SEC to step up demutualisation of Colombo bourse

The Securities and Exchange Commission (SEC) is stepping up the demutualisation of the Colombo Stock Exchange (CSE) and targeting six months to complete the job, according to SEC officials.

Demutualization is the process through which a member-owned company becomes shareholder-owned; frequently this is a step toward the initial public offering (IPO) of a company, according to stock market sources.

"The large part of this process will be completed by April and the rest will take about three more months," a SEC official told the Business Times. He added that the demutualisation will be completed within six months.

He said the Qatar Holdings, which owns around 20% in the London Stock Exchange is interested in a stake in the CSE and will do a feasibility study of the local exchange in a bid to invest in a 'sizeable' stake. "But before that the CSE has to be demutualised and made into a public limited company which is now being fast-tracked," he said.

He also noted that the present SEC Act was introduced in 1987 and though there were three amendments thereafter, an overall review of the provisions to align it to the global market trends has not been done.

He said the SEC Act will be amended to incorporate provisions that would regulate demutualised exchanges, to effectively regulate a Central Counter Party/ Depositories, to introduce civil sanctions and administrative sanctions to deal with capital market offenders and the introduction of provisions that will provide for restitution for investors, to licence and regulate derivative exchanges including a Commodities Exchange, incorporating legal duties on Auditors in respect of capital market offences and other relevant measures that will enhance protection to investors.

The SEC is trying to introduce a risk management system, which is a precursor to bringing in demutualization and dematerialization of the Colombo Stock Exchange and establishing the Central Counter Party (CCP) system, according to the official. "The market participants need risk management models to manage the risks involved especially at a time like now when the regulators are trying to bring in the CCP. Now the financial integrity of the stock exchange is at stake and by bringing in appropriate margining and risk containment the market will be ready for CCP," he added.

According to the SEC, effective risk management practices render stability to the financial markets and its participants by ensuring proper and timely settlement of the trades. "It also prevents market manipulations and other abnormal price behaviour. It is imperative for any participant in any market to have a thoroughly well tested and reliable risk management system to shield it from any future rude shocks," he added.