Sri Lanka to Enhance Capital Market Through New SEC Act

The new SEC Act will allow for recognition of new categories of market intermediaries and introduce new enforcement mechanisms to deal with market misconduct.

Sri Lankan SEC (Securities and Exchange Commission) officials have said the new SEC Act will be tabled before the Cabinet for approval soon.

The draft law seeks to achieve improved governance standards, provide for a new clearing house to be set up, allow a demutualised structure for exchanges, recognise new categories of market intermediaries, and introduce a wide range of enforcement mechanisms to deal with market misconduct.

Financial analysts, derivatives dealers, financial planners, market makers and corporate finance advisors can be licensed as market intermediaries under the new Act, SEC officials told Regulation Asia.

The new Act will also introduce civil enforcement actions as potential penalties for capital market offences. Currently, the Act allows for criminal enforcement actions, which entail difficulties proving an offence under Sri Lanka law.

“There’s a provision to claw back offenders’ ill gotten gains up to three times that of the value of an offence. That money will be reverted to the investors to compensate them,” an official explained, adding that this will enable swift and clear enforcement.

The Act will facilitate the demutualisation of the CSE (Colombo Stock Exchange), DvP settlement, a new CCP, improved governance standards, and democratisation of the stock market.

The Sri Lankan stock market has been grappling with its small size and low liquidity. Analysts say that solving the “size and liquidity” puzzle is critical to unlocking the stock market’s potential, and requires “bold and visionary” supply- and demand-side reforms at the government level.

“The new Act will assist the market to face these roadblocks,” one analyst said.