Key policy initiatives undertaken in 2011 by the SEC

Amendments to the Unit Trust Code
The Unit Trust Code was amended and gazetted to enable the SEC to regulate exchange traded funds. An exchange traded fund, is a financial product which reflects a unit trust and tracks a capital market index or the price of gold or any other commodity approved by the Commission. The units of such a fund can be listed on a stock exchange and can be traded at prices equal or approximate to the net asset value of the underlying. The amended Code was gazetted in all three languages in the Gazette Extraordinary No. 1723/4 dated 12th September 2011.

Amendments to the Takeovers and Mergers Code
The proposed amendments to the Takeovers and Mergers Code were finalized during the year. The amendments were spearheaded by Justice Saleem Marsoof PC, Judge of the Supreme Court of Sri Lanka. Many changes have been introduced to the existing Code by the proposed amendments, including inter alia, the following:

•  The regulation of indirect takeovers of a listed company through an unlisted company;
• The establishment of a consultative panel to determine on matters coming within the Code in order to make recommendations to the Commission;
• The recognition of Compliance Auditors who will oversee and be responsible for the compliance of the Code by the offer or and a target company; and
• The introduction of ‘white wash resolutions’ to cure the need of having to make a mandatory offer under certain specified circumstances.
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Steps will be taken to gazette the new Code.
Amendments to the SEC Act
The World Bank through FIRST Initiative, (the Financial Sector Reform and Strengthening Arm of the World Bank), is providing technical assistance to the SEC to propose amendments to the SEC Act to provide a robust legal framework as a foundation to develop the capital market. The mission commenced in June 2011. Through the amendments to the SEC Act, the SEC envisages to bring in many changes to the existing Act which will inter alia, include wide powers for the SEC to regulate demutualised stock exchanges, derivative exchanges, clearing corporations, futures brokers, futures dealers, futures fund managers, corporate investment advisers and financial planners in addition to the other market participants already under regulation. In addition, the SEC will be empowered to institute civil actions against capital market offenders in order to disgorge investors who have incurred losses due to their actions.
Many consultations were held by the mission with the officials of the SEC and all stakeholders. The position papers on the above amendments that are to be submitted for public consultation were finalised by the end of the year.

Draft Bill to Demutualise the CSE
After the Cabinet of Ministers approved the demutualisation of the CSE by way of a special Act of Parliament, the SEC assisted the Legal Draftsman in respect of the provisions to be included in the Draft Act. The finalisation process of the Draft Bill is in progress.

Clearing House
The draft legal provisions which need to be incorporated into the SEC Act in respect of a clearing house were forwarded to the Securities and Exchange Board of India (SEBI) for their comments. These provisions together with the inclusions suggested by SEBI were submitted for review to the FIRST Initiative Team which will provide further technical assistance in this regard.

Revision of the CSE Listing Rule on Private Placements
The current Listing Rules on private placements by Listed Companies does not adequately protect the rights of the minority shareholders. In many instances, high net worth investors (both institutions and individuals) take advantage of gaining undue profits over the minority shareholders by privately placing shares, at unfavourable prices, without offering them to existing shareholders. The SEC undertook a research on the private placement of shares of Listed Companies and a consultation paper was prepared and circulated to obtain the views of the public with regard to the proposed amendments to the rules.

Revision of the Listing Rule to Suspend Listings by Introduction
A company can be listed within a shorter period of time by an Introduction than through the other two methods of listing. However, companies as well as some of the investors in the market use this method to manipulate the market forces. The SEC has made recommendations to lock in all the shares held by the promoters and all other shareholders prior to such offer for a period of 09 months from the date of listing of shares on the CSE.
The main objective of this new rule is to minimise the negative impact of the sell-down of shares by the directors/ promoters of the company in the secondary market and to create a conducive environment for an efficient price discovery mechanism.

Introduction of Rules for Employee Share Schemes
The SEC together with CSE, reviewed the Employee Share Schemes adopted by Listed Companies and noted that there are no rules or regulations to regulate the Employee Share Schemes except procedural guidelines given in Section 5.6 of the CSE Listing Rules.
After a detailed research carried out by the SEC and the CSE, a consultation paper was prepared and circulated to obtain public comments. After much deliberation and reviewing the comments received from the public, the first draft rules on Employee Share Options Schemes (ESOS) and Employee Share Purchase Schemes (ESPS) were developed and circulated for public comments in December 2010. Based on the public comments, the regulation on ESOS and ESPS were finalised in the year 2011.

Develop a Framework for the Investor Association of Sri Lanka
Most of the companies listed on the CSE are family oriented companies in which the major shareholder/s individually and/or together with other related parties hold more than 75% of the voting rights of the Listed Company. Under such circumstances minority shareholders encounter difficulties in voicing their concerns over decisions taken by the Board of Directors and/or the major shareholders which can be detrimental to the company as well as minority shareholders.
Although the Companies Act No. 07 of 2007 contains provisions that can provide relief to investors and shareholders, these provisions remain dormant due to limitations caused by the high cost of litigation. In addition, the minority shareholders of Listed Companies in Sri Lanka are unaware of their rights and are unable to obtain redress to their grievances.
The main feature of this Association is that it will be a body corporate having a legal personality which can sue on behalf of investors. The SEC is in the process of drafting the initial framework to establish an association in order to protect the minority shareholder rights.

Guidelines to Classify Companies Listed on the CSE into Industry Sectors
The SEC noted that certain companies listed on the CSE have not been classified according to the core business or the primary revenue generating activity. Considering the advantages available to the market participants by having a proper industry sector classification, the SEC carried out a study in classifying Listed Companies into industry sectors. Based on the study carried out, draft guidelines were formulated and forwarded to the CSE for implementation.

Revision of the Listing Rules to Introduce New Rules on Regulation of Non-Performing Listed Companies
The SEC observed that regulation of Listed Companies facing serious financial and operational difficulties is vital to maintain a fair and transparent market. A research was carried out on Non Performing Listed Companies and a consultation paper was issued for public comments. The CSE, and the SEC are in the process of drafting the final rules pertaining to the regulation of Non Performing Listed Companies.