What should come first in Sri Lanka’s debt market, Regulation or Development?

June 9, 2015 (LBO) – Sri Lanka needs to allow the debt market development through producing new products before regulating it, since the market is pacing fast and changing day by day, Ajith Fernando, chief of Capital Alliance Sri Lanka said. “The regulator has to move away from stopping everything that they can’t regulate,” Fernando said.



“Regulator can never be the facilitator to develop the market, regulator has to allow the market to develop and then regulate it,” “Trying to protect all the investors in all perils at all times is not possible.” Fernando was speaking at the 63rd LBR LBO CEO forum held at the Colombo, Hilton last week. Experts say that the domestic debt market in Sri Lanka is still at a nascent stage. It has been estimated that retained profits finance about 70 percent of private investment in Sri Lanka, with short-term borrowing financing a further 20 percent. Thus long-term debt funds only around 10 percent of private investments.

However regulator plays a big role in the Sri Lankan debt market. Fernando says if the country wants the market to grow, the regulator should allow ways and means to generate liquidity for companies.

“Let it happen, and then regulate it. The idea is to allow the investor to invest the way that he wants and products will take care different in features,” Pointing out an example of a regulated product Fenando said that, short selling is considered a bad thing and treated like a traitor to the country, not only here that is a common thinking in many parts of the world,” “The law says you can short sell, but the regulation has been done in such a manner that you cannot short sell,” “Without short selling there is no liquidity in the market and without liquidity you cannot continue issuing bonds in to a saturated market,” “So the products also will have to start coming very soon,” “Now as an example if you want to list a debenture in Sri Lanka it has to be one notch above the investment grade,” “That is the regulator taking one further step and deciding and looking what if there is a credit downgrade, so they are trying to protect the investors from credit downgrade, which is ridiculous.” Fernando said. He said the mindset has to change, allowing more things to happen and setting up regulations has to be speeded up according to the market change.