Colombo Stock Exchange

The establishment administering the buying and selling of the shares of listed companies is known as the Colombo Stock Exchange.The Colombo Stock Exchange is company limited by guarantee.

The brokering companies act there as full members. These brokering companies function as intermediates in the Colombo Stock Exchange. The functions of the Colombo Stock Exchange are regulated and monitored by Sri Lanka Securities and Exchange Commission.

Some Important Years

·        Inception of share trading in Sri Lanka under the Colombo Share Brokers Association (CSBA)– 1896

·        Automation of the Clearing House of the Stock Exchange with the establishment of the Central Depository System (CDS) – 1991

·        Automation of trading with the installation of a state of the art Screen Based Trading System (ATS) – 1997

·        Introduction of the Milanka Price Index (MPI) – 1999

·        Launch of a new system for the trading of Debt Securities (DEX) – 2004

·        Opened Branch Offices in Matara, Kandy Jaffna,Kurunegala,

Central Depository Systems (Pvt) Limited  - CDS

The Central Depository Systems (Pvt) Limited (CDS) is a wholly owned subsidiary of the Colombo Stock Exchange (CSE) and is licensed as a Market Intermediary and Clearing House by the Securities and Exchange Commission of Sri Lanka (SEC).

 

Incorporated on 30th August 1991, the CDS acts as a depository in respect of securities traded on the CSE and holds the securities in custody on behalf of shareholders of the listed companies.

Some reasons for the Colombo Share Market to be important

·        Encouraging individuals and institutions for investments.

·        Investors can enjoy various benefits by investing through Colombo Share Market.

·        Companies get the opportunity to collect a large capital.

·        Ability to attack foreign investors to the country.

·        The government can collect required fund by selling government securities.

·        Creating a value for company shares.

·       Increasing the goodwill and the image of companies.

Primary market and Secondary market.

·        Direct purchasing of shares by investors from a company that involves in issuing shares isthe primary market.

·        Purchasing of shares by investors from Colombo Share Market is the Secondary market.

A limited company has three options to register in the share market

·       Through an initial public offer.

Registering through an initial public offer is a company getting listed in the share market after inviting the public to invest by issuing share for the first time.

·       Through an offer for sale

A company that has already issued shares can get listed to present the shares for sale which already belong to the public through the share market is known by this.

·       Through an introduction

A company can get listed in the share market as an introduction without issuing shares to the public.

The companies are listed under two boards

The Main board

The board separated for the companies with larger stated capital is the main board.

Conditions to be fulfilled for the ordinary shares to be listed in the main board.

·        The stated capital of the company should be at least 500 million rupees.

·        Profits should have been earned before tax continuously for at least three previous years before the day of applying to be listed.

·        Positive net assets as per the consolidated audited financial statements for the last two financial years immediately preceding the date of application

·        Minimum Public Holding as per below Table,

 

The Dirisavi Board

The board separated for the companies established with a limited stated capital is Dirisavi board.

Conditions to be fulfilled to be listed in Dirisavi Board.

·        The stated capital of the company should not be less than 100millions rupees.

·        At least 10% of shares issued should belong to the public.

·        Positive net assets as per theconsolidated audited financialstatements for the financial yearimmediately preceding the date of

·        Operating History Of at least one year immediatelypreceding the date of application

·        Minimum Public Holding as per below Table,

Watch List Board

The board in which the companies those violate or do not follow the conditions of listing, are entered is known as Watch List Board. This was called “ Default Board”previously.

 

Securities exchanged in Colombo Stock Exchange

·       Ordinary Shares

·       Preference Shares

·       Share Warrants

·       Corporate Debentures

·       Government Debt Securities

Ø  Ordinary Shares

The investors become owners of the company through buying of these shares. Though the investors who purchase ordinary shares are entitled for a certain percentage of profit that the company earn, they are not entitled for a specific percentage of dividends. Therefore the risk is higher. They get the chance to participate in the Annual General meeting. They acquire the administrative authority as well. There are two kinds of ordinary shares.

o   Voting Shares

o   Non-voting shares

Although the non-voting ordinary shareholders are not entitled for voting, they enjoy all the other privilege entitled for ordinary shares.

Ø  Preference Shares

The shares that are entitled for a specific dividend and priority in refunding the capital at an occasion of dissolving the company are known as preference shares. Theseshareholders do not gain the ownership of the company. The risk is low. They do notacquire administrative authority.

Ø  Share Warrants

A document issued by a company assuring the right to purchase the shares at a specific price in future is known as a share warrant. Until this share warrant is converted intoshares benefits other than capital gains cannot be enjoyed.

Ø  Corporate Debentures

These are special securities issued by a company to obtain the lone capital. Listed debentures issued by listed companies can be exchanged in the Colombo StockExchange. The investors of debentures are entitled for a specific rate of interest.

Ø  Government Debt Securities

The treasury bills and treasury bonds issued by the Central Bank of Sri Lanka on behalf of the government are known as Government Debt Securities. These are considered asinvestments with minimum risks. While the interest rate for treasury bills and treasurybonds are not, the government issues these securities at various times with variousinterest rates.

Benefits gained by investing in securities exchanged in the share market

Ø  Direct Benefits

Dividends

The amount distributed among the shareholders from the net profits earned by a company through its business operations is known as dividends. Dividends are declared as financial value or as shares. When the dividends are declared as financialvalue, they are declared as a monetary value per share. In other words, declaring a certain amount of monetary value per share.

Example : Rs.2.50 share

Interest

The companies pay an annual interest rate to the investors that have bought corporate debentures issued by those companies. While the interest rate paid for debentures arefixed, it is declared at the time of issuing debentures.

Capitalizing of Reserves

Here, the reserves of the company are converted into share capital. The existing ordinary shareholders receive these new shares according to a certain ratio. When capitalizingthe reserves, the declared capital of the company will be increased. For this process ofcapitalizing of reserves, the complete permission from the Colombo Stock Exchangeshould be obtained.

Right Issue

The existing ordinary shareholders of the company are offered again the shares at a particular proportion. The investors get an opportunity to obtain shares at a price whichis less than the market price. Having an opportunity to obtain share at a lower price andsell them at a higher price in this manner by an investor is the benefit of a right issue.

Capital Gain

If an investor sells the shares higher than their buying price, he receives a capital gain through that. For example if a person, who has bought a share at Re.30, sells it forRs.50, he has obtained a profit of Rs.20 per share.

The most attractive benefit that investors, transact in the share market, receive is this capital gain..

Indirect Benefits

·        An ordinary share holder is entitled to be appointed as a director of the companyand also for the voting rights.

·        Securities can be used as collaterals when obtaining loans.

·        The risk of investing in government securities is low and liquidity is high.

·        Capital gains are free from tax.

·        Since the shares can be sold at the time of need in the share market, they can beconverted into money quickly and they consist of a higher liquidity.

·        Entitled for bonus issue.