The Emerging Asia Pacific Capital Markets: Sri Lanka

Abstract

The capital market of Sri Lanka consists of government securities, stocks, and corporate bonds. All financial instruments have a combined value of about USD 66.3 billion as of July 2020. Government securities contribute the most, with about 63% of the economy. Government securities are issued in both Sri Lankan rupee (LKR) and foreign currency denominated securities.

The current stock market formed in 1985 and was later renamed the Colombo Stock Exchange (CSE). The CSE currently has two indices, and the main securities traded include ordinary and preferred shares, close-ended funds (unit trusts), and corporate debentures. Currently 287 entities are listed on the CSE, with stocks contributing 16% of the economy.

The corporate bond market became active in 2013, with the introduction of incentives from the government, including the exemption of interest income received from listed debt from income and withholding taxes. The market capitalization of the listed corporate debt market reached LKR 257.9 billion in July 2020. The Securities and Exchange Commission (SEC) and the CSE have focused on expanding the contributions made by corporate debt in the capital market.

The CSE faces many challenges, including the need to increase corporate listings, liquidity, and foreign investor participation as well as to broaden the depth of financial instruments. A master plan has been developed with the SEC to develop the Sri Lankan capital market to be on par with global exchanges, beginning with the South Asia region. Importance has been placed on attracting global investors and developing new financial instruments. Development of capital market–related infrastructure has included measures to set up and implement a risk management system, a delivery versus payment settlement method, and a central counterparty clearing house. The SEC has also facilitated the introduction of real estate investment trusts (REITs), as a forward-looking step in its market development strategy.