Making Trading More Accessible

Interviewee : Naresha Abeysekera; Interviewer : Dilusha Gamage;
Date of Interview : 09/08/2021

List of Acronyms : NA = Naresh Abeysekera, IN = Interviewer

IN:

Good governance is vital to any organization, institution, business entity, or even the country at large. Colombo Stock Exchange is not that different. The SEC of Sri Lanka is the governing body and regulator for the CSE. It is very important to understand the perspective of the regulator to understand the dynamics of the market.

IN:

Today, we are privileged to have the commissioner of the SEC of Sri Lanka, Mr. Naresh Abeysekera. Welcome to Market Insight.

NA:

Thanks for having me.

IN:

So Naresh to start of the conversation, you are the chairman of the SEC/CSE committee for the digitalization of the CSE. To start off, how did this all start and what is the reason to go for these initiatives?

NA:

As soon as we were appointed to the commission sometime in February, Covid-19 struck causing utter chaos in the country and halting the market from operating properly. Therefore, we looked at every single touchpoint and identified that there are several manual touchpoints involved in the market which prevented us from operating a free and fair market due to certain areas been under lockdown and preventing accounts from been opened. It was only a small segment that could access the market due to restricted access to online account creation. As the market was closed, the SEC chairman President’s Counsel Viraj Jayaratne decided to establish a joint committee to lead the digitalization of the Colombo Stock Exchange due to fears of future lockdowns & disruptions. There are two commissioners that share the committee. Another commissioner is Manil Jayasinghe, two other board members of CSE, Jayantha Fernando & Dilshan Weerasekara, and two teams of SEC and CSE were combined to form the committee to get the market operational.

During that phase, we decided that we needed to get online account opening. We, as a commission, felt that we needed to go out into all corners of Sri Lanka and grow the market. Online account opening was seen as a huge challenge in Sri Lanka, so we thought to take on this challenge and engage with the Central Bank to look for options on how we can bring about online account opening. Then, together we came up with an option of creating an interface directly connecting to the department of registrar of persons where your NIC is automatically verified. Within a period of three months, we were able to build this interface thereby eliminating all intermediaries and manual transactions. We converted this exchange (including 26 brokers) from non-operational status to fully electronic trading including online account creation. For the first time in Sri Lanka, we had automated ID verification using a DRP interface with robotics. Today, the same interface is changing the banking landscape of Sri Lanka.

The committee was created by the SEC chairman to get the market operating and to create a free and fair environment in which the SEC act also articulates fiercely. That was the primary objective and it was one of the fastest and most complex digital transformations in the region probably. I come from a capital markets technology background and have been involved in about 40 odd capital market regulated investment banks around the world. This was a complex and quick implementation which thereafter we decided to let the committee continue to take the market to a different level altogether in terms of digitalization. After a week’s break of completing the first phase of digitalization, we commenced phase two and went ahead with other activities. There were fill overs from phase one which we could not complete such as chat bots and AI assistants and are to date progressing well.

IN:

And Naresh as you mentioned, it’s a joint effort with CSE and SEC in which the requirement too would have arose due to the pandemic but do the objectives go far beyond simply working remotely?

NA:

There were certain aspects of it that we already wanted to create before the pandemic such as online account creation but the pandemic expedited it and created the need for it in an electronic, risk-free manner. While that was the immediate need, now we are looking at developing market infrastructure to combine capital market technology (fintech) to develop next generation capital raising and distribution to market infrastructure. That will have various aspects of it such as investor engagement. For instance, if you take the CSE mobile app it is one of the fastest growing mobiles apps in Sri Lanka with over 65,000 downloads in less than 10 months which has led to an increase in CDS accounts by 70%. The months of September, October, November and December were responsible for 50% of account creation for the year 2020. To date, 97% of account creation is done digitally and the time taken as reduced to one day from the previous ten days. There are also performance matrices built into that whole equation. Broadly, we are looking at using digital technology as a means to basically to re-invent the market and how it operates.

IN:

As the chairman of this committee, you were the mastermind behind the process and getting it done within three months would not have been easy task if you did not have the required qualifications or the prior experience. So tell us about your background and how you became conversant about this process.

NA:

I was previously employed as the group CFO for MilleniumIT (now known as LSEG Technologies) and I was also in the global leadership of the LSEG. Having been in the technology business and the capital market business probably contributed to this. But it was also a major team effort where everyone was stressed especially since the timeline was set for three months with no compromises. Basically Dilusha, the digitization committee is run similarly to a mini-organization, there is clear plan, a road map in place, clear time lines, and clearly defined objectives that a tracked & monitored on a weekly basis for project risks, delays, technical issues and whatever that may arise. It was tough on the team especially with a finance guy who knows technology on the team. In finance, you tend to be more objective driven, numbers driven, and KPI driven and when you have to deliver a technology solution, it tends to drive the process a bit faster.

IN:

Can you elaborate on the success of phase one and what has been achieved so far by its completion?

NA:

During phase one, we targeted a mobile first quadruple play strategy. Why mobile first? Because everyone accesses information from the palm of their hand. We wanted to bring all stock trading information whether its market data, research reports, listed company press releases and macro videos into the palm of the hand. This mobile app was created from scratch. To date, we have 65,000 active accounts. Wherever the investor is in the world, he can receive a listed company’s press release. Now that we have eliminated the geographical boundaries, anyone can receive information. So when I said quadruple play, I meant that you can get all the content in voice assisted by AI form, video form, and article form. So with the AI Assistant, we have integrated into Apple’s Siri and Google’s Assistant, an investor can simply request Siri or Google Assistant for today’s market information and it will be retrieved and displayed. Since people have little time to read, we have encouraged brokerage firms to share their reports in video form that can be viewed via the app. The app also allows online account creation allowing every task to be done from the palm of the hand. When it came to the exchange, brokerages, statements, and contract notes, they were fully eliminated. So in the background, we had to create digital signatures and rule changes. Our biggest challenge in the first three months was collecting phone numbers, email addresses and bank account numbers of investors as they were not readily available. We brought in certain changes such as having a bank account connected guarantees your dividend payment in two days. This process overhaul guaranteed faster dividend payments and electronic annual reports with all this information been displayed on the app notifications section. This drove up active accounts by 60% and new account creation increased by 70%. This fully digital onboarding process has led to over 80% of new account creators to be less than the age of 40. You have a new millennial generation of
investors taking notice of the stock exchange thanks to all the digital tools we have provided to encourage education. SEC’s YouTube channel helps further engage with new investors by guiding them through the do’s and don’ts. Our entire growth strategy has revolved around creating an app rich with content that anyone can access and receive exchange rates, business news and so on via the app. So once the investor downloads the content, we convert them into the serious account holder segment.

IN:

There was a time when we received annual reports through compact disks (CDs) which was costly practice. What more ways have listed companies benefitted by the digitalization process?

NA:

Today, if a listed company wants to engage with a potential investor it’s merely a click of a button away. For instance, if a listed company wants to send their annual report to their investors they have to simply send it to CSE and via the app CSE will distribute it to the investors. Another objective for this app was to improve investor relations in Sri Lanka from the perspective of the listed company. If you navigate through the app into the listed company tab, you can see all the press releases, annual report, corporate videos, financial information, company history, and other content that will help the investor (foreign/local) make a sound decision. But alas, only very few listed companies have shared their company content on the app which has led us to creating Stock Pulse where all the content was created from scratch (including CEO interviews) and hosted on the app. In other words, the Ferrari has been created but it has not been put to optimum use. So now it’s up to the listed companies to play their part and make their company profiles attractive to be marketed via the app. Basically, listed companies need to work on their foreign investor relations element by using our digital platform.

IN:

Can you give us some insight into the DVP (Delivery Versus Payment) implementation which was part of the digitalization strategy to facilitate foreign investor participation?

NA:

The DVP was not part of the digitization committee initiative. It was already in the cards for the CSE for some time, probably more than 3-5 years. To put it in layman’s terms, the DVP is similar to when you order a product online and pay by cash on delivery, it reduces the risk to the consumer. Basically, the DVP helps secure the investor and help get the house in order to move from a frontier market to an emerging market. It’s great that the DVP is now in place.

IN:

Tell us a bit more on phase two and what we can expect for the future?

NA:

Phase two was launched two weeks ago by his Excellency, the president of Sri Lanka. Phase two has brought in new functionality to connect with the investor more effectively. CSE E-Connect was created to connect the investor directly to their CDS account allowing them to browse through their portfolio, amend their personal details and so on. This eliminated the previous practice of visiting the broker and filling a load of forms. We developed an AI assistant named Investo that will answer any question with regards to the market. We hope to evolve this AI assistant to a national level AI assistant that will aid in helping investors learn more about how to create a company, how to invest, how to open an IIA account, and so on. If you take look into the app, you might notice the amount of work gone into developing the face & technology of Investo by responding to queries in all three languages (English, Tamil & Sinhalese). Furthermore, our assistant investor can be integrated with Siri or Google Assistant to gain more efficiency. We have also created e-IPOs to conduct IPOs from the palm of your hand. More content was added to the platform as part of phase two.

We also brought in company CDS account creation where the interface is built directly into the registrar of companies eliminating the physical visits and heaps of documentation that were once required. This was basically done with simplification in mind, to reduce time by simplifying processes to be quicker, efficient, and interactive.

IN:

What are in the cards for this platform in the future?

NA:

In the next few months, we will be introducing creating of corporate debt markets, gold lending, peer-to-peer lending, and crowdfunding. If there is a publicly listed company who needs to borrow money, they can do so via P2P lending directly through the platform and earn better rates from the corporate debt market. They will also be products such as green bonds coming in. What we are mainly trying to do is to build the infrastructure that is required to run a capital market based economy. This will evolve into reaching the property market and if your property is broken into unit trusts, an overseas investor can electronically subscribe to it.

This will be further articulated in phase three where we hope to build a single digital interface for the capital market allowing us to go into multiple sectors such as agriculture and so on. Overall, the entire market infrastructure is being developed for efficient capital raising and distribution. This will eventually bring the IPO time down to a single day taking away the lead time all the while being accurate.

IN:

Is it possible for Sri Lankan investors to invest in cryptocurrency via the stock exchange in the future?

NA:

With the new SEC act coming in, we brought in regulation for digital assets classes for crypto, block chain, etc. But it depends on what drives the economy and where the money should flow. Digital asset classes are definitely in the cards but what you have to understand is that capital markets are also evolving with concepts such as intellectual capitalism where your intellectual design (music, art, etc.) is been traded. This all works with distributed ledger technology that has come into the market. Immediately what requires solving is how companies will arrive at the capital market, raise capital, and continue participate in it. The first thing that an overseas startup does is list the company because the brand value, equity value, and valuations increase exponentially. The element of benefits in capital markets are well known overseas. First, we want to build the market infrastructure, the environment, then the knowledge base, and finally the investor & entrepreneur mindset. We educated CFOs on the benefits of capital raising and how patient capital being infused to the market creates an efficient dynamic that immediately drives innovation up. The SME market in Sri Lanka in my view is about 50+% or more and is a catalyst for innovation. Therefore, we need to get SMEs into the capital market to drive capital growth & innovation.

IN:

Is there a phase three?

NA:

There is definitely a phase three where we will focused on creating a wallet (single interface) which allows brokering houses and investment banks to digitally market to overseas investors enabling company account creation to IIA account creation, digitally & conveniently. This will reduce repetition associated with the traditional way of registering accounts. That will also link to a national investor management system allowing account holders to know who their investors are nationally. That will help build the structure for your regional and country-wise management and the entire design structure will come into place. The wallet will be a single digital window allowing transactions via an ATM machine. For example, if an investor comes into the country via a QR code we will be able to identify the investor and welcome them into the country via a special channel. This is the mindset we have in order to not merely create a CDS account as a stock trading account but also to function as a passport to the local capital markets.

IN:

Why does the general public still prefer traditional Fixed Deposits with minimum interest as opposed investing in capital markets to receive high dividend yield?

NA:

To answer this, I shall wear my Chartered Accountant hat. To start off, you have already lost the plot by referring it to as dividend yield. People prefer FDs because unlike finance and investments because it is simplified and comprehensible. So we need to make investing a simplified process to reach a wider audience. This is where the broker community comes into play by going to the provinces and talking to the people in order to further simplify the process and communicating the value proposition of profit sharing. From a regulatory point of view, we are currently in the process of launching a capital markets related subject to target students at an early age. The chairman of the commission felt that Sri Lankans do not have the investment mindset even with regards to property asset class. So we aim to incorporate this new subject on capital markets during the syllabus change coming in 2023. We are currently running two streams of marketing; digital marketing and 12-24 month education campaign to educate investors on the company they wish to invest in. For example, majority of the world’s billionaires’ net worth is held in equity and that there is a strong value proposition to educate people on the advantages of investing in capital markets. Yes, it is risky but similar to riding a bicycle if you know what you are doing then you can avoid major disasters during investing. Hence, where our educational channels are important to learn and grow.

IN:

What is your view on foreign investors? Can Sri Lanka survive without foreign investors or not?

NA:

In my view, they will definitely come back. Today, we have a market cap of about 3.4 Trillion (if I’m not mistaken) which is the highest in quite a long time. The market daily turnover is over 3-4 billion. If you look at price to book values, we are the lowest which gives a good valuation. If you look at the regional exchanges of Philippines and Bangladesh, the ASPI has given a return of 54% (if I’m not mistaken). Our region is probably below India which has given a 64% return. Sri Lanka has given a good return and has appeared in Bloomberg as one of the best performing markets in the region. If you look at the listed company performances, they are currently having the best results in history. Personally, If I articulate this strategy in different dimensions, we are seeing a scenario where we are producing a lot of products locally. To put into perspective, at my previous place of work, we were tasked with producing capital market technology which we excelled at by being the world’s number one capital trading technology company. Sri Lanka managed to make the fastest trading platform in the world and is a testament to our potential as a country. So, we definitely have the talent and the brains, it’s just that we are bad at showcasing our competencies to the world. For example, some of our listed companies still have not uploaded their corporate videos on to the platform and that therein lies the problem. By developing this technology infrastructure (wallet), we are not just opening the market for the funds but also simplifying the process to be able to use a single click to digitally market ourselves by any broker to reach out to Sri Lankan expats to invest in the local capital market. This here is digital marketing by click of a button. Foreign investor onboarding too can be achieved with a single click. The current mobile app has performance criteria built into the system.

IN:

What your advice to stock broking companies and listed companies?

NA:

We have created a platform for brokers to reach into the market & listed companies to disseminate information regarding their company. So, we have created the Ferrari’s and now we need the drivers.

IN:

Currently over social media there is a lot of chatter and advice from different channels on investing in capital markets. Can we trust these sources?

NA:

In my opinion, investors need to trust only the legitimate sources hence the importance of the broker community. Therefore, everyone with a CDS account is working with a broker and it is the job of the broker to disseminate information in a simplified and comprehensible manner via multiple channels that will prevent unproven sources from misguiding existing and potential investors. As a regulating committee, we have our own channels of disseminating clear and simplified information. But end of the day, it’s up to the investor to identify and understand the legitimate sources of advice and proceed with educating themselves.

IN:

What is your advice to the general population on investing in capital markets?

NA:

Primarily, the general population should first educate themselves on capital markets in depth by going through the proper channels of education. If not, they might end up in a fiscally bad place. This is so for everything you wish to put your hand in to.

IN:

What is your advice for companies planning to get listed in the stock exchange?

NA:

If you go to a bank and leverage yourself by gaining debt, your financial leverage goes up in terms of interest costs. How dynamics work in a capital market system is that you have patient permanent capital coming in to the business (without interest rates) and if you get your entity right, you pay them off by dividends and giving your entity’s valuation a boost. SMEs should identify the sweet spot between capital and debt that would not put their entity at risk. When joining the market, most entities have shown growth with their financial discipline, accounts, quality workforce, and improved customer base thereby helping them raise capital, increase brand value, and grow more at a faster pace. Hence, you see more companies in foreign countries listing in the stock exchange more and more.

IN:

So from what I noticed, the SEC and CSE are keen on building and encouraging the use of the digital infrastructure. Now it’s simply a matter of getting all the parties to drive themselves towards the future.

NA:

We have seen a quite a lot of IPOs (from SMEs) in the last few months raising about 7.5 billion in equity. There are more entities lining up for IPOs at the moment thereby creating a positive outlook on the market itself. Although easier said than done, we are looking to bring capital raising to every single segment of industry using technology thereby hoping for a capital market based economy.