New SEC Act: Preparing Sri Lanka’s capital markets for the future

For more than 17 years Sri Lanka’s capital market regulator has been trying to revamp its primitive securities law. The lack of a proper legal system in the capital market has stopped ‘ meaningful’ foreign investment in the Colombo Stock Exchange (CSE). The fact that this has been going on for nearly two decades is inexcusable.

This is the second time the draft law is before the parliament. This is the fourth try of the Securities and Exchange Commission (SEC) to bring fresh regulations and replace the 34-year-old archaic law to keep it in line with the other countries in the region. In 2007, the SEC ‘tried’. In 2012, the regulator managed a draft Bill, but it did not make it to the parliament. In 2018 a bill went to the parliament, but when the incumbent government was ousted for 52 days, it took a backseat.

This is SEC’s fourth chance. This piece of legislation over the years has seen many millions of rupees spent to pay for consultants to help draft it and many months and at times years spent in drafting. For an outsider, this equation is a proper waste of time.

“It is long overdue,” agreed Viraj Dayaratna, Chairman SEC when contacted by the Business Times. He explained that the new Bill will be different from the others in terms of being futuristic. “The new law has considered how the local capital market will evolve with the intended Port City kicking into place. It will have provisions for introducing new products and new investment options which are essential to increase the liquidity and attract sizeable foreign investments. It will open new avenues to raise funds and finance businesses. It is also in line with the Inter national Organisation of Securities Commissions standards, and we have benchmarked the draft law with other regional markets such as Malaysia, Singapore, India, Australia, and Vietnam.”

He stressed that strong foreign funds and investments have a checklist for countries. This entails a proper legal regime with investor protection, a proper exit mechanism from the market for them, proper infrastructure such as post- trade settlement and risk mitigation systems such as the delivery versus payment and the central counterparty. “All these are provided for in the new bill,” Mr. Dayaratna said.

Analysts said one reason the CSE does not appear on the radar of big investors is that it does not have the proper infrastructure to support/ protect their investments. “It is a nascent market in that sense,” one analyst opined.

Each year the custodian banks that conduct due diligence on capital markets for their fund managers ask the SEC if the new law will be introduced. “There will probably be a lot more investment and we may be able to somewhat arrest the foreign outflows if we have the proper laws in place,” a second analyst noted.

Mr. Dayaratna said the legal and technological risk is mitigated in the market with the introduction of the new law. “It will be easier to sell our capital market products with the new law in place.”

When questioned on the current discussion on whether the new law gives unnecessary powers to the regulator, he explained that while the regulatory aspect is strengthened there are other checks and balances so that the regulator does not act arbitrarily. “It is mandatory to hear an affected party before taking any administrative sanction. Appealing to the minister is provided for and if that fails in a conclusive decision for the affected party then seeking Court of Appeal assistance is also provided for.” He stressed that the instances where the SEC Commission can take civil proceedings against wrongdoers have been specifically stated thereby spelling out how the Commission can use their discretion. Also, the defences available to a person accused of wrongdoing are spelled out in the draft law, which is not in the current Act, he added. He also pointed out that the application of law happens when there is a requirement.

“A regulator has to be vested with the use of material justice and this power will be exercised ‘legally’.”

He also said that provision is included to make it obligatory for market intermediaries to act in the best interest of their clients. “This is their duty but in the new Act it is specifically stated.”

Mr. Dayaratna said that stockbrokers and investment advisors rights are protected in the intended law.

On questions raised on the new law being bulky, he said that unlike now where the main market offences are only mentioned in the rules, in the new law they are embodied in the Act itself increasing the number of pages.

Analysts noted that to safeguard the sophisticated investors' interest in securities which they cannot physically hold, futuristic laws should be in place.

After 17 years of struggle the SEC might be fourth time lucky.