Parliament recommends the introduction of incentives to encourage greater liquidity in Sri Lanka’s secondary market and to maintain high public float.

Accordingly, the Committee on Banking and Financial Services said that Sri Lanka’s capital market is unable to realise its full potential as a facilitator of economic growth through cost-effective capital raising, due to a number of reasons, most of which can be attributed to the lack of an enabling environment. 

The report said that this results in a capital market which lacks breadth and depth and therefore inhibits local and foreign participation on both the demand and supply sides.

The Committee recommends the introduction of incentives to encourage greater liquidity in the secondary market to address this lack of breadth and depth in the market.

“The turnover velocity in Sri Lanka’s capital is low relative to peer markets such as Bangladesh, Vietnam and Pakistan. An adequate public float is essential for attracting foreign investors as illiquidity results in high transaction execution costs,” the report noted.

Also, it added that many listed companies maintain low public floats, meeting only the minimum regulatory requirements while recommending the introduction of incentives to listed companies to maintain a higher public float.

Further, the Committee also recommends the introduction of tax and other incentives to encourage large capitalised companies to list on the Colombo Stock Exchange (CSE).

“The limited number of large capitalised listed companies is a major barrier to attracting a larger investor base, particularly foreign institutional investors.” the Committee said.

Sri Lanka introduced a 50% tax incentive for companies getting listed at CSE through the 2021 Budget which resulted in 13 companies getting listed on the stock exchange in 2021 which was then discontinued in 2022 as a result of the unprecedented economic crisis and the incentives granted to companies were reversed by the new Government.

Due to the incentive in 2021, the CSE witnessed a record Rs. 124 billion in capital-raising where the capital raised was a combination of Rs. 84.4 billion via debt and Rs. 39.4 billion in equity, as the CSE saw 28 new listings, including 14 debt Initial Public Offerings (IPOs) and 13 equity IPOs.