STRIKING THE RIGHT BALANCE Annual Report 2019 Recognising our pivotal role, we navigated through an evolving financial market guided by a strong desire to ensure regulation and development of the capital market. We created the right eco-system capable of serving the needs of investors and entrepreneurs by striking the right balance between promoting and facilitating the growth of the market and ensuring market integrity, transparency and investor protection. 2 Securities and Exchange Commission of Sri Lanka | Annual Report 2019 Mission To promote, develop and maintain a capital market that is fair, effcient, orderly and transparent Vision To become the benchmark regulator in the region for effective, effcient and proactive capital market regulation About us The Securities and Exchange Commission of Sri Lanka (SEC) was established by Act of Parliament No. 36 of 1987 as amended by Act No. 26 of 1991, Act No. 18 of 2003 and Act No. 47 of 2009. The SEC is under the purview of the Ministry of Finance Securities and Exchange Commission of Sri Lanka | Annual Report 2019 3 CONTENTS Chairman’s Review | 4-5 Financial Reports Director General’s Review | 6-12 Securities and Exchange Commission of Sri Lanka Comprehensive, Action-Oriented, Auditor General’s Report | 66-68 Practical and Measurable Capital Statement of Financial Position | 69 Market Strategy 2020 - 2025 | 13 Statement of Financial Performance | 70 Key Regulatory and Development Statement of Changes In Reserves | 71 Strategies | 14-15 Cash Flow Statement | 72-73 Members of the Commission | 16-21 Accounting Policies and Notes to the Senior Management | 22-23 Financial Statements | 74-88 Managers | 24 Staff Members | 25-27 Settlement Guarantee Fund Operational Review | 28-54 Auditor General’s Report | 89-90 Additional Information | 55-59 Statement of Financial Position | 91 Highlights of the Year | 60-63 Statement of Financial Performance | 92 Statement of Changes in Net Assets | 93 Cash Flow Statement | 94 Accounting Policies and Notes to the Financial Statements | 95-96 Corporate Information Inner Back Cover 4 Securities and Exchange Commission of Sri Lanka | Annual Report 2019 Chairman’s Review “The main thrust of the work undertaken during the past year has been aimed at addressing regulatory gaps and coverage, adopting appropriate risk mitigation measures, strengthening the supervision of intermediaries and enhancing financial literacy”. It is my pleasure to present my first at addressing regulatory gaps and exchange, recognise new categories of Annual Report as the Chairman of coverage, adopting appropriate risk market intermediaries and introduce a the SEC. Capital markets represent mitigation measures, strengthening wide range of enforcement mechanisms an important source of financing for the supervision of intermediaries and to deal with market misconduct. businesses to meet their funding enhancing financial literacy. Firstly, let me requirements and better wealth creating highlight a few of our key achievements It was not possible to have the draft opportunities for investors. Taking in 2019. Act taken up for debate in Parliament into consideration the important role although it had been tabled in Parliament played by the capital market, the SEC Robust Regulatory Framework and in view of the dissolution of is required to ensure that appropriate We believe that regulation is necessary Parliament, the process of introducing regulations are in place to meet the to strengthen and ensure the integrity the draft Act in the new Parliament will demands of both businesses and of the capital market and not stand have to commence after the General investors. Therefore, while we remain in the way of its development. To that Elections. In preparation for this, the new steadfast in our commitment to end, promulgation of the new Securities Commission is presently engaged in delivering on our mandate, we intend Exchange Act was considered as a the process of reviewing the provisions to strike a balance between ensuring priority in order to provide a better and contained therein. The SEC is confident strong investor protection and providing more efficacious regulatory framework that the Government will take steps to the flexibility required to maintain a in line with international best practices. have it enacted early enabling balanced, thriving capital market. Considerable work has gone into effective and proportionate regulation. drafting the new Act and it contains In this review, I take the opportunity to many salutary provisions. The draft law Proactive Risk-Based Supervision both reflect on the main areas which seeks to achieve improved governance The SEC continued to adopt a risk- defined our work in 2019 and present standards, provide for the establishment focused approach to supervise our vision for the coming years. The of a clearing house acting as a central regulated entities and identify, monitor main thrust of the work undertaken counterparty (CCP), make provision and contain risk with special focus during the past year has been aimed for the regulation of a demutualised on financial soundness and business Securities and Exchange Commission of Sri Lanka | Annual Report 2019 5 efficacy. Given the potential money Widening Fundraising for SMEs stakeholders and obtained their views laundering and terrorist financing risks For capital markets to be inclusive, it on developing the capital market as well posed to the securities sector in Sri is imperative that Small and Medium as listened to the difficulties faced by Lanka, we conducted guidance and Enterprises (SMEs) are able to obtain them. These deliberations brought out awareness sessions for our regulated market-based financing. Hence, the some valuable suggestions and insights entities aimed at strengthening the SEC together with the Colombo Stock to develop infrastructure, strengthen and industry’s understanding of the Anti- Exchange (CSE) launched the “Empower simplify market regulation, develop new Money Laundering and Countering Board” to create a platform for SMEs products and enhance awareness for the Financing of Terrorism (AML/CFT) to list. To generate greater awareness both investors and issuers. We expect regulations. During the year, based on of capital raising through this listing to appoint joint committees of the SEC high risk areas identified by the Risk platform, the SEC along with the CSE and the CSE to look into and make Assessment Questionnaire and the and regional Chambers conducted recommendations to address these supervision framework for stock broking awareness programmes targeting SMEs challenges expeditiously. companies, we conducted on-site and other entrepreneurs. More than 500 supervision focusing on AML/CFT risks. participants attended these programmes Moreover, to promote agility and and engaged with the speakers, operational efficiency in the capital We are currently exploring the possibility panelists and investment banks. market, the SEC along with the CSE will of expanding digitalised reporting and take steps to offer investors a fully digital regulatory processes further, in order Since SMEs constitute the backbone onboarding experience, enable seamless to ensure regulatory reporting is more of the Sri Lankan economy with a post-trade and settlement and adopt accurate, efficient, and consistent. contribution of over 50% to the Gross e-contract notes and e-statements. The Domestic Product and generating a high process of reviewing and amending the Improving Investor Education and Stockbroker Rules, Central Depository Insights level of socio-economic benefits, we are committed to facilitate financing for such Systems (CDS) Rules and Listing Rules It is imperative that investors have a enterprises through the capital market. is already underway to drive innovation proper understanding of Sri Lanka’s and greater capital market development. capital market before they venture to External Stakeholder Engagement invest if they are to appreciate the We are mindful that engagement I would like to conclude by thanking all benefits and the risks of making such with our stakeholders is necessary Commission members for sharing their investments. The SEC continued with to facilitate the discharge of the expertise, and experience and spending its nationwide investor awareness SEC’s responsibilities. During 2019, their valuable time in the performance programmes through a multi-pronged we regularly had consultations with of the work of the SEC. I also wish to engagement strategy in the form industry participants, especially Listed express my deep appreciation of the of workshops as well as print and Companies, auditors, stock brokers and cooperation and unstinted support and electronic media campaigns. We unit trust management companies in the hard work of the Director General engaged over 10,000 participants order to discuss and gather feedback and staff of the Secretariat. Finally, through our trilingual outreach on issues regarding policy and I wish to thank Hon. Prime Minister programmes. The SEC continued regulatory matters. Since we received Mahinda Rajapaksa, who in the capacity to honour the agreement which valuable inputs through this dialogue, of the Minister of Finance is our line was entered into with the Ministry of we will ensure that steps are taken Minister, Mr. S.R. Attygalle, Secretary Education and commenced a provincial to further strengthen our relationship to the Treasury, officials of the Ministry television quiz programme for Advanced with them. This will not only help of Finance and all our stakeholders