Sri Lanka to regulate OTC debt

Oct 27, 2010 (LBO) - Sri Lanka will regulate over-the-counter debt securities by specifying disclosure requirements, a regulatory official said, amid warnings that liquid markets and low interest rates were increasing risk taking. "We are very mindful of the need to regulate the unlisted securities market," director of capital market development at the Securities and Exchange Commission, Vajira Wijegunawardene told an LBR-LBO chief financial officers' forum in Colombo.
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"It has to be done through a process and it has to be enabled through legislation.

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Currently we are in the process of amending the SEC Act.
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Through that the SEC would expand the regulatory purview to cover the unlisted securities market as well."

Maninda Wickramasinghe, head of Fitch Ratings in Sri Lanka, said unlisted debt securities were essential to deepen access to capital for firms but regulators needed to be "proactive rather than reactive" to the possible build-up of risky practices and defaults.

Wickramasinghe estimates that there are about 30 billion rupees worth of various bonds named variously as debentures, promissory notes or securitized asset paper in the unregulated market.

"I think securitization would probably get addressed with the securitization Act, which is yet to be gazetted and passed in parliament," he said.

"This is extremely vital as debt markets, keep a balance between the banking sector and equity markets.

"They all have a role to play in terms of risk in financial markets. It is important that this market comes under a disclosure based regulation."

He said ratings would help investors assess the risk, but there needs to more disclosure.

Regulators would also need to define what is a 'public' security issue.

Wickremeasinghe said in some jurisdictions an issue sold to more than 40 buyers was considered a public issue.

Wijegunawardene said the SEC wanted to ensure that unlisted securities issuers would register disclosure documents with the regulator which will be made public via the internet.

He said "adequate disclosure" similar to what is now asked for listed debt will be required from unlisted issuers as well.

Neomal Gunewardene, partner of Nithya Partners, a law firm, said the risk appetite was rising due to low interest rates on Treasury bills and people were looking to put money in riskier investments simply chasing after the yield.

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