Market participants estimate that there may be about 35 to 40 billion rupees of corporate securities with a majority of them being lease-backed securities. The trustee of most them is one foreign bank.
According to central bank data, 12.3 billion rupees of bank guaranteed commercial paper was issued.
He said if the central bank’s real time gross settlement system and the stock exchange’s DEX system is connected, a bond trading platform could be built.
In some markets such as the US, prices of unlisted securities (including equities) are reported on an OTC bulletin board. An OTCBB could be used to report price quotes on at least rated and bank guaranteed debt.
Up to March 2011 there was 3.6 billion rupees outstanding in commercial paper. Commercial paper has a maturity of less than a year and is usually three months.
“There are different types of appetites to different debt securities,” Wickramasinghe said. “They all need to be in one area where there is visibility and price discovery.”
Ajith Devasurendra, chairman of Taprobane Holdings, also a long term player in bond markets said foreign investors may soon enter the market because the Central Bank has relaxed exchange control rules.
A corporate bond market also needed market makers to give liquidity and provide two way price quotes, he said.
“We have to start right now, otherwise we will miss the bus,” Devasurendra said.
Wickramasinghe said, bond dealers, insurance firms, banks and mutual funds were involved in the sector and the formation of association under umbrella of the Securities and Exchange Commission would be useful to iron out issues and take the market forward.
Ajith Fernando head of Capital Alliance, said the government securities market had developed because the Central Bank had acted as a ‘champion’ and pushed reforms and the SEC had pushed reforms in the equity market.
If the SEC could take over the role as the champion of the corporate debt as well, and publish a road map at the beginning of the year, the market could move faster, he said.
“That might help implement what we already know,” Fernando said. “We know what needs to be done.”
He said two years ago a study was conducted and the report was available.
Vajira Wijegoonewardene SEC director for capital market development said the report was being acted upon.
He said said a proposal for foreigners to invest in corporate debt and mutual funds originated from the watchdog. The SEC had also talked with the finance ministry to clear an anomaly of taxation between government and corporate.
Amendments to the SEC law, being shaped with World Bank assistance would give authority for the SEC regulate the unlisted bond market.
Fernando said primary dealers in government securities were now sitting on a lot of cash and were well capitalized and they could move to dealing in corporate debt if the Central Bank allowed them to do.
The Central Bank has allowed primary dealers to engage in fee based services, such as advisory and placement.
Fernando said with some of the macro-economic problem easing and interest rates and inflation being relatively low compared to the past, conditions were right for the market to move forward.
Adrian Perera, chief executive of RAM Ratings said a lot of investment houses were springing up and there was more interest in investing in corporate debt but the sector was not regulated and information was scarce.
“Some (corporate debt) are rate rated, some are not rated, some are retailed – it is a fact,” he said.
“In Sri Lanka investment houses are mushrooming, there is a danger zone.”