Tomorrow - Colombo Stock Exchange · 2017-05-30 · Annual Report 2016 Tomorrow Together Towards #...
Transcript of Tomorrow - Colombo Stock Exchange · 2017-05-30 · Annual Report 2016 Tomorrow Together Towards #...
Annual Report 2016
Tomorrow Together Towards
# 04-01, West Block,World Trade Center, Echelon Square,Colombo 1, Sri Lanka.Web: www.cse.lk
Colombo Stock Exchange | Annual Report 2016
Corporate Information
Name
Colombo Stock Exchange
Legal Status
A Company Incorporated in Sri Lanka and Limited by Guarantee
Company Registration Number
GL12
Subsidiary
Central Depository Systems (Private) Limited.
Registered Office
# 04-01, West Block, World Trade Center, Echelon Square, Colombo 1, Sri Lanka.
Secretaries
Corporate Services (Private) Limited
Auditors
KPMG
Lawyers
M/s Julius & Creasy, Attorneys-at-Law M/s FJ and G de Saram, Attorneys-at-Law
Bankers/ Settlement Banks
Bank of Ceylon Commercial Bank of Ceylon PLC Sampath Bank PLC
Colombo Stock Exchange Contact
Tel : +94 11 2356456FaxClearing and Settlement : +94 11 2440396 Finance : +94 11 2448921 Administration : +94 11 2325804 Information Technology : +94 11 2440162 Trading and Market Surveillance : +94 11 2448925 Market Development : +94 11 2445279 Listing and Corporate Affairs : +94 11 2391128 Human Resources : +94 11 2440163 Legal : +94 11 2440539 Email : [email protected] Website : www.cse.lk
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Colombo Stock Exchange Annual Report 2016
About Us 2Corporate Maxims 3Member Firms 4Market Highlights 8Operational Highlights 11Envisioning Full Service Offering 14Stakeholder Interaction Matrix 15Value Creation and Sustainability 19Strategy Update 22Chairman’s Statement 26Chief Executive Officer’s Review 30Board of Directors 38Management Structure 43Operational Review 44Corporate Governance Framework
of the CSE 76Corporate Sustainability Statement 90
Financial Information
Annual Report of the Board of Directors on the Affairs of the Company 94
Directors’ Responsibility for Financial Reporting 97
Risk and Audit Committee Report 98Independent Auditors’ Report 100Statement of Profit or Loss and other
Comprehensive Income 101Statement of Financial Position 102Statement of Changes in Equity 103Statement of Cash Flows 105Notes to the Financial Statements 106Notice of Meeting 144Corporate Representation 146Notes 147Corporate Information Back Inner
Cover
Contents
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We at the Colombo Stock Exchange relentlessly focus on the future as we strive to explore possibilities in many spheres of excellence both within Sri Lanka and internationally.
2016 was a year dedicated to harnessing our competitive and innovative IT strengths to deliver seamless advancements in our service platform, keeping on par with international stock exchange standards. These IT enhancements continue to elevate the Colombo Stock Exchange to world class dimensions. We believe that these initiatives will position the Colombo Stock Exchange strategically, facilitating achievement of the aspirational economic growth targets of Sri Lanka.
Together towards Tomorrow represents our collective vision driven by multi-polar collaboration, as we strive forward in offering the services of a vibrant stock exchange that achieves the shared goals and aspirations of all our stakeholders.
2
About Us
ProfileThe Colombo Stock Exchange (CSE or the Exchange) is the only licensed stock exchange in Sri Lanka and was incorporated as a company limited by guarantee in 1985. We are regulated by the Securities and Exchange Commission of Sri Lanka (SEC).
The CSE acts as a conduit of both equity and debt capital and provides the necessary market infrastructure to buyers and sellers in order to transact. Our main trading infrastructure comprises the Automated Trading System (ATS), a multi-asset class, scalable and versatile platform supporting future growth efforts. Our post-trade services comprise central securities depository based clearing (CSD Clearing), settlement and safekeeping provided through a fully owned subsidiary, Central Depository Systems (Private) Limited (CDS).
To deliver comprehensive end to end exchange services, the C S E Clear (Private) Limited (C S E Clear) was incorporated in 2016, as a solely owned subsidiary. C S E Clear was established anticipating the provision of centralised clearing and settlement services (Central Clearing), by acting as a Central Counterparty (CCP) for all securities transactions.
Group Structure
Colombo Stock
Exchange
C S E Clear (Private)Limited (C S E Clear)
100%
Central Depository Systems
(Private) Limited(CDS) 100%
The CSE also provides real time and reference market data to vendors and other users. We are committed towards conducting trading oversight to ensure the fairness and integrity of the Sri Lankan capital market.
Alongside the wider community which interacts with us, our core stakeholder base constitutes of 35 Members and Trading Members, 295 issuers, 750,000 investors and 154 employees.
Colombo Stock Exchange | Annual Report 2016 3
Corporate Maxims
Our Vision
To be the preferred choice for creation of wealth and value
Our Mission
§ Encourage issuers to raise capital through the CSE
§ Increase the number of active investors
§ Provide facilities for diversified products
§ Ensure balanced regulation to maintain market integrity and investor confidence
Our Values
Integrity
Passion
TeamworkProfessionalism
Care
Institutional Alignment
4
Member Firms
Bartleet Religare Securities (Pvt) Ltd.
Level “G”, “Bartleet House”, 65, Braybrooke Place, Colombo 2.
Tel: +94 11 5 220 200
Fax: +94 11 2 434 985
E-mail: [email protected]
Website: http://www.bartleetreligare.com
Mr. R. Muralidaran Managing Director
Acuity Stockbrokers (Pvt) Ltd.
No. 53, Dharmapala Mawatha, Colombo 3.
Tel: +94 11 2 206 206
Fax: +94 11 2 206 298 / 9
E-mail: [email protected]
Website: http://www.acuity.lk/
Mr. Prashan Fernando Director / CEO
John Keells Stock Brokers (Pvt) Ltd.
186, Vauxhall Street, Colombo 2.
Tel: +94 11 2 306 250
Fax: +94 11 2 342 068
E-mail: [email protected]
Website: http://www.jksb.com/
Mr. Tivanka Ratnayake Chief Executive Officer
Asha Phillip Securities Ltd.
No. 321, Galle Road, 2nd Floor, Lakshmans Building, Colombo 03.
Tel: +94 11 2 429 100
Fax: +94 11 2 429 199
E-mail: [email protected]
Website: http://www.ashaphillip.net/
Mr. Dimuthu Abeysekera Director / CEO
Assetline Securities (Pvt) Ltd.
No.120, 120A, Pannipitiya Road, Battaramulla.
Tel: +94 11 4 700 100
Fax: +94 11 4 700 101, +94 11 4 700 112
E-mail: [email protected]
Website: http://assetline.lk/product/stock-broking/
Mr. Deepta Ekanayake Managing Director
Somerville Stockbrokers (Pvt) Ltd.
1A, Park Way, Park Road Colombo 5.
Tel: +94 11 2 502 852 / +94 11 2 502 854/ +94 11 2 502 858 / +94 11 2 502 862
Fax: +94 11 2502596
E-mail: [email protected]
Ms. Shalini Dias Director / CEO
J B Securities (Pvt) Ltd.
150, St. Joseph Street, Colombo 14.
Tel: +94 11 2 490 900
Fax: +94 11 2 430070
E-mail: [email protected]
Website: https://www.jbs.lk/
Mr. Murtaza Jafferjee Chief Executive Officer
Lanka Securities (Pvt) Ltd.
228/1, Galle Road, Colombo 04.
Tel: +94 11 4 706 757, 2 554 942
Fax: +94 11 4 706 767
E-mail: [email protected]
Website: http://www.lsl.lk/
Mr. Kosala Gamage Managing Director / CEO
Asia Securities (Pvt) Ltd.
2nd Floor, No 176/1 - 2/1, Thimbirigasyaya Road, Colombo 05.
Tel: +94 11 7 722 000
Fax: +94 11 2584864
E-mail: [email protected]
Website: http://asiasecurities.net/
Mr. Sabri Marikar Chief Executive Officer
Colombo Stock Exchange | Annual Report 2016 5
Nation Lanka Equities (Pvt) Ltd.
44, Guildford Crescent, Colombo - 07.
Tel: +94 11 4658658
Fax: +94 11 2 688 899
E-mail: [email protected]
Website: http://www.nlequities.com/
Mr. Ajahn Punchihewa Director/ Chief Executive Officer
Capital Trust Securities (Pvt) Ltd.
42, Mohamed Macan Markar Mawatha, Colombo 3.
Tel: +94 11 2 174 174, +94 11 2 174 175
Fax: +94 11 2 174 173
E-mail: [email protected]
Website: http://www.capitaltrust.lk/
Mr. Tushan Wickramasinghe Managing Director
S C Securities (Pvt) Ltd.
5th Floor, 26 B, Alwis Place, Colombo 3.
Tel: +94 11 4 711 000 / +94 11 47 11 001
Fax: +94 11 2 394 405
E-mail: [email protected]
Website: http://www.sampathsecurities.lk/
Mr. Manoj Cooray Chief Executive Officer
CT CLSA Securities (Pvt) Ltd.
4-14, Majestic City, 10, Station Road, Colombo 4.
Tel: +94 11 2 552 290 - 4
Fax: +94 11 2 552 289
E-mail: [email protected]
Website: http://www.ctclsa.lk/
Mr. Kanishka Hewage Chief Executive Officer
First Capital Equities (Pvt) Ltd.
No. 2, Deal Place, Colombo 03.
Tel: +94 11 2639898
Fax: +94 11 5 736 264
E-mail: [email protected]
Website: http://www.firstcapital.lk/
Mr. Jaliya Wijeratne Chief Executive Officer
NDB Securities (Private) Ltd.
5th Floor, NDB Building, 40, Navam Mawatha, Colombo 2.
Tel: +94 11 2 314 170 to 2 314 178, +94 11 2 131 000
Fax: +94 11 2 314 181
E-mail: [email protected]
Website: http://www.ndbs.lk/
Mrs. Prasansini Mendis Chief Executive Officer
Trading Members
Capital Alliance Securities (Pvt) Ltd.
Level 5, “Millennium House”, 46/58 Navam Mawatha,Colombo 2.
Tel: +94 11 2 317 777
Fax: +94 11 2 3177 88
E-mail: [email protected]
Website: www.capitalalliance.lk
Mr. Harinlal Aturupane Managing Director / CEO
SMB Securities (Pvt) Ltd.
No. 102/1, Dr. N.M. Perera Mawatha (formerly Cotta Road) Colombo 8.
Tel: +94 11 4 388 138
Fax: +94 11 2 670 294
E-mail: [email protected]
Website: www.smbsecurities.lk
Mr. N. N. Jayatillake Chief Executive Officer
First Guardian Equities (Pvt) Ltd.
32nd Floor, East Tower, World Trade Centre,Colombo 1.
Tel: +94 11 5 884 400 (Hunting)
Fax: +94 11 5 884 401
E-mail: [email protected]
Website: www.firstguardianequities.com
Mr. Rohan Goonewardene Managing Director / CEO
6
Member Firms
Enterprise Ceylon Capital (Pvt) Ltd.
27th Floor, East Tower,World Trade Centre, Echelon Square, Colombo 1
Tel: +94 11 2 333 000, +94 11 2 147 147
Fax: +94 11 2 333 383
E-mail: [email protected]
Website: www.ecc.lk/
Ms. Priyani Ratna-Gopal Managing Director / CEO
TKS Securities (Pvt) Ltd.
4th Floor, No. 245, Dharmapala Mawatha, Colombo 7.
Tel: +94 11 7 857 799
Fax: +94 11 7 857 857
E-mail: [email protected]
Website: www.tks.lk
Mr. Ralph Wijesinghe Chief Executive Officer
Richard Pieris Securities (Pvt) Ltd.
No. 55/20, Vauxhall Lane, Colombo 02.
Tel: +94 11 7 448 900 , +94 11 5 900 800
Fax: +94 11 2 330 711
E-mail: [email protected]
Website: www.arpico.com/contents/services_stock_broking.php
Reshan Kurukulasuriya Acting Chief Executive Officer
Claridge Stockbrokers (Pvt) Ltd.
No.10 Gnanartha Pradeepa Mawatha, Colombo 8.
Tel: +94 11 2 697 974
Fax: +94 11 2 689 250
E-mail: [email protected]
Mr. P .N. A. Epa Chief Executive Officer
Navara Securities (Pvt) Ltd.
No. 12B Gregory’s Road,Colombo 7.
Tel: +94 11 2 358 700 / 20
Fax: +94 11 5 005 551
E-mail: [email protected]
Website: www.navarasecurities.lk
Mr. Vedisa Jayasankha Alahendra Chief Executive Officer
Softlogic Stockbrokers (Pvt) Ltd.
No.06, 37th Lane, Queens Road, Colombo 03.
Tel: +94 11 7 277 000
Fax: +94 11 7 277 099
E-mail: [email protected]
Website: www.softlogicequity.lk
Mr. Dihan Dedigama Chief Executive Officer
Taprobane Securities (Pvt) Ltd.
2nd Floor, No. 10, Gothami Road, Colombo 08.
Tel: +94 11 5 328 200, +94 11 5 328 100
Fax: +94 11 5 328 177
E-mail: [email protected]
Website: www.taprobane.lk/
Mr. Niranjan Niles Chief Executive Officer
Candor Equities Ltd.
Level 8, South Wing, Millennium House, 46/58 Nawam Mawatha,Colombo 02.
Tel: +94 11 2 359 100
Fax: +94 11 2 305 522
E-mail: [email protected]
Website: www.candor-holdings.com
Mr. Ryan Perera Acting Chief Executive Officer
LOLC Securities Ltd.
No. 481, T.B.Jayah Mawatha, Colombo 10.
Tel: +94 11 5 889 889
Fax: +94 11 2 662 883
E-mail: [email protected]
Mr. Sriyan Gurusinghe Managing Director/CEO
Colombo Stock Exchange | Annual Report 2016 7
Trading Members - Debt
Capital Alliance Ltd.
Level 5, “Millenium House” 46/58, Nawam Mawatha, Colombo 2.
Tel: +94 11 2 317 777
Fax: +94 11 2 317 788
E-mail: [email protected]
Mr. Gihan Hemachandra Chief Executive Officer
First Capital Markets Ltd.
No. 2, Deal Place, Colombo 3.
Tel: +94 11 2 639 898, +94 11 2 681 888
Fax: +94 11 2 639 899, + 94 11 2 576 866
E-mail: [email protected]
Website: www.firstcapital.lk
Mr. Dilshan Wirasekara Deputy Chief Executive Officer
Wealthtrust Securities Ltd.
No. 32, Dudley Senanayake Mawatha, Colombo 08.
Tel: +94 11 2 675 091-4
Fax: +94 11 2 689 605
E-mail: [email protected]
Mr. D.H.B. Ranawana Managing Director
Perpetual Treasuries Ltd.
610, Galle Road, Colombo 3.
Tel: +94 11 2 206 123, +94 11 2 206 107
Fax: +94 11 2 206 110
E-mail: [email protected]
Website: www.perpetualtreasuries.com/
Mr. Kasun Palisena Acting Chief Executive Officer
NSB Fund Management Ltd.
No 255, 1st Floor, NSB Head Office, Galle Road, Colombo 3.
Tel: +94 11 2564601
Fax: +94 11 2 574 387
Mrs. G.V.A.D.D Silva Chief Executive Officer
Acuity Securities Ltd.
4th Floor, No. 53, Dharmapala Mawatha, Colombo 3.
Tel: +94 11 2 206 280
Fax: +94 11 2 206 290
Mr. Amal Fernando Director / CEO
Natwealth Securities Ltd.
Prince Alfred Tower, No. 10-1/1, Alfred House Gardens, Colombo 3
Tel: +94 11 4 716 274
Fax: +94 11 4 645 776
Mr. Gihan Jayatilleke Acting Chief Executive Officer
Commercial Bank of Ceylon PLC
Commercial House,No. 21, Sir Razik Fareed Mawatha,Colombo 1.
Tel: +94 11 2 486 334
Fax: + 94 2 384 650
Mr. Prins Perera Head of Global Markets
8
Market Highlights
2016 2015 2014 2013 2012 2011 2010 2009 2008 2007
Equity
Turnover (Rs. Mn) 176,935.4 253,251.0 340,917.1 200,467.8 213,827.2 546,255.8 570,326.8 142,462.6 110,453.9 104,985.4
Domestic (Rs. Mn) 102,544.2 166,151.5 246,796.8 128,227.6 160,543.3 486,959.4 464,733.6 99,010.8 50,796.9 63,815.7
Foreign (Rs. Mn) 74,391.3 87,099.5 94,120.3 72,240.2 53,283.9 59,296.4 105,593.2 43,451.8 59,656.9 41,169.7
Shares Traded (No. Mn) 7,195.8 9,414.7 16,721.5 9,054.2 9,691.2 24,543.7 18,489.2 4,762.7 3,154.9 2,887.3
Domestic (No. Mn) 5,776.2 7,693.2 14,726.2 7,861.6 8,289.6 23,151.6 16,684.5 3,784.2 1,934.9 2,009.9
Foreign (No. Mn) 1,419.6 1,721.5 1,995.4 1,192.6 1,401.7 1,392.1 1,804.7 978.4 1,220.0 877.3
Trades (No.) 1,056,849 1,506,790 1,982,709 1,421,303 1,857,384 4,579,352 3,355,126 1,266,299 776,244 876,928
Domestic (No.) 1,002,476 1,431,750 1,899,569 1,355,380 1,796,868 4,463,404 3,225,041 1,190,822 730,415 831,663
Foreign (No.) 54,373 75,040 83,140 65,923 60,516 115,948 130,085 75,477 45,829 45,265
Daily Average Turnover (Rs. Mn) 737.2 1,059.6 1,414.6 828.4 883.6 2,285.6 2,396.3 593.6 464.1 435.6
Market Capitalisation (Rs. Bn) 2,745.4 2,938.0 3,104.9 2,459.9 2,167.6 2,213.9 2,210.5 1,092.1 488.8 820.7
Turnover to Market Capitalisation (%) 6.2% 8.4% 12.3% 8.7% 9.8% 24.7% 34.5% 18.0% 16.9% 12.7%
Market Capitalisation as a % of GDP* 23.2% 26.8% 30.0% 25.6% 24.8% 30.7% 34.5% 22.6% 11.1% 22.9%
* based on latest available revised GDP, at current market prices for each year
Contribution to Total Turnover
Foreign Companies 41.0% 32.8% 26.0% 34.3% 23.5% 8.3% 15.3% 26.8% 49.0% 33.8%
Foreign Individuals 1.0% 1.6% 1.6% 1.8% 1.4% 2.6% 3.2% 3.7% 5.0% 5.4%
Total Foreign Investor Contribution 42.0% 34.4% 27.6% 36.1% 24.9% 10.9% 18.5% 30.5% 54.0% 39.2%
Local Companies 30.9% 30.4% 34.7% 30.4% 41.0% 34.5% 37.5% 33.9% 23.8% 29.0%
Local Individuals 27.1% 35.2% 37.7% 33.5% 34.1% 54.6% 44.0% 35.6% 22.2% 31.8%
Total Local Investor Contribution 58.0% 65.6% 72.4% 63.9% 75.1% 89.1% 81.5% 69.5% 46.0% 60.8%
Foreign Trading Activities
Secondary Market
Purchases (Rs. Mn) 74,583.0 84,414.6 104,689.8 83,607.0 72,614.2 49,776.8 92,425.5 43,057.3 66,632.2 46,796.8
Sales (Rs. Mn) 74,199.5 89,784.4 83,550.8 60,873.3 33,953.6 68,816.0 118,760.9 43,846.3 52,681.7 35,542.5
Net Foreign Flow (Rs. Mn) 383.5 -5,369.9 21,139.0 22,733.7 38,660.7 -19,039.2 -26,335.3 -789.0 13,950.5 11,254.3
New Listings/ Issues
Equity IPOs (No.) 3 2 5 1 6 13 8 2 2 -
Equity Introductions (No.) 1 - 1 1 11 16 2 - 1 -
Debt IPOs (No.) 17 25 20 28 3 1 2 1 4 5
Capital Raised
Equity IPOs (Rs. Mn) 1,897.5 329.6 2,693.8 494.4 1,739.4 19,155.7 4,347.5 681.8 1,518.5 -
Debt IPOs (Rs. Mn) 77,994.9 83,414.4 54,234.9 68,262.3 12,500.0 1,000.0 15,000.0 630.6 5,581.7 3,571.0
Rights Issues (Rs. Mn) 2,531.1 16,105.3 8,099.0 25,539.0 11,128.0 28,019.7 24,321.7 5,235.4 2,679.1 44,622.0
Conversion of Warrants (Rs. Mn) 3,193.8 7,972.8 - 0.5 1,954.8 2,675.0 Not Available
Private Placement (Rs. Mn) - 1,517.7 12,755.2 - 2,266.2 4,500.0 433.0 1,100.0 510.0 -
Colombo Stock Exchange | Annual Report 2016 9
2016 2015 2014 2013 2012 2011 2010 2009 2008 2007
Returns, Yields and Valuation Multiples
All Share Price Index 6,228.26 6,894.50 7,298.95 5,912.78 5,643.00 6,074.42 6,635.87 3,385.55 1,503.00 2,541.00
Change % -9.7% -5.5% 23.4% 4.8% -7.1% -8.5% 96.0% 125.3% -40.9% -6.7%
S&P SL 20 3496.44 3,625.69 4,089.14 3,263.87 3,085.33 - - - - -
Change % -3.6% -11.3% 25.3% 5.8% 8.4%* - - - - -
Market PER (Times) 12.4 18.0 19.7 15.9 15.9 15.8 25.2 16.6 5.4 11.6
Price to Book Value (Times) 1.4 2.0 2.2 2.0 2.1 2.0 3.0 1.7 0.8 1.8
Dividend Yield 2.8% 2.2% 2.1% 2.9% 2.4% 1.8% 1.2% 3.0% 5.6% 2.5%
* Launched on 27 June 2012
Debt Trading Statistics
Corporate Debt
Turnover (Rs. 000) 2,932,154.0 4,714,012.7 7,139,730.4 2,229,221.3 75,717.1 2,690,664.4 72,288.0 136,765.0 102,639.0 98,903.1
Trades (No.) 291 220 401 173 39 62 92 42 27 144
Debentures Traded (No. 000) 28,335 42,201 56,909 19,999 740 25,861 693 1,020 953 1,020
Closed End Fund
Turnover (Rs. 000) 113,300.3 55,316.5 131,872.5 44,160.0 21,865.5 137,848.1 621,264.6 4,615.6 - -
Trades (No.) 925 765 940 883 767 2,898 8,302 228 - -
Units Traded (No. 000) 1976 818 1680 640 339 1,642 8,222 87 - -
Funds Listed (as at 31 December, 2 2 1 1 1 1 1 1 - -
Additional Data
Companies Listed (No.) 295 294 294 289 287 272 241 231 235 235
Companies Traded (No.) 278 278 284 278 280 264 238 231 232 231
Delistings (No.) 2 3 3 1 2 - 1 6 2 2
Market Days (No.) 240 239 241 242 242 239 238 240 238 241
Warrants
Turnover (Rs. Mn) 1,220.21 2,691.60 6,090.90 1,461.50 3,942.50 14,076.10 19,581.20 1,688.10 142.2 12
Trades (No.) 44,540 68,035 73,235 48,633 85,462 242,328 227,671 35,826 7,830 829
Warrants Traded (No. Mn) 232.14 163.60 677.50 334.20 754.70 2,733.10 1,531.60 148.80 24.80 6.40
No of Warrants Traded 2 6 7 8 9 14 16 5 3 1
(as per Type of Warrant)
New Warrants Listed (Types) - 1 - 2 1 1 12 2 2 -
10
Market Highlights
20162015201420132012
Market Capitalisation & No. of Trades – Equity
Equity Market Capitalisation (Rs. Bn) Equity Trades (No.)
2,16
8 2,46
0
3,10
5
2,93
8
2,74
5
1,857,384
1,421,303
1,982,709
1,506,790
1,056,849
20162015201420132012
Annual Turnover and New Issues - Corporate Debt
Turnover (Rs. 000) New Issues of Corporate Debt (Rs. Mn)
2,22
9,22
1
75,7
17
7,13
9,73
0
4,71
4,01
3
2,93
2,15
4
12,500
68,262
54,235
83,414
77,995
20162015201420132012
Net Foreign Flow - Equity
Net Foreign Flow - Equity (Rs. Mn)
38,6
61
22,7
34
21,13
9
(5,3
70)
384
20162015201420132012
Composition of Annual Turnover
Foreign (Rs. Mn)Domestic (Rs. Mn)
160,
543
128,
228
246,
797
166,
152
102,
544
53,284 72,240
94,120
87,100
74,391
50
100
150
200
250
SLT
MELS
TACO
RP
DISTIL
LERIE
S
CEYL
ON CO
LD ST
ORESHN
B
DIALO
G
NEST
LE
COMM
ERCIA
L BAN
K
CEYL
ON TO
BACC
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Top 10 Companies by Market Capitalization as at 31st Dec 2016
Market Capitalisation (Rs Bn) Equity
201.2
151.1
120.
9
107.
6
85.5
74.4
71.3
71.1
69.1
65.0
Likes
2016 - 13,1802015 - 8,886
Followers
2016 - 2,1332015 - 1,736
Followers
2016 - 3,0932015 - 2,286
Subscribers
2016 - 3242015 - N/A
Downloads
2016 - 23,7612015 - 14,433
Downloads
2016 - 5,9302015 - 3,530
www.cse.lk
2016 - 15,295,7072015 - 17,518,874
CSE in Social Media
Colombo Stock Exchange | Annual Report 2016 11
Operational Highlights
01
04
06
07
08
FEBRUARY
01. The CSE partners with FinanceAsia to hold Sri Lanka Investment Summit in Singapore targeted at foreign institutional investors.
02. Amendments to sections 10 (Client-Stockbroker Dispute Resolution) and 11 (Disciplinary Action against Stockbroker Firms) of the Stockbroker Rules were approved by the CSE Board.
03. The CSE issues an RFI for setting up a Clearing Company to act as a Central Counterparty for secondary market transactions and to move to a Delivery Vs Payment System.
MARCH
04. The CSE conducts an Investor Forum and Issuer Forum in the Maldives.
05. The CSE implements a new Broker Back Office and Order Management Systems for Stock broker Firms as part of upgrading Member firm Infrastructure funded jointly by the CSE and SEC.
06. The CSE launches Educational Portal targeted at prospective investors and students to be used as an educational tool.
07. The CSE wins Global HR Excellence Award for Innovation in Training and Development.
08. The CSE partners with the Sri Lanka Institute of Directors and IFC to Ring the Bell for Gender Equality as a part of the Sustainable Stock Exchanges initiative of the UN.
APRIL
09. The S&P/CSE Sector and Industry Group Indices jointly launched by S&P Dow Jones Indices and Colombo Stock Exchange.
12
Operational Highlights
09
10
11
14
15
MAY
10. The CSE Chairman in the capacity of the Chairman of the South Asian Federation of Exchanges (SAFE) inaugurates the 4th SAFE Executive Committee Board Meeting in Mumbai.
JUNE
11. The CSE wins IPM’s –National HR Excellence Gold Award for Best HR Practices .
12. Amendments to the CSE Rules, required to facilitate the Alternate Market Segment & the SME Board and CDS Rules to facilitate e-portal were approved by the CSE Board.
JULY
13. Entered into an Internship agreement with CMDA Maldives.
14. Official visit of the CBSL Governor to the CSE.
AUGUST
15. The CDS launches e-Connect facility.
SEPTEMBER
16. The CDS signs MOU with Central Depository Company Pakistan Ltd.
17. The CDS celebrates 25 years in the Sri Lankan capital market.
Colombo Stock Exchange | Annual Report 2016 13
16
17
19
18
24
OCTOBER
18. The CSE conducts a forum for Heads of State Owned Enterprises with Hon Dr. Tanri Abeng the Indonesia’s first Minister for State-Owned Enterprises as the Key Note speaker.
19. The CSE opens new regional branch office in Ambalantota.
20. An AGM Calendar for Listed companies was introduced during the year on the CSE website for the information of the investors.
21. The CSE conducts a planned failover to the Disaster Recovery site during trading hours involving all market participants successfully as part of the ISO 22301 Business Continuity Planning (BCP) initiative.
22. Amendments to Listing Rules, CDS Rules and ATS Rules required to facilitate secondary listing of securities of foreign entities on the Multi-Currency Board were approved by the Board Of Directors of the CSE.
DECEMBER
23. The CSE Implements new surveillance system.
24. The CSE shines at the ‘Great HR Quiz 2016’ organized by IPM.
25. The Rules to facilitate the Capital Adequacy Retirements (CAR) were approved by the Board of Directors of the CSE. The SEC, via a Directive, approved the said Rules, subject to certain amendments set out therein. The amended CAR Rules were approved by the CSE Board.
14
Envisioning Full Service Offering
Corporate ModelWe have depicted below our forward-looking corporate model, given strategic initiatives aiming to diversify investor choice and providing end to end services across the trade through post-trade value chain.
Proposed Product Offering
Clearing CSD Clearing including trade confirmation, obligation calculation and reporting are facilitated through the ATS and the CDS.
Central Clearing is to be initiated with the start of operations as a CCP by CSE Clear.
Current Product Offering
Settlement Settlement services are currently provided by the CDS.
Upon start of operations as a CCP, settlement assurance is to be provided by C S E Clear.
Custody Depository and custody services are currently provided by the CDS.
Equities Warrants Closed-end Funds
CorporateDebt
StructuredWarrants
ExchangeTradedFunds
Multi-currency
SecuritiesREITs Financial
Derivatives
Trading
Listings
Market Data
The CSE has traditionally focused on cash markets (or spot markets) in equity shares, warrants and closed-end funds in the equities segment and corporate debt securities in the debt segment.
As we move forward, we intend to create tangible value through comprehensive services covering an expanded array of instruments,
from the franchise of cash equities to financial derivatives, whilst widening stakeholder outreach, achieving broad-based investor participation and attracting new issuers that diverge by size, scale, locality and requisite value recognition needs.
Colombo Stock Exchange | Annual Report 2016 15
Stakeholder Interaction Matrix
Building a Robust Social and Relationship Capital Base
Stakeholder Modes of Engaging Stakeholders Focus Areas
Government of Sri Lanka (GoSL)Stakeholders include the Ministry of Finance, the Central Bank of Sri Lanka (CBSL) and the Department of Inland Revenue
§ Meetings on a needs basis
§ Quarterly reviews by CBSL
§ Policy papers
§ Areas of mutual interest including the impact on national budget from capital market development initiatives
§ Long-term sustainability of the market and critical aspects for which GoSL support is needed for example the listing of state owned entities
§ Systemic risk mitigation measures
§ Exchange control matters as well as taxation impacting the capital market
§ Taking our unique selling proposition of Sri Lankan equity and debt markets to the global forum
§ Market statistics to evaluate and measure inter-linkage between the market and economic activity
Industry RegulatorThe Securities and Exchange Commission of Sri Lanka (SEC)
§ Direct meetings
§ Commission meetings by invitation represented principally by the Chief Executive of the CSE
§ Meetings arranged by the industry regulator with market participants coming under the SEC’s jurisdiction including unit trusts and custodians
§ Surveillance referrals
§ License renewal and reporting of stockbroker non-compliance
§ Policy and regulatory areas of mutual interest including the CSE’s monitoring activities such as surveillance, investor and market protection as well as stockbroker supervision
§ General financial regulatory framework and our capability of meeting international standards in view of CPSS-IOSCO compliance
§ Market development initiatives applicable to a range of market participants including the implementation of CCP and demutualisation
Members and Trading Members
§ AGM/Annual report
§ Direct meetings
§ Circulars
§ On and off site audits
§ Awareness building sessions
§ Complaint meetings
§ Opinion polls
§ Industry advisory panels
§ Regulatory compliance and reporting areas applicable to Members and Trading Members including surveillance, broker supervision and enforcement
§ Member expectation and service needs through their operational perspective
§ Market development both foreign and local
§ Structural/infrastructure enhancements
§ Investor protection
§ Industry research and strategy related consultations
16
Stakeholder Interaction Matrix
Stakeholder Modes of Engaging Stakeholders Focus Areas
Listed Issuers § One-on-one meetings
§ Circulars
§ Awareness sessions
§ Compliance monitoring reviews
§ CSE website
§ Public consultation
§ Sponsorships
§ Market-Open (Bell Ringing) ceremonies
§ Quiz competitions for investors
§ Services with regard to listing and additional listing
§ Introduction of new products
§ Regulatory compliance including listing, trading and continuous listing
§ Corporate milestone commemoration
Potential Issuers § CSE website
§ Issuer relations forums
§ One-on-one meetings
§ Sponsorships
§ Introduction of potential issuers to the listing process, guidance and advise on the CSE Listing Rules
Investors § CSE website
§ Investor education sessions
§ Financial literacy publications
§ Focused awareness sessions for target groups of investors
§ Foreign Investor Forums
§ Press releases and interviews
§ Programmes and features on Radio and TV and newspaper articles
§ Investor complaint meetings
§ Investor surveys
§ Financial literacy and investor education on the available range of investment products and investment process
§ Presentation and clarification of the CSE and Sri Lanka’s value proposition for investment
§ Complaint resolution
§ Investor perception and behavioural aspects
Colombo Stock Exchange | Annual Report 2016 17
Stakeholder Modes of Engaging Stakeholders Focus Areas
Employees § Employee committees (CSE SRC Club)
§ Employee announcements (Your Voice)
§ Training needs analysis and training programmes
§ Knowledge sharing sessions and awareness sessions
§ Employee suggestion box
§ Cross functional teams
§ Staff welfare activities and engagements
§ KPI review
§ Job rotation scheme
§ HR clinics
§ Employee awards
§ Ongoing strategic and operational initiatives
§ Performance management
§ Remuneration and benefits
§ Employee inclusion and welfare
§ Training and development
§ Health and wellness
Technology providers § Meetings
§ Negotiations
§ DR testing process
§ Provision of technological infrastructure and requisite enhancements to support strategic initiatives
§ Technological reliability and readiness
§ Cost evaluation
§ Performance metrics
§ Disaster recovery and business continuity
Media § Results announcements
§ Annual report and interim report
§ CSE website
§ Roadshows
§ Press releases and interviews
§ Performance, growth areas, company sustainability, prospects
§ Strategy
§ Financial literacy and investor education
External associations § Strategic alliances
§ Ad-hoc meetings
§ Market opening ceremony
§ Areas where cohesive strategic mileage can be gained in enhancing operations and strategy
18
Stakeholder Interaction Matrix
Stakeholder Modes of Engaging Stakeholders Focus Areas
Regional exchanges, international exchange bodies and Central Securities Depository (CSD) related alliances
§ Partnerships and membership in stock exchange bodies and initiatives including the World Federation of Exchanges (WFE) and South Asian Federation of Exchanges (SAFE) as well as the United Nations Sustainable Stock Exchanges Initiative (SSE)
§ Cross Exchange Training
§ Conferences
§ Memoranda of Understanding
§ Areas where cohesion with other stock exchanges and CSDs can fortify our operations as well as strategy and execution
Custodian Banks § Direct meetings § Post-trade operational matters
§ Strategic initiatives on post-trade risk mitigation including CCP implementation
Community § CSE website
§ Social forums (Facebook, Twitter)
§ YouTube channel
§ Press releases
§ CSE publications
§ Educational tours to the CSE trading floor
§ Workshops and seminars to educational institutions and general public
§ Foreign Employment Bureau programmes
§ Trade exhibitions
§ Corporate social responsibility initiatives
§ Bell Ringing ceremonies
§ Financial literacy with focus on markets, portfolio choice, investment risks and other aspects of informed investment decision making
§ Community development
§ Sponsorships and donations
§ Environmental/green initiatives such as process changes enabling a paperless office
§ Call to action on socio-economic, ethical and equitability concerns including gender empowerment
Colombo Stock Exchange | Annual Report 2016 19
Value Creation and Sustainability
An Integrated ApproachOur value creation model delineates to stakeholders the manner in which we draw on input capitals in our operations, the links between our material concerns, and while endeavouring to create tangible value, the outputs that we deliver.
We currently operate key market infrastructures and have identified expansion opportunities in comprehensive end to end service offering and the potentiality of enhanced product choice and issuer- access. We are proponents of growth through regional collaboration and are active in gaining expansive market visibility globally. We now carry a renewed focus on commercialisation arising through the impending demutualisation which would increasingly orient us towards invigorated growth plans.
The latter builds in the necessity to exercise a financial sustainability perspective along with goals shared by our market regulator, the SEC and other stakeholders we align with, to better execute our broad market strategies. These extend collectively over the effective use of principally five input capitals, namely, financial, human, intellectual, manufactured and social capital. Through our sustainability focus we also aim to minimise detrimental impacts on the environment – thus natural capital.
The Six Capitals
� Financial Capital
Our financial capital resources are mainly through accumulated funds and reserves. We use our financial capital to invest in infrastructure
and technological adoption, recruit and retain staff, and ensure that we have resources for future growth efforts. Our subsidiaries draw on equity as financial capital.
� Human Capital
Human capital comprises our staff and the mass of skills and experience they possess. Given the industry’s sophistication and specialisation, we rely on skilled and motivated people for continuous and robust operations. Our human capital also focuses on current realities, changing stakeholder needs and strategies that we aim to execute in enabling the local capital market navigate regulatory and developmental challenges and opportunities.
� Intellectual Capital
We are a learning organization and our knowledge and competencies translate to the rules and regulation, policies and procedures that we adopt and other intellectual property that we create and own. The Colombo Stock Exchange trademark and intellectual property rights, proprietary rights to market data, our regulatory regime, and other intangible assets can be considered as intellectual capital.
� Manufactured Capital
As a market infrastructure provider, we facilitate the technological foundation on which market users transact. Further, the technological infrastructure runs through our pre-trade through post-trade value chain, streamlining operations, ensuring security and business continuity, while enhancing
efficiency of our markets as required.
� Social Capital
Our social capital constitutes of the relationships we build and maintain with our many stakeholders and the communities that we operate in. We are active in educating and awareness raising amongst investor-communities island-wide, to enhance financial literacy, utilising outreach programmes and our branches. We interact with the wider community through socio-economic upliftment as a responsible corporate citizen. We act as strategic partners to prominent professional bodies including the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) providing stewardship to endeavours which delineate and elevate the quality of corporate reporting.
We also leverage our position as the only exchange of Sri Lanka to engender support in the South Asian region through a leadership role in the South Asian Federation of Exchanges (SAFE), and internationally as a member of the World Federation of Exchanges (WFE) and as a partner exchange of the Sustainable Stock Exchanges (SSE) initiative for collaborative growth.
� Natural Capital
Although our use of natural capital happens as a course of operations, and not through the specific use of natural resources for outputs, we are aware that our activities can impact circuitously the broader environment. We consider carefully
20
Value Creation and Sustainability
the impact we may have upon natural capital and as an institution adopt practices to minimise such effects through an environmentally friendly perspective, as part of a holistic view on sustainability.
Material Concerns
Stak
ehol
der
Resp
onsi
vene
ss
We operate with a variety of stakeholders who are impacted by, rely upon or are influenced by our initiatives and activities. Conversely, select stakeholder groups also influence and impact our ability to meet strategic objectives.
We recognise that being responsive to needs of our stakeholders and their circumstances within the capital market context is critical to our success. Our priority stakeholders are our Members and Trading Members, issuers and investors. Nevertheless, we engage with due consideration, the wider community and many other groups of stakeholders with the intention of preserving and reinforcing our synergetic relationships.
Dive
rsifi
catio
n
As the only stock exchange in Sri Lanka, we currently do not face local competition. However, as a frontier market in the global environment, we compete with emerging markets as well as evolving frontiers.
Currently our cash markets offer equities and debt, traditionally favouring the equities segment. From an investor perspective, diversification signifies increased portfolio choice and enhanced ability to reduce risk. From an issuer’s point of view it is access to financing through a broader set of asset classes as well as listing platforms. For the Exchange, diversification is a foundation for increasing size and liquidity in the market, requisite for growth and resilience.
The CSE also needs to identify services that can be offered to diverse market users including investors and issuers. In short, revenue intelligence, as a financial discipline is material to us. This altered financial consciousness is needed to progress from a ‘mutual’ to demutualised state.
Ope
ratio
ns a
nd T
echn
olog
y
This value driver encompasses diverse operational and structural elements including technological progression, risk management and other process enhancements propagating growth and resilience of the marketplace and our institution.
Peop
le
Our most valued asset is our people. We provide a conducive and choice environment for our team to work in. The institition benefits from the symbiosis of our human capital strategy and its positive impact on this asset.
Stak
ehol
der F
ocus
We interact with a plethora of stakeholders extending from our Members and Trading Members, investors and issuers, to the wider community.
Prod
ucts
Refers to our product offering, hitherto mainly in cash equities and debt but aiming expansion into risk-hedged and structured products as we progress. It includes listings, trading and post-trade, inter-alia, as part of an envisioned end to end service offering.
Our Material Concerns and Value Drivers
In our tactical and value creation modality material concerns drive our strategic logic while identified value drivers provide relevant focal points of action.
Colombo Stock Exchange | Annual Report 2016 21
Material Concerns
Coh
esiv
e C
apac
ity B
uild
ing
Institutionally, technology, its reliability and readiness in addition to optimising human capital are key. Our trading, post-trade, surveillance and back office functions are all critical to our role as a market infrastructure provider. Users connect to our technological infrastructure and pervasive infrastructure capabilities extend to the wider stakeholder base. The reliability, stability and readiness of our technology is material for us.
Within the key area of human capital optimisation, we look inward at our own institutional capacity as well as outward to our Member capacity. Within the CSE, we focus on continued learning and many components of human capital building including inclusion, welfare, performance recognition and succession are important to us.
Not only do we require specific skills within the Exchange, but we also rely on stockbrokers particularly, to continually upgrade their skills. Further, a positive culture which centers on ethicality and client-centric service is a must for intermediaries. With intended diversification of the product offering and broader markets, both our own as well as communal human capital capacity building necessitating technology as well as knowledge and skill range, becomes imperative.
Regu
lato
ry
Read
ines
s The regulatory environment is constantly evolving. We are vigilant and responsive regarding the need to accommodate the implications of interconnectedness and internationalisation, and the parallel advancement across the globe, seeking to provide clarity to all aspects of securities markets and related laws. We continue to address the deficiencies in legalities that our local regime is defined by in certain aspects, in order to establish a balanced and relevant regulation that empowers and promotes advancement.
Syst
emic
Ri
sk
As a market operator, systemic risk is a material focus for us as it affects the wider community and the quality and stability of our marketplace. Systemic risk refers to the cascading effects that impact the propensity for industry failure due to interconnectedness. We are transiting to risk based supervision and actioning several post-trade related risk management initiatives to ensure stability and apt risk management.
22
Strategy Update
Aligned with Value CreationThe CSE’s medium term transformational trajectory leading to the year 2020, was defined under a foundational blueprint, through our association with McKinsey and Company. Internally, we review and update the actionable strategic path, calibrating it in short-term phases for ease of execution, setting out a force of continuity for our medium term strategy. As such, the Strategy Continuity 2017-2019, provides clarity to the ensuing period, and was initiated while navigating a challenging market environment and constrained economic conditions both here and internationally.
The broad growth strategies help maintain the progression and efficiency of our core operations and focuses particularly on the CSE’s sustainability as a market. The CSE expresses strategy under four main principles and aims to achieve organizational excellence through the achievement of identified goals and objectives.
StakeholderFocus
NewProducts
People
Operations&
Processes
Formulation
Strategy Continuity 2017-2019 garnered institution-wide support including that of the Management team and respective divisional staff at all levels. As preparation for the Strategic Summit 2017 (SS2017), resource material consisting of analysis concepts to be applied at the SS2017, financial and business position and the IT strategy of the CSE were compiled and shared amongst participants.
Several brain storming sessions were conducted prior to and after the SS2017. Guest speaker Manjula De Silva, Chairman, National Insurance Trust Fund Board shared his insights on Public Enterprise Reform and the way forward, which was followed by a Strategy Session constituting of a detailed analysis of the external environment, stakeholders, costs versus benefits, financial and business position and IT strategy.
Dissemination and Monitoring
Suitable strategic goals were identified and further categorised as divisional goals or sub goals. The goals so identified were allocated to relevant divisions. Respective action plans with timelines and related budgets were also identified. The final plan was then deliberated with varied stakeholder groups and the CSE Board at the beginning of 2017.
Constant monitoring of strategic goals for each division was effected monthly via the Intranet based Work Breakdown System (WBS) in order to identify the progress of individual projects. Quarterly and year-end review reports and presentations were compiled with the coordination of relevant Heads of Divisions and the CEO, which were then presented to the CSE Board and staff on a periodic basis. A gap analysis was also conducted with the mid-year and year-end reviews. Further, financial feasibility of selective strategic projects were carried out during the year.
The CSE budget proposals for the National Budget 2017 aiming to glean support for the Strategy Continuity 2017-2019, were also formulated with the collaboration of the Senior Management Team.
The diagrammatic representation of our value creation model clarifies how our value drivers which align with our broad strategy and its themes as outlined above, feed into our corporate model and focus on achieving relevant outcomes.
Colombo Stock Exchange | Annual Report 2016 23
Value Creation Model
Our Vision Our Mission
§ To be the preferred choice for creation of wealth and value
§ Encourage issuers to raise capital through the CSE
§ Increased the number of Investors
§ Provide facilities for diversified products § Ensured balanced regulation to maintain
market integrity and investor confidence
Our Values
§ Integrity § Passion
§ Teamwork § Professionalism
§ Care
Stakeholder Responsiveness
Diversification
Cohesive Capacity Building
Regulatory Readiness
Systemic Risk
Stakeholder Focus § Stakeholder centricity § Brand, trust and reputation building
§ Enhanced visibility § Expansion of investor base § Enhanced listings /Capital formation
§ Long term strategic partnerships § Regional cohesion § Enhanced financial literacy § Enhanced corporate disclosures § Enhanced industry capacity
Products § Diversification of product offering § Increased portfolio choices for investors and platforms of listing for issuers
§ Revenue enhancement § Enhanced market size /Improved liquidity
§ Broader outreach § Strengthened visibility and branding
People § Employee retention § Skilled workforce § Unified culture § Improved transformation § Creation of a learning organization § Leadership accountability § Performance driven work ethics
Operations and Technology § Balanced regulation § Improved governance § Integrated diversification § Technological responsiveness and readiness
§ Enhanced information security § Improved service delivery § Enhanced resource planning § Efficient risk management § Business continuity § Increased environmental consciousness
Outcomes
Cash Markets
Custody
Market data
Trading
Listing
EquitiesShares,
Warrants, Closed-end
Funds
DebtCorporate
Debt
Clearing
Settlement
Corporate Model
Financial Capital
Human Capital
Intellectual Capital
Manufactured Capital
Social Capital
Natural Capital
Value Drivers and Capital Inputs
Stakeholder Focus § Stakeholders § Stakeholder engagement § Brand positioning § Strategic partnerships § Regional and global cohesion
§ Community wide educational initiatives
Products § New product identification § Research and prototyping § Enabling regulation § Market structure/ Micro structure enhancement
§ Market segmentation by asset classes/Issuer inclusiveness
§ Economic climate conducive market dynamics
§ Stakeholder responsiveness
§ Licenses and regulatory approvals
People § Core competency and execution skills
§ Organization culture § Corporate philosophy § Training and development § Compensation and benefits § Succession planning § Performance focus § Engagement enablers
Operations and Technology § Technological infrastructure § Regulation § Governance § Systems § Resources § Processes § Benchmarking
24
Strategy Update
Revenue MixOur revenue is generated from the following sources:
§ Trade activity on a per trade basis with fees related to a combination of the value and/or number of securities traded for a trade activity;
§ Member associated fees;
§ Listing of companies and additional listing of the securities of listed companies;
Year on Year Variation in Revenue by Source
2016 2015 Variation
Rs. Mn Rs. Mn
Trading (Secondary Markets) 245.6 364.0 -32.5%
Listing (Primary Markets) 104.8 102.6 2.2%
Post-Trade (CDS) 136.5 163.0 -16.2%
Information Services (Market Data) 22.1 19.1 16.0%
Members & Trading Members 39.8 42.2 -5.7%
Other Revenue 200.4 161.9 23.7%
Total Revenue 749.2 852.8 -12.1%
§ Depository services with fees related to a combination of the value and/or number of securities traded for a trade or post-trade activity;
§ The sale of market data-live, statistical, historical and end of day to vendors and other users ;
§ Dividend income from the CDS; and
§ Investment income from investments.
All fees are regularly reviewed by the Board of Directors. Although constrained by market conditions over the year under consideration, we continue to explore our potential in creating new income streams.
Contribution by revenue sources to adjusted income of the CSE is depicted below.
Contribution by Revenue Source 2016, 2015
Other RevenueMembers & Trading Members
Listing (Primary Markets)Trading (Secondary Markets)
Information Services (Market Data)Post-Trade (CDS)
2015
2016
19.0%
4.9%
2.2%
19.1%
12.0%
42.7%32.8%26.7%
5.3%
2.9%
18.2% 14.0%
Total Revenue Rs.852.8Mn
Total Revenue Rs.749.2Mn
Colombo Stock Exchange | Annual Report 2016 25
Our Value Added Perspective
As a partner exchange of the Sustainable Stock Exchanges initiative we have invested in a common commitment to sustainability, both exchange and stakeholder centric, to create inclusivity, responsible investment and best-practice driven capital markets.
For us, sustainability means many things: growing our capabilities; unswervingly following the trajectory for continued excellence; building and maintaining strong stakeholder relationships; and adding value across stakeholder groups. Our value added perspective integrates social, ethical and environmental considerations into our day-to-day operations.
Members and Trading Members
Grants provided for infrastructure projects
Rs.17.3Mn
EmployeesTraining and
developmentRs.6.9Mn
Exchange Infrastructure
CapitalisedRs.37.7Mn
Community Investment
Donations and outreach Rs.5.6Mn
Market Contribution
to the Governmentpassed through as collecting agent of
taxesRs.748.6Mn
Green InitiativesPaperless office and
related solutionsRs.3.3Mn
26
Chairman’s Statement
We have participated in highly visible economic and securities market events during the year ensuring that the CSE brand is globally proliferated. We participated in several forums over the year, with Singapore pivotal to our brand presence and visibility, as a nucleus of fund managers and investors.
As the only licensed stock exchange in Sri Lanka, we hold a sensitive position with our service offering expected to drive and align with broader goals of the national economy. We are unswerving in our focus of continued resilience and growth.
Vision and Composure in Trying TimesGlobal Panorama
The year 2016, was characterised by periods of unprecedented uncertainty. Geo-political events including the UK’s vote in favour of an exit from the EU and the presidential election in the US, influenced, if not overshadowed global markets. US markets gained ground by year-end. While select Latin American and European markets rallied at considerable levels, a handful of others reflected deep losses, China and Italy headlining. Relevant in the regional context, Chinese stock markets closed the year with double-digit losses having also notably lost ground early in the year.
The International Monetary Fund projected a global economic growth of 3.1% in 2016 and expects the global economy to expand at 3.4% in 2017. Emerging and developing economies are anticipated to improve further and continue to exceed growth across the developed world.
There were concerns that our economy’s growth had decelerated to 4.4%, lower than its preceding five-year average of 6.1%. Local political developments continued to colour our financial market volatility and performance throughout the year. The broad market index, the ASPI lost 9.7%, while the S&PSL20 fell by 3.6%. Average daily turnover was Rs.737.2Mn and the year’s turnover decreased 30.1% to Rs.176.9Bn as against 2015.
A restrained sentiment was seen among particularly local investors, despite some foreign interest with the market’s price to earnings multiple becoming attractive,
Vajira KulatilakaChairman
Colombo Stock Exchange | Annual Report 2016 27
reflecting a considerable discount to the average regional valuation. The turnover mix between local and foreign stood at 58:42 contrasting with the previous year’s ratio of 66:34. Low activity levels and index values posed a challenging market environment for the CSE as a whole, impacting both market users and internal financial goals.
The Macrocosm of Sustainability
As the only licensed stock exchange in Sri Lanka, we hold a sensitive position with our service offering expected to drive and align with broader goals of the national economy. We are unswerving in our focus of continued resilience and growth. We are also firm in our commitment to the UN initiative of Sustainable Stock Exchanges.
The Exchange’s focus on cost discipline while investing for growth, continued visibility and brand energising, focusing on new opportunities
wherever possible, are reflective of our contemplation on sustainability.
Despite the accompanying global market volatility and uncertainty, we have maintained focus on the execution of agreed strategy aiming to transform the value drivers of stakeholder focus, operations and technology, products and people. The CSE’s transformational strategy up to 2020, clarifies the medium term goals and strategic path leading to institutional excellence. The actionable initiatives under this broad strategy are calibrated within shorter-term planning cycles to facilitate continuation and diligent management. A range of initiatives to establish our marketplace as a preferred trading and listing venue while seeking technological excellence, operational prowess, pervasive stakeholder interaction and human capital development, was effected under the continued strategic drive.
Continuity of service and the orderly functioning of our markets and other activities for our stakeholders remain a priority. We have over the year reinvigorated our approach to the critical market infrastructure including aspects such as the provision of trading platforms, value added services, business continuity, and the maintaining of global standards. The ambition to extend our clearing and settlement platforms in its scope and efficiency also continued.
During the review period, the CSE facilitated the industry-wide rollout of an integrated Broker Back Office (BBO) and Order Management systems (OMS). The market-wide implementation of the BBO and OMS is funded jointly through grants by the SEC and the CSE. The adoption enables future migration to Central Clearing requiring the streamlining of the trade through post-trade value chain at stockbroker end.
28
Chairman’s Statement
In responding to the needs of our issuers in particular, imminent regulatory changes were worked towards in creating both the Multi-Currency Board and the Alternative Segment including an SME platform. Issuers differ in size, scale, domicile, profitability and objectives while having varying needs for recognition of value. Through the new platforms which intend to provide access to foreign issuers for secondary listing, and small and medium enterprises, we are working towards providing an expanded choice for this diverse stakeholder base.
We put into effective use our regional collaborations to formulate the requisite rules for secondary listing by foreign issuers. Making this initiative a reality would enable much needed liquidity to be infused to our market. Once this platform is operable, we also intend to enable local issuers to list multi-currency securities. The challenge currently is to ensure that we supercede the innate complications of cross border regulation and to expeditiously utilise this opportunity to create enhanced access to issuers.
Over the past year, in addition to the regulatory aspects of listing on new platforms, we reviewed and revised and formulated as applicable, capital adequacy, risk-based supervision and corporate governance rules. We progressively intend to move towards IOSCO compliance and risk-based frameworks are a critical commencing point.
Even as we intend to dispense regulatory duties as diligently as possible, responsiveness to the needs and circumstances of the
market delineates our approach. As a mutualised exchange, this year warranted close management of the institution’s as well as our Members’ financial discipline. Industry-wide measures were put in place for capital adequacy over the year with detailed deliberations with Members leading to corrective measures being applied where extant financial conditions required such intervention and remedy. We continue to supervise member firms, reviewing financial and operational constraints, while ongoing dialogue has resulted in collective solutions in aligning with the need for a tailored proposition for consolidation.
I reiterate that our consolidation policy is aimed at sustainability with an enduring membership that can claim robust capital adequacy and financial performance. The wellbeing and stability of our Members defined our market place hitherto, and it is significant that the legacy created thereby, which extends to a wide community – investors, staff and counterparts to name a few, can be given the best possible opportunity to reinvigorate, under the prevailing circumstances.
We have actively participated in the consultations aiming to reform and strengthen the local regulatory regime. Aspects included the proposed Securities Exchange Act and the Demutualisation Act, as led by the SEC. While far-reaching changes are anticipated through both, the latter in particular is significant for us as within an institutional framework.
Through the anticipated demutualisation, for which the CSE has sought Member-views with regard to the post-
demutualisation allocation – a pivotal component of deliberations, would result not only in dispersion of ownership and change in governance, but also realign the CSE’s strategic orientation further. Although efforts have been made already in seeking to diversify and rebalance revenue streams, we will lay greater emphasis on commercialisation and financial performance as we go into the future.
The modality of demutualisation will gain further clarity in the next year, as will the potentiality of the CSE’s gaining global recognition as a world-class institution. In this context, domestic capacity extends to community capacity. Strategy, institutional capacity building and value creation within the CSE would be expected to enhance the capital market macrocosm we operate in. Within our organization, human capital is a significant strategic constituent and we received in testimony, both an international and a national award for HR excellence during the year. People are inextricably linked to sustainability.
Through this perspective on human capital, we have noted that community capacity building has many dimensions. Learning and continued development, attracting and retention of high quality staff, and paving the way for the succession of young talent so as to infuse ‘new blood’ which takes over the reins of the market with vigour from its predecessors, remain dire requirements at present.
Creating knowledge and awareness on new products, listing platforms, and importantly, values, integrity and corporate governance that form the foundation of a positive
Colombo Stock Exchange | Annual Report 2016 29
intermediary culture are also significant to community capacity building. Without the multiplicity of vision, values, capacity building and a client focused psyche being inculcated at intermediary end, our strategic initiatives would not take flight as intended.
As the Chair of the South Asian Federation of Exchanges and as an active member of the World Federation of Exchanges, we have spearheaded transformative initiatives in regional exchanges, to uplift domestic securities markets progression. It is our intention to showcase the region to fund managers by fortifying its value proposition. We also secured potential partnerships with international exchanges that can be formalised early next year, extending our collaborative footprint in Australasia and South East Asia.
We have participated in highly visible economic and securities market events during the year ensuring that the CSE brand is globally proliferated. We participated in several forums over the year, with Singapore pivotal to our brand presence and visibility, as a nucleus of fund managers and investors. With greater policy certainty in respect of taxation implications applicable to the market, reforms that are anticipated, and the Government of Sri Lanka’s tactical measures that necessitate the participation of capital markets, we believe that our own market’s value proposition can be further enhanced. It is a matter of maintaining composure during adverse times and remaining undeterred in our sustainability efforts.
Acknowledgements
The CSE appreciates the interactions and endeavours of the SEC, and would like to express our gratitude for the support extended in view of mutual interests over the year. I note that collaborative and responsive action by the CSE and the market regulator empowers the market whilst allowing us room to achieve regulatory objectives.
I am happy to have had the collective strengths of the Board to have borne us through a challenging year. We are confident that together with our stakeholders, the CSE can herald expansive transformation in our business, operations and collaborations leading to sustainability.
On behalf of the Board of Directors, I wish to take this opportunity to thank our members for their mutual dedication and support that has helped us weather these trying times.
It has been a fulfilling three-year term that I bring to completion this year and am enriched by the association as Chairman of the CSE.
As the global economy poises itself with more optimism for the future, we too hope to be an envoy of the continued support of all our stakeholders and engender synergetic partnerships that lead this marketplace forward in its sustainability journey.
Vajira KulatilakaChairman
02 May 2017
As the Chair of the South Asian Federation of Exchanges and as an active member of the World Federation of Exchanges, we have spearheaded transformative initiatives in regional exchanges, to uplift domestic securities markets progression.
30
Simultaneously, our non-trading fees reflected versatility through renewed awareness on revenue potential. Primary markets related revenues were sustained at Rs.104.8Mn due to debt listings, and even rose marginally by 2.2% in comparison to 2015.
Together Towards TomorrowPerformance in a Tenuous Backdrop
The operational environment of 2016 was one defined by geopolitical concerns, mixed credit conditions as well as market performance, all tinged by the undertones of uncertainty. Asian markets reacted varyingly over the year, China in particular experiencing marked losses. In Sri Lanka, we faced a challenging environment. Factors inclusive of weather, led to a below par economic performance and the capital market was extremely restrained as interest rates created opportunity for capital flight.
The cautious sentiment among investors, alongside the above dynamics reflected across indicators. The ASPI fell 9.7% as against a 5.5% decline in the previous year. The S&PSL20 fell 3.6% in comparison to a 11.3% fall in the previous year, showing some resilience in larger and liquid counters with sound fundamentals. Subdued turnover for the year was Rs.176.9Bn falling 30.1% from the last year’s value of Rs.253.2Bn. Average daily turnover was at a seven-year low at Rs.737.2Mn. This compares with Rs.1,059.6Mn in the previous year.
The market price to earnings multiple falling to 12.4 times at year end compared to 18.0 times, in the previous year, garnered perceptible interest from foreign investors. The previous year’s outflow of Rs.5,369.9Mn reversed to an inflow of Rs.383.5Mn by the end of 2016. Local investor contribution to turnover fell to 58.0% from the previous year’s level of 65.6%, while foreign investor contribution stood at 42.0%, up from the previous year’s level of 34.4%.
Chief Executive Officer’s Review
Our focused execution of strategy acts as a force of continuity for sustainability and progression of the marketplace. It aligns closely with our value drivers of stakeholder focus, operations and technology, people and products. It addresses the material concerns of stakeholder responsiveness, diversification, cohesive capacity building, regulatory responsiveness and systemic risk.
Rajeeva BandaranaikeChief Executive Officer
Colombo Stock Exchange | Annual Report 2016 31
Our debt primary market remained active although tempered by uncertainty regarding applicable taxation, raising Rs. 78.0 Bn through 17 issues. Equity IPOs raised approximately Rs.2.0Bn. There were 4 equity listings with one being an introduction. A further Rs.5.7Bn was raised in the equity market as rights issues and through the conversion of warrants. In total, our primary markets raised Rs.85.6Bn, a 21.7% decrease over last year, albeit from an all-time high of Rs.109.3 Bn. It is clear that the debt primary markets have held firm within this constitution, only recording a 6.5% decrease. We are wary that this asset class should be given the opportunity to flourish, particularly through policy certainty if not other process related tactics that we have contemplated as part of strategy.
The market depth indicator as calculated by the market capitalisation
to GDP, moved to 23.2% from 2015’s 26.8% level. This indicator is frequently used to denote the level of proliferation of the capital market, and as such, its development. Under-par levels of this indicator although can be interpreted as low valuation of the market in comparison to markets with higher levels, and hence potential for improvement, it also highlights that momentum must be gathered and markets invigorated, in order to reach that potentiality.
With subdued secondary markets, we again strongly felt the negative impact on our revenue model that is heavily dependent on trading volumes in particular through the revenue generated in secondary market and post-trade. Overall revenue totaled Rs.749.2Mn in 2016 reflecting a decrease of 12.1% against the previous year. Trading fees decelerated by 32.5% to Rs.245.6 Mn and post-trade fees fell
16.2% to Rs.136.5Mn, in comparison to respective revenues made in 2015.
We exhibited temerity in our financial discipline in cost consciousness, with the need to adopt a ‘survival mode’ befitting the adverse market dynamics. In the face of falling trading volumes, the CSE adopted an austere cost management strategy. Reflecting restraint, administration costs, marketing, publication and CDS related expenses were reduced by 5.2%, 41.9%, 27.2% and 37.0%, respectively, resulting in an overall cost reduction of 2.2%.
Simultaneously, our non-trading fees reflected versatility through renewed awareness on revenue potential. Primary markets related revenues were sustained at Rs.104.8Mn due to debt listings, and even rose marginally by 2.2% in comparison to 2015. Our market data related revenue rose 16.0%, while other revenue rose by
32
Chief Executive Officer’s Review
23.7%. Collectively, non-trading revenues inclusive of Member-related fees, contributed to 49.0% of the total revenue base, and at Rs.367.1 Mn reflected a 12.7% growth over the previous year. This is in contrast to a 27.5% decrease in trading related fees inclusive of post-trade, totaling Rs.382.1Mn.
We have been gaining ground towards diversification by introducing value added services at the CDS and intend to strengthen the fee base earned through services pertaining to custodians, corporate actions and contract note-provision. Further effort must be expended towards revenue expansion by growing new services, particularly in post-trade value added as well as market data related services, despite our limitations inherent to rebalancing our revenue model. This would be a must in the context of demutualisation, reorienting us more keenly towards commercialisation.
Strategy and Value Creation
We have hitherto utilised the transformational blueprint formulated in association with McKinsey & Company to provide a clear medium
term strategic trajectory for the CSE which leads us up to 2020. Internally, the CSE executes the implementation process by calibrating the initiatives into short-term, achievable phases, providing us the ability to closely manage review, adjustment and implementation activities. As such, we have updated and set in place the way forward for the period 2017-2019, within the confines of current market realisms.
During the year 2016, a forward-looking Strategic Summit (SS2017) was held, engaging all divisions of the Exchange in the strategic planning process. Several brainstorming sessions were conducted prior to and after the SS2017. Guest speaker Manjula De Silva, Chairman, National Insurance Trust Fund Board shared his insights on Public Enterprise Reform and the way forward, followed by the Strategy Session constituting of a detailed analysis of the external environment, stakeholders, costs benefit analyses, financial and business position and IT strategy applicable.
Suitable strategic goals were identified and further categorised as divisional goals or sub goals. The goals so identified were allocated to relevant divisions. Respective action plans with timelines and related budgets were also identified. The final plan was then deliberated with varied stakeholder groups and the CSE Board, before being launched staff-wide at the beginning of 2017.
Our focused execution of strategy acts as a force of continuity for sustainability and progression of the marketplace. It aligns closely with our value drivers of stakeholder focus, operations and technology, people and products.
We have been gaining ground towards diversification by introducing value added services at the CDS and intend to strengthen the fee base earned through services pertaining to custodians, corporate actions and contract note-provision.
Contribution by Revenue Source 2016, 2015
Other RevenueMembers & Trading Members
Listing (Primary Markets)Trading (Secondary Markets)
Information Services (Market Data)Post-Trade (CDS)
2015
2016
19.0%
4.9%
2.2%
19.1%
12.0%
42.7%32.8%26.7%
5.3%
2.9%
18.2% 14.0%
Total Revenue Rs.852.8Mn
Total Revenue Rs.749.2Mn
Colombo Stock Exchange | Annual Report 2016 33
It addresses the material concerns of stakeholder responsiveness, diversification, cohesive capacity building, regulatory responsiveness and systemic risk. These concerns affect the CSE’s ability to create sustained value for stakeholders. Each is interlinked with our value drivers which in turn impact the CSE’s strategic prowess. By aligning with value drivers and focusing on material concerns our strategy takes a multi-polar approach and creates the foundational map for value creation. Tangible value and strategy works together to drive our performance and potential.
Reflecting our commitment to sustainable growth, notwithstanding the operational backdrop, we progressed towards delivering on our strategic initiatives, as recounted below, categorised by value driver.
Stakeholder Focus
Ours is a diverse stakeholder base. Priority stakeholders include 35 Members and Trading Members, 295 issuers and over 750,000 investors. We also interact closely with other market participants including unit trusts, settlement banks, custodians and investment banks totaling approximately 60.
The CSE continued its investor education drive in 2016, with broad socio-economic and demographic outreach island-wide. A total of 665 educational and awareness programmes were conducted attracting the involvement of over 28,000 participants.
The CSE advocated as a strategic partner, over the year, the Annual Report Awards competition of the
Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) which demarcates benchmark reporting and disclosure, and the Research Challenge organised by the CFA Institute of Sri Lanka promoting best practices in equity research among analysts. Through such collaborations we reiterate our allegiance towards defining reporting practices including Integrated Reporting and improved statutory disclosure as well as acting as a catalyst for capacity building in market related value added services.
The CSE partnering with the Ministry of Public Enterprise Development hosted a forum themed ‘Reorientation of Public Enterprises: The Way Forward’ exclusive to representatives of State Owned Enterprises (SOEs). Under the auspices of Tanri Abeng PhD, Indonesia’s first Minister for SOEs renowned for his catalytic contribution to Indonesian SOE reform, the event was impactful in gaining insight on driving growth and efficiencies in the Sri Lankan context.
Market opening ceremonies, which were earlier introduced primarily as
a platform to generate exposure for listed companies, expanded its scope to support other initiatives of domestic and global significance in 2016. Along with ceremonies celebrating corporate milestones, we supported the United Nations, the International Finance Corporation and other local business associations and industry groups to utilise Bell Ringing ceremonies as a call-to-action for key economic, capital market and social initiatives. Our sustainability perspective as an institution was highlighted particularly through support of gender empowerment and equality, an agenda that carries through to the spirit of value creation in human capital within the CSE.
The CSE’s interactions with our members, particularly regarding the implementation of risk-based methodologies for capital adequacy as well as performance and sustainability under the current realities of the market place, were expansive. We have been successful in obtaining consensus on enhanced capital adequacy requirements and have executed corrective measures where member
Market opening ceremonies, which were earlier introduced primarily as a platform to generate exposure for listed companies, expanded its scope to support other initiatives of domestic and global significance in 2016. Along with ceremonies celebrating corporate milestones, we supported the United Nations, the International Finance Corporation and other local business associations and industry groups to utilise Bell Ringing ceremonies as a call-to-action for key economic, capital market and social initiatives.
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Chief Executive Officer’s Review
firms were experiencing vulnerability in financial performance.
We have interacted closely with the SEC during the year in view of transformative dialogue in the regulatory sphere, to support member readiness and other strides in strategy.
The year saw us active in significant brand positioning activities through affiliations and synergistic partnerships. The CSE was also featured in the definitive economic and social publication by the Oxford Business Group ‘The Report: Sri Lanka 2016’, which has a wide readership of corporate, academic, media and public sector representatives worldwide.
Together with FinanceAsia and other Sri Lankan State and private enterprises we partook in what was termed the largest concerted effort to entice Asian investors operating out of Singapore into our market. As strategic partner for the Sri Lanka Investment Summit, our brand was further energised in the Asian region in aligning the capital market with the country’s ambitious economic and growth agenda. The forum in Singapore was followed by a first-ever issuer forum held in the Republic of Maldives, an initiative focused on securing secondary listings on the proposed Multi-Currency Board, fostering cross exchange collaboration.
The foregoing reflects one facet of our active involvement in brand energising, globally and regionally through multiple forums. We demonstrate purposeful membership in the World Federation of Exchanges (WFE) and have during the year acted as part of an evaluation team assessing a South Asian exchange for potential membership of the WFE. Within the regional perspective, we provide leadership as the Chair of the South Asian Federation of Exchanges (SAFE) to engender closer cooperation and understanding among peer exchanges.
As per the Memorandum of Understanding signed between the CSE and the Maldives Stock Exchange,
a Training and Internship Programme was conducted for the staff of the Maldivian regulator, the Capital Market Development Authority.
In the post-trade arena, with the intention of fortifying intra-CSD linkages, a Memorandum of Understanding was signed with the Central Depository Company of Pakistan Limited. With the CDS commemorating its 25th year of post-trade operations, fostering international working relationships provides opportunity for knowledge and information sharing and the refining of our operational and revenue model.
As an active member of the Technical Task Force of the Asia-Pacific Central Securities Depository Group (ACG), the CDS contributed to the 18th Cross Training Seminar of the ACG through knowledge dissemination on the use of digital channels to service clients.
Operations and Technology
As a market infrastructure provider, technological stability, responsiveness and readiness remain a priority for the CSE. During the year we recorded a near-100% uptime in our critical systems, whilst executing an array of strategic initiatives in view of our technological offering.
The CSE facilitated its member readiness activities including the industry-wide rollout of new integrated Broker Back Office (BBO) and Order Management systems (OMS). The adoption of the universal BBO and customised OMS by stockbrokers facilitates transition to the CCP environment proposed. Broker reporting systems for CAR related information have been completed and made ready for implementation. The above initiatives together signify technology-driven salutary foundations for a material concern that affects us- systemic risk management.
The CCP implementation necessitated through the systemic risk management objective, has entered a decisive state. The business framework and model based on recommendations by the lead consultant BTA Consulting Limited, UK, have been modified and finalised. Over the year, given cost benefit analysis of the market ecosystem, with due consideration to the required initial investment, we sought financial assistance options for this project.
As strategic partner for the Sri Lanka Investment Summit, our brand was further energised in the Asian region in aligning the capital market with the country’s ambitious economic and growth agenda.
Colombo Stock Exchange | Annual Report 2016 35
With the potential funding becoming crystalised, we look forward to the next phase of CCP implementation in the coming year.
During the review period, we upgraded our website interface and the underlying technology architecture. The new interface was designed to enhance user experience and to be mobile compatible in line with the envisaged digital transformation. The new architecture would enable the CSE website to be more robust and responsive, catering for future growth.
The CDS launched its e-portal, www.cdseconnect.lk in 2016 as a green initiative improving connectivity, response time and cost saving in information sharing. The CDS e-Connect defines the future platform where CDS Account holders access many planned services via a single interface.
We continued to improve processes and procedures in compliance with Information Security (ISO 27001), Business Continuity (ISO 22301) and IT Service Management Systems (ISO 20000). We further challenged ourselves in Disaster Recovery, successfully conducting a live Disaster Recovery simulation during the trading day for the first time in the history of CSE, with no significant operational issues, the results of which have been independently validated by Ernst and Young. Due to the increasing volume of global cyber-security threats and breaches, during the year we continued to give priority for cyber-security preparedness.
People
Evidencing the excellence of our HR function we received our first international accolade for “The Most Innovative Use of Training and Development” at the World Human Resources Development Congress in Mumbai, India early in the year.
We were gratified and further endorsed, as a recipient of the National HR Excellence Gold Award at the National HR Conference for 2016, organised by the Institute of Personnel Management. The event is held to be South Asia’s largest HR event and the recognition afforded substantiates the exceptional HR practices adopted by us, and the contribution of the HR function in driving institutional excellence.
Our evolutionary journey of transforming into a world class organization is well supported through human capital development efforts. We currently employ a workforce of 154 employees in an inclusive culture recognising the strengths and talents of different individuals. We have a tri-polar strategy for HR, which aims to foster a value driven culture, provide strategic advice for the institution and optimise the HR function.
We focus on several core areas including creating a learning culture, retention, engagement and value centrism as continuous goals and have made good progress in these areas. In view of the highly-specialised role in capital markets, we rely on leveraging the skills and experience of our employees. Through our internship programmes, talented and diversely skilled personnel have been absorbed to the organization.
Evidencing the excellence of our HR function we received our first international accolade for “The Most Innovative Use of Training and Development” at the World Human Resources Development Congress in Mumbai, India early in the year.
We were gratified and further endorsed, as a recipient of the National HR Excellence Gold Award at the National HR Conference for 2016, organised by the Institute of Personnel Management.
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Chief Executive Officer’s Review
Our structured training and development plan stimulates innovation and best work practices requisite for a learning organization. Despite resource limitations during the year, we recorded a total of 38 hours of training (4.78 man days of training) on average per employee, ensuring consistent and equitable training.
Over the year, we motivated inclusion and engagement through rewards and recognition, welfare events and employee benefits. Our rewards and recognition scheme captures a “total rewards” approach that ensures progressive employee performance. The structured benefits package assures the best interests of our staff. Welfare events that promoted a sense of work-life balance at the CSE included the Sports Day, Battle of the Brains quiz and an employee get together. We have a workspace which is considerate, and in testimony, we secured a 100% return to work rate after parental leave, during the year.
In order to preserve sustainability, we believe that HR processes and policies should be optimised and improved continuously. As such, in addition to initiatives to automate routine
processes, measures are currently being undertaken to obtain an ISO 9001:2015 quality certification.
Products
The regulatory framework to enable secondary listing by foreign issuers and the listing of small and medium enterprises was completed over the year. The proposed Multi-Currency Board, and the Alternative Segment and SME Board, would define an expanded issuer-offering in the future. An enabling regulation in this regard would attract issuers that vary in scale, profitability and value recognition as well as other characteristics. The Multi-Currency Board could later evolve as a platform that allows local issuers to list securities of acceptable multiple currencies in line with their business needs. The SME Board should strengthen access to finance through non-traditional means.
Regulatory frameworks on the above and policy considerations on new products including structured products have been shared with the market regulator in order to align with high-level strategies and to seek regulatory approval.
In 2016, we proactively collaborated with Ceylon Chambers of Commerce and other agencies, in light of the progression in the real estate sector leading to manifest interest in the structured product category of Real Estate Investment Trusts (REITs). A project team has been established by the CSE in exploring REIT product design, legal and regulatory regime, concessionary tax environment and other components required for successful productisation.
Together Towards Tomorrow
I wish to express my appreciation to the Chairman and Board of Directors. The Board has helped gain fresh perspective on collective solutions during adversities that in particular affected our Members, and key stakeholders. As an organization, we have together been able to make our values, growth agendas, and concerns be known, and optimal remedies, ideas and plans be deliberated upon collectively.
Our Management and staff was not deterred from their activities or our strategic initiatives, although we had limited promise in some areas and the market in general. Despite this, the team worked in a unified manner selectively focusing on the tactical projects that would lay a sound foundation for the challenges ahead. I take this opportunity to express my sincere thanks to the Management and staff as a whole for their contribution in maintaining our platform of safety and credibility as a listing, investment and trading venue. Your efforts as a team hold the foundations of this economically significant edifice in good stead.
The proposed Multi-Currency Board, and the Alternative Segment and SME Board, would define an expanded issuer-offering in the future. An enabling regulation in this regard would attract issuers that vary in scale, profitability and value recognition as well as other characteristics. The Multi-Currency Board could later evolve as a platform that allows local issuers to list securities of acceptable multiple currencies in line with their business needs.
Colombo Stock Exchange | Annual Report 2016 37
We appreciate the SEC’s stewardship in support of pivotal initiatives, particularly those reflecting advancement to international benchmarks and a balanced regulatory regime.
We engage and support our Members and Trading Members in view of all activities, as a priority stakeholder. Our Members and Trading Members have maintained continued and relevant dialogue, working closely with us on respective institutional stability and operational needs, while supporting our strategic initiatives.
I also look forward to active support from investment banks, custodians, unit trusts and other participants in the ensuing year.
We note some optimism in the outlook for global markets and economy and closer to home, tempered enthusiasm on the part of foreign investors on the opportunities that CSE offers.
As a partner exchange of the Sustainable Stock Exchanges initiative, we will remain committed towards gaining resilience and competence, engendering sustainability in our market. Our holistic view of value creation sees us increasingly participating in organic growth through our service offering, with a heightened awareness of corporate responsibility, governance and ethical concerns.
This transformative vision is one that is unshakable in its commitment to create value for all our stakeholders.
We look forward with confidence towards turning our market into an increasingly more valuable franchise for all.
Together Towards Tomorrow.
Rajeeva BandaranaikeChief Executive Officer
02 May 2017
38
Board of Directors
Mr. Vajira KulatilakaChairman
Mr. Dakshitha ThalgodapitiyaDirector
Mr. Ray AbeywardenaDirector
Ms. M.A.D.S. Jeeva Shirajanie NiriellaDirector
Mr. Anton GodfreyDirector
Colombo Stock Exchange | Annual Report 2016 39
Mr. M. R. PrelisDirector
Mr. Anthony Shanil FernandoDirector
Mr. Asanga SeneviratneDirector
Mr. Aravinda PereraDirector
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Board of Directors
Mr. Vajira KulatilakaChairman
Mr. Vajira Kulatilaka is the Chairman of the Colombo Stock Exchange and has been a Director of the Exchange since 2009. He also serves as the Chairman of the South Asian Federation of Exchanges (SAFE).
Mr. Kulatilaka, is designated as Director/Chief Executive Officer - NDB Capital Holdings PLC and overlooks the operations of the Investment Banking Cluster of the NDB Group, which comprises of NDB Investment Bank Limited, NDB Securities Pvt Limited, NDB Wealth Management Limited, NDB Zephyr Partners Lanka Limited, and NDB Capital Limited, Bangladesh. He carries over 32 years of experience in the Finance Sector and Capital Market of Sri Lanka. Prior to joining NDB Investment Bank Limited, he functioned as the Chief Executive Officer at CKN Fund Management (Pvt) Limited. Mr. Kulatilaka has been instrumental in managing some of the largest IPO’s in Sri Lanka.
Mr. Kulatilaka is a Chartered Financial Analyst and has obtained a B.Sc. Degree in Civil Engineering with First Class Honours from the University of Moratuwa, and MEng in Industrial Engineering & Management from the Asian Institute of Technology. He also obtained qualifications as a Fellow Member of the Chartered Institute of Management Accountants UK. He was adjudged the ‘Best Investment Banking CEO Sri Lanka 2014 and 2015’ by Global Banking and Finance Review in recognition of his contribution to the investment banking arena of Sri Lanka. In addition to the above he serves as a Council Member at the University of Moratuwa.
Mr. Kulatilaka currently holds directorships at NDB Capital Holdings PLC, NDB Investment Bank Limited,
NDB Securities Pvt Limited, NDB Wealth Management Limited, NDB Capital Limited – Bangladesh, NDB Zephyr Partners Limited – Mauritius, NDB Zephyr Partners Lanka (Private) Limited and Emerald Sri Lanka Fund I Limited - Mauritius.
Mr. Ray AbeywardenaDirector
Mr. Ray Abeywardena is the Managing Director of Acuity Partners (Pvt) Ltd. He has been associated with the Sri Lanka’s capital markets for over 30 years, primarily as a Stockbroker and since 2009 as an Investment Banker. Prior to being appointed as Managing Director/CEO of Acuity Partners (Pvt) Ltd he served as the Managing Director/CEO of Acuity Stockbrokers (Pvt) Ltd from 2001 to end 2008. Mr. Abeywardena is the Chairman of Acuity Stockbrokers (Pvt) Ltd and Acuity Securities Ltd and is a Director of Guardian Acuity Asset Management Ltd, Lanka Ventures PLC and Lanka Energy Fund Ltd. He also serves as an independent non-Executive Director of Softlogic Life Insurance PLC.
Mr. Abeywardena is a past Chairman of the Colombo Stockbrokers Association, is a member of the Chartered Institute of Marketing (UK) and holds a Masters Degree in Business Administration from the University of Wales.
Mr. M. R. PrelisDirector
Mr. M.R. Prelis counts a 27 year career in banking with 21 years collectively as Chief Executive Officer / Director of DFCC Bank and Nations Trust Bank. He has held the posts of Chairman - Ceylon Electricity Board, National Institute of Business Management, Association of Development Finance Institutions of Asia & Pacific headquartered in Manila,
SME Bank, Executive Director National Asset Management Co Ltd (NAMAL), Director BNP-Paribas South Asia Asset Management Ltd, Director HDF Securities Ltd and Deputy General Manager (Merchant Banking & Consultancy) Bank of Ceylon. He is currently the Chairman of the Capital Trust Securities Group and an Independent Director of Dialog Axiata.
An Honours graduate in Mechanical Engineering (University of Ceylon), he also holds a Master’s in Industrial Engineering and Management from Purdue University, USA as a Fulbright Scholar and ISMP from Harvard Business School. He is a Chartered Engineer of UK, a Fellow of the Institution of Engineers, Sri Lanka, a Member of the Institute of Personnel Management and a Fellow of the Institute of Bankers, Sri Lanka. He also functions currently as a member of the National Research Council of Sri Lanka.
Mr. Asanga SeneviratneDirector
Mr. Asanaga Seneviratne is presently the Chairman of Nation Lanka Equities (Pvt) Ltd. He also serves as the Managing Director of Asia Fort Asset Management (Private) Limited, Anilana Hotels and Properties and Investor Access Equities (Private) Limited. He had also served as the Chairman of the Stock Brokers Association of Sri Lanka.
Mr. Seneviratne was the Director / CEO of Asia Capital PLC, the largest Investment Bank quoted on the Colombo Stock Exchange. He was the Managing Director, Asia Securities (Pvt) Ltd., which was ranked as the number one stock broking Company in Sri Lanka for many years.
He has more than 25 years of experience in finance, investments, capital management and has invested in the hospitality and property industry.
Colombo Stock Exchange | Annual Report 2016 41
Mr. Seneviratne pioneered online trading in Sri Lanka through his company, Investor Access Asia (Pvt) Ltd with CDAX, the first online trading system in Sri Lanka, enabling direct access to the Colombo Stock Exchange from the clients’ personal computer.
Mr. Seneviratne is also the President of the Sri Lanka Rugby Football Union and in the Executive Committee of the Asian Rugby Football Union (ARFU).
Mr. Aravinda PereraDirector
Mr. Aravinda Perera counts over 30 years in the Banking sector and is presently the Managing Director of Royal Ceramics Lanka PLC.
He is a Member of the Institute of Engineers (Sri Lanka) MIE (SL) and a Chartered Engineer (C.Eng.)
He is also a Fellow Member of the Chartered Institute of Management Accountants, UK (FCMA) and a Fellow of the Institute of Bankers, Sri Lanka (FIB). He also holds an MBA from the Post Graduate Institute of Management, University of Sri Jayewardenepura.
Presently, he is the Chairman of Siyapatha Finance Ltd & a Director of SC Securities (Pvt) Ltd; subsidiaries of Sampath Bank. He also represents Sampath Bank as a Director of LankaBangla Finance Ltd in Bangladesh.
Presently, Mr. Perera serves on the board of Colombo Stock Exchange and he is also a Board Director and chairs the Audit Committees of Hayleys PLC, Fentons Ltd., & Hayleys Industrial Solutions Pvt Ltd.
Mr. Perera is also a past President of the Association of Professional Bankers of Sri Lanka.
Mr. Dakshitha ThalgodapitiyaDirector
An Accountant by profession, Mr. Dakshitha Thalgodapitiya now functions as the Consultant to the Board of Investment of Sri Lanka. He represents the Board of Investment on the Petroleum Resources Development Committee (PRDC) and is a member of the Board of Governors of the University of Vocational Technology.
Mr. Thalgodapitiya counts over 38 years of experience at CEO level in both the public and private sectors. He has served the public sector as Chairman / CEO of Sri Lanka Land Reclamation & Development Corporation, River Valleys Development Board and Lanka Machine Leasers Ltd. He has also served as Director of a large number of public corporations engaged in infra-structure development and in the irrigation and water management sectors. He has carried out many consultancy assignments for International organisations and donor agencies.
Mr. Thalgodapitiya holds postgraduate qualifications in Management from the George Washington University, Washington D.C., USA.
Ms. M.A.D.S. Jeeva Shirajanie NiriellaDirector
Ms. M.A.D.S. Jeeva Shirajanie Niriella is a senior academic of the University of Colombo and is a senior attorney- at- law. She holds Bachelor’s Degree with Honours in Law and Master’s Degree (M.Phil) in Law and Criminal Justice from the University of Colombo. She was admitted as an Attorney-at-Law of the Supreme Court of Sri Lanka in 1997. She served as the Head of Department of the Department of Public and International Law, Faculty of Law, University of Colombo from 2012 to 2015 and also
served as a member of the National Research Committee of National Science Foundation from 2005-2011.
She is presently the Deputy Director/Examinations of Virtual Campus, University of Colombo, Course Director of LLM Programme conducted by the Faculty of Law, University of Colombo, visiting lecturer for the Master of Laws programmes conducted by Open University, Sri Lanka and Kotelawal Defence University, member of the Board of Management of the National Authority for the Protection of Victims of Crime and Witnesses, Sri Lanka, member of the executive committee of World Center for Women Studies, USA and International Economic Development and Research Center, China. She also serves on Advisory Panel, Editorial and Reviewer Boards of several International Journals including International Journal of Contemporary Laws, International Annals of Criminology published by the University of Cambridge Press, Asian Journal of Humanities and Social Science, Asian Journal of Humanities and Social Studies, International Journal on Art and Humanities and African Journal of Politics and Governance.
Mr. Anton GodfreyDirector
Mr. Anton Godfrey is the Founder of Agxa Global which focuses on resources trade, energy, pulp and paper, technology, futures & options. The company has global presence in Australia, Singapore, India and Sri Lanka with principal network span over Europe and North America.
He possesses over two decades of extensive expertise on capital markets derivatives, international trade-futures and FDI initiative with global networking skills. Mr. Godfrey holds an MBA from the University of Leicester UK, Chartered
42
Board of Directors
Marketer and a Fellow of The Chartered Institute of Marketing UK and the Australian Institute of Management.
Mr. Anton Godfrey has also been actively involved in International Trade Council s including the Chamber Of Commerce in Sri Lanka and Australia. He is the past president of the Vietnam Sri Lanka Business Council and Indonesia Sri Lanka Business Council of the Ceylon Chamber of Commerce and currently serves on the Board of the Western Australian Chamber of Commerce and Industry’s panel focusing on International Trade.
An entrepreneur with demonstrated business acumen, he is the recipient of the Outstanding Asia Pacific Entrepreneurship Award, APEA 2013 leading the frontier in Asia Pacific and Australasia.
Mr. Anthony Shanil FernandoDirector
Mr.Anthony Shanil Fernando, Attorney-at-Law, Solicitor, MBA, MsiArb, is a Senior Partner at Anton Fernando Associates Law firm. Chairman of, Asian Logistics Park Pvt Ltd, and World Express (CMB) Limited. And Director of The Colombo Stock Exchange of Sri Lanka and Director Central Depositary Systems Ltd, and AFA Corporate Services Limited.
He obtained a First Class Honours and Prize in Commercial Law at the Sri Lanka Law College, where he founded the first Student Human Rights Society.
He followed his Postgraduate studies at the Queen Mary College, University of London, in Corporate Law, on a Commonwealth Scholarship (now called Chevning). The University of Texas, USA, and the University of Prince Edward Island Canada, Shanil has obtained a Master of Business Administration
(MBA) from Postgraduate Institute of Management (PIM) University of Sri Jayewardenepura and his researched on the Use of Electronic Data interchange for the facilitation of Trade and Transport Facilitation.
He was a recipient of the Achievers Award by the Postgraduate Institute of Management Professional Association University of Sri Jayewardenepura. He is a Trustee of the PIM Professional Association Foundation.
Mr. Fernando has obtained a Diploma in Arbitration, and is a qualified arbitrator and a member of the Singapore Institute of Arbitrators. Shanil has also appeared in ICC Paris conducted Arbitrations.
Shanil is a certified trainer on Corporate Governance and was trained by Commonwealth Association for Corporate Governance London.
Shanil was also trained by UNESCAP as a Trainer’s, trainer on International Trade and Multimodal Transport Facilitation. And has followed training courses in International Contracts and Arbitration in ICC Academy in Paris.
He was also awarded the AOTS Scholarship to follow training in South Asian Corporate Management in Tokyo Japan.
Mr. Fernando was a member of the board of Urban Development Authority (UDA), and Paliyagoda Warehousing Co Ltd, formally under the Ministry of Urban Development, He was also nominated member of the Investment committee of the Employees Trust Fund (ETF) of Sri Lanka.
Mr. Fernando is a Task Force Member, of the ICC Commission on Arbitration and ADR, and has attended many international
ICC workshops. Shanil is the Secretary/ Director, of The International Chamber of Commerce (ICC Sri Lanka).
He is a life member of the Bar Association of Sri Lanka, the Corporate Lawyers Association and the Organization of Professional Associations of Sri Lanka. He is a past president of The Postgraduate Institute of Management Professionals Association.
He also serves as a visiting Lecturer and resource person in the area of Corporate Law, Arbitration, Corporate Compliance, Negotiations and Conflict Resolution and Supply Chain Management.
Anthony M Shanil Fernando was the President of the Postgraduate Institute of Management Professional Association Alumni of the Postgraduate Institute of Management of the University of Sri Jayawardanapura.
He is an old boy of St. Peters College, and D.S. Senanayakka College and captained the school athletic team for three years which won the Tarbot shield thrice during his captaincy and was awarded athletic colors.
Colombo Stock Exchange | Annual Report 2016 43
Management StructureBo
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of D
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Head
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N
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Head
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Head
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Sam
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Head
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Inte
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Head
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Head
of
Fina
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& Ad
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Kusa
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Head
of
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&
New
Pr
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Head
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Risk
& A
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Com
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ee
44
Primary Markets
Through our listing platforms we provide access to the CSE’s equity and debt capital markets, facilitating connectivity and broad visibility to a range of issuers. We strive to enhance our listing platforms, increasing issuer choice in line with varied characteristics such as size, scale, locality and needs for value recognition.
We provide an array of mechanisms facilitating the raising of capital, enabling issuers to reap the benefits of listing on the CSE’s equity and debt markets. Continuous guidance is provided to issuers on the Listing Rules of the Colombo Stock Exchange (Listing Rules), throughout the
The listing of SMEs on the SME Board and the secondary listing of foreign entities on the Multi-Currency Board constitute priority enhancements to issuer choice, as featured in our strategic goals.
Operational Review
Our teams contribute collectively through the core functions that consolidate our position as market infrastructure provider and supervisor in ascertaining market quality and integrity. Our expansive priority stakeholder interactions, our people orientation and our holistic approach to risk management at enterprise level also are significant to continuity. Here we recount our operational prowess.
listing process, ensuring that offer documentation disseminated to the public contain adequate disclosures which empower investors to make informed investment decisions. Efficiency and fairness of our markets through full and fair disclosure, is a pivotal focus of our listing related services.
We continually review and revise the Listing Rules to ensure their quality, comprehensiveness and effectiveness in order to safeguard the integrity of the market. Apt review and revision of the Listing Rules enhance the quality of listings whilst forming a sound foundation to inculcate and grow investors’ trust and participation in our market.
Listing Platforms
Equity
No. of Listed Companies - 289(Includes companies which have also
listed Debt)
Main Board
*No. of Listed Companies - 221
Diri Savi Board
*No. of Listed Companies - 68
Debt
No. of Listed Companies having solely Debt listed - 06
No. of listed Debt Issuances
Outstanding as at 31 December
2016 - 84
Colombo Stock Exchange | Annual Report 2016 45
Total capital raised across our debt and equity markets, both through primary and secondary issuances reached Rs.85.5Bn. The year 2016 saw 17 debt issuances raising approximately Rs.78.0Bn. Uncertainty on the applicability of tax exemptions for interest earned on listed debentures, resulted in a few proposed debenture issuances being kept on hold until the potential outcome was ascertained.
Three new issuers listed on our equity platform raising in total Rs.1.8Bn. One other issuer opted for listing via Introduction, contributing Rs.80.4Bn or 2.9% of the broad market index weightage. A further eight raised Rs.5.7Bn, of which six comprised Rights Issues, reflecting approximately 44.2% of total secondary issue proceeds.
Select non-strategic enterprises were identified as the Government’s listings pipeline, in the Budget Speech delineating the National Budget 2017, thus creating a promising window of opportunity for primary market growth for the coming year.
Additionally, five listed companies carried out scrip dividends, while three concluded capitalisation of reserves, and ten sub-divided their shares, respectively. The year 2016 also
saw an Arrangement in accordance with the Companies Act No.7 of 2007 (Companies Act) taking place, in which a listed company was also a party.
A ‘go-green’ approach has been adopted by our listings team during the year, where applicant entities seeking to list on the CSE are offered the opportunity to submit listing applications electronically. The e-listing application system streamlines the listing process at both the Exchange and the proposed issuer-end, creating a paperless, cost and time-efficient solution.
Anticipated Developments
The listing of SMEs on the SME Board and the secondary listing of foreign entities on the Multi-Currency Board constitute priority enhancements to issuer choice, as featured in our strategic goals. We are continually focused on aligning with and elevating to best practices which in turn will assist our growth momentum as we journey into the future.
We intend to duly recognise non-voting shares listed on the Exchange, by considering the value of such shares in the calculation of the ASPI and the S&PSL20. Currently only the voting share base is captured in index construction. Moving forward,
No. of Security Issues
Warrant conversion Rights issues
Debt IPOEquity IPO
1732
6
Capital Raised (Rs. Mn) & as a Percentage (%)
Warrant conversion Rights issues
Debt IPOEquity IPO
77,994.9(91.2%)
3,193.8 (3.7%)2,531.1(3.0%) 1,822.5 (2.1%)
46
Operational Review
both the ASPI and the S&PSL20 will be amended to duly represent voting and non-voting shares of listed equity securities, enabling a greater level of value recognition.
Corporate Affairs
We at the Exchange have given a priority focus on ensuring fairness, transparency and accountability of the financial reporting framework and compliance with good corporate governance practices by listed companies. We advocate effective internal and external communication in order to build and retain strong relationships with listed companies and investors.
Experienced and competent accounting professionals perform a critical role within Corporate Affairs, as part of the CSE’s endeavour to provide sound financial reporting by listed entities :
§ Reviewing of annual reports and interim financial statements for compliance with Sri Lanka Accounting Standards, Listing Rules and Companies Act requirements;
§ Monitoring of the Continuous Public Holding Requirements of listed companies to ensure compliance with the Listing Rules;
§ Guiding and advising stakeholders on the Continuing Listing Requirements;
§ Carrying-out timely improvements to the Listing Rules to enhance effectiveness and efficiency;
§ Follow up on Default Board companies in order to ensure compliance with the Listing Rules;
§ Examining investor grievances that may be lodged by an investor against a company listed on the Exchange.
Compliance and Monitoring
Compliance Review
§ Annual reports of all listed companies are reviewed by the CSE jointly with the SEC. Accordingly, 146 annual reports were allocated to the CSE from the total sample, with the remainder reviewed by the SEC. In the review of published
annual reports, the identified non-compliances are reported to respective companies for rectification and future compliance.
§ For the year 2016, published interim financial statements of the listed companies were reviewed on a sample basis and non-compliances were reported for rectification.
Primary Market Related Special Assignments
The AGM /EGM calendar was introduced during the year 2016. It is hosted on the CSE website and indicates tentative dates of AGMs and EGMs conducted by listed companies. The AGM/EGM calendar is intended to facilitate improved attendance by investors by providing such relevant information.
Promoting Transparency, Accountability and Governance
We continually strive to adopt regional best practices in order to improve the Financial Reporting and Governance aspects of listed companies.
2013201420152016
Annual Reports Reviewed
Observation Letters Sent Reviewed
132
110
130
95
132
95
137
93
2016 2015
Interim Financial Statements Reviewed
September December
March June No
n -C
ompl
ianc
esO
bser
ved
Revi
ewed
Non
-Com
plia
nces
Obs
erve
d
Revi
ewed
144
142
48245429
144
144
139
142
27384944
143
143
Colombo Stock Exchange | Annual Report 2016 47
Secondary Markets
Our secondary markets create liquidity and facilitate efficient trading through a multi-asset trading platform with current focus on equity and debt. Characterised by volatility, the year resulted in positive sentiment in most equity markets. Some regional markets however, including China, Malaysia and Hong Kong reflected losses of varying degree at year end.
The S&P500 was up 9.8% YoY and UK’s FTSE 100 registered an increase of 14.4%. The MSCI Emerging Markets
Index which covers over 830 securities across 23 markets rose by 8.6% in 2016. The CSE’s All Share Price Index (ASPI) recorded a 9.7% decrease while the S&PSL20 Index recorded a decrease of 3.6%.
Market capitalisation of the cash equity market amounted to Rs.2,745.4Bn from Rs.2,938.0Bn reflecting a 6.6% decline in market size. Activity levels remained subdued during 2016. Turnover decreased by 30.2% to Rs.176.9Bn in 2016 from Rs.253.3Bn in 2015. Average daily turnover declined to Rs.737.2Mn per trading day from Rs.1059.6Mn in the previous year.
Domestic participation decreased to 58.2% from 65.6% of turnover against the previous year. Foreign investors were net buyers at year end marking a net foreign flow of Rs.383.5Mn. Foreign participation contributed to 42.0% of turnover relative to 34.4% in 2015. Overall, institutional investors contributed 71.9% of turnover as against 63.2% in 2015. Debt markets reflected a fall of 38.0% YoY in secondary markets.
Comparative Returns – Regional Markets
Karachi Stock Exchange KSE All Share Index 43.0%
Stock Exchange of Thailand SET Index 19.8%
Indonesia Stock Exchange Jakarta Composite Index 15.3%
Ho Chi Minh Stock Exchange VN Index 14.8%
Singapore Exchange FTSE ST All Share Index 11.8%
Taiwan Stock Exchange TAIEX Index 11.0%
Philippine Stock Exchange PSE All Share Index 4.2%
National Stock Exchange of India CNX 500 3.8%
Korea Exchange KOSPI Index 3.3%
Hong Kong Stock Exchange Hang Seng Composite Index -0.9%
Bursa Malaysia Berhad FTSE Bursa Malaysia EMAS Index -2.8%
Colombo Stock Exchange All Share Price Index -9.7%
Shanghai Stock Exchange Shanghai Composite -12.3%
Source: Bloomberg
48
Operational Review
Priority Stakeholder Engagement
Investor Engagement
Education and Awareness Raising
The CSE continued its investor education drive in 2016, reaching out to a broad range of socio-economic and demographic segments across the country. A total of 665 educational and awareness programmes were conducted island-wide attracting the involvement of over 28,000 participants.
A diverse and far-reaching range of programmes were delivered through the CSE branch network including educational workshops, seminars on market conditions, programmes for schools and universities, trade exhibitions, inter-alia. Conducted throughout the year, these programmes were well received by target audiences including representatives of commercial and public sector organizations, business associations, industry trade groups and the public at large. Teams around the country also continued to conduct programmes focused on refreshing interest among inactive investors.
Energised Brand Position and Broad Visibility
The CSE continued its investor education and awareness drive amidst challenging market and financial constraints. We focused on pursuing and implementing creative and cost-effective marketing initiatives. Year 2016 saw us unswervingly continue significant brand positioning activities through affiliations and synergetic partnerships.
Sri Lanka in the Global Forum
Branding and promoting the Sri Lankan capital market as an attractive investment destination in the international arena remains an important facet of the CSE’s strategy of achieving growth through improved foreign investor participation.
In 2016, the CSE joined prominent Asian publisher FinanceAsia and other Sri Lankan State and private entities in what was termed the largest concerted effort ever to entice Asian
Current market conditions seminar at the CSE Trading Floor,Colombo
Investor awareness session in Ratnapura
The Report: Sri Lanka 2016
Branding and promoting the Sri Lankan capital market as an attractive investment destination in the international arena remains an important facet of the CSE’s strateg
Colombo Stock Exchange | Annual Report 2016 49
investors operating out of Singapore. As a Strategic Partner for the Sri Lanka Investment Summit, the CSE energised its brand presence in the Asian region by aligning the capital market with the country’s promising and ambitious economic and growth agenda. The forum in Singapore was followed by a first-ever issuer forum held in the Republic of Maldives, an initiative focused on securing foreign listings on the proposed Multi-Currency Board, simultaneously supporting the development of cross-exchange activities between the two exchanges.
The CSE was featured in ‘The Report: Sri Lanka 2016’, a comprehensive economic and social snapshot of the country published by the Oxford Business Group. A benchmark publication on country-based research, its outreach extends across corporate, academic, media and public sector representatives from around the world.
Invigorated brand presence achieved at the international stage through these means, together with other favorable factors contributed to the reversal of the foreign capital outflow trend witnessed in 2015, with 2016 recording a net inflow of foreign equity investments.
Strategic Partnerships
The Annual Report Awards competition of the Institute of Chartered Accountants of Sri Lanka (CA Sri
Lanka) a definitive agenda in corporate disclosure and reporting excellence, and the Research Challenge organised by the CFA Institute of Sri Lanka promoting best practices in equity research among analysts, are collaborative initiatives that the CSE advocated as a strategic partner, over the year.
Through support extended to initiatives such as the CA Sri Lanka Annual Report Awards, the CSE actively reiterates its commitment towards encouraging companies in embracing concepts such as Integrated Reporting aiding advancement in statutory disclosures, by promoting corporate transparency, and ultimately performance in relation to both financial and non-financial value creation.
Market Opening Ceremonies
Market opening ceremonies, which were introduced primarily as a platform to generate exposure for listed companies, expanded its scope to support other initiatives of domestic and global significance in 2016. Along with ceremonies celebrating new listings and S&PSL20 constituents’
milestones, the CSE joined the likes of the United Nations, the International Finance Corporation and other local business associations and industry groups to utilise Bell Ringing ceremonies as a call-to-action for key economic, capital market and social initiatives.
CFA Sri Lanka Research Challenge 2016
The Sri Lanka Investment Summit at the Four Seasons Hotel in Singapore
The CSE powers CA Sri Lanka’s 52nd Annual Report Awards as Strategic Partner
50
Operational Review
Other Branding Initiatives
In other branding initiatives, the Ambalantota branch of the CSE was officially opened in 2016. The branch improves the CSE’s geographical footprint and offers accessibility in conducting educational and other retail investor focused initiatives in the Hambantota, Badulla and Monaragala districts. The existing branches located in Anuradhapura, Kurunegala and Jaffna were also rebranded in 2016. Initiatives driven through the CSE branch network play a significant role in facilitating the CSE’s investor education and awareness drive, with particular emphasis laid on retail investors.
In terms of reputation and perception management through Public Relations, the initiatives introduced in 2016 not only focused on the investor, but also acted as a platform for improved visibility for the CSE among listed companies, potential issuers, media personnel and other private and public enterprises. Media workshops conducted to foster knowledge of the capital market among media personnel
was a pivotal initiative launched during the year.
Stakeholder-focused Technological Advancements
Over the year we explored the use of technology based innovations to offer convenience and enhanced value to our stakeholders.
Website Upgrade
In one of many steps marking wide-ranging redefinition of its online offering, the CSE re-launched its website in the year 2016. The site now offers easier and more in-depth access to information through a range of new upgrades and features. The enhanced content and physical appearance of the contemporary design together with user friendly navigation is informative and congruent with the business lines of the CSE.
CSE Education Portal - www.cse.edu.lk
Catering to a growing interest amongst the public in improving skills and knowledge related to the capital
market, the CSE officially launched its online Educational Portal in 2016. The trilingual portal adds a new dimension to the CSE’s investor education initiatives, offering online information dissemination, training and analysis at the click of a button.
The CSE launched its YouTube channel in yet another first-
of-its-kind initiative in the Sri Lankan capital market. The education portal and the newly launched CSE YouTube channel, broadcasted live, a number of investor education and awareness events conducted across the country. The initiative significantly improved virtual accessibility to such educational and awareness programmes, acting as a medium to enhance outreach to a broader segment of investors and potential market participants.
Mobile Trading
Increased smartphone usage and the emergence of the device as an e-commerce tool encouraged the Exchange to promote the concept of mobile trading as means of conveniently trading stocks. A marketing campaign promoting mobile trading attracted over 2,000 new application subscriptions over a three month period. A range of training programmes on mobile trading continues to be conducted around the country and attracts keen interest among both current and prospective investors.
Social Media
The CSE Mobile Application and other social media platforms continued to play a significant role in disseminating a constant, interactive stream of real-time data, news, and social commentary on the capital market. Mobile application downloads grew by 32% to over 23,000 during the year, complemented by an average 35% growth of followership across social media platforms.
HNB PLC opens trading at CSE for the month of January 2016
Colombo Stock Exchange | Annual Report 2016 51
Issuer Engagement
Complementing our primary market development activities, we offer a dynamic platform for issuers by facilitating listing and engaging potential issuers through a range of events and one-on-one meetings.
In an inaugural event in the Sri Lankan capital market, the CSE in partnership with the Ministry of Public Enterprise Development hosted a forum exclusive to representatives of State Owned Enterprises (SOEs) on the theme ‘Reorientation of Public Enterprises: The Way Forward’. The keynote address made by Tanri Abeng PhD, Indonesia’s first Minister for State-Owned Enterprises and an individual renowned for successfully driving the effort to reform SOEs in Indonesia was impactful in building perspective. The forum successfully presented the relevance of the capital market in driving growth and efficiencies in SOEs.
The inaugural capital market quiz ‘CSE Masterminds 2016’ was organised with the objective of enhancing knowledge of the capital market among employees of listed companies. The competition attracted the participation of listed companies across industry and sector groups represented on the Exchange.
CSE Mobile Trading Campaign 2016
CSE Masterminds 2016 Winners
52
Operational Review
Post-Trade
Suppressed market activity resulted in equity trades settled in 2016 decreasing by 29.8% to 1,058,070 trades. The number of accounts opened totalled 14,724 recording a 46.7% decrease compared to the previous year. Deposits showed a 3.3% decrease whilst transfers reflected a 6.5% decrease in volumes.
The value of equity trades settled in 2016 was Rs.177.0 Bn and settled debt trade value amounted to Rs.1.8 Bn. The total market value of shares held amounted to approximately Rs.2.8 Tn, with a 3.0% decrease against the previous year. The share of dematerialised equity and debt securities held in custody of the CDS stood at 95.2% and 99.6%, respectively.
2016 2015 2014
Operational Highlights
New accounts 14,724 27,618 27,656
Deposits 94,257 97,464 54,872
Withdrawals 16 22 21
Transfers 26,759 28,605 31,486
Trades 1,058,070 1,507,555 1,983,649
Listed companies 295 294 294
Participants 51 52 50
Value of Securities held by the CDS as at 31 December (Rs. Mn)
Total market value of securities 2,845,809 2,934,901 2,988,693
Quantity of shares held by the CDS as at 31 December (No. Mn)
Domestic investors 63,685 60,408 58,055
Foreign investors 21,256 20,474 20,274
Total quantity of shares 84,941 80,883 78,329
Percentage of equity shares held in dematerialized form 95.2% 95.0% 94.0%
Percentage of debt shares held in dematerialized form 99.6% 99.0% 95.0%
Operational Enhancement and Streamlined Services
Celebrating a corporate milestone of 25 years on 2 September 2016, the CDS heralds a new phase of innovation based review of our revenue and operational strategy. The CDS has in its growth trajectory which surpassed the initial objectives of streamlining the settlement, transactions and safekeeping of securities on behalf of domestic and international investors. We have effectively
enhanced our strategic achievements by strengthening depository infrastructure, implementing a world class system which provides a safe clearing and settlement environment, and executing the selective diversification of value-added business ventures.
Corporate Action Services
The CDS continued providing corporate action services to listed companies through the year 2016. Sub-divisions, adjustments for warrants and script dividends were among the corporate actions handled adding to the CDS revenue base. Going forward, we intend to optimise our revenue earning capability via this value added service.
Re-Introduction of Custodian Fees
With a view to enhancing the revenue base, steps were taken to re-introduce a custodian fee of Rs.25 per transaction in respect of all custodian transactions with effect from 1 August 2016. The custodian fee which was in effect from the inception of the CDS was abolished in 2012 due to concerns raised by the custodian investors and banks revolving around the minimum lot size. The re-introduction comes subsequent to addressing the issue by imposing a minimum quantity of 100 shares per transaction on which the custodian fee is charged.
Celebrating a corporate milestone of 25 years on 2 September 2016, the CDS heralds a new phase of innovation based review of our revenue and operational strategy.
Colombo Stock Exchange | Annual Report 2016 53
Memorandum of Understanding with the Central Depository Company of Pakistan Limited
A Memorandum of Understanding (MoU) was signed with the Central Depository Company of Pakistan Limited, with the intention of exploring areas for cooperation and establishing operational linkages. Channels of communication were established for knowledge and information sharing and to introduce new business process initiatives and innovative products, while fostering closer working relationships between the two depositories.
Sending Account Opening Confirmation through E-mail
Our upgraded technology increased the opportunities for customers to benefit from enhanced functionality, improved service, resilience and efficacy. The initiative of same-day-confirmation of account opening, was aimed at augmented investor awareness, involvement, and efficiency through a green initiative in line with the sustainability concerns of our institution. The confirmation that is simultaneously forwarded to the stock brokers/custodian banks was revised to include comparatively more information including dividend disposal instructions, subscribed email address, the registered mobile number, CDS value added services and important instructions relevant for the maintenance of the CDS account.
Launch of e-Connect Facility
CDS e-Connect, a secure electronic business portal was introduced in 2016 as an enhanced online service offering to account holders. The CDS, through the introduction of the e-Connect
facility, now joins depositories from around the world in offering electronic services to account holders. With e-Connect, CDS account holders have the ability to access resources including transaction details, portfolio reports and past monthly statements in real time, at the click of a button. For institutions such as margin providers the ability to manage multiple user accounts through a single user ID is another key feature offered.
18th Cross Training Seminar of the Asia-Pacific Central Securities Depository Group
As an active member of the Technical Task Force of the Asia-Pacific Central Securities Depository Group (ACG), the CDS contributed through a presentation on facilitating digital channels to service clients, at the 18th Cross Training Seminar of the ACG. E-Services currently offered and planned to be offered by the CDS in the near future were focus areas at the seminar. CDS e-Statements, SMS alert facility, Digital Settlement Schedules (DS3), e-Connect, e-Voting and the digital account opening facility were discussed with delegates from various depositories participating in the programme.
Progress in Operations and Services
Custody Agent Service
In developed capital markets, the administration and management of securities records is carried out by Central Securities Depositories. The CDS anticipates to embrace this avenue as a new business initiative - through the provision of registry services for companies. As a means of additional fee based income, the revenue base of the CDS would be enhanced through
this venture, while streamlining registrar’s functions provided for listed companies.
Decentralisation
The proposed decentralisation of depository functions including account openings, dematerialisation of securities and the intra-transfer of securities was approved by the Board of Directors of the CDS during the year 2016. Modalities and processes in this regard, are currently being finalised under the SEC’s guidance. Decentralisation will enable participants to provide a more swift and convenient service to investors. With this initiative, the CDS will elevate to the ranks of regional counterparts that focus on monitoring and compliance/audit as key, in contrast to direct involvement in the administrative function of account opening.
54
Operational Review
Information Technology
Information technology plays a vital role in providing greater control and efficiency to drive innovation in our operational and strategic functions and to sustain a secure, stable platform. As a market infrastructure provider, technological responsiveness and readiness are material concerns, optimising of which have far reaching positive consequences on our service offering.
Systems
The Automated Trading System (ATS) and the Central Depository System (CDS) recorded an uptime of near 100% during trading hours during the review period. We experienced an extraneous circumstance on 16 March 2016, as a result of an islandwide power outage affecting all back up emergency power we avail of at our premises at the World Trade Center. Trading halted on the day for a period of 17 minutes, as the CSE’s Business Continuity Plan was activated while switching to the Disaster Recovery site. There were no significant critical incidents reported in the ATS System.
Stakeholder Services
During the year, the CSE launched many systems to enhance its services to the stakeholders. Upon laying the technological foundation to implement a new CDS e-portal in 2015, the CDS launched the web portal CDS e-Connect (www.cdseconnect.lk) in 2016. Launched as a green initiative improving connectivity, response time and cost efficiency in information sharing, the e-portal offers an array of services to CDS account holders. CDS e-Connect would act as the
platform of the future through which CDS account holders can access many planned services via a single interface. We also enhanced the CDS to facilitate the implementation of the new price multiple calculation methodology.
During the review period, the CSE facilitated its Member readiness activities including the industry-wide rollout of new integrated Broker Back Office (BBO) and Order Management systems (OMS).This is a ground breaking development in Member Firm IT Infrastructure, the first in 30 years. This empowerment to brokers will result in their ability to differentiate their service offerings via customised front-ends, much improved risk management and better internal controls through the use of robust back officer ledger systems. The SEC and CSE joint project monitoring committee effected project monitoring and RFP compliance audits of the OMS and BBO systems to ensure compliance. We have since discontinued the native ATS Trader Front End, with the exception of the manager terminals at stockbroker-end.
The implementation of the BBO and OMS market-wide is funded jointly by the CSE and the SEC.
The adoption of the universal BBO and customised OMS by stockbrokers, enables future integration as the post-trade risk mitigation initiatives advance.
These include the implementation of Central Clearing requiring the streamlining of the trade through post-trade value chain at the broker end.
The CSE launched the online educational portal of CSE which would be base platform for all future educational content distribution.
Technology Based Productivity and Cost Savings
As a part of the Digital Transformation intended to streamline internal processes, work more efficiently and improve visibility across the entire organization, the CSE continued to build workflow based systems to replace internal paper based manual processes.
During the review period we upgraded our website interface and the underlying technology architecture. The new interface was designed to enhance user experience and to be mobile compatible in line with the envisaged Digital Transformation. The new underlying technology architecture would enable the CSE website to be more robust and responsive, whilst catering for future growth.
During the review period, the CSE facilitated its Member readiness activities including the industry-wide rollout of new integrated Broker Back Office and Order Management systems .This is a ground breaking development in Member Firm IT Infrastructure, the first in 30 years.
Colombo Stock Exchange | Annual Report 2016 55
The CSE also migrated its corporate website to cloud based technology platform materialising considerable cost savings for the organization.
With the advent of risk based supervision, broker reporting systems for CAR related information have been completed and made ready for implementation.
Preserving High Standards
We continued to improve processes and procedures in compliance with Information Security (ISO 27001), Business Continuity (ISO 22301) and IT Service Management Systems (ISO 20000). We successfully recertified in all ISO standards during the year.
We further challenged ourselves in our commitment towards continual improvement in Disaster Recovery. We successfully conducted a live Disaster Recovery simulation during the trading day for the first time in the history of the CSE, with no significant operational issues, the results of which have been independently validated by Ernst and Young.
Information and Cyber Security
Due to the increasing volume of global cyber-security threats and breaches, during the review period we continued to give priority for cyber-security preparedness.
Multiple rounds of vulnerability and threat- assessments were conducted for internal assets as well as publicly available services which guaranteed an un-interrupted service for all stakeholders. The CSE conducted multiple systems, technological and information security governance audits with leading audit and advisory firms to ensure Information and cyber security operations are on par with internationally accepted criteria.
56
Operational Review
Regulatory Environment and Monitoring Role
Ours is a highly regulated industry which experiences continual evolution and adherence to internationally acceptable benchmarks. Our role within the regulatory regime is a dynamic one, and regulatory responsiveness is a material concern that impacts corporate value. We continually evaluate and refine our regulations to be market relevant whilst aiming to adopt internationally accepted standards.
Rule Amendments
Over the year the following amendments were carried out to the respective rules of the CSE and the CDS.
§ Amendments to Listing Rules, CDS Rules and ATS Rules to facilitate secondary listing by foreign entities on the Multi-Currency Board
Amendments to Listing Rules, CDS Rules and ATS Rules required to facilitate secondary listing of securities of foreign entities on the Multi-Currency Board were approved by the Board of Directors of the CSE (CSE Board) on 28 October 2016.
§ Rules to facilitate an Alternate Market Segment and the SME Board
The amendments to the CSE Rules, required to facilitate the Alternate Market Segment and the SME Board, were approved by the CSE Board on 27 June 2016.
§ Rules to facilitate Capital Adequacy Requirements (CAR)
The Rules to facilitate the Capital Adequacy Requirements (CAR) were approved by the Board of Directors of the CSE on 8 February 2016.
The SEC, via a Directive dated 22 November 2016, approved the said Rules, subject to certain amendments set out therein. The amended CAR Rules were approved by the CSE Board on 22 December 2016.
§ Amendments to Section 10 (Enforcement) of the Listing Rules
Section 10 of the Listing Rules was amended with a view to strengthening the enforcement action taken by the CSE. The said amendments, upon obtaining the SEC’s concurrence, were presented for public consultation.
§ Rules pertaining to Section 10 (Client-Stockbroker Dispute Resolution) and Section 11 (Disciplinary Action against Stockbroker Firms)
Amendments to Sections 10 and 11 of the Stockbroker Rules were approved by the CSE Board on 8 February 2016.
§ Amendments to CDS Rules to facilitate the CDS e-Portal
The proposed Rule amendments were approved by the CSE Board on 27 June 2016.
Translation of Rules
The Stockbroker Rules of the CSE were translated into Sinhala and Tamil languages, in keeping with the Official Language Policy, and were uploaded to the CSE website.
Amendments to the CSE Articles of Association
Articles 47, 48, 51 and the definition of Appointed Director in the CSE Articles of Association were amended upon obtaining member approval on 27 May 2016.
Execution of Agreements /Deeds for the CSE/CDS
In total, over 90 Agreements/Deeds were prepared/reviewed and finalised for execution by the CSE and the CDS during the course of 2016.
Our role within the regulatory regime is a dynamic one, and regulatory responsiveness is a material concern that impacts corporate value. We continually evaluate and refine our regulations to be market relevant whilst aiming to adopt internationally accepted standards.
Colombo Stock Exchange | Annual Report 2016 57
The comparative breakdown of the total Agreements/Deeds executed, follows:
Intellectual Property and requisite Licensing/ Registration
Registration of Trademark
The trademark “CSE” was registered with the National Intellectual Property Office of Sri Lanka as Trademark No. 132907 in Class 36, in terms of the Intellectual Property Act No. 36 of 2003.
The registration of the aforesaid trade mark was gazetted in May 2016.
Renewal of Licenses/Registrations with the SEC
The annual registration granted to the CDS under the category of Clearing House was renewed for the period 2016/2017, within the stipulated timeframes, in accordance with the provisions of the Securities and Exchange Commission of Sri Lanka Act 36 of 1987 (as amended).
Our Monitoring Role
We strive to ensure fair, orderly markets through our monitoring role. Within
to the market and improved efficiency through paperless transactions.
We introduced a fee-based service to provide Bought/Sold Notes pertaining to transactions carried out by clients of Margin Providers and Investment Managers on the CSE directly to the Margin Providers/Investment Managers, at the end of the Trade Day. This facility would assist the Margin Providers and Investment Managers to monitor the transactions carried out by their respective investors through Stockbrokers and respond appropriately in a timely and efficient manner.
Alternate surveillance methods were implemented in 2016 to enhance our market surveillance activities. A total of 31 cases of suspected market malpractices were detected during the year. Of these, 13 cases comprised alleged insider dealing, eight pertained to front running while ten related to suspected market manipulation. All cases were referred to the SEC for further investigation. The main challenges facing market surveillance today are increased fragmentation and abusive trading practices.
Broker Supervision
We continued to closely supervise the activities of our Stockbroker Firms during the year under review. The supervision procedures adopted progressed towards the international benchmark through the assimilation of risk based supervision.
Capital Adequacy Requirements
The CSE developed the methodology for the calculation of the Capital Adequacy Requirement (CAR) and related Rules, taking a holistic approach
2016 2015
Adde
ndum
s
Cons
ultan
cy A
gree
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ts
Mor
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e Bon
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ents
Lette
rs of
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gem
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rs of
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rd
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ice A
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our Trading and Market Surveillance perspective, we engender investor confidence and protection through transparency and regularity of transactions in addition to ensuring the accuracy and comprehensiveness of information dissemination. Our monitoring rule also extends to Broker Supervision in creating a disciplined level playing field for all Stockbroker Firms.
Trading and Market Surveillance
In 2016, we re-engineered the corporate announcement dissemination procedure for all listed companies. As a step forward, the CSE anticipates introducing a web portal/panel to all Company Secretaries of listed companies where corporate disclosures would be submitted in keeping with a standard format. This will enhance the consistency and accuracy of corporate announcements and corporate actions published by all listed companies. This mechanism would help reduce the time taken to disseminate price sensitive information
58
Operational Review
to the varied risks that Stockbroker Firms are exposed to. The following regulatory principles and benchmarks were taken into consideration in developing the said methodology and Rules:
§ Principle 30 of the International Organization of Securities Commissions (IOSCO) - Objectives and Principles of Securities Regulations (issued in June 2010) which identify the purpose of capital adequacy, which is, as a general guideline, that capital must be sufficient to protect a financial organization’s customers and counterparties from various risks including market risk, settlement/counterparty risk, credit risk, operational risk and liquidity risks.
§ The Report of the Emerging Markets Committee of the IOSCO, “Guidance to Emerging Market Regulators Regarding Capital Adequacy Requirements for Financial Intermediaries” published in December 2006, which identifies as one important element of capital adequacy, the practice of developing a risk profile for securities industry through considering market risk, credit risk, and liquidity risk inter-alia. These risks are to be accounted for while determining the capital adequacy requirement of a Stockbroker Firm, resulting in different minimum capital requirements for respective Stockbroker Firms based on the type of risks each is exposed to.
The Rules to facilitate CAR were issued on 22 November 2016 by the SEC by way of a Directive effective from 01 March 2017.
Through the said Directive, the SEC also imposed a minimum Liquid Capital Requirement of Rs. 35.0 Mn, in addition to the maintenance of capital adequacy or the coverage offered by Liquid Capital of the Total Risk Requirement of respective Stockbroker Firms, at a ratio of 1.2 times, as recommended by the CSE, to be maintained on a daily basis.
The CSE discussed the CAR methodology with the Stockbroker Firms and also conducted several awareness sessions during the year regarding its computation and the methodology.
Further, one-on-one sessions were also conducted with the representatives of several Stockbroker Firms to discuss and provide advice on the practical issues faced in the implementation of the CAR.
In addition, we internally developed a reporting system to facilitate the reporting of the CAR online to the CSE on a daily basis. A trial run of the reporting system commenced in December 2016.
Risk Based Supervision
Principle 12 of the IOSCO Objectives and Principles of Securities Regulations, issued in June 2010, identifies the purpose of having a regulatory system to ensure an effective and credible use of inspection and enforcement powers and implementation of an effective compliance program. Under the said principle it is also identified the importance of assessing the risk associated with market intermediaries.
Accordingly, a framework was developed to carry out both onsite and offsite supervision activities with a pivotal focus on risk identification, assessment, and analysis. This Risk Framework was developed to complement to the on-going monitoring and supervision on Rule compliance by Stockbroker Firms.
In relation to the Risk Framework the following were carried out:
Off-site Supervision
In June 2016 an independent risk assessment was carried out taking into consideration the financial performance of all Stockbroker Firms during the preceding 12 months leading to 31 March 2016.
The said analysis was presented to the Risk and Audit Committee of the CSE with specific recommendations on policy and reform, to overcome or mitigate risks. Special focus was made on the following aspects:
§ Financial performance of the Stockbroker Firms
§ Different risks the Stockbroker Firm may exposed to
We continued to closely supervise the activities of our Stockbroker Firms during the year under review. The supervision procedures adopted progressed towards the international benchmark through the assimilation of risk based supervision.
Colombo Stock Exchange | Annual Report 2016 59
§ Actions taken by the Broker Supervision Division in order to mitigate the risks
§ Futuristic approach in relation to risk mitigation
§ Direction of the Risk and Audit Committee in relation to future enforcements
Based on the decisions taken by the Risk and Audit Committee regarding the recommendations and the futuristic approach presented, amendments to the CSE’s Stockbroker Rules, enforcement actions and policies and procedures are in the process of being effected.
On-site Supervision - Risk based Audit Programme
In order to identify the significant risks that the Stockbroker Firms are exposed to an audit programme covering the following aspects was developed:
1. Financial and Liquidity Risk
2. Credit Risk/Default Risk
3. Operational Risk
4. Information Technology Risk
5. Other Risks
Broker Related Initiatives
§ Internet Trading Rules
During the year, the SEC has suggested selective amendments to the proposed Internet Trading Rules formulated by the CSE. The CSE is in the process of commenting on such amendments and obtaining the approval of the SEC for the same.
§ Introduction of Corporate Governance Rules for Stockbroker Firms
New rules in connection with Corporate Governance practices for Stockbroker Firms were developed and same was approved by the Board of Directors of the CSE. The SEC has suggested selective amendments to the proposed Rules.
§ Implementation of a Standardised Client Agreement Form for Stockbroker Firms
A standardised client agreement has been developed which would act as a benchmark to guide client agreement formulation by Stockbroker Firms.
Systems Reviews
We carried out 13 on-site inspections and four off-site inspections of Stockbroker Firms during year 2016.
Enforcement Actions
Details of enforcement actions carried out in relation to key violations of the CSE Stockbroker Rules during 2016 are as follows:
§ Minimum Net Capital Requirement
Four Stockbroker Firms failed to meet the minimum Net Capital Requirement during certain months in the year 2016. Three of the said
Stockbroker Firms subsequently complied with the requirement.
With regard to the remaining Broker Firm, the CSE took steps to prohibit purchase of securities by the said Stockbroker Firm from 12 April 2016 since the Firm did not comply with the requirement. By way of a Directive issued on 6 May 2016, the SEC directed the said Stockbroker Firm ‘to refrain from carrying out purchases and sales on behalf of clients’ and accordingly, the CSE suspended the aforesaid Stockbroker Firm from trading on the ATS, with effect from 9 May 2016.
Subsequently, by way of a letter dated 1 June 2016, the SEC did not renew the license granted to the said Stockbroker Firm to operate as a Stockbroker. The SEC further informed that, upon such lapse and the expiration of the license, the said Stockbroker Firm ceased to be entitled to function in the capacity of a Stockbroker. As a consequence, in terms of the Article 11 of the Articles of Association of the CSE, the said Stockbroker Firm ceased to be a Member of the CSE.
§ Adequacy of Client Funds
Three Stockbroker Firms did not maintain adequate funds in their respective Client Bank Accounts to settle the creditor balances over T+3 during certain months in 2016.
A standardised client agreement has been developed which would act as a benchmark to guide client agreement formulation by Stockbroker Firms.
60
Operational Review
However, these Stockbroker Firms complied with the said requirement subsequently.
§ Violation of Single Client Limit
Three Stockbroker Firms violated the Single Client Limit (extension of credit over 15% of the total credit extendable to a single client) during certain months in 2016. The said Stockbroker Firms complied with the said requirement subsequently.
Shareholding Changes of Stockbroker Firms
The CSE approved capital structure changes of nine Stockbroker Firms, by way of transfer of shares and/or issue of new shares, during the year.
Appointment of Agents by Stockbroker Firms
Five Agents were appointed by four Stockbroker Firms. Five agent agreements were terminated by four Stockbroker Firms during the year 2016.
Branch Offices of Stockbroker Firms
Two branch offices were opened by two Stockbroker Firms and 19 were closed by eight Stockbroker Firms during the period.
Periodic Referrals and Interactions with the CSE Board and Board Committees
Referrals are made to the CSE Board, respective Board Committees and the Non-Broker Directors of the CSE on an ongoing basis highlighting relevant matters including the performance of Stockbroker Firms and those pertaining to dispute resolution, inter-alia.
Referrals to Risk and Audit Committee
An independent risk assessment of Stockbroker Firms was carried out, taking into consideration their business practices and the financial performance. The said analysis was presented to the Risk and Audit Committee of the CSE during the month of June 2016. Based on the said risk assessment, the committee recommended certain amendments to the CSE Stockbroker Rules, enforcement actions and policy changes for risk mitigation.
Referrals made to the Non-Broker Directors of the CSE
In June 2016, the Risk and Audit Committee requested the Secretariat to carry out an extensive assessment of the financial stability of Stockbroker Firms which are experiencing an unfavourable financial performance. Accordingly, a detailed assessment was effected on the financial performance
of all 27 Stockbroker Firms leading to the identification of six Stockbroker Firms experiencing an unfavourable financial performance.
Subsequently, a Discussion Paper, containing an analysis of the said six Stockbroker Firms, was presented for discussion by the Risk and Audit Committee in July 2016 and subsequently, to the Non-Broker Directors and the Chairman.
Thereafter, it was decided to organise meetings with the Chairman/major shareholder and the Chief Executive Officer of the identified six Stockbroker Firms with the Non-Broker Directors and the relevant officials of the CSE, to discuss the financial performance of the respective Broker Firm. During the months of August and September 2016, meetings were held with the representatives of the six Stockbroker Firms and at each meeting corrective strategies that could be undertaken to overcome the unfavorable financial performance were discussed extensively.
The suggestions made by the Non-Broker Directors and the follow-up actions taken thereafter by the CSE enabled several Stockbroker Firms to take corrective actions to overcome the unfavorable financial situation.
Referrals to the CSE Board
Comprehensive periodic referrals were made to the CSE Board during the months of August and October 2016 regarding the six Stockbroker Firms found to be facing unfavorable financial performance.
An independent risk assessment of Stockbroker Firms was carried out, taking into consideration their business practices and the financial performance. The said analysis was presented to the Risk and Audit Committee of the CSE during the month of June 2016.
Colombo Stock Exchange | Annual Report 2016 61
Disciplinary Action
Pursuant to a referral made by the CSE for contravening certain Rules of the Member Regulations and the Stockbroker Rules of the CSE, the Arbitration and Disciplinary Committee instituted disciplinary action against three Stockbroker Firms of the CSE, during the year 2016.
Client-Stockbroker Dispute Resolution
Resolution of Disputes by the CSE Secretariat
During the year, nine complaints were received from investors against Stockbroker Firms, in terms of Rule 10.2 of the Stockbroker Rules.
The status of the said complaints is summarised below:
Status No. of Complaints
Decisions issued 02Decisions pending 02
Settled between the parties
04
Complaints withdrawn 01
The number and status of the appeals referred to and adjudicated by the Dispute Resolution Committee during the course of 2016 are summarised below:
Total number of appeals received
06
Decisions issued 06
Decisions pending -
62
Operational Review
Enterprise Risk Management
In view of adapting to the changing business environment and ascertaining existing and emergent risk, Enterprise Risk Management (ERM) has emerged as a vital dimension of organizational resilience and sustainability.
The CSE’s robust ERM process is founded on a policy and framework that is reviewed on a continuous basis to prioritise and allocate resources against those risks that underpin the continued sustainability of the organization.
The Risk Governance Framework (ERM Framework) clearly sets out the guiding principles for the CSE’s
The Risk Governance Framework (ERM Framework) clearly sets out the guiding principles for the CSE’s management of risk on an ERM basis.
management of risk on an ERM basis. The Framework comprises the totality of all structures as identifying the roles and responsibilities of the Board and Executive Level Committees, policies, strategies and procedures within the CSE that deal with risk management at a strategic or ERM level.
Risk Governance
The CSE Board of Directors is responsible for reviewing and approving the overall risk management strategy and policy .The sound risk management process at the Exchange
emphasizes the integrity of the system and its alignment to the organization’s strategy.
The Board has delegated the detailed oversight and monitoring to the Risk and Audit Committee (RAC) comprising selected members from the CSE Board. The RAC and an Executive Level Committee of CSE monitors the effectiveness of risk management activities across the CSE to ensure that these activities continue to support our corporate philosophy and strategic goals.
Risk Governance Committees
Board Level
Risk and Audit Committee Dispute Resolution Committee
Executive Level
IT Steering Committee Investment Committee
Procurement Committee Management Committee
Colombo Stock Exchange | Annual Report 2016 63
Three Lines of Defence
The ERM Framework at CSE which defines the responsibilities and accountabilities for the holistic management of risk is based on the Three Lines of Defence model.
Risk and Audit Committee (RAC)
Chief Executive Officer (CEO)
Management Committee (MC)
Risk Coordinators
Enterprise Risk Management (ERM)
Internal Audit Function
Market Development
Division
Broker Supervision
Division
CDS HR Division
IT Division
Finance & Administration
Division
Legal Division
Research & New
Products Division
Strategy Division
Trading & Market
Surveillance Division
Listings & Corporate
Affairs Division
Firs
t lin
e of
De
fenc
eSe
cond
line
of
Defe
nce
Third
line
of
Defe
nce
First Line of Defence Second Line of Defence Third Line of Defence
Daily Risk Management Risk Management Function Independent Assurance
The First Line of Defence is mainly focused on evaluating divisional business processes, possibilities of failures in the processes and the impact to the organization due to such failures. This would be carried out by the Divisional Risk Coordinator. The Risk Coordinator for each Division is identified and appointed by the respective Divisional Head. Risk Coordinators along with the respective Divisional Heads identify and escalate key risks in their division to Risk Management Function (RMF).
The Second Line of Defence comprises the Management Committee (MC) of the CSE together with the Risk Management Function (RMF). The primary role of the MC and RMF is to provide the framework and guidance in which each division can operate, identify and report on enterprise wide risks. RMF will consolidate CSE risks across divisions, and the business processes with high severity (Probability * Impact) to the organization are escalated to the CSE Board. The RMF will provide support and guidance to the divisions with respect to risk management activities to ensure consistency in dealing with risks.
The Third Line of Defence is the Board of CSE via the Risk and Audit Committee (RAC), supported by the Risk Management Function (RMF) of CSE, which, as part of their activities, is responsible for ensuring that CSE’s risk management process is appropriate and functioning as designed.
Three types of risk management activities are carried out at each defence level to achieve the strategic objectives of the CSE:
64
Operational Review
Risk Management Process
The risk management process at the CSE is a cyclical process that commences with risk identification followed by risk assessment, risk treatment/mitigation, monitoring and reporting to the CSE Board.
Risk is identified by evaluating the impact and the probability of failure of business processes in each division and tabulated in the risk register of the respective division. Divisional Heads along with the Risk Coordinators will identify the risk at a divisional level.
Key divisional risks will be escalated to the organizational level and maintained in the organizational risk register which will be submitted to the CSE Board with recommended mitigating strategies. Risks that have been identified are broadly categorized under one of the following categories for risk management plans that are appropriate to mitigate the risks.
Risk assessment is carried out based on the combination of the probability of an event (likelihood) and the impact of its failure. The impact and likelihood is measured on a scale of 1 to 5. The risk severity is derived by the multiplication
of impact and likelihood where a high score has a greater severity and is required to be addressed immediately depending on the impact to the organization.
The Exchange and the Management Committee has identified Competition Risk, Cyber Security Risk and Changes to Regulation as the emerging risk to the Exchange during the 2015 annual risk review.
At the CSE, risk reviews are conducted every quarter by assessing threats and opportunities impacting overall business objectives. These risks, considering the threats and opportunities, are then subject to scrutiny by the Management Committee during meetings held with each Division, and are escalated to the organizational level depending on Risk Severity. The organizational Risk Register comprising recommended mitigating strategies would be reported to the RAC for review on a quarterly basis. Subsequent to the approval of the RAC these are submitted for the approval of the CSE Board.
Reporting
MonitoringRisk
Identification
Risk Response and Action
Risk Assessment
and Measurement
On-going re-evaluation
and update of ERM process and risks
At the CSE, risk reviews are conducted every quarter by assessing threats and opportunities impacting overall business objectives.
Strategic
Operational
Financial
Compliance
Risk Categories
Colombo Stock Exchange | Annual Report 2016 65
Overview of the CSE’s Risk Profile
Risk Category Risk Focused Description Risk Mitigation Strategies
Strategic Low Turnover Levels The CSE generates low turnover levels due to poor liquidity, traditional product offering , lack of large capital listings and limited free float
§ The New Product Development team formulated a blue print for derivatives and have identified potentiality of expanding the offering to varied structured products.
§ Business development activities are being carried out in a continuous effort to attract new listings from the private sector
§ Concerted efforts have been made to the Government in view of SOE listing
§ The foundation has been laid to create issuer choice to encourage foreign issuer, SME and alternate segment access to the market through new listings platforms
§ Continual maintaining of the free float requirement is requisite for listed issuers
Broker Failure There is a high probability of settlement failure by clients which could lead to broker failure due to available capital insufficient to meet such failure
§ Developed a methodology to implement risk based Capital Adequacy Requirement(CAR) to control the amount of risk undertaken by the Broker. As per a Directive by the SEC risk based CAR is to be made effective from March 2017 onwards
§ The implementation of OMS and BBO systems better enable risk management at stockbroker-end
Attract and Retain Right Talent
Loss of key employees would have a greater impact on the CSE as effecting the Exchange’s operations and strategy require specialised knowledge and competencies
§ Reward and recognition mechanisms were introduced to appreciate the contributions of the employees
§ Training opportunities are identified and provided to all staff members
§ Internal/Industry salary surveys are carried out and anomalies are to be corrected over a period of time
§ Employee concerns are discussed in common quorums/focus groups
§ Competency based training initiatives are underway
66
Operational Review
Risk Category Risk Focused Description Risk Mitigation Strategies
Mutual Exchange The Exchange is currently a Member owned organization with Members having equal voting rights in decision making
§ Groundwork on the Demutualisation process is complete and awaits the proposed Demutualisation Act’s enactment for the modality to be effected. Members have continually maintained relevant dialogue with the CSE in this regard
Low Investor Confidence
Investor confidence has been affected due to lack of enforcement activities in the market and market malpractices
§ Enhancement of surveillance and strengthening of the enforcement processes
Competition Risk CSE faces competition domestically (from other available alternative investment opportunities) and internationally. Competition can arise from other regional exchanges
§ The introduction of new products and new indices is underway
Financial Financial Loss Uncertain environmental conditions, both local and global, have directly impacted the revenue streams of the CSE in turn adversely affecting the organization’s financial position
§ Active treasury management to increase investment income
§ Process improvement
§ Increased the revenue through data sales
§ New revenue generation through CDS services and other value added/ fee based services
Counterparty Credit Risk (settlement failure)
Failure of one Broker could lead to failure in the settlement cycle thus causing a domino effect where other Brokers may also fail due to lack of available funds to meet settlement obligations
§ Establishment of a Central Counterparty (CCP) with post-trade risk mitigation measures including Delivery vs. Payment
Compliance Legal Risk Risk arising from failure to safeguard the interests of the CSE due to acts / omissions and non-compliance of rules and regulations laid by the SEC and other governing bodies
§ Participate in initial discussions and review legal aspects pertaining to new business implementations to ensure that the market continues to operate in an orderly and fair manner
§ Continuous upgrade of legal , product and industry knowledge
§ Active engagement with regulators and policy makers
Changes to Regulations
Regulations may change over time and may require CSE to comply with the new requirements.
Colombo Stock Exchange | Annual Report 2016 67
Risk Category Risk Focused Description Risk Mitigation Strategies
Operational Failure of Systems and Processes
System downtime and failure of processes will have an adverse effect to the entire capital market operations
§ A comprehensive Business Continuity Plan (BCP), including a Disaster Recovery Plan was tested successfully
§ Continual improvement of process and procedures to compliant with the ISO Standards (ISO 22301 Business Continuity Management System, ISO 20000 IT Service Management System)
§ Staff awareness was raised regarding policies and procedures through continuous awareness sessions
Cyber Security Risk Cyber security has been a major area of concern globally. In order to ensure that systems are secure, the CSE has invested and set in place adequate IT security tools and mechanisms to detect and protect against emergent and persistent cyber security threats
§ Continual improvement of information security and cyber security framework to complaint with ISO Standard (ISO 27001 Information Security Management System)
68
Operational Review
Business Continuity Management (BCM)
The CSE has implemented a comprehensive BCM System which is ISO22301:2012 compliant to ensure continuity of business and technology operations in the event of a disaster. The Business Continuity Plan (BCP) is tested annually by conducting a Disaster Recovery (DR) drill by activating the alternative (backup) site. A Live DR drill was conducted on 25 November 2016 from the alternative site with the inclusion of industry participants. The DR drill set a historical milestone, as the planned live-failover to the alternative site was conducted during trading hours. The exercise successfully recovered and resumed critical functions/systems to ensure smooth functioning of the business operations at the CSE from the alternative site. The Live DR drill was observed and audited by an Independent External Audit team to ensure compliance to ISO22301:2012 standards.
Risk Assessment of Outsourced Business Processes
We have now commenced the execution of initial and routine risk assessment of outsourced business processes. Comprehensive templates have been used to evaluate the risk of initial and routine outsourced Business Processes to ensure a reliable service is provided by the outsourced vendor. Recommendations are made at the end of each risk assessment to the respective division in order to improve the outsourced vendor’s business processes thereby meeting the CSE’s expectations.
Significant Highlight- Implementation of a Central Counterparty (CCP)
The proposed Implementation of a Central Counterparty (CCP) is a joint project with the auspices of the SEC, where BTA Consulting Limited from the United Kingdom was selected as the Consultant/Project Manager to the project. The project adopts a phased out approach with five phases. Execution of its five phases from business requirement and inception, procurement and vendor management, legal, regulatory and operational documentation, operationalisation of CCP and Go-Live followed by post implementation, are at varying stages of completion.
The first phase of the project comprising business requirement and inception, was completed in 2015 with the identification and finalisation of the business and technical requirements for the clearing and settlement model.
Under Phase 2 procurement and vendor management of the project commenced with an official Request for Information (RFI) being called by the CSE. After carefully evaluating the responses to the RFI for their technical aspects and the financial aspects, the CCP procurement committee shortlisted 6 vendors to be called
upon to submit proposals. Request for Proposals (RFP) for a CCP System was sent to these vendors, with responses anticipated by August 2016.
The first step of Phase 3, under regulatory and operational documentation, the incorporation of CSE Clear (Private) Limited, a fully owned subsidiary of the CSE was completed on 28 March 2016.
As the project anticipates technical and donor-financial assistance, project implementation was temporarily suspended in view of this arrangement led by the SEC. Formalisation of the funding arrangement is expected to catalyse recommencement of the implementation in early 2017.
Internal Audit
An in-house Internal Audit function was set-up on 1 December 2015. The Internal Audit Charter governing the Mission, Purpose, Responsibilities, Scope and Accountability of the Internal Audit was presented to the RAC for approval in January 2016. The Internal Audit adds value to the following areas:
§ Overall risk management process
§ Internal controls
§ Compliance with policies, procedures and regulations
We have now commenced the execution of initial and routine risk assessment of outsourced business processes. Comprehensive templates have been used to evaluate the risk of initial and routine outsourced Business Processes to ensure a reliable service is provided by the outsourced vendor.
Colombo Stock Exchange | Annual Report 2016 69
§ Process improvement and efficiency enhancement
§ Cost minimisation
§ Revenue maximisation and diversification opportunities
§ System Controls and related enhancement
§ Controls to mitigate Fraud Risks
Professionalism
The Internal Audit is self-managed through the adherence to the Institute of Internal Auditor’s Mandatory Guidance including the Definition of Internal Auditing, Code of Ethics and the International Standards for the Professional Practice of Internal Auditing.
Accountability
The Internal Audit reports functionally to Risk and Audit Committee of CSE and CDS. This includes:
§ Periodic reporting on the progress of implementing the Internal Audit Plan
§ Reporting of significant control weaknesses relating processes Non-Compliances to established Rules, Policies and Procedures
§ Providing annual assessments of the adequacy and effectiveness of the CSE’s and the CDS’s Risk Management, Governance and Internal Controls
Implemented Action Plan
In line with the core functions of the Internal Audit, an initial review of the operations and the associated Risks of each Division including Broker Supervision, Listing and Corporate Affairs, Trading and Market Surveillance, Central Depository System, Market Development and Finance and Administration inter-alia was carried out during December 2015 and a comprehensive Audit Plan highlighting the critical areas to Audit during the year 2016 was presented to the RAC during January 2016 for approval.
The most critical operations at the CSE and the CDS were reviewed end-to-end considering the processes and risks associated with the processes during 2016 financial year. Consequent to the in-depth review of the processes and related risks, corrective actions were recommended to mitigate the risks associated with each process, enhance efficiencies of each process, to ensure compliance to rules, policies and procedures and achieve cost minimisation. The Management of the CSE and the CDS are currently in the process of implementing the suggested improvements to control weaknesses as a response to enhancing the overall Risk Management process.
70
Operational Review
Human Resources
Sustainability in People Management
We believe that our workforce is the fundamental resource in our mission of successfully delivering consistent value to our stakeholders. In light of this, we strive to provide a supportive and empowering workplace for our people in order to groom a talented and committed workforce.
Our Approach
In aligning with the strategic trajectory of becoming a world class organization, people care is at the heart of our strategy. We believe that a high performing, people oriented culture is centric to maximising workforce contribution. It is our strong belief that our three-pronged strategy facilitates the CSE in transforming into a world class organization.
Our workforce diversity has helped to create an inclusive culture recognizing the strengths and talents of different individuals.
Our Three-Pronged Strategy
We aim to perform our services with excellence in the areas of talent acquisition, talent management and retention.
We constantly review our processes and make enhancements to improve the value yielded.
We strive to foster a culture that champions our organizational values,
constantly reinforcing and reminding
employees of what defines our culture
We act as a strategic advisor to the organization
and core functions by highlighting employee
concerns and developing a
coherent people strategy in support
of organizational goals
Optimizing
the HR
function
Fostering a
Value driven
Culture
Acting as
a Business
Partner
Building a Learning Culture
In our vision, it is vital that our employees are constantly informed of best work practices and we believe in facilitating an environment that helps them learn. A high emphasis is placed on enhancing the knowledge and skills of our employees through local, foreign and in-house training programmes. Apart from this, we have organized a knowledge sharing process on a monthly frequency where our employees learn from the experiences of our senior employees and other notable external resource people within the industry. Measures are currently being taken to organize foreign faculty brought down programmes within the company so as to positively impact learning and development.
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Structured Talent Development and Retention Process
Our talent development approach engages through four strategies; a competency framework, a training and development plan, succession planning and mentoring and coaching.
Our competency framework guides the talent development process by defining the set of competencies required to perform a job effectively. This helps us to link company objectives with personal performance. The training and development plan includes comprehensive training analytics that capture data in real-time and provides key metrics to the HR team on the training dashboard to measure the success of training. Succession planning contributes to our long-term goals which facilitate the talent development process ensuring that talent is ready to take over responsbilities for posterity. Mentoring and coaching is provided to those who require grooming for the future.
The skills and competencies of our leaders are enriched through annual leadership developmental programmes. Job rotations, lateral transfers and the assignment of temporary leadership roles facilitate “action-oriented learning” within the workplace.
Customizing and Enhancing the Performance Management System
We continuously engage in efforts to manage the Performance Management System in order to ensure the optimum fit of the process with the strategic objectives of the organization.
Considering the unique business model of the company, we take it as a challenge to constantly seek ways and means to arrive at a fair and transparent performance management system. Employee buy-in through educational sessions and employee feedback is constantly sought to improve the current Performance Management System process and iron-out any issues identified with the system.
Validating Best Practices in HR
Significant importance is placed on performing HR services efficiently in the areas of HR operations, policies and the strategic function. Value addition process improvements such as the development of an operations tracker and the use of real time training analytics helps in optimizing the administrative function of HR by creating transparent and faster processes necessary for long term sustainiability.
The CSE was recognized at The IPM National Conference 2016 with a Gold Category Award for HR Excellence. Also, the CSE received the award for “The Most Innovative Use of Training and Development” organized by the World Human Resources Development Congress in Mumbai.
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Operational Review
Developing and Engaging Talent
A Unique Induction Programme
Through our one-of-a-kind on-boarding process, new employees are guided through a learning programme spanning six months that helps them to become accustomed with the attitudes, knowledge, skills and behaviours required to function effectively and efficiently within the organization. Our unique welcome initiatives ensure that our employees are adjusted to the social and performance aspects of the new job role.
Harnessing Talent
Through our structured training and development plan, we have worked to establish a learning culture that stimulates innovation and best work practices.
Despite resource limitations during a challenging year for the market, we recorded a total of 38 hours of training (4.78 man days of training) in average per employee ensuring that a consistent amount of training is delivered to the staff.
Highlights
Attracting Talent
In view of the highly-specialized role in capital markets, we rely on leveraging the skills and experience of our employees whilst also ensuring that external talent is attracted to bring in the necessary skills and capabilities required for long-term sustainability.
Through our internship programmes, talented personnel have been absorbed to the organization, diversifying the employee cadre with a multitude of competencies. We currently employ a workforce of 154 employees.
Workforce Dynamics
Our workforce diversity has helped to create an inclusive culture recognizing the strengths and talents of different individuals.
Colombo
Matara
Ratnapura
Kurunegala
Anuradhapura
KandyNegombo
Ambalangoda
Jaffna
Dispersion of Employees by Geographic Region
Diversity of Employees by Gender (%)
Male
Females
4159
55-60
50-54 45-49
40-44
35-39
30-3425-29
20-24
Diversity of Employees by Age
34810
311
3830
19
Primary
Secondary (A/L)Diploma
Degree/Degree equivalent
Masters
Dispersion of Employees based on Qualification (%)
107 13
54
16
Gamified
learning
experience
Unique learning
exposure
Rapid
knowledge
transfer
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2016
Total No. of Training hours provided for female employees 2348.9
Total No. of female employees 64
Average training hours per female employee 36.7
Total No. of Training hours provided for male employees 3380.5
Total No. of male employees 90
Average training hours per male employee 37.6
Percentage of employees receiving regular performance appraising and career development reviews by gender - 2016
2016
% of Female Employees 41.0
% of Male Employees 59.0
Employee Engagement
We strive to actively engage our employees in an intense work environment aiming to deliver a positive employee experience.
201620152014
Average Training Man Hours/ Days Per Employee 2014 - 2016
3 5.1 4.78
24
40.838
Training Man Days Training Man Hours
As a responsible employer, we endeavour to work in collaboration with all stakeholders of the company in transforming the CSE into a world class organization comprising of a knowledge based workforce.
Welfare Events
Employee
Benefits
Rewards &
Recognition
Our Approach
74
Operational Review
Our rewards and recognition scheme captures a “total rewards” approach that ensures progressive employee performance. The structured benefits package assures the best interests of our staff. Quarterly organized welfare events promote a sense of work-life balance at the CSE.
Annual Sports Day
CSE Staff Get-together
“Battle of the Brains” Quiz Competition
CSE Staff Get-together
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Return to Work and Retention Rates after Parental Leave
2016 2015
Return to Work and Retention Rates after Parental LeaveNumber of employees entitled for maternity leave 39 43
Number of employees who took maternity leave 4 5
Number of employees who returned to work after maternity leave 2* 3
Number of employees who returned to work after maternity leave and stayed for 12 months 2* 3
Number of employees due to return to work after taking parental leave 2* 2
Return to work rate 100% 150%
Retention rate 67% 150%
*One employee (not included in this count) had taken leave in 2016 and is due to return to work in 2017As a general policy, parental leave is granted as maternity leave, applicable only for females
Internal staff communications
Staff communications remains a vital element in ensuring that the workforce is up to date with the current events relating to the business. Mediums such as the quarterly issue of the company newsletter and the intranet platform serve as useful mediums in facilitating the communication process efficiently. In addition, staff meetings with the CEO ensures that the staff is briefed on the progress of the company every quarter.
Process Efficiency
Apart from the initiatives to automate routine processes, measures are currently being undertaken to obtain an ISO 9001:2015 quality certification for the HR division. This ensures that the current HR practices are carried forward and the processes and policies are optimized and improved continuously to achieve HR excellence.
As a responsible employer, we endeavour to work in collaboration with all stakeholders of the company in transforming the CSE into a world class organization comprising of a knowledge based workforce.
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Corporate Governance Framework of the CSE
The policy making body of the CSE is the Board of Directors. The Chief Executive Officer is responsible for the operations of the CSE. The Board recognizes the importance of sound corporate governance practices to ensure sustainable value creation. The following Governance model has been established by the CSE to discharge the responsibilities of the Board effectively.
Colombo Stock Exchange (CSE)
Central Depository Systems (Private) Limited
Board of Directors of CSE
Chief Executive Officer
Management Governance Framework
§ Management Committee
§ Information Technology Steering Committee
§ Investment Committee
§ Information Technology Procurement Committee
External Auditors
Governance Committees
§ Risk and Audit Committee
§ HR Committee
Other Committees
§ Market Development Committee
Regulatory Committees
§ Consultative Committee of Market Stakeholders
§ Rules Committee
§ Arbitration and Disciplinary Committee
§ Dispute Resolution Committee
§ Member Evaluation Committee
Internal Auditors
Colombo Stock Exchange | Annual Report 2016 77
The Board
The CSE’s Board of Directors composed of nine members. Five Directors are elected by the fifteen Members, while the Government on the recommendation of the Securities and Exchange Commission of Sri Lanka appoints four. The Board of Directors represents the fields of Accounting, Banking, Investment Banking, Law, Management, Economics, Engineering, Marketing and Public & Business Administration. In terms of Article 50 of the Articles of Association of the CSE require each Director to retire by rotation once in every three years and they are required to stand for re-election by the members at the Annual General Meeting. The profiles of the Board of Directors are given on pages 40 to 42.
Board Meetings
The Board meets at monthly intervals, while special Board meetings are convened as the need arises. A secure electronic Board paper storage and distribution system is used to circulate meeting agendas and Board papers prior to Board and Sub-Committee meetings. Details of Board Meetings, Sub Committee Meetings and attendance is given below.
Name of the DirectorsBoard
meetingRules
committeeHR
Committee
Risk & Audit
Committee AGM
Dispute Resolution Committee
Arbitration & Disciplinary Committee
Meeting with SEC
Meeting with
Investors &
Members
Market Development
Committee me
Other meeting
Mr. C.V.Kulatilaka 16/16 2/2 1/1 - 1/1 31/34 17/17 2/4 4/4 3/3 7/7
Mr. M.R.Prelis 12/16 2/2 1/1 12/13 1/1 - - 4/4 1/3 - -
Mr. Ray Abeywardene 16/16 2/2 1/1 8/13 1/1 - - 3/3 2/3 3/3 -
Mr. Asanga Seneviratne 8/16 1/2 1/1 - 1/1 - - 2/2 0/3 - 3/5
Mr. Aravinda Perera 11/16 - 1/1 7/13 1/1 - - 2/2 1/3 2/3 2/2
Mr. Dakshitha Thalgodapitiya 16/16 - 1/1 13/13 1/1 34/35 17/17 4/4 15/15 3/3 6/7
Ms. Jeeva Niriella 15/16 2/2 1/1 13/13 0/1 35/35 17/17 2/2 14/15 - -
Mr. Anton Godfrey 11/16 - 1/1 - 1/1 33/35 15/17 2/2 7/12 3/3 4/4
Mr. A. Shanil Fernando 5/5 - - - - - - - 3/3 2/2 -
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Corporate Governance Framework of the CSE
Board Sub-Committees
The Board has appointed Sub Committees to assist in the discharge of their collective duties and the delegation of authority to provide effective operation of the CSE. The minutes of the Board Sub Committee meetings have been tabled at Board meetings. The details of Board Committees are given below.
1. Rules Committee
The Rules Committee of the CSE ensures that the Rules of the CSE achieve the purpose of maintaining a market in which securities are issued and traded in an organized and fair manner. The Committee approves or amends proposed amendments to Rules pertaining to listed companies and broker firms. All decisions of the Committee will be submitted to the Board of Directors for approval, modification or rejection as per the Terms of Reference and the Articles of Association of the CSE.
Two meetings were held during the year.
The members of the Committee are:
Mr. C.V. Kulatilaka (Chairman)
Mr. M.R. Prelis
Ms. J. Niriella
Mr. R. Abeywardena
Mr. S. Fernando
2. Risk and Audit Committee
The primary function of the Risk and Audit Committee is to ensure the establishment of an appropriate risk management framework within the CSE, to monitor the
integrity of financial statements and review internal controls and work of internal and external audit functions. The Committee should comprise of at least two appointed directors and two elected directors, one of whom shall have recent and relevant financial experience. This Committee is also empowered to review the financial statements of the CDS.
Thirteen meetings were held during the year.
The members of the Committee are:
Mr. D. Thalgodapitiya (Chairman)
Mr. M.R. Prelis
Ms. J. Niriella
Mr. R. Abeywardena
Mr. A. Perera
3. Arbitration and Disciplinary Committee
The Arbitration and Disciplinary Committee reviews any disputes or disciplinary matters arising between the Members of the CSE as well as disputes arising between investors and Members. Further, matters pertaining to breach of CSE and/or Central Depository Systems (CDS) Rules or provisions of the Securities and Exchange Commission Act by Members will also be referred to the Committee for review. The Committee consists of four Directors of CSE, one of whom shall be an elected Director and the other three shall be appointed Directors. Members of the Committee shall notify the Board of Directors before the hearing of any possible conflict of
interest and abstain from hearing a charge in which they may have a conflict of interest. The Committee may establish its own procedures except where it is expressly provided in the Stockbroker Rules and/or the Articles of Association of the CSE.
Seventeen meetings were held during the year.
The members of the Committee are:
Ms. J. Niriella (Chairperson)
Mr. D. Thalgodapitiya
Mr. A. Godfrey
Mr. C. V. Kulatilaka
4. Dispute Resolution Committee
The Dispute Resolution Committee of the CSE adjudicates upon the decisions of the Secretariat on disputes arising between investors and Members. The Committee may grant a hearing to the Member and/or the complainant if required. The decisions of the Committee shall be referred to the Board of Directors for ratification and the decision of the Board will be conveyed to the relevant parties in dispute. The Committee consists of one elected Director and three appointed Directors.
Thirty Five meetings were held during the year.
The members of the Committee are:
Ms. J. Niriella (Chairperson)
Mr. D. Thalgodapitiya
Mr. A. Godfrey
Mr. C. V. Kulatilaka
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5. HR Committee
The HR Committee is entrusted with evaluating, assessing, deciding and recommending to the Board of Directors on any matter that may affect the Human Resource Management of the CSE.
The Committee reviews and recommends the compensation and benefits of the CSE staff and lays down policies and parameters for compensation structures, makes recommendations to the Board of Directors of the additional/new expertise required by the CSE and promotions for the Heads of Divisions, approves annual increments and bonuses and establishes a succession plan in respect of the office of the CEO and key management personnel of the CSE. Recommendations of the Committee are submitted to the Board of Directors for approval, modification or rejection.
One meeting were held during the year.
The members of the Committee are:
Mr. C.V. Kulatilaka (Chairman)
Mr. M.R. Prelis
Mr. A. Perera
Mr. A. Godfrey
6. Consultative Committee of Market Stakeholders
The Consultative Committee of Market Stakeholders was set up to provide recommendations and responses to the Board of Directors or the Rules Committee of the CSE on market development and rules
relating to CSE operations and to the Board of Directors of the CDS on new rules and amendments to rules of the CDS. The Committee comprises of sixteen members representing all stakeholders of the CSE selected by the Board of the CSE. The Committee is chaired by the Chairman of the CSE.
No meetings were held during the year.
7. Member Evaluation Committee
The Member Evaluation Committee is responsible for evaluating and reviewing applications submitted by Broker Firms for a significant change in shareholding. The Committee’s role would be to ensure compliance with the guidelines and procedure set up by the CSE Board, granting approval for a significant change in shareholding of a Broker Firm and make suitable recommendations to the CSE Board.
Two meetings were held during the year.
The members of the Committee are:
Mr. C.V. Kulatilaka (Chairman)
Mr. D. Thalgodapitiya
Mr. A. Godfrey
8. Market Development Committee
The above Committee was set up in March 2015 to give policy direction to the market promotional strategies of the CSE with a view to developing and broad basing the stock market. The Committee is also mandated to give policy direction
aimed at developing the debt and equity IPO markets.
Three meeting were held during the year.
The members of the Committee are:
Mr. A. Godfrey - Chairman
Mr. C. V. Kulatilaka
Mr. R. Abeywardena
Mr. D. Thalgodapitiya
Mr. A. Perera
Mr. S. Fernando
An overview of the CSE Corporate Governance framework
The CSE Corporate Governance Framework is based on the Code of Best Practice on Corporate Governance issued jointly by the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) and the Securities and Exchange Commission of Sri Lanka (SEC). There are some limitations in adopting certain areas of the code and the CSE is in the process of addressing said non-compliance at present.
The CSE’s adherence with the Code is detailed below with explanatory comments as follows:
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Corporate Governance Framework of the CSE
Corporate Governance Principles
Adoption Status
Compliance and Implementation SEC & CA Sri Lanka
Code Reference
Board of Directors
Effective Board Adopted The CSE’s Board of Directors composed of nine members. Five Directors are elected by the fifteen Members, while the Government on the recommendation of the Securities and Exchange Commission of Sri Lanka appoints four.
The CSE Secretariat, headed by the Chief Executive Officer is responsible for the operations of the CSE, and is accountable to the Board of Directors.
The Board has appointed Sub Committees to assist in the discharge of their collective duties and the delegation of authority to provide effective operation of the CSE.
The Board is also engage with the management in developing strategy and setting the short, medium and long term goals of the CSE.
The profiles of the Board of Directors are given on pages 40 to 42.
A 1
Regular meetings Adopted The Board meets at monthly intervals, while special Board meetings are convened as the need arises. A secure electronic Board paper storage and distribution system is used to circulate meeting agendas and Board papers prior to Board and Sub-Committee meetings. Details of Board Meetings, Sub Committee Meetings and attendance are given on page 77.
The following Sub Committees met regularly:
§ Rules Committee
§ Risk and Audit Committee
§ Arbitration and Disciplinary Committee
§ Dispute Resolution Committee
§ HR Committee
§ Market Development Committee
A 1.1
Board’s Responsibilities
Ensure the formulation and implementation of sound business strategy
Adopted The strategic direction to the development of short, medium and long term strategy has been provided by the Board. During the year the Board has reviewed the 3 year Strategic Plan developed by the Management, the monitoring of performance against agreed goals and KPIs executed on a quarterly basis by the Board.
A 1.2
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Corporate Governance Principles
Adoption Status
Compliance and Implementation SEC & CA Sri Lanka
Code Reference
Ensure that the Chief Executive Officer (CEO) and management team possess the skills, experience and knowledge to implement the strategy
Adopted The Board through the HR Committee ensures that the Management team led by the CEO possess the required skills, experience and knowledge necessary to implement the business strategy. The process to reward of high performers is in place and talent pool has been created.
A 1.2
Ensure effective CEO and Senior Management succession strategy
Adopted Over the years, the Board has executed its responsibility towards succession planning through the HR Committee.
A 1.2
Ensure effective systems to secure integrity of information, internal controls, business continuity and risk management
Adopted The Board of Directors recognize its responsibility for the CSE’s system of internal control and for reviewing its effectiveness on a continuous basis. Risk & Audit Committee reviews Internal Audit reports submitted by the Internal Audit Department and monitors follow up action. Directors’ Responsibility statement for Financial Reporting is given on page 97 and the Risk & Audit Committee Report is given pages 98 to 99.
A 1.2
Ensure compliance with laws, regulations and ethical standards
Adopted The Board has taken the appropriate measurement to ensure to fulfill their responsibilities as in line with the law, regulations and good governance practices adopted by the CSE.
A 1.2
Ensure all stakeholder interests are considered in corporate decisions
Adopted Given the nature of the business all matters where the corporate decision making by the CSE Board may impact stakeholders, the views of stakeholders , including Member firms have been obtained.
A 1.2
Ensuring that the Company’s values and standards are set with emphasis on adopting appropriate accounting policies and fostering compliance with financial regulations
Adopted The review of accounting policies has been carried out annually by the Board Risk & Audit Committee and the Board.
A 1.2
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Corporate Governance Framework of the CSE
Corporate Governance Principles
Adoption Status
Compliance and Implementation SEC & CA Sri Lanka
Code Reference
Fulfill such other Board functions as are vital, given the scale, nature and complexity of the business concerned
Adopted The Board has taken the appropriate measurement to ensure to fulfill their responsibilities as in line with the law, regulations and good governance practices adopted by the CSE.
A 1.2
Access to the advice and services of the Company Secretary,
Adopted The role of the Company Secretary has been outsourced to Corporate Services (Private) Limited who has appointed permanent and independent representative to the CSE to whom all Directors have access. The Company Secretary is an Attorney-at-Law by profession. The role of the Company secretary includes scheduling Board meetings in consultation with the Chairman, the circulation of the Board meeting notices , agenda and Board papers , follow up of Board procedures, compliance with rules and regulations, directions and statutes, keeping and maintaining minutes and relevant records of the company.
A 1.4
Independent judgment
Adopted The Directors of the Company have no vested interests and take decisions on matters before them using independent judgment.
A 1.5
Dedicate adequate time and effort to matters of the Board and the Company,
Adopted The Board has dedicated adequate time and effort for the affairs of the CSE by attending Board meetings, Subcommittee meetings and other meetings. Details of Board Meetings, Sub Committee Meetings and attendance are given on page 77. The Board members had meetings and discussions with Management as & when necessary. The Board Papers have been circulated well in advance for the meetings.
A 1.6
Chairman and Chief Executive Officer (CEO)
Division of responsibilities of the Chairperson and CEO
Adopted The CSE Secretariat, headed by the Chief Executive Officer is independently responsible for all the operations of the CSE, and is accountable to the Board of Directors. The roles of the Chairman and Chief Executive are separate. The Chairman is a non-executive Director and presides over all the Board meetings.
A 2
Chairman’s Role
Chairman’s role Adopted The Chairman is responsible for leading the Board and for its effectiveness. A 3
Preserving order and facilitating the effective discharge of Board functions and conducting Board proceedings in a proper manner
Adopted Board proceedings are conducted according to the Agenda which circulates well in advance along with papers.
A 3.1
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Corporate Governance Principles
Adoption Status
Compliance and Implementation SEC & CA Sri Lanka
Code Reference
Financial Acumen
Availability of financial acumen and knowledge to offer guidance on matters of finance
Adopted The directors are holding senior positions in leading companies, as a result of that they have gained vast experience and also due to their academic and professional background, all of them possess financial acumen and knowledge.
The details of their qualifications and experience have been set out on pages 40 to 42.
A 4
Board Balance
Non Executive Directors of sufficient calibre and number
Adopted All 9 Directors are Non-Executive Directors. A 5.1 and A 5.2
Independence of Non Executive Directors
Adopted The Directors should be independent of management and free of any business or other relationship that could materially interfere with or could reasonably be perceived to materially interfere with the exercise of their unfettered and independent judgment.
A 5.3
Recording of concerns in Board Minutes
Adopted All concerns raised have been included in Board Minutes. A 5.10
Supply of Relevant Information
Information to the Board by the Management
Adopted The management has submitted timely and appropriate information for the Board by way of Board papers. The Board sought additional information as and when necessary. The members of management team has made presentation to the Board on key subject matters. The Chairman ensured that all Directors were briefed on issues arising at Board meetings. The Directors have free and open contact with the Management team of the CSE
A 6.1
Adequate time for effective Board meetings
Adopted The Board papers are generally circulated to the Directors at least a week before the respective Board meetings.
In some instances urgent papers are circulated within a shorter time frame and also for approval of matters by circulation.
A 6.2
Appointments to the Board
Disclosure of details of new Directors to shareholders
Adopted Details of new Directors are disclosed by way of press release as well as in the Annual Report. Prior approval for appointment of new Directors is required to obtain from the SEC.
A 7.3
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Corporate Governance Principles
Adoption Status
Compliance and Implementation SEC & CA Sri Lanka
Code Reference
Re - Election
Appointment of Non Executive Directors
Adopted In terms of Article 50 of the Articles of Association of the CSE require each Director to retire by rotation once in every three years and they are required to stand for re-election by the members at the Annual General Meeting.
A 8.1
Election of Directors by the shareholders
Adopted Please refer to comments given for A 8.1. A 8.2
Disclosure of Information in Respect of Directors
Annual Report to disclose specified information regarding Directors
Adopted Details of the Directors are given on pages 40 to 42. Directors’ attendance at the Board and Board Sub-committee meetings are given on page 77.
A 10.1
Appraisal of Chief Executive Officer
Set reasonable financial and nonfinancial targets to be met by the CEO
Adopted Financial & non-financial targets have been set in the beginning of the year when finalizing the strategic plan for the year.
A 11.1
Evaluate performance of the CEO with reference to targets
Adopted The performance of the CEO has been evaluated by the Board. A 11.2
Directors’ Remuneration
Appointment of a Remuneration Committee
Adopted The Board has established a HR Committee to develop policy and determine remuneration for Management Team.
B 1.1
Composition of the HR Committee
Adopted HR committee comprises from the Non-Executive Directors
Mr. C.V. Kulatilaka(Chairman)
Mr. M. R. Prelis
Mr. Aravinda Perera
Mr. A. Godfrey
B1.2
and
B1.3
Remuneration of the Non Executive Directors
Adopted In compliance with the provisions of the Articles of Association, the CSE has not made any payments on account of Directors’ remuneration other than payment pertaining to meet out of pocket expenses for attending Board Meeting as given in Note 29 to the Financial Statements.
B 1.4 and
B 1.5
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Corporate Governance Principles
Adoption Status
Compliance and Implementation SEC & CA Sri Lanka
Code Reference
Relations with Shareholders
Count of all proxy votes lodged
Adopted The CSE has a mechanism to record all proxy votes and proxy votes lodged for each resolution.
C 1.1
Separate resolutions for each substantially separate issue
Adopted A separate resolution is proposed at the AGM for each substantially separate issue accordingly the adoption of the report and accounts is proposed as a separate resolution.
C 1.2
Availability of Board Sub- Committee Chairpersons at AGM
Adopted The Board, which includes the Chairmen of all the sub committees present at the AGM to answer any questions.
C 1.3
Circulation ofnotice of AGM andrelateddocuments toshareholders
Adopted The Annual Report including financial statements and the notice of the meeting are sent to members as per the Article of Association.
C 1.4
Summary ofproceduresgoverning votingat the AGM
Adopted Voting procedures at General Meetings are circulated to the members. C 1.5
Communication with Shareholders
Channel to reach all shareholders of the company
Adopted The Annual Report and AGM are the main communication modes between the CSE and its members. Information is provided to the members prior to the AGM to give them an opportunity to raise any issues relating to the business of CSE, either verbally or in writing prior to the AGM. On need basis the meetings with members are conducted other than the AGM
C 2.1
Major and Material Transactions
Disclosure of major transactions
Adopted The CSE’s future strategies and their potential impact have been disclosed in the following sections of this Annual Report.
Chairman’s Statement on pages 26 to 29.
CEO’s Review on pages 30 to 37.
Operational Review on pages 44 to 75.
C 3
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Adoption Status
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Disclosure of all facts of related party transactions which have a material impact on net assets
Adopted The situation has not arisen to make a disclosure. C 3.1
Accountability and Audit
Statutory and Regulatory reporting
Adopted The CSE has reported a true and fair view of its financial position and performance for the year ended 31st December 2016.
In the preparation of annual financial statements, the CSE had complied with the requirements of the Companies Act No 07 of 2007 and are prepared and presented in conformity with Sri Lanka Accounting Standards
D 1.1
Directors’ report in the Annual Report
Adopted The Annual Report of the Board of Directors on pages 94 to 96 contains the declarations as required by the Code.
D 1.2
Statement of Directors’, and Auditor’s responsibility for the Financial Statements.
Adopted The statement of “Directors’ Responsibility for Financial Reporting” is given on page 97. Auditor’s reporting responsibility is given in their report on the Financial Statements on page 100.
D 1.3
Management Discussions and Analysis
Adopted The Operational Review is given on pages 44 to 75. D 1.4
Declaration by the Board that the business as a going Concern
Adopted This is given in the “Annual Report of the Board of Directors on the Affairs of the Company” on pages 94 to 96.
D 1.5
Summoning an EGM to notify serious loss of capital
Adopted This situation has not arisen. D 1.6
Related Party Transactions
Adopted All related party transactions are disclosed in note No 29 to the Financial Statements.
D 1.7
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Corporate Governance Principles
Adoption Status
Compliance and Implementation SEC & CA Sri Lanka
Code Reference
Internal Control
Maintain a sound system of internal control to safeguard shareholders’ investments and the Company’s assets.
Adopted The Board is responsible for formulating and implementing appropriate and adequate internal control systems. The Board Risk and Audit Committee has responsibility to the Board to ensure that the system of internal controls is sufficient and effective. Reviews of the adequacy and effectiveness of these internal control systems are carried out by the Internal Audit Division which reports on a regular basis to the Board Risk & Audit Committee.
ERM division is responsible for the review of risks face by the CSE and the risk report submit to the Risk and Audit Committee.
D 2.1
Internal audit function
Adopted The CSE has established an in house Internal Audit Division which report to Board Risk & Audit Committee.
D 2.2
Review of the process and effectiveness of risk management and internal controls
Adopted The Internal Audit Division of the CSE carries out regular review on internal control system including internal control over financial reporting. The ERM Division review the risk management function. The Risk and Audit Committee monitors, reviews and evaluates the effectiveness of internal control system including the internal controls over financial reporting & Risk Management.
D 2.3
Audit Committee
Composition of the Audit Committee
Adopted The Risk and Audit Committee of the Colombo Stock Exchange (CSE) comprises of 3 elected Directors and two appointed Directors.
The members of the Risk and Audit Committee appointed by the Board are;
Mr. D.T.W. Thalgodapitiya - Chairman
Mr. M.R. Prelis
Ms. M.A.D.S. Jeeva Shirajanie Niriella
Mr. Ray Abeywardena
Mr. Aravinda Perera
All five members of the Risk and Audit Committee are Non-Executive Directors.
The Chief Executive Officer, Chief Operating Officer, Chief Information Officer, Head of Enterprise Risk Management, Head of Finance & Administration, Head of Internal Audit, other relevant Senior Management members and External Auditors attend the meetings of the Risk and Audit Committee on invitation.
D 3.1
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Corporate Governance Principles
Adoption Status
Compliance and Implementation SEC & CA Sri Lanka
Code Reference
Review of Objectivity of the External Auditor
Adopted The Risk and Audit Committee monitors and reviews the External Auditor’s independence, objectivity and the effectiveness of the audit process taking into account relevant professional and regulatory requirements.
D 3.2
Terms of reference of the Audit Committee
Adopted The Audit Committee is guided by the Committee Charter which sets out authority and responsibility of the said Committee. The Board also considered the Code of Best Practice on Audit Committees of CA Sri Lanka in defining the terms of reference for the Audit Committee.
D 3.3
Disclosures of the Audit Committee
Adopted The names of the members of the Risk and Audit Committee are given in the Risk and Audit Committee Report on pages 98 and 99.
D 3.4
Corporate Governance Disclosures
Disclosure of Corporate Governance
Adopted This requirement is met through the presentation of this report. D 5.1
Shareholders – Institutional Investors
Institutional shareholders
Adopted The Colombo Stock CSE (CSE) is a company limited by guarantee. The CSE is a mutual exchange and has fifteen Members & Twenty Trading Members, of which Twenty Seven Members operate as Stockbrokers for both Equity & Debt and Eight members are appointed by the CSE as Trading Members only for Debt. All Members are corporate entities. Annual General Meeting is used to have an effective dialogue with the members on matters which are relevant and concern to the general membership. The feedback obtained from members are of concern communicated to the entire Board by the CEO.
E 1.1
Shareholder Voting
Individual shareholders voting
Adopted Members are encouraged to participate at Annual General Meetings and exercise their voting rights.
F 2
Sustainability Reporting
Sustainability is a business approach that creates long term stakeholder value by embracing opportunities and managing risks derived from economic, environmental and social developments and their potential implications and impacts on the business activities of the entity.
Sustainability reporting is the practice of recognising, measuring, disclosing and being accountable to internal and external stakeholders for organisational performance towards the goals of sustainable development in the context of the overall business activities and strategy of the entity and directed to the target stakeholders, usually shareholders, employees customers, society and government.
Colombo Stock Exchange | Annual Report 2016 89
Corporate Governance Principles
Adoption Status
Compliance and Implementation SEC & CA Sri Lanka
Code Reference
Economic Sustainability
Adopted Please refer pages 90 to 92 for details G 1.1
Stakeholder identification, engagement & effective communication
Adopted Please refer pages 15 to 18 for details G 1.6
Sustainable Reporting and Disclosure
Adopted Please refer pages 90 to 92 for details G 1.7
90
Corporate Sustainability Statement
As the sole operator of the country’s stock market, we are well aware of our commitment towards fostering sustainable socio-economic growth. While endorsing and encouraging sustainable practices and commitments among our stakeholders and the society at-large is an important facet of our strategy, at the core of our approach is a strong focus on economic, social and environmental value creation through our very own policies and initiatives.
Economic
Social Environmental
Economic Perspective of Sustainability
Our Market
In the midst of the various growth initiatives we are pursuing, what remains unchanged is our focus on maintaining our market’s integrity and quality. Through operating an open, secure, fair, orderly and transparent marketplace, the CSE facilitates the creation of wealth and value in the Sri Lankan economy. We offer businesses with an opportunity to raise the capital required for expansion, to create jobs opportunities and pursue further growth. Rs. 85.6 Bn in capital was raised across debt and equity markets at the CSE in 2016, sourced through IPOs and additional financing. Investors
are provided with an opportunity to benefit through such growth within a well-regulated and well-established framework.
The year also recorded a net inflow of foreign investments amounting to Rs.383.5Mn, which once again outlined the stock market as an important avenue through which foreign investment flows into the economy.
Promoting Transparency, Accountability and Governance
Improving overall financial reporting and the better management of assets is crucial to enhancing transparency, accountability and good governance in any type of business. The CSE hence takes an activate effort to encourage listed companies to enhance the quality, transparency and the timeliness of the disclosure of information through maintaining an appropriate enforcement mechanism with relation to the continuous listing rules.
In the external front, we also continued our commitment to promote transparency, accountability and governance in financial reporting by renewing our strategic partnership for the Annual Report Awards competition organized by the Institute of Chartered Accountants (CA Sri Lanka). In another key strategic partnership, the CSE partnered with the CFA Institute of Sri Lanka for its Research Challenge, a programme
promoting best practices in equity research among analysts.
Financial Literacy and the Knowledgeable Investor
The CSE fully understands and acknowledges the importance of financial literacy to both stock market participation and overall sustainable development. We have over the years continued to roll-out investor education and awareness programs with the objective of equipping individuals with the basic financial knowledge and skills required to navigate the financial environment.
Through our programs, we reach out to a number of diverse segments from around the country, including school children, university students, senior citizens, public servants, aspiring entrepreneurs and others. These programs have attracted an overwhelming interest amongst the public and play a vital role in in paving the way for better-informed financial activity in the capital market and society.
Investors at an education seminar
Colombo Stock Exchange | Annual Report 2016 91
Social Perspective of Sustainability
CSR Projects
Library Project - Diganegama Vidyalaya, Anuradhapura
Recognizing the value of fostering access to education in rural communities, the CSE in 2016 carried out a library donation project at the Diganegama Vidyalaya in Anuradhapura. The library was provided with new furniture, literature and other resources to facilitate a comfortable learning environment for students.
Diganegama Vidyalaya, established in 1954, plays a vital role in delivering learning opportunities to over 100 children spread across grades 1 to 11 in the rural village of Diganegama located in the Anuradhapura District. Access to sound facilities and resources concerning early childhood education, primary and post primary education remains a key challenge for the school. Despite many challenges, the school has been remarkably successful in maintaining an 80% pass rate in the local G.C.E (Ordinary Level) Examination over the years. The school was also
awarded the best eco-friendly school in North Central Province in the year 2012.
The CSE Anuradhapura Branch continues to monitor the progress of the children, the facilities and identify new ways through which the CSE could support the livelihood of the community.
CSE Flood Relief Campaign
During May 2016, the CSE launched an emergency relief campaign to assist those affected by torrential rainfall across Sri Lanka, which resulted in floods and landslides around the country.
Listed companies and other capital market stakeholders, along with the general public responded to the campaign with donations of relief and aid, which resulted in the distribution of
emergency relief goods and essentials including bottled water, dry rations, clothing, stationery and blankets to affected areas through the CSE Branch Network.
Bell Ringing Ceremonies as a Call to Action
On a number of occasions in 2016, CSE market opening ceremonies were used as a call-to-action to bring attention to issues of social and economic significance. A number local and international organizations including
The CSE CEO Rajeeva Bandaranaike handing over a set of books to the school Principal
The parents and the students of Diganegama Vidyalaya in Anuradhapura
Distribution of emergency relief goods and essentials
92
the International Trade Centre, the Sri Lanka Export Development Board, the International Finance Centre, SSE, the World Federation of Exchanges and the CFA Society Sri Lanka partnered the CSE to raise awareness on issues ranging from gender equality, women’s and minority economic empowerment and protecting the rights of investors.
The Sustainable Stock Exchanges Initiative
The CSE has been a member of the Sustainable Stock Exchanges (SSE) initiative of the United Nations since 2015. Through our affiliation with the SSE, we work with member exchanges from around the world on initiatives directed at enhancing the sustainability practices of listed companies and overall, making a meaningful contribution to the investment community. During 2016, the CSE was represented at the SSE Global Dialogue Speaker Briefing by CEO Mr. Rajeeva Bandaranaike, an event which is a global gathering of stock exchanges to analyse, promote and foster communication on stock exchanges’ sustainability initiatives. The Forum focused on sustainability
reporting, green finance and the capital market’s contribution to sustainable development.
Our People - Personal and Professional Growth
Embracing our responsibility as an employer and job creator, we continue to be committed to developing and retaining a highly competent and motivated group of professionals through our operation. Creating an inclusive, diverse, rewarding and secure working environment for our employees is important us. Personal and professional development is a key priority, where employees are offered the financial and professional support required to contribute and excel at work and in the communities they represent.
Environmental Perspective of Sustainability
Introduction of an ESG Index
The introduction of an Environmental, Social and Governance (ESG) Index at the CSE is being presently considered as a possibility, where initial research has been conducted in that regard.
The index will be used to measure the performance of companies demonstrating strong Environmental, Social and Governance practices, offering investors an opportunity to measure value through a new perspective.
Embracing the “Paperless Office” Concept
Since 2015, the CSE has implemented a number of initiatives with a view to reducing the use of paper within the organization. Automation of the purchase requisition process, the launch of the SMS based Trade Verification Service, the launch of CDS E-statements, launch of web portal of CDS e-Connect, shifting to the use of e-Board papers and the Settlement Schedule Digitization Solution are a few of the many initiatives actioned during the year.
The CSE partners the EDB and ITC to ring the bell for the ‘She Trades’ Initiative
The CSE and CFA Ring Opening Bell in Support of Putting Investors First Month
Corporate Sustainability Statement
FinancialInformation
Contents
Annual Report of the Board of Directors on the Affairs of the Company 94
Directors’ Responsibility for Financial Reporting 97
Risk and Audit Committee Report 98
Independent Auditors’ Report 100
Statement of Profit or Loss and other Comprehensive Income 101
Statement of Financial Position 102
Statement of Changes in Equity 103
Statement of Cash Flows 105
Notes to the Financial Statements 106
94
Annual Report of the Board of Directors on the Affairs of the Company
The Board of Directors of the Colombo
Stock Exchange (CSE) has pleasure in
presenting their Annual Report to the
Members, together with the audited
consolidated Financial Statements and
Auditors’ Report on those Financial
Statements for the financial year ended
31st December 2016.
This Annual Report on the affairs of
the Company contains the information
required in terms of the Companies Act
No. 07 of 2007.
The Financial Statements were reviewed and approved by the Board of Directors on 02 May 2017.
General
The Colombo Stock Exchange (CSE)
is a company limited by guarantee,
incorporated in Sri Lanka on 02nd
December 1985, under the Companies
Act No.17 of 1982 and is licensed by the
Securities and Exchange Commission
(SEC). The CSE was re-registered as per
the Companies Act No.7 of 2007 on 13th
May 2008 with GL 12 as the new number
assigned to the Company.
The CSE is a mutual exchange and
has fifteen Members & Twenty Trading
Members, of which Twenty Seven
Members operate as Stockbrokers for
both Equity & Debt and Eight members
are appointed by the CSE as Trading
Members only for Debt. All Members are
corporate entities. The CSE became the
first South Asian member of the World
Federation of Exchanges (WFE) in 1998.
CSE is also a member of the South Asian
Federation of Exchanges (SAFE) and
currently hold the chairmanship.
The policy making body of the CSE is the Board of Directors composed of nine members. Five Directors are elected by the fifteen Members, while Government
on the recommendation of Securities Exchange Commission appoint four.
The CSE Secretariat, headed by the Chief Executive Officer is responsible for the operations of the CSE, and is accountable to the Board of Directors.
Vision, Mission and Corporate
Conduct
The Vision and Mission statements are given on page 3 of the annual report. The business activities of the group are conducted in keeping with the highest level of ethical standards in achieving its Vision and Mission.
Principal Activities
The principal activity of the Company
is the operation of a Stock Exchange.
The fully-owned subsidiary, Central
Depository Systems (Pvt) Ltd. (CDS) acts
as a depository for listed securities. CSE
Clear (Pvt) Limited (CSE Clear) which
is also a fully owned subsidiary of CSE
was incorporated on 28th March 2016.
The CSE Clear is anticipated to carry out
clearing and settlement functions as the
Central Counter Party (CCP).
There were no significant changes in
the nature of principal activities of the
Company and its subsidiary during the
financial year under review.
Review of Operation and Future
Developments
A review of the activities of the CSE during the year is contained in the Chairman’s Statement on pages 26 to 29 and the Chief Executive Officer’s Review on pages 30 to 37 and the Operational Review on pages 44 to 75 the Annual Report 2016. These reports form an integral part of the Annual Report.
Financial Statements
The Financial Statement of the Company
and its subsidiary have been prepared in
accordance with Sri Lanka Accounting
Standard (SLFRS) laid down by the
institute of Chartered Accountants
of Sri Lanka and complying with the
requirements of the Companies Act No.
07 of 2007.
The financial statement of the Company and its subsidiary for the year ended 31st December 2016, duly signed by the Head of Finance & Administration and two of the Directors of the Company on pages 101 to 143 are form an integral part of the annual report of the Board of Directors.
Auditor’s Report
Messrs KPMG the Auditors of the
Company carried out the audit on the
Consolidated Financial Statements for the
year ended 31st December 2016 and their
report on those statements which forms
an integral part of the Report of the Board
of Directors, on page 100 of this Annual
Report.
Board Sub Committee
The composition of the Board sub committees, comprising of Non-Executive Directors is provided on pages 78 to 79.
The report of the Board Risk and Audit Committee in the given on pages 98 to 99.
Significant Accounting Policies
The significant accounting policies adopted in preparation of the Financial Statements are given on pages 106 to 113. There have been no changes in the accounting policies adopted by the company and its subsidiary, during the year under review.
Colombo Stock Exchange | Annual Report 2016 95
Going Concern
The Board is satisfied that the Company has adequate resources to continue its operations in the foreseeable future. Therefore, we continue to adopt the “going-concern” basis in preparing these Financial Statements.
Income
The income of the Group for 2016 was
Rs.711.84Mn (2015: Rs 833.59Mn) while
the Company’s income was Rs.613.25Mn
(2015: Rs 705.55Mn). An analysis of the
income is given in Note 04 to the financial
statements.
Financial Results and Appropriations
The Group has recorded a Loss before
tax of Rs.152.14Mn (Loss before tax
of Rs.26.88Mn in 2015) and loss after
tax of Rs.156.87Mn (Loss after tax of
Rs.29.04Mn in 2015) for the year 2016.
The Company has recorded a Loss
before tax of Rs.139.19Mn (Loss before
tax of Rs.34.78Mn in 2015) and loss after
tax of Rs.141.42Mn (Loss after tax of
Rs.35.31Mn in 2015) for the year 2016.
The Group’s total other comprehensive
income for the year 2016 was Rs.62.06Mn
(total other comprehensive income of
Rs.21.38Mn in 2015) while the Company
has recorded a total other comprehensive
income of Rs.47.41Mn for the year 2016
(total other comprehensive income of
Rs.18.06Mn in 2015).
Donations
During the year Company made donations amounting to Rs.476,082/-. (Rs.449,739 in 2015).
Taxation
The income tax rate applicable on the Company and the subsidiary company is 28% (2015 –28%).
Statutory Payments
The Directors, to the best of their knowledge and belief, are satisfied that all statutory payments in relation to the Government and the employees have been made up to date.
Capital Expenditure
The total capital expenditure on acquisition of property, plant and equipment and intangible assets of the Group amounted to Rs.38Mn (2015: Rs.27 Mn). Details of property & equipment are given in Note 09 to the financial statements. The capital expenditure approved and contracted for and not contracted for as at Balance Sheet date is given in Note 27 to the financial statements.
Property & Equipment
Details of property, plant and equipment
are given in Note 09 to the financial
statements.
Reserves
The Group Accumulated fund and other reserves as at 31st December 2016 amounted to Rs.3,023,180,901 (Rs. 3,117,996,443 in 2015). The break up and movement are shown in the Statement of Changes in Equity in the Financial Statements.
Outstanding Litigation
In the opinion of the Directors and the Company’s Lawyers, pending litigation against the Company disclosed in Note 26 of the Financial Statements will not have a material impact on the financial position of the Company or its future operations.
Events after the Reporting Date
Events after the Reporting Date has been
disclosed in Note 30 of the Financial
Statements.
Board of Directors
The following Directors held office as at
the Statement of Financial Position date:
Name of the Director
Mr. C.V.Kulatilaka (Chairman)
Mr. M.R. Prelis
Mr. D.T.W.Thalgodapitiya
Mr. Ray Abeywardena
Mr. A.C Seneviratne
Ms. M.A.D.S Jeeva Shirajanie Niriella
Mr. M.Y.Aravinda Perera
Mr. A.C.J. Godfrey
Mr. A. Shanil Fernando (Appointed to the Board on 05th October 2016)
Mr. A.C Seneviratne retires by rotation at the conclusion of the Annual General Meeting in terms of Article 50 of the Articles of Association, and being eligible and offering himself for re-election.
Mr. C.V.Kulatilaka retires by rotation at the conclusion of the Annual General Meeting in terms of Article 50 of the Articles of Association. Mr. Kulatilake is not offering himself for re-election.
In terms of Section 211 (2) of the Companies Act, the Board of Directors have given notice to the Company that Mr. M. R. Prelis, aged 80 years be elected as a Director and that the age limit of 70 years referred to in Section 210 of the Companies Act of the Companies Act No 7 shall not apply to Mr. M. R. Prelis.
The details of the Directors’ meetings which comprise Board meetings, Risk and Audit Committee meetings, HR Committee meetings, Dispute Resolution Committee, Arbitration & Disciplinary Committee and Rules Committee meetings and the attendance of Directors at these meetings are given on page 77 of the Annual Report.
96
Annual Report of the Board of Directors on the Affairs of the Company
Directors’ Interest Register
The CSE maintains a Directors’ Interests Register confirming to the provision of the Companies Act No. 7 of 2007. The Directors of the CSE have disclosed their interests in other companies to the Board and those interests are recorded in the Interests Register conforming to the provisions of the Companies Act No.7 of 2007. The particulars of those entries are set out on Note 29 to the Financial Statements and form an integral part of the Annual Report of the Board of Directors.
Related Party Transactions
The Directors have also disclosed transactions if any, that could be classified as related party transactions in terms of LKAS 24 “Related Party Disclosures” which is adopted in the preparation of the financial statements. Those transactions disclosed by the Directors are given in Note 29 to the financial statements forming part of the Annual Report of the Board of Directors.
Directors’ Remuneration
In compliance with the provisions of the Articles of Association, the CSE has not made any payments on account of Directors’ remuneration other than payment pertaining to meet out of pocket expenses for attending Board Meeting as given in Note 29 to the financial statements.
Directors’ Responsibility for Financial
Reporting
The Statement of Directors’ Responsibility for the Financial Reporting given on page 97 forms an integral part of the Annual Report of the Board of Directors.
Environmental Protection
To the best of knowledge of the Board, the Company has complied with
the relevant environmental laws and regulations. The Company has not engaged in any activity that is harmful or hazardous to the environment.
Risk Management and Internal Control
Risk Management
The Company has an ongoing process in place to identify, evaluate and manage the risks that are faced by the Company.
Internal Control
The strong internal controls are integral to
the sound management of the Company,
hence the Board committed to maintain
strict financial, operational and risk
management controls over all its activities
including safeguard the assets of the
Company and prevent and detect frauds.
There is an ongoing process for
identifying, recording, evaluating and
managing the risks that are faced by
the Company, and the Directors have
reviewed this process, through the Board
Audit & Risk Committee including internal
reviews, internal audits and system audits.
Corporate Governance
The Directors and Management of
the CSE have placed emphasis on
conforming to the best corporate
governance practices and procedures. A
separate report on Corporate Governance
is given on pages 76 to 89.
Auditors
The Company’s Auditor’s during the period under review were Messrs KPMG, Chartered Accountants. Audit Fee and reimbursement of expenses paid to KPMG during the year under review by the Company and its subsidiary amounted to Rs. 866,250 (Rs. 866,250 in 2015). Further Rs.648,063 (Rs.545,883 in 2015) was paid on account of tax related
services. The detail of their remuneration is given in Note 7 to the Financial Statements.
As far as the Directors are aware the Auditors do not have any interest with the CSE or its subsidiary other than those disclosed above.
The Auditors have expressed their willingness to continue in office. A resolution to re-appoint the Auditors and authorize the Directors to determine their remuneration will be proposed at the Annual General Meeting.
Notice of Meeting
The 32nd Annual General Meeting of the CSE will be held on 26th May 2017 at 5 p.m. at the Colombo Stock Exchange, Auditorium, 4-1, West Block, World Trade Center, Colombo 01.
Acknowledgement of the Contents of
the Report
As required by Section 168 (1) (k) of the Companies Act No. 07 of 2007, the Board of Directors hereby acknowledges the contents of this Annual Report.
For and on behalf of the Board of Directors.
Chairman Director
Corporate services (Private) LimitedSecretaries
02 May 2017Colombo
Colombo Stock Exchange | Annual Report 2016 97
Directors’ Responsibility for Financial Reporting
The responsibility of the Directors, in relation to the Financial Statements, is set out in the following statement. The responsibility of the Auditors, in relation to Financial Statements, is set out in the Report of the Auditors’ on the Annual Report.
As per the provisions of the Companies Act No. 7 of 2007 the Directors are required to prepare Financial Statements for each financial year and place them before a General Meeting. The Financial Statements comprise the Statement of Financial Position as at 31st December 2016, and the Statement of Comprehensive Income, Statement of changes in Equity and Cash flows for the year then ended and Notes thereto.
The Financial Statements of the Company and its Subsidiary give a true and fair view of:
the state of affairs of the Company and its Subsidiary as at the Statement of Financial Position date and the Profit or Loss of the Company and its Subsidiary for the financial year ended on the Statement of Financial Position date.
The Directors have ensured that, in preparing these Financial Statements:
1. The appropriate accounting policies have been selected and applied in a consistent manner.
Material departures, if any have been disclosed and explained;
2. All applicable accounting standards as relevant have been followed;
3. Judgments and estimates have been made which are reasonable and prudent.
The Directors confirm that the Consolidated Financial Statements of
the CSE and its Subsidiary CDS for the year ended 31st December 2016 presented in this Annual Report have been prepared in accordance with the Sri Lanka Accounting Standards (SLFRS), Companies Act No: 7 of 2007 and Sri Lanka Accounting and Auditing Standards Act No: 15 of 1995.
The Directors have adopted the going concern basis in preparing the Financial Statements. The Directors are of the view that the CSE & CDS have adequate resources to continue in operation.
The Directors have taken reasonable steps to safeguard the assets of the CSE and its subsidiary CDS and in this regard to give proper consideration to the establishment of appropriate internal control systems with a view of preventing and detecting fraud and other irregularities. Further, the Directors have a responsibility to ensure that the Company maintains sufficient accounting records to disclose, with reasonable accuracy.
Directors are required to prepare the Financial Statements and to provide the Company’s External Auditors, Messrs KPMG, with every opportunity to carry out any reviews and tests that were considered appropriate and necessary for expressing their independent audit opinion on the Financial Statements.
The financial statements of the Company and its Subsidiary have been certified by the Company’s Head of Finance & Administration, the officer responsible for their preparation, as required by the Sections 150 (1) (b) and 152 (1) (b) of the Companies Act. Also the financial statements of the Company and its Subsidiary have been signed by two Directors on 02nd May 2017 as required by Sections 150 (1) (c) and 152 (1) (c) of the Companies Act No.7 of 2007.
The Directors to the best of their knowledge and belief, are satisfied that all statutory payments in relation to all relevant regulatory and statutory authorities which were due and payable by the CSE and its subsidiary CDS as at the Statement of Financial Position date have been paid or where relevant provided for.
The Directors are of the view that they have discharged their responsibilities as set out in this statement.
By order of the Board
Corporate Services (Private) LimitedSecretaries
02 May 2017Colombo.
98
Risk and Audit Committee Report
Composition of the Committee
The Risk and Audit Committee of
the Colombo Stock Exchange (CSE)
comprises of 3 elected Directors and two
appointed Directors.
The members of the Risk and Audit Committee appointed by the Board are;
Mr. D.T.W. Thalgodapitiya - Chairman
Mr. M.R. Prelis
Ms. M.A.D.S. Jeeva Shirajanie Niriella
Mr. Ray Abeywardena
Mr. Aravinda Perera
All five members of the Risk and Audit Committee are Non-Executive Directors.
The Chief Executive Officer, Chief
Operating Officer, Chief Information
Officer, Head of Enterprise Risk
Management, Head of Finance &
Administration, Head of Internal Audit,
other relevant Senior Management
members and External Auditors attend
the meetings of the Risk and Audit
Committee on invitation.
Responsibilities and Duties of the
Committee
The responsibilities and duties of the Committee were based on the Terms of Reference (TOR) adopted by the Company in terms of best practices. The TOR as approved by the Board of Directors, include the following functions:
� To ensure that adequate and efficient processes are in place to identify, report and monitor risks.
� To benchmark risk management exposure of the CSE against other exchanges
� To advise the Board on the risk profile and appetite of the Company and
as part of the process of the risk assurance within the CSE.
� To act on behalf of the Board of Directors to ensure that appropriate mechanisms are in place with respect to risk identification, risk assessment, risk assurance and overall risk management.
� To review significant accounting and reporting issues, including complex or unusual transactions, recent professional and regulatory pronouncements, and understand their impact on financial statements of the Company.
� To review the effectiveness of the Company’s internal control systems.
� To monitor and review the effectiveness of the Company’s internal audit function, in the context of the overall financial control and risk management system of the Company.
� To assess independence and objectivity of the external auditor.
� To make recommendations to the Board of Directors on the appointment, reappointment and removal of the CSE’s external auditor.
Meetings of the Committee
During the year, thirteen Risk and Audit Committee meetings were held to discuss reports on Enterprise Risk Management, Budgets, and Investments, reports of the Internal and External Auditors and Annual/Quarterly accounts. The Company Secretary functions as the Secretary to the Risk and Audit Committee. Minutes of each committee meeting were recorded and submitted for confirmation at the next committee meeting and subsequently presented to the Board for ratification.
Risk Management
The Committee is tasked with the monitoring the effectiveness and implementation of the Enterprise Risk Management (ERM) Policy and Framework in the CSE.
The Committee reviewed the Annual update to the ERM Framework and ERM Policy. The Committee recommended that the risks be categorized broadly as Strategic Risk, Operational Risk, Financial Risk and Compliance Risk to be in line with the practices followed by other Regional Exchanges. The Committee also reviewed the appropriateness of the three new risks; Competition Risk, Cyber Security Risk and Changes to regulations, which were to be included in the CSE’s Organizational Risk Matrix. The Committee also reviewed the quarterly updates to the ERM Framework and discussed the effectiveness of the risk treatment measures and the progress of the action plans which were proposed to mitigate the exposure of the Organizational Risks.
The Risk based Capital Adequacy Requirement (CAR) was implemented based on the advice obtained from the Committee. In introducing CAR the Committee also reviewed the methodology in computing Value at Risk (VaR) margining.
The Committee reviewed an independent risk assessment carried out by the Secretariat on all Broker Firms, taking into consideration the business practices and the financial performance of the Broker Firms. Based on the said risk assessment, the committee recommended certain amendments to the CSE Stockbroker Rules, enforcement actions and policy changes for risk mitigation.
Colombo Stock Exchange | Annual Report 2016 99
Integrity of financial statements
The Committee reviewed the appropriateness of the accounting policies followed and the financial statements of the group to assess their integrity and compliance with Accounting Standards. The Committee reviewed and discussed with the management, the quarterly financial statements and recommended the same for approval of the Board to ensure effectiveness of the Financial Reporting Systems that are in place and reliability of the information provided, at the request of the Committee, the Internal Auditor performed a review on each quarterly financial statement.
Internal Controls
The Committee reviewed the effectiveness of the Group’s internal control systems and suggested, where necessary, appropriate remedial measures.
External Audit
The independence of the External Auditor was evaluated by the Committee and the Committee also reviewed the non-audit services provided by the Auditors to ensure that the provision of such services does not impair the External Auditors’ independence. The Committee met with the External Auditor during the year to discuss their audit approach and procedures, including matters relating to the scope of the audit and Auditor’s independence. The Risk and Audit Committee reviewed the Consolidated Financial Statements audited by Messrs. KPMG for the financial year ended 31st December 2016 and approved the Financial Statements for submission to the Board. The Committee also reviewed and approved the Letter of Representation to be given to the External Auditors for the year 2016.
The Risk and Audit Committee has recommended for approval at the Annual General Meeting, the re-appointment of the external Auditor, Messrs. KPMG and for the Board of Directors to fix the Auditors’ remuneration.
Internal Audit
An in-house Internal Audit Division was set-up on 1st December 2015. The Internal Audit Charter governing the Mission, Purpose, Responsibilities, Scope and Accountability of the Internal Audit Division was presented to the Risk and Audit Committee for approval at the Risk and Audit Committee Meeting during January 2016.
The Purpose of the Internal Audit Division as highlighted in the Internal Audit Charter is to add Value in all of the following areas:
� Overall Risk Management Process
� Strengthen the Internal Controls in all areas
� Ensure Compliance with Policies, Procedures and Regulations
� Recommend opportunities for Process Improvement and enhancing Efficiency
� Recommending opportunities for Cost Minimization
� Recommending Revenue Maximization and Diversification opportunities
� Enhancing System Controls
� Recommending Controls to mitigate Fraud Risks, if any
In-line with the above requirements, an internal audit plan comprising areas chosen for Audit was developed, approved by the Risk and Audit
Committee and implemented. Proper Policies, Procedures and Controls were recommended for implementation at the review of each audit area. The findings of the internal auditor together with management comments and agreed action plans were reviewed by the Committee during the year and approved for implementation.
Other activities
The Risk & Audit Committee has instructed to carryout IT System Audit, accordingly the consultant was selected during the year & the IT System Audit will be carried out in 2017.
On behalf of the Risk and Audit Committee,
D.T.W. ThalgodapitiyaChairman - Risk and Audit Committee
02 May 2017Colombo.
100
Independent Auditors’ Report
To the MEMBERS OF COLOMBO
STOCK EXCHANGE
Report on the Financial Statements
We have audited the accompanying financial statements of Colombo Stock Exchange, (“the Company”), and the consolidated financial statements of the Company and its Subsidiaries (“the Group”), which comprise the statement of financial position as at 31 December 2016, and the statements of profit or loss and other comprehensive income, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information.
Board’s Responsibility for the Financial
Statements
The Board of Directors (“Board”) is responsible for the preparation of these financial statements that give a true and fair view in accordance with Sri Lanka Accounting Standards, and for such internal control as Board determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Sri Lanka Auditing Standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of the financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by Board, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements give a true and fair view of the financial position of the Group as at 31 December 2016, and of its financial performance and cash flows for the year then ended in accordance with Sri Lanka Accounting Standards.
Report on Other Legal and Regulatory
Requirements
As required by section 163 (2) of the Companies Act No. 07 of 2007, we state the following:
a) The basis of opinion and scope and limitations of the audit are as stated above.
b) In our opinion:
- we have obtained all the information and explanations that were required for the audit and, as far as appears from our examination, proper accounting records have been kept by the Company,
- The financial statements of the Company, give a true and fair view of its financial position as at December 31, 2016, and of its financial performance and cash flows for the year then ended in accordance with Sri Lanka Accounting Standards.
- The financial statements of the Company, and the Group comply with the requirements of sections 151 and 153 of the Companies Act No. 7 of 2007.
CHARTERED ACCOUNTANTS
Colombo02 May 2017
Colombo Stock Exchange | Annual Report 2016 101
Statement of Profit or Loss and other Comprehensive Income
Group Company
For the Year Ended 31 December, 2016 2015 2016 2015
Note Rs. Rs. Rs. Rs.
Revenue 4 481,837,126 641,617,077 373,506,109 491,519,914
Other Income 5 230,006,628 191,977,112 239,748,589 214,026,580
711,843,754 833,594,189 613,254,698 705,546,494
Staff Cost 6 (291,686,821) (293,413,980) (270,728,245) (272,036,044)
Depreciation & Amortization (99,687,749) (98,433,969) (99,601,041) (98,420,179)
Other Operating Expenses 7 (472,610,914) (468,631,005) (382,116,007) (369,875,143)
Loss before Taxation (152,141,730) (26,884,765) (139,190,594) (34,784,872)
Income Tax Expense 8 (4,731,721) (2,153,700) (2,226,963) (524,281)
Loss for the year (156,873,451) (29,038,465) (141,417,557) (35,309,153)
Other Comprehensive Income
Item that will never be reclassified to Profit or Loss
Actuarial Gains on defined benefit plans 24,708,137 2,212,502 21,904,272 2,232,151
Item that are or may be reclassified to Profit or Loss
Net Change in Fair Value of Available-for- Sale Financial Assets
68,848,394 28,949,019 49,843,464 24,327,878
Net Change in Fair Value of Available-for- Sale Financial Assets Reclassified to Profit or Loss
(31,498,622) (9,779,667) (24,335,926) (8,503,002)
Other Comprehensive Income Net of Tax 62,057,909 21,381,854 47,411,810 18,057,027
Total Comprehensive Expense for the Year (94,815,542) (7,656,611) (94,005,747) (17,252,126)
The Notes annexed form an integral part of these Financial Statements.
Figures in brackets indicate deductions.
102
Statement of Financial Position
Group CompanyAs at 31 December, 2016 2015 2016 2015
Note Rs. Rs. Rs. Rs.
ASSETSNon Current AssetsProperty and Equipment 09 154,852,171 210,037,643 154,852,127 210,037,599Intangible Assets 10 207,264,072 218,753,852 206,931,875 218,380,253Capital Work in Progress 11 69,490,022 56,417,620 69,490,022 56,417,620Investments in Subsidiary 12 - - 25,000 25,000Financial Investments - Held For Maturity 13 779,979,389 185,823,706 779,979,389 185,823,706Financial Investments - Available-For-Sale 14 - 261,883,940 - -Investments in LFSB 15 1,000,000 1,000,000 - -Settlement Guarantee Fund 16 100,000,000 100,000,000 100,000,000 100,000,000Total Non Current Assets 1,312,585,654 1,033,916,761 1,311,278,413 770,684,178Current AssetsInventories 4,777,083 4,017,225 4,656,537 3,872,908Trade and Other Receivables 18 249,910,235 273,931,839 220,957,571 239,562,060Tax Receivable 23,699,225 24,170,792 21,245,307 20,338,030Financial Assets -Available-for-Sale 14 793,239,975 1,890,227,224 624,310,213 1,736,805,877Other Investment 19 152,980,105 - - -Cash and Cash Equivalents 20 758,146,752 158,279,732 558,111,222 136,310,591Total Current Assets 1,982,753,375 2,350,626,812 1,429,280,850 2,136,889,466Total Assets 3,295,339,029 3,384,543,573 2,740,559,263 2,907,573,644EQUITY AND LIABILITIESAccumulated Fund 2,841,750,261 2,973,915,575 2,397,879,449 2,517,392,735Other Reserves 21 181,430,640 144,080,868 62,525,877 37,018,339Total Equity 3,023,180,901 3,117,996,443 2,460,405,326 2,554,411,074Non Current LiabilitiesBrokers' Deposits in lieu of Bank Guarantee 22 939,970 939,970 939,970 939,970Retirement Benefit Obligation 23 43,230,230 61,939,239 43,230,230 61,939,239Total Non Current Liabilities 44,170,200 62,879,209 44,170,200 62,879,209Current LiabilitiesBrokers' Deposits in lieu of Bank Guarantee 22 123,859,048 114,080,000 83,500,000 81,750,000Other Payables 24 87,594,269 88,817,889 84,157,688 86,671,942Amounts due to Related Company 25 - - 51,791,438 121,439,970Bank Overdraft 20 16,534,611 770,032 16,534,611 421,449Total Current Liabilities 227,987,928 203,667,921 235,983,737 290,283,361Total Equity and Liabilities 3,295,339,029 3,384,543,573 2,740,559,263 2,907,573,644
The Notes annexed form an integral part of these Financial Statements.These Financial Statements have been prepared and presented in compliance with the requirements of the Companies Act No.07 of 2007.
N A K K NissankaHead of Finance & Administration
The Board of Directors is responsible for the preparation and presentation of these Financial Statements.Approved and signed on behalf of the Board;
C V Kulatilaka Dhakshitha T W ThalgodapitiyaChairman Director
02 May 2017Colombo.
Colombo Stock Exchange | Annual Report 2016 103
Statement of Changes in Equity
GROUP Accumulated Available-for- Capital Total
Fund Sale Reserve Reserve Equity
Rs. Rs. Rs. Rs.
Balance as at 01 January 2015 3,000,741,538 24,936,516 99,975,000 3,125,653,054
Total Comprehensive Income
Loss for the Year (29,038,465) - - (29,038,465)
Other Comprehensive Income
Net Change in Fair Value of Available-for- Sale Financial Assets Reclassified to Profit or Loss - (9,779,667) - (9,779,667)
Actuarial Gain on Retirement Benefit Obligations 2,212,502 - - 2,212,502
Net Change in Fair Value of Available-for- Sale Financial Assets - 28,949,019 - 28,949,019
Total Other Comprehensive Income for the Year 2,212,502 19,169,352 - 21,381,854
Total Comprehensive Income / (Expense) for the Year (26,825,963) 19,169,352 - (7,656,611)
Balance as at 31 December 2015 2,973,915,575 44,105,868 99,975,000 3,117,996,443
Balance as at 01 January 2016 2,973,915,575 44,105,868 99,975,000 3,117,996,443
Total Comprehensive Income
Loss for the Year (156,873,451) - - (156,873,451)
Other Comprehensive Income
Net Change in Fair Value of Available-for- Sale Financial Assets Reclassified to Profit or Loss - (31,498,622) - (31,498,622)
Actuarial Gain on Retirement Benefit Obligations 24,708,137 - 24,708,137
Net Change in Fair Value of Available-for- Sale Financial Assets - 68,848,394 - 68,848,394
Total Other Comprehensive Income for the Year 24,708,137 37,349,772 - 62,057,909
Total Comprehensive Income / (Expense) for the Year (132,165,314) 37,349,772 - (94,815,542)
Balance as at 31 December 2016 2,841,750,261 81,455,640 99,975,000 3,023,180,901
-
104
Statement of Changes in Equity
COMPANY Accumulated Available-for- Total
Fund Sale Reserve Equity
Rs. Rs. Rs.
Balance as at 01 January 2015 2,550,469,737 21,193,463 2,571,663,200
Total Comprehensive Income
Loss for the Year (35,309,153) - (35,309,153)
Other Comprehensive Income
Net Change in Fair Value of Available-for- Sale Financial Assets Reclassified to Profit or Loss - (8,503,002) (8,503,002)
Actuarial Gain on Retirement Benefit Obligations 2,232,151 - 2,232,151
Net Change in Fair Value of Available-for- Sale Financial Assets - 24,327,878 24,327,878
Total Other Comprehensive Income for the Year 2,232,151 15,824,876 18,057,027
Total Comprehensive Income / (Expenses) for the Year (33,077,002) 15,824,876 (17,252,126)
Balance as at 31 December 2015 2,517,392,735 37,018,339 2,554,411,074
Balance as at 01 January 2016 2,517,392,735 37,018,339 2,554,411,074
Total Comprehensive Income
Loss for the Year (141,417,557) - (141,417,557)
Other Comprehensive Income
Net Change in Fair Value of Available-for- Sale Financial Assets Reclassified to Profit or Loss - (24,335,926) (24,335,926)
Actuarial Gain on Retirement Benefit Obligations 21,904,272 - 21,904,272
Net Change in Fair Value of Available-for- Sale Financial Assets - 49,843,464 49,843,464
Total Other Comprehensive Income for the Year 21,904,272 25,507,538 47,411,810
Total Comprehensive Income / (Expenses) for the Year (119,513,285) 25,507,538 (94,005,747)
Balance as at 31 December 2016 2,397,879,449 62,525,877 2,460,405,326
The Notes annexed form an integral part of these Financial Statements.
Figures in brackets indicate deductions.
Colombo Stock Exchange | Annual Report 2016 105
Statement of Cash Flows
Group CompanyFor the Year Ended 31 December, 2016 2015 2016 2015
Note Rs. Rs. Rs. Rs.
Cash Flows from Operating ActivitiesLoss before Taxation (152,141,730) (26,884,765) (139,190,594) (34,784,872)
Adjustments For :Depreciation / Amortization 09/10 99,687,749 98,433,969 99,601,041 98,420,179Interest Income 05 (86,179,332) (5,839,729) (74,065,281) (5,204,368)Loss on Sale of Property & Equipment 05 4,027,041 1,186,971 4,027,041 1,186,971Dividend Income 05 (63,128,668) (120,569,664) (59,071,279) (109,618,268)Gratuity Provision 23 11,502,074 12,832,561 10,419,181 11,772,221Gratuity Provision - Transfer to / (Reversal from) Subsidiary 23 - - (1,720,972) 1,079,989Provision / (Reversal) for Impairment of Trade receivables 1,380,314 1,336,196 1,032,365 1,021,657Operating Profit / (Loss) before Working Capital Changes (184,852,552) (39,504,461) (158,968,498) (36,126,491)
(Increase) / Decrease in Inventories (759,858) (157,238) (783,629) (153,840)(Increase) / Decrease in Trade and Other Receivables 19,633,627 (24,463,316) 14,679,218 (26,986,381)Increase / (Decrease) in Other Payables (1,223,619) (38,607,161) (2,514,254) (38,476,283)Increase / (Decrease) in Amounts due to Related Company - - (69,648,532) (10,972,933)Increase / (Decrease) in Brokers' Deposit 9,779,048 9,037,873 1,750,000 (1,750,000)Cash Generated from / (Used in) Operating Activities (157,423,354) (93,694,303) (215,485,695) (114,465,927)Income Tax and Dividend Tax Paid (300,000) (22,230,826) - (1,638,802)Gratuity Paid 23 (5,502,946) (692,420) (5,502,946) (692,420)Net Cash Generated from / (Used in) Operating Activities (163,226,300) (116,617,549) (220,988,642) (116,797,149)
Cash Flows from Investing ActivitiesInterest Income 05 38,091,053 5,579,260 29,668,264 4,943,899Purchase of Property & Equipment and Intangible Assets 09 (37,716,815) (45,534,521) (37,671,509) (45,147,132)Proceeds from Sale of Property & Equipment 677,276 7,220,219 677,277 7,220,219Increase in Fixed Deposit (150,000,000) - - -Increase in Corporate Debenture Investments (550,000,000) (185,823,706) (550,000,000) (185,823,706)Dividend Income 05 63,128,668 120,569,664 59,071,279 109,618,268(Increase) / Decrease in Investments in Unit Trusts 1,396,220,961 253,283,280 1,138,003,202 254,559,945Capital Work in Progress 11 (13,072,402) (17,523,986) (13,072,402) (17,523,986)Net Cash Generated from / (Used in) Investing
Activities 747,328,741 137,770,210 626,676,112 127,847,507
Cash Flows from Financing Activities - - - -Net Increase / (Decrease) in Cash and Cash Equivalents 584,102,441 21,152,658 405,687,469 11,050,356Cash and Cash Equivalents at beginning of the Year 157,509,700 136,357,042 135,889,142 124,838,786Net Cash and Cash Equivalents at End of the Year 20 741,612,141 157,509,700 541,576,611 135,889,142
Analysis of Cash and Cash Equivalents at End of the yearCash in Hand 230,050 230,050 225,050 225,050Cash at Bank 23,878,662 5,114,670 22,894,781 4,219,971RTGS Account 17,600 17,600 - -Short Term investment in Treasuary Bill -Repos 565,000,000 - 395,000,000 -Short Term investment in Overnight Repos 169,020,439 152,917,412 139,991,391 131,865,570Cash & Cash Equivalents 758,146,752 158,279,732 558,111,222 136,310,591
Bank Overdraft (16,534,611) (770,032) (16,534,611) (421,449)Net Cash & Cash Equivalents at End of the Year 741,612,141 157,509,700 541,576,611 135,889,142
The Notes annexed form an integral part of these Financial Statements.
Figures in brackets indicate deductions.
106
Notes to the Financial Statements
1 REPORTING ENTITY
1.1 Domicile and Legal Form
Colombo Stock Exchange is a Company Limited by Guarantee incorporated & domiciled in Sri Lanka. The registered office of the Company is located at 4 - 01, West Block, World Trade Center, Echelon Square, Colombo 01, and the principal place of business is also situated at the same place.
The Consolidated Financial Statements of the Company as at and for the year ended 31 December 2016 comprise the Company and Central Depository Systems (Private) Limited which was incorporated on 02 September 1991 as a wholly Owned subsidiary of Colombo Stock Exchange.
1.2 Principal Activities and Nature
of Operations
The principal activity of the Company is the operation of a Stock Exchange. The subsidiary operates a clearing and settlement of securities system for equities traded in the Colombo Stock Exchange and acts as a depository for such securities.
2 BASIS OF PREPARATION
2.1 Statement of Compliance
The Consolidated Financial Statements which comprise the Statement of Financial Position, Statement of Profit or Loss and Other Comprehensive Income, Statement of Changes in Equity, Statement of Cash Flows and Notes to the Financial Statements thereto have been prepared in accordance with the Sri Lanka Accounting Standards (SLFRSs
and LKASs) laid down by the Institute of Chartered Accountants of Sri Lanka, and comply with the requirements of Companies Act No 07 of 2007.
The Financial Statements of Colombo Stock Exchange for the year ended 31 December 2016 were authorized for issue in accordance with a resolution of the Board of Directors on 02 May 2017.
2.2 Basis of Measurement
The Financial Statements have been prepared on the historical cost basis except for the Available-for-sale Financial Asset which is measured at Fair value.
2.3 Functional and Presentation
Currency
The Financial Statements are presented in Sri Lanka Rupees, which is the Company’s functional currency. Financial information presented in Sri Lanka Rupees has been rounded to the nearest rupee.
2.4 Significant Accounting
Judgments, Estimates and
Assumptions
The preparation of Financial Statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of Assets, Liabilities, Income and Expenses. Actual results may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are
recognized in the period in which the estimate is revised and in any future periods affected.
3 SIGNIFICANT ACCOUNTING POLICIES
The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by Group entities, except for the new standards adopted from this year (see Note 3.12)
3.1 Basis of Consolidation
The Financial Statements of the Company and Group comprise the Financial Statements of the Company and its Subsidiary for the year ended 31 December 2016. The Financial Statements of the Company’s Subsidiary for the purpose of consolidation is prepared for the same reporting year as that of Colombo Stock Exchange, using consistent accounting policies.
3.1.1 Business Combinations
Business combinations are accounted for using the acquisition method as at the acquisition date – i.e. when control is transferred to the Group. The consideration transferred in the acquisition is generally measured at fair value, as are the identifiable net assets acquired. Any goodwill that arises is tested annually for impairment. Any gain on a bargain purchase is recognised in profit or loss immediately. Transaction costs are expensed as incurred, except if they are related to the issue of debt or equity securities.
Colombo Stock Exchange | Annual Report 2016 107
The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss.
Any contingent consideration payable is measured at fair value at the acquisition date. If the contingent consideration is classified as equity, then it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes in the fair value of the contingent consideration are recognised in profit or loss.
3.1.2 Non-Controlling Interests
NCI are measured at their proportionate share of the acquiree’s identifiable net assets at the acquisition date. Changes in the Group’s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions.
3.1.3 Subsidiaries
‘Subsidiaries’ are investees controlled by the Group. The Group ‘controls’ an investee if it is exposed to, or has rights to, variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date when control ceases.
3.1.4 Loss of control
When the Group loses control over a subsidiary, it derecognises the assets and liabilities of the subsidiary, and any related NCI
and other components of equity. Any resulting gain or loss is recognised in profit or loss. Any interest retained in the former subsidiary is measured at fair value when control is lost.
3.1.5 Transactions eliminated on consolidation
Intra-group balances and transactions, and any unrealised income and expenses (except for foreign currency transaction gains or losses) arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains and losses resulting from transactions between the Group and its Associates are also eliminated in preparing the consolidated financial statements to the extent of the Group’s interests in the Associates.
Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.
3.2 Foreign Currency Transactions
Transactions in foreign currencies are translated to Sri Lankan Rupees at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the Reporting Date are translated to Sri Lankan Rupees at the foreign exchange rates ruling at that date. Foreign exchange differences arising on translation are recognized in the profit or loss.
3.3 Financial Instruments
3.3.1 Non Derivative Financial Assets
The Group initially recognizes loans and receivables on the date
that they are originated. All other financial assets (including assets designated as at fair value through profit or loss) are recognized initially on the trade date, which is the date that the Group becomes a party to the contractual provisions of the instrument.
The Group derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all the risks and rewards of ownership of the financial assets are transferred. Any interest in such transferred financial assets that is created or retained by the Group is recognized as a separate asset or liability.
Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle them on a net basis or to realize the asset and settle the liability simultaneously.
The Group classifies non-derivative financial assets into the following categories: financial assets at fair value through profit or loss, held-to-maturity financial assets, loans and receivables and available-for-sale financial assets.
Financial Assets at Fair Value
through Profit or Loss
A financial asset is classified as at fair value through profit or loss if it is classified as held-for-trading or is designated as such on initial recognition. Financial
108
Notes to the Financial Statements
assets are designated as at fair value through profit or loss if the Group manages such investments and makes purchase and sale decisions based on their fair value in accordance with the Group’s documented risk management or investment strategy.
Attributable transaction costs are recognized in profit or loss as incurred. Financial assets at fair value through profit or loss are measured at fair value and changes therein, which takes into account any dividend income, are recognized in profit or loss.
Loans and Receivables
Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, loans and receivables are measured at amortized cost using the effective interest method, less any impairment losses. The losses arising from impairment are recognized in profit or loss.
Held to Maturity Financial Assets
If the Group has the positive intent and ability to hold securities to maturity, then such financial assets are classified as held-to-maturity. Held-to-maturity financial assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, held-to-maturity financial assets are measured at amortized cost using the effective interest method, less any impairment
losses. The losses arising from impairment of such investments are recognized in profit or loss.
3.3.1 Non Derivative Financial Assets (Ctd.)
Cash and Cash Equivalents
Cash and cash equivalents comprise cash balances and call deposits with maturities of three months or less from the acquisition date that are subject to an insignificant risk of changes in their fair value, and are used by the Group in the management of its short-term commitments.
Available for Sale Financial Assets
Available-for-sale financial assets are non-derivative financial assets that are designated as available-for-sale or are not classified in any of the above categories of financial assets. Available-for-sale financial assets are recognized initially at fair value plus any directly attributable transaction costs.
Subsequent to initial recognition, they are measured at fair value and changes therein, other than impairment losses and foreign currency differences on available-for-sale debt instruments, are recognized in other comprehensive income.
When an investment is derecognized, the gain or loss accumulated in equity is reclassified to profit or loss.
3.3.2 Non Derivative Financial Liabilities
All financial liabilities are recognized initially on the trade date, which is the date that the Group becomes a party
to the contractual provisions of the instrument. The Group derecognizes a financial liability when its contractual obligations are discharged, cancelled or expire.
The Group classifies non-derivative financial liabilities into the other financial liabilities category. Such financial liabilities are recognized initially at fair value less any directly attributable transaction costs.
Subsequent to initial recognition, these financial liabilities are measured at amortized cost using the effective interest method.
Other financial liabilities comprise of bank overdrafts, trade and other payables and brokers’ liquidity deposits payables.
3.4 Property and Equipment
3.4.1 Recognition and Measurement
Property and equipment are stated at cost less accumulated depreciation and any impairment losses.
Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self – constructed assets includes the costs of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for its intended use, and the cost of dismantling and removing the items and restoring the site on which they are located. Purchased software that is integral to the functionality of the related equipment is capitalized as part of that equipment.
Colombo Stock Exchange | Annual Report 2016 109
Where parts of an item of property and equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment.
Gains and losses on disposal of an item of property and equipment are determined by comparing the proceeds from disposal with the carrying amount of property and equipment, and are recognized net within the “other income” in profit or loss.
3.4.2 Subsequent Costs
The cost of replacing part of an item of property and equipment is recognized in the carrying amount of the item, if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. The costs of the day - to – day servicing of property and equipment are recognized in the profit or loss as incurred.
3.4.3 Depreciation
Depreciation is charged to the profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property and equipment. Items of property, plant and equipment are depreciated from the date they are available for use or, in respect of self-constructed assets, from the date that the asset is completed and ready for use.
The estimated useful lives of the Property, Plant & Equipment of the Company as at 31st December 2016 are as follows:
Rate
Furniture & Fittings 10 years
Hardware & Software 5 - 10 years
Office Equipment 5 years
Motor Vehicles 5 years
Telephones 4 years
The depreciation rates are
determined separately for each
significant part of an item of
Property, Plant & Equipment and
commence to depreciate when
it is available for use, i.e. when it
is in the location and condition
necessary for it to be capable
of operating in the manner
intended by the management.
Depreciation of an assets ceases
at the earlier of the date that the
assets is classified as held for
sale or the date that the asset is
derecognized.
3.4.4 Capital Work-in-Progress
Capital work-in-progress is stated
at cost. These are expenses of a
capital nature directly incurred for
system development.
3.5 Intangible Assets
Intangible Assets consist of
application software used in
trading, clearing, settlement,
surveillance, accounting, mail
systems and the web site of the
Colombo Stock Exchange.
3.5.1 Basis of Recognition
An Intangible Asset is recognized if it is probable that future economic benefits that are attributable to the asset will flow to the enterprise and the cost of the asset can be measured reliably
in accordance with the LKAS 38, Intangible Assets.
3.5.2 Subsequent Expenditure
Subsequent expenditure on intangible assets is capitalized only when it increases the future economic benefits embodied in the specific assets to which it relates. All other expenditure is expensed as incurred.
3.5.3 Amortization
Intangible Assets are amortized on a straight-line basis to profit or loss, from the date when the asset is available for use, over the best estimate of its useful economic life.
3.5.4 Research and Development
Costs
Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognized in profit or loss as incurred. Development activities involve a plan or design for the production of new or substantially improved products and processes. Development expenditure is capitalized only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Group intends to and has sufficient resources to complete development and to use or sell the asset. The expenditure capitalized includes the cost of materials, direct labour, overhead costs that are directly attributable to preparing the asset for its intended use, and capitalized borrowing costs. Other development expenditure
110
Notes to the Financial Statements
is recognized in profit or loss as incurred.
Capitalized development expenditure is measured at cost less accumulated amortization and any accumulated impairment losses.
3.5.5 De recognition of Intangible Assets
Intangible assets are derecognized on disposal or when no future economic benefits are expected from their use. Gain or losses arising from de recognition of an intangible asset are measured as the difference between the net disposals proceed and the carrying amount of the asset and are recognized in profit or loss.
3.6 Inventories
Inventories include stationeries, stamps and data wall spares and measured at the lower of cost and net realizable value.
3.7 Impairment of Assets
3.7.1 Non-derivative Financial Assets
A financial asset not classified as at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset, and that loss event(s) had an impact on the estimated future cash flows of that asset that can be estimated reliably.
Objective evidence that financial assets are impaired includes
default or delinquency by a debtor, restructuring of an amount due to the Group on terms that the Group would not consider otherwise, indications that a debtor or issuer will enter bankruptcy, adverse changes in the payment status of borrowers or issuers, economic conditions that correlate with defaults or the disappearance of an active Market for a security. In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment.
Financial Assets Measured at
Amortized Cost
The Group considers evidence of impairment for financial assets measured at amortized cost (loans and receivables and held-to-maturity financial assets) at both a specific asset and collective level. All individually significant assets are assessed for specific impairment. Those found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified.
Assets that are not individually significant are collectively assessed for impairment by grouping together assets with similar risk characteristics.
Available-for-Sale Financial
Assets
Impairment losses on available-for-sale financial assets are recognized by reclassifying the losses accumulated in the fair value reserve in equity to profit or loss. The cumulative loss that is reclassified from equity to profit or loss is the difference
between the acquisition cost, net of any principal repayment and amortization, and the current fair value, less any impairment loss recognized previously in profit or loss. Changes in cumulative impairment losses attributable to application of the effective interest method are reflected as a component of interest income. If, in a subsequent period, the fair value of an impaired available-for-sale debt security increases and the increase can be related objectively to an event occurring after the impairment loss was recognized, then the impairment loss is reversed, with the amount of the reversal recognized in profit or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognized in other comprehensive income.
3.7.2 Non-Financial Assets
The carrying amounts of the Group’s non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. Goodwill and indefinite-lived intangible assets are tested annually for impairment. An impairment loss is recognized if the carrying amount of an asset or cash-generating unit (CGU) exceeds its recoverable amount.
The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current
Colombo Stock Exchange | Annual Report 2016 111
market assessments of the time value of money and the risks specific to the asset or CGU. For impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or CGUs.
3.8 Employee Benefits
3.8.1 Short – Term Employee Benefits
Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognized for the amount expected to be paid under short-term cash bonus plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably.
3.8.2 Defined Contribution Plan –
Employees’ Provident Fund and
Employees’ Trust Fund
A defined contribution plan is a post employment benefit plan under which an entity pays fixed contribution into separate entity and will have no legal or constructive obligation to pay further amounts.
All employees who are eligible for Employees’ Provident Fund and Employees’ Trust Fund are covered by relevant contributions to the defined contribution plans and are recognized as an expense in profit or loss when incurred.
(a) Employees’ Provident Fund
The Company and employee contribute 12% and 8%
respectively on the basic salary of each employee to the employees’ approved provident fund.
(b) Employees’ Trust Fund
The Company contributes 3% of the basic salary of each employee to the employee’s trust fund.
3.8.3 Defined Benefits Plan – Gratuity
As required by LKAS -19 “Employee Benefits”, which the Company has provided for gratuity liability based on projected unit credit method.
However under the Payment of Gratuity Act No.12 of 1983, the liability to an employee arises only on completion of five years of continued service.
The Group recognizes all Actuarial Gains / (Losses) arising from Defined Benefit plans immediately in Other Comprehensive Income and Expenses related to Defined Benefit in employee benefits in profit or loss.
The liability is not externally funded.
3.9 Provisions
A provision is recognized if the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation.
3.10 Revenue
Revenue is recognized to the extent that it is probable that the economic benefits will flow to the group and the revenue can be reliably measured.
3.10.1 CSE & CDS Fees
CSE & CDS fees on securities traded on the stock exchange are recognized on a trade date basis.
3.10.2 Listing Fees
Annual listing fees are recognized on an accrual basis and charged annually from listed companies a fee of Rs.100,000/- or 0.003% of the market capitalization of the Listed Entity as at 31st December of the year immediately preceding, whichever is higher, subject to a maximum of Rs..2,000,000/-
3.10.3 Quotation Fees
The initial listing fee payable when the ordinary voting shares of an Entity are listed on the Exchange and recognized upon the listing of an applicant.
Additional listing fees are recognized for a further issue of Securities by way of rights issue of shares, issues of shares credited as fully paid-up by way of capitalization of reserves, issues of shares through private placements, scrip dividend, share swaps & ESOP as per listing rules.
3.10.4 Brokers’ Fees
Monthly subscription fees from brokers are recognized on an accrual basis.
3.10.5 Charges for Computer
Information
The CDS charge a fee on a pre-determined basis from listed companies for the service rendered pertaining to providing information and fees are recognized on an accrual basis.
112
Notes to the Financial Statements
3.10.6 Listed Company Fees
Listed Company Fee is charged based on the number of trades and Rs.15/- will be charged per trade, subject to a minimum charge of Rs.25,000/- and a maximum charge of Rs.750,000/- per annum.
3.10.7 Other Income
� Dividend from unit trust is recognized in profit or loss on an accrual basis when the Company’s right to receive the dividend is established.
� Interest income is recognized in profit or loss as it accrues, using the effective interest method.
� Gain on disposal of property, plant and equipment have been accounted for in profit or loss, after deducting from the net sales proceeds on disposal of the carrying amount of such assets.
3.11 Taxation
As per Sri Lanka Accounting Standard (LKAS 12) – “Income taxes”, tax expense is the aggregate amount included in determination of profit or loss for the period in respect of current and deferred taxes. Income tax expense is recognized in the income statement.
3.11.1 Current Taxation
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted on the Reporting Date, and any adjustment to tax payable in respect of previous years. Provision for taxation is based on
the profit for the year adjusted for taxation purposes in accordance with the provision of the Inland Revenue Act No. 10 of 2006 and subsequent amendments thereto.
The Company is Liable for income tax at the rate of 28% on the taxable profit.
3.11.2 Deferred Taxation
Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.
The measurement of deferred tax reflects the tax consequences that would follow the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. For investment property that is measured at fair value, the presumption that the carrying amount of the investment property will be recovered through sale has not been rebutted.
Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date.
Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to taxes levied by the same tax authority on the same
taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.
A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.
3.11.3 Other Tax Exposures
In determining the amount of current and deferred tax, the Group takes into account the impact of uncertain tax positions and whether additional taxes and interest may be due. This assessment relies on estimates and assumptions and may involve a series of judgments about future events. New information may become available that causes the Company to change its judgment regarding the adequacy of existing tax liabilities; such changes to tax liabilities will impact tax expense in the period that such a determination is made.
3.11.3.1 Withholding Tax on Dividends
Distributed by Subsidiary
Dividend distributed out of profit of the Subsidiary attracts 10% deduction at source and is not available for set off against the tax liability of the Colombo Stock Exchange. Thus the withholding tax deducted at source is added to the expense of the Subsidiary Company in the Group Financial
Colombo Stock Exchange | Annual Report 2016 113
Statements as a consolidation adjustment.
3.11.3.2 Economic Service Charge (ESC)
As per the provisions of Economic Service Charge Act No. 13 of 2006 and subsequent amendments thereto, ESC is payable on the liable turnover at specified rates. ESC is deductible from the income tax liability. Any unclaimed amount can be carried forward.
3.11.3.3 Value Added Tax (VAT)
Value Added Tax is calculated in accordance with Value Added Tax Act No 14 of 2002 and subsequent amendments thereto. VAT is payable at 11% up to October 2016 and at 15% October onwards.
3.11.3.4 Nation Building Tax (NBT)
As per the provisions of the Nation Building Tax Act, No. 9 of 2009 and the subsequent amendments thereto, Nation Building Tax should be payable at the rate of 2% with effect from 1 January 2011 on the liable turnover as per the relevant provisions of the Act.
3.12 New Accounting Standards Issued but not Effective
The Institute of Chartered Accountants of Sri Lanka has issued the following new Sri Lanka Accounting Standard which will become applicable for financial periods beginning on or after 1st January 2016. Accordingly, the Group has not applied the following new standards in preparing these consolidated financial statements.
3.12.1 SLFRS 9-Financial Instruments
SLFRS 9 – “Financial Instruments” replaces the existing guidance in LKAS 39 – Financial Instruments: Recognition and Measurement. SLFRS 9 includes revised guidance on the classification and measurement of financial instruments including a new expected credit loss model for calculating impairment on financial assets.
SLFRS 9 is effective for annual period beginning on or after 1st January 2018 with early adoption permitted.
The Group is assessing the potential impact on its Consolidated Financial Statements resulting from the of SLFRS 9. Given the nature of the Group’s operations, this standard is expected to have a pervasive impact on the Group’s financial statements.
3.12.2 SLFRS 15 – Revenue
Recognition from Customer
Contracts
SLFRS 15 – “Revenue from Contracts with Customers” establishes a comprehensive framework for determining whether, how much and when revenue is recognized. It replaces existing revenue recognition guidance LKAS 18 Revenue, LKAS 11 Construction Contracts.
SLFRS 15 is effective for annual reporting period beginning on or after 1st January 2018, with early adoption permitted.
114
Notes to the Financial Statements
Group Company
For the Year Ended 31 December, 2016 2015 2016 2015
Rs. Rs. Rs. Rs.
4 Revenue
CSE & CDS Fees 316,437,752 469,454,776 245,570,065 364,003,048
Listing Fees 95,422,948 95,548,822 95,422,948 95,548,822
Quotation Fees 9,421,128 7,085,775 9,421,128 7,085,775
Brokers' Fees 21,852,968 23,665,817 21,852,968 23,665,817
Charges for Remote Data Link 1,239,000 1,216,452 1,239,000 1,216,452
Charges for Computer Information 17,754,130 21,139,950 - -
Listed Company Fees 19,709,200 23,505,485 - -
481,837,126 641,617,077 373,506,109 491,519,914
5 Other Income
Interest Income 86,179,332 5,839,729 74,065,281 5,204,368
Dividend Income - Unit Trusts 63,128,668 120,569,664 56,371,279 100,618,268
Dividend Income - CDS - - 2,700,000 9,000,000
CDS Rental Income - - 36,162,068 45,134,652
Management Fee - - 5,834,977 2,000,000
Profit/(Loss) on Disposal of Property & Equipment (4,027,041) (1,186,971) (4,027,041) (1,186,971)
Miscellaneous Income 53,227,047 56,975,023 44,306,099 44,753,261
Net Gain on Disposal of Available-For-Sale Financial Assets 31,498,622 9,779,667 24,335,926 8,503,002
230,006,628 191,977,112 239,748,589 214,026,580
Miscellaneous Income comprise of net interest income from staff loan Rs.2,825,121 (Interest Income of Rs.8,654,837 and Interest Expense of Rs.5,829,716 ) in 2016 and net interest income of Rs.2,889,269 (Interest Income of Rs.9,203,081and Interest Expense of Rs.6,313,812) in 2015.
Group Company
For the Year Ended 31 December, 2016 2015 2016 2015
Rs. Rs. Rs. Rs.
6 Staff Cost
Salaries 262,967,508 241,641,827 244,559,538 225,498,899
Staff Bonus 1,535,423 20,445,232 1,535,423 18,983,612
Terminal Benefits (Gratuity) 11,502,074 12,832,562 10,419,181 11,772,222
Staff Welfare 8,627,470 10,840,441 7,865,945 9,237,854
Medical Expenses 4,838,899 4,415,170 4,409,764 3,845,544
Transport & Traveling 2,215,447 3,238,748 1,938,394 2,697,913
291,686,821 293,413,980 270,728,245 272,036,044
The Number of Employees at the end of the Year 2016 was 154 (150 in 2015).
Colombo Stock Exchange | Annual Report 2016 115
Group Company
For the Year Ended 31 December, 2016 2015 2016 2015
Rs. Rs. Rs. Rs.
7 Other Operating Expenses
Rent 118,531,578 118,629,570 108,875,106 108,961,308
Administration Expenses 43,576,100 45,013,816 32,865,695 34,954,370
Data Communication Charges 34,688,348 33,856,115 27,558,612 26,529,860
CDS Statement Expenses 10,450,738 12,391,512 - -
Stationery Expenses 1,351,481 4,053,981 999,523 3,117,644
Maintenance Expenses 126,208,361 105,198,544 100,646,722 84,716,809
Issuer Marketing Expenses 795,611 (1,665,647) 620,576 (2,042,629)
Donation 476,082 449,739 476,082 449,739
Training Expenses 6,571,274 9,304,518 6,090,486 8,297,928
Conference Expenses 4,824,665 6,563,814 4,495,770 6,062,012
Nation Building Tax & Disallowed VAT 31,633,603 32,459,082 19,183,468 20,780,864
Investor Education & Foreign Road Show Expenses 18,958,469 32,618,158 14,788,590 25,442,163
Publication & Website Expenses 16,056,161 22,044,212 12,474,952 17,110,660
Incentive Scheme for Brokers Back Office Systems 17,250,000 - 17,250,000 -
Directors' Expenses 11,507,000 7,183,000 11,507,000 7,183,000
Auditors' Remuneration 866,250 866,250 551,250 551,250
Fees Paid to Auditors for Non-Audit Services 648,063 545,883 419,036 343,713
Legal Fees 1,426,086 3,300,721 1,426,086 3,300,721
Professional Charges & Subscription 24,868,037 22,570,055 20,311,995 18,734,575
SAFE AGM & ACG Cross Training Program - 11,911,486 - 4,359,499
Provision for Bad Debts 1,380,314 1,336,196 1,032,365 1,021,657
Other Project Cost 542,693 - 542,693 -
472,610,914 468,631,005 382,116,007 369,875,143
8 Taxation
Group Company
For the Year Ended 31 December, 2016 2015 2016 2015
Rs. Rs. Rs. Rs.
8.1 Income tax Expense
Current tax expense 4,431,721 1,153,700 2,226,963 524,281
4,431,721 1,153,700 2,226,963 524,281
Taxes on dividends 300,000 1,000,000 - -
4,731,721 2,153,700 2,226,963 524,281
116
Notes to the Financial Statements
Group Company
For the Year Ended 31 December, 2016 2015 2016 2015
Rs. Rs. Rs. Rs.
8.2 Reconciliation on Accounting Loss to Income TaxAccounting Profit/(Loss) before taxation (152,141,730) (26,884,765) (139,190,594) (34,784,872)Adjustment on Disallowable Expenses 120,798,663 167,342,881 118,316,952 165,121,769Adjustment on Allowable Expenses (101,459,887) (155,648,230) (101,281,401) (155,401,506)Exempt Income (174,916,216) 96,914,797 (160,996,131) (116,866,193)Income not form an part of total Statutory Income - (9,000,000) (2,700,000) (9,000,000)Other Source of income (24,350,114) (2,886,104) (12,236,063) (2,880,662)Losses from Business (332,069,283) 69,838,579 (298,087,237) (153,811,464)
Total Statuory Income 24,350,114 2,886,104 12,236,063 2,880,662Tax Loss Utilized (8,522,540) - (4,282,623) (1,008,232)Taxable Income 15,827,574 2,886,104 7,953,441 1,872,430
Income Tax at 28% (Note 8.3) 4,431,721 1,153,700 2,226,963 524,281Income Tax on Current year Profit 4,431,721 1,153,700 2,226,963 524,281
8.3 Tax has been provided at the rate of 28% in respect of CSE & CDS for the Financial Year 2016 (28% in 2015).
As per the Inland Revenue Act No.10 of 2006 any person who derived income from the secondary market transactions in Government securities issued after or outstanding at 01 April 2002 would be entitled to a notional credit in relation to tax payable by such person. Accordingly, the net interest earned by the CSE for the year, has been grossed up in the Financial Statements and the resulting notional credit is Rs.1,215,248/- ( Rs. 260,469/- in 2015).
9 Property & Equipment
9.1 GROUP Furniture & Office Motor
Fittings Computers Equipment Vehicles Telephones Total
Cost Rs. Rs. Rs. Rs. Rs. Rs.
As at 01 January 2016 164,839,315 382,482,084 49,055,678 12,190,987 14,414,882 622,982,946Additions 2,899,150 12,124,381 532,615 - 247,080 15,803,226Transfers from Capital Work in Progress - 127,400 - - - 127,400Disposals (7,731,920) - (3,204,702) - (517,858) (11,454,480)As at 31 December 2016 160,006,545 394,733,865 46,383,591 12,190,987 14,144,104 627,459,092
Accumulated DepreciationAs at 01 January 2016 86,395,404 280,053,796 33,247,401 2,266,009 10,982,693 412,945,303Charge for the year 10,611,073 45,124,693 6,098,770 2,389,829 2,187,415 66,411,780Disposals (3,400,250) - (2,838,400) - (511,512) (6,750,162)As at 31 December 2016 93,606,227 325,178,489 36,507,771 4,655,838 12,658,596 472,606,921
Net Book ValueAs at 31 December 2016 66,400,318 69,555,376 9,875,820 7,535,149 1,485,508 154,852,171
As at 31 December 2015 78,443,911 102,428,288 15,808,277 9,924,978 3,432,189 210,037,643
Colombo Stock Exchange | Annual Report 2016 117
9.1.1 Based on the assessment carried out internally, by the Board of Directors no provision was required for the potential impairment of fixed assets as at 31 December 2016.
9.1.2 Gross carrying amount of fully depriciated assets as at 31 December 2016 is Rs. 11,809,819.
9.1.3 There were no restrictions on the title of the Property and Equipment as at 31 December 2016.
9.1.4 There were no items of Property and Equipment pledge as security as at 31 December 2016.
9.2 COMPANY Furniture & Office Motor
Fittings Computers Equipment Vehicles Telephones Total
Cost Rs. Rs. Rs. Rs. Rs. Rs.
As at 01 January 2015 164,447,998 379,610,647 48,929,959 12,190,987 14,354,032 619,533,623
Additions 2,899,150 12,124,381 532,615 - 247,080 15,803,226
Transfers from Capital Work in Progress - 127,400 - - - 127,400
Disposals (7,731,920) - (3,204,702) - (517,858) (11,454,480)
As at 31 December 2016 159,615,228 391,862,428 46,257,872 12,190,987 14,083,254 624,009,769
Accumulated Depreciation
As at 01 January 2015 86,004,111 277,182,372 33,121,687 2,266,009 10,921,845 409,496,024
Charge for the year 10,611,073 45,124,693 6,098,770 2,389,829 2,187,415 66,411,780
Disposals (3,400,250) - (2,838,400) (511,512) (6,750,162)
As at 31 December 2016 93,214,934 322,307,065 36,382,057 4,655,838 12,597,748 469,157,642
Net Book Value
As at 31 December 2016 66,400,294 69,555,363 9,875,815 7,535,149 1,485,506 154,852,127
As at 31 December 2015 78,443,887 102,428,275 15,808,272 9,924,978 3,432,187 210,037,599
9.2.1 Based on the assessment carried out internally, by the Board of Directors no provision was required for the potential impairment of fixed assets as at 31 December 2016.
9.2.2 Gross carrying amount of fully depriciated assets as at 31 December 2016 is Rs. 11,360,540
9.2.3 There were no restrictions on the title of the Property,Plant and Equipment as at 31 December 2016.
9.2.4 There were no items of Property, Plant and Equipment pledge as security as at 31 December 2016.
118
Notes to the Financial Statements
Group Company
As at 31 December, 2016 2015 2016 2015
Rs. Rs. Rs. Rs.
10 Intangible Assets
Cost
Balance as at 01 January 492,624,868 488,741,543 492,237,479 488,741,543
Acquitision and Transfers during the year 21,786,189 3,883,325 21,740,883 3,495,936
Balance as at 31 December 514,411,057 492,624,868 513,978,362 492,237,479
Accumulated Amortization
Balance as at 01 January 273,871,016 239,923,763 273,857,226 239,923,763
Charge for the year 33,275,969 33,947,253 33,189,261 33,933,463
Balance as at 31 December 307,146,985 273,871,016 307,046,487 273,857,226
Net Book Value 207,264,072 218,753,852 206,931,875 218,380,253
Intangible Assets consist of application software used in trading, clearing, settlement, surveillance, accounting, mail systems and the web site of the Colombo Stock Exchange.
Group Company
As at 31 December, 2016 2015 2016 2015
Rs. Rs. Rs. Rs.
11 Capital Work in Progress
Balance as at 01 January 56,417,620 38,893,634 56,417,620 38,893,634
Incurred during the year 29,974,924 43,715,734 29,974,924 43,715,734
Transfers (16,902,522) (26,191,748) (16,902,522) (26,191,748)
Balance as at 31 December 69,490,022 56,417,620 69,490,022 56,417,620
Group Company
As at 31 December, 2016 2015 2016 2015
Rs. Rs. Rs. Rs.
12 Investment in Subsidiary
Central Depository Systems (Pvt) Ltd.
(10,000,000 Ordinary Shares) - - 25,000 25,000
- - 25,000 25,000
Colombo Stock Exchange | Annual Report 2016 119
Group Company
As at 31 December, 2016 2015 2016 2015
Rs. Rs. Rs. Rs.
13 Financial Investments - Held to Maturity
Investment in Listed Debenture of People's Leasing and Finance PLC 183,500,000 183,500,000 183,500,000 183,500,000
Investment in Listed Debenture of DFCC Bank PLC 200,000,000 - 200,000,000 -
Investment in Listed Debenture of HNB PLC 200,000,000 - 200,000,000 -
Investment in Listed Debenture of Sampath Bank PLC 150,000,000 - 150,000,000 -
733,500,000 183,500,000 733,500,000 183,500,000
Interest Receivable 46,479,389 2,323,706 46,479,389 2,323,706
779,979,389 185,823,706 779,979,389 185,823,706
Group Company
As at 31 December, 2016 2015 2016 2015
Rs. Rs. Rs. Rs.
14 Financial Investments - Available-for-Sale
Long Term Investments
NDB Wealth - Eagle Gilt Edged Fund - 261,883,940 - -
- 261,883,940 - -
Current Investments
CEYBANK - Savings Plus Money Market Fund 162,363,815 653,538,245 162,363,815 653,538,245
CEYBANK - Surakum Gilt Edged Fund - 309,028,308 - 309,028,308
NDB Wealth - Eagle Money Plus Fund 242,126,233 367,946,279 242,126,233 367,946,279
NDB Wealth - Eagle Income Fund - 252,871,698 - 252,871,698
JB Vantage - Money Market Fund 337,859,525 306,842,694 168,929,762 153,421,347
Guardian Acuity Money Market Fund 50,890,403 - 50,890,403 -
793,239,975 1,890,227,224 624,310,213 1,736,805,877
Total 793,239,975 2,152,111,164 624,310,213 1,736,805,877
120
Notes to the Financial Statements
14.1 Financial Investments - Available-for-Sale (Ctd.)
As at 31 December, 2016 2015
Group No. of Units Rs. No. of Units Rs.
CSE
CEYBANK - Savings Plus Money Market Fund 15,293,247 162,363,815 63,324,281 653,538,245
CEYBANK - Surakum Gilt Edged Fund - - 29,357,733 309,028,308
NDB Wealth - Eagle Money Plus Fund 15,691,202 242,126,233 25,937,099 367,946,279
NDB Wealth - Eagle Income Fund - - 24,213,310 252,871,698
JB Vantage - Money Market Fund 9,769,696 168,929,762 9,769,696 153,421,347
Guardian Acuity Money Market Fund 3,714,655 50,890,403 - -
624,310,213 1,736,805,877
CDS
NDB Aviva - Eagle Gilt Edged Fund - - 25,566,115 261,883,940
JB Vantage - Money Market Fund 9,769,696 168,929,762 9,769,696 153,421,347
168,929,762 415,305,287
Total 793,239,975 2,152,111,164
Group Company
As at 31 December, 2016 2015 2016 2015
Rs. Rs. Rs. Rs.
15 Investment in LFSB
Ordinary Shares 1,000,000 1,000,000 - -
1,000,000 1,000,000 - -
This represents the 100,000 Ordinary Shares purchased from Lanka Financial Services Bureau Ltd (LFSB) by the Central Depository Systems (Pvt) Ltd. LFSB is the SWIFT Service Bureau for Sri Lanka which facilitates inter-bank transactions.
16 Settlement Guarantee Fund
Group Company
As at 31 December, 2016 2015 2016 2015
Rs. Rs. Rs. Rs.
Settlement Guarantee Fund 100,000,000 100,000,000 100,000,000 100,000,000
100,000,000 100,000,000 100,000,000 100,000,000
This fund was established as a Trust on 22 May 1988 to guarantee the settlement of trades between clearing members of the Central Depository System of the Colombo Stock Exchange and to provide for matters connected therewith and incidential thereto. Current trustees of the fund are Securities Exchange Commission of Sri Lanka (SEC) and Colombo Stock Exchange (CSE). The CSE has decided to transfer Rs. 100 Million to strengthen the Settlement Guarantee Fund subsequent to the fund meeting held on 20 December 2011 and transferred the funds on 18 January 2012.
Colombo Stock Exchange | Annual Report 2016 121
17 Deferred Tax Assets
Group Company
As at 31 December, 2016 2015 2016 2015
Rs. Rs. Rs. Rs.
Deferred Tax Liabilities (72,089,842) (55,935,639) (72,089,842) (55,935,639)
Deferred Tax Assets 72,089,842 55,935,639 72,089,842 55,935,639
- - - -
Deferred tax assets and liabilities are attributable to the following originations of temporary differences;
Property, equipment & intangible assets 72,089,842 199,770,140 72,089,842 199,770,140
Retirement Benefit Obligation (12,104,464) (55,365,883) (12,104,464) (55,365,883)
Brought Forward Tax Loss (59,985,378) (144,404,257) (59,985,378) (144,404,257)
Total Taxable Temporary Difference - - - -
Applicable Tax Rate 28% 28% 28% 28%
Deferred Tax Assets - - - -
Deferred Tax Assets arising from the unused tax losses has been recognized only to the extent of entity’s taxable temporary differences. Hence, the full amount of differed tax asset arising from the unused tax loss has not been recognized in the Financial Statements in accordance with the LKAS 12 - "Income taxes" due to the unavailability of convincing other evidence that sufficient taxable profit will be available against which the unused tax loss can be utilized by the entity.
Group Company
As at 31 December, 2016 2015 2016 2015
Rs. Rs. Rs. Rs.
18 Trade & Other Receivables
Trade Receivables 40,868,033 45,825,342 11,985,022 10,237,140
Provision for Impairment (7,022,427) (5,643,074) (3,432,138) (2,400,735)
33,845,606 40,182,268 8,552,884 7,836,405
CSE & CDS Fees Receivable 3,982,995 1,743,907 3,097,880 1,356,365
Prepayments 38,947,049 61,800,389 38,494,939 61,613,205
Advance Payments 4,340,211 4,386,578 4,330,211 4,386,578
Refundable Deposits 54,715,771 54,517,438 54,715,771 54,517,438
Sundry Debtors 46,123,503 37,873,872 44,524,031 36,792,934
Other Receivable 269,628 2,361,076 269,628 1,994,911
Interest Receivable 974,962 22,471 261,717 20,384
Staff Loans 51,909,582 53,226,167 51,909,582 53,226,167
Prepaid Staff Cost 14,800,929 17,817,673 14,800,929 17,817,673
249,910,235 273,931,839 220,957,571 239,562,060
122
Notes to the Financial Statements
Group Company
As at 31 December, 2016 2015 2016 2015
Rs. Rs. Rs. Rs.
19 Other Investment
Investment in Fixed Deposit 150,000,000 - - -
Interest Receivable 2,980,105 - - -
152,980,105 - - -
20 Cash & Cash Equivalents
Treasury Bill - Repos 565,000,000 - 395,000,000 -
Overnight Repos 169,020,439 152,917,412 139,991,391 131,865,570
Cash at Bank 23,878,662 5,114,670 22,894,781 4,219,971
RTGS Account 17,600 17,600 - -
Cash in Hand 230,050 230,050 225,050 225,050
Favourable balance 758,146,752 158,279,732 558,111,222 136,310,591
Bank Overdraft (16,534,611) (770,032) (16,534,611) (421,449)
Cash & Cash Equivalents in the Statement of Cash Flows 741,612,141 157,509,700 541,576,611 135,889,142
21 Other Reserves
Capital Reserve (Note 21.1) 99,975,000 99,975,000 - -
Available-for-Sale Reserve 81,455,640 44,105,868 62,525,877 37,018,339
181,430,640 144,080,868 62,525,877 37,018,339
21.1 Capital Reserve
This represents 4,997,500 Ordinary Shares issued by CDS on capitalisation of its Revenue Reserves in Year 2004 and the transfer of its Capital Redemption Reserve in Year 2009.
Group Company
As at 31 December, 2016 2015 2016 2015
Rs. Rs. Rs. Rs.
22 Broker Deposits In Lieu Of Bank Guarantee
Non Current Liability
Deposits for Computer Facility 111,670 111,670 111,670 111,670
Entrance Deposits 640,000 640,000 640,000 640,000
Deposits for Telephones 188,300 188,300 188,300 188,300
939,970 939,970 939,970 939,970
Current Liability
Broker Deposits (Note 22.1) 83,500,000 81,750,000 83,500,000 81,750,000
Dex Liquidity Deposits (Note 22.2) 11,330,000 11,330,000 - -
15% Margin Deposit (Note 22.3) 29,029,048 21,000,000 - -
123,859,048 114,080,000 83,500,000 81,750,000
Colombo Stock Exchange | Annual Report 2016 123
22.1 This is the cash deposit maintained by broker firms as part of their Liquidity Requirement in terms of Section 03 of Member Regulations of the Colombo Stock Exchange.
22.2 This is the cash deposit maintained by broker firms as part of their Liquidity Requirement in terms of Section 18 of CDS Regulations of the Colombo Stock Exchange.
22.3 This is the cash deposit maintained by broker firms as part of their Liquidity Requirement in terms of Section 5 of CDS Regulations of the Colombo Stock Exchange.
Group Company
2016 2015 2016 2015
Rs. Rs. Rs. Rs.
23 Retirement Benefit Obligations
Balance as at 01 January 61,939,239 52,011,600 61,939,239 52,011,600
Charge for the year 5,034,095 7,900,058 4,711,951 7,376,315
Interest for the year 6,467,979 4,932,503 5,707,230 4,395,906
Actuarial Gains / (Losses) recognized in OCI (24,708,137) (2,212,502) (21,904,272) (2,232,151)
Provision transferred to Subsidiary - - (1,720,972) 1,079,989
Payments made during the year (5,502,946) (692,420) (5,502,946) (692,420)
Balance as at 31 December 43,230,230 61,939,239 43,230,230 61,939,239
As required by the Sri Lanka Accounting Standard LKAS 19 - “Employee Benefits”, the company has provided gratuity liability based on the Projected Unit Credit Method.
The principal assumptions used to arrive above gratuity liability are as follows;
2016 2015
Expected Annual Average Salary Increment 4% 11.00%
Discounting Rate / Interest Rate 11.75% 9.79%
Staff Turnover Factor 15.30% 9.60%
23.1 Sensitivity of Assumptions Employed on Gratuity Formula Method
Assumptions regarding discount rate and salary increment rate have a significant effect on the amounts recognised in profit or loss and statement of financial position.
Following table demonstrates the sensitivity to a reasonably possible change in the key assumptions employed with all other variables held constant in the employment benefit liability measurement.
Salary
Discount Rate Increases
-1% -1%
Effect on the Aggregate Service and Interest Cost (301,394) 133,206
Effect on Defined Benefit Obligation (2,411,738) 3,029,825
124
Notes to the Financial Statements
Group Company
As at 31 December, 2016 2015 2016 2015
Rs. Rs. Rs. Rs.
24 Other Payables
Interest Payable to Brokers 1,905,746 1,205,181 1,892,336 1,201,015
Payments Received in Advance 1,907,328 1,263,143 1,895,065 1,263,143
Sundry Creditors & Accrued Expenses 83,781,195 86,349,565 80,370,287 84,207,784
87,594,269 88,817,889 84,157,688 86,671,942
25 Amounts due to Related Company Relationship
Central Depository Systems (Pvt) Limited Subsidiary - - 51,791,438 121,439,970
- - 51,791,438 121,439,970
26 Contingencies & Commitments
26.1 Litigation Against the CSE
1) The case bearing No. SC Appeal No. 180/2012 (SC SPL L.A. 199/2010) was filed in the Supreme Court of Colombo against the Colombo Stock Exchange (CSE) by Ms. Preeni Witharanage, who is a former employee of the CSE. This case is an appeal filed against the decision made by the High Court of Colombo on 30 September 2010 in case bearing No. HCALT 40/2008. Both Labour Tribunal and the High Court orders have been made in favour of the CSE. Ms.Witharanage claims re-instatement with back wages and other allowances or compensation in lieu of re-instatement.The matter has been fixed for hearing on 3rd June 2017.
2) Mr.I.B.Isaac (Plaintiff) claimed Rs.21,784,454.97 (Including consequential damages) from the CSE stating that the CSE has failed to properly execute duty,was negligent and failed to exercise due diligence (Prior to the announcement of 2006 bonus issue of Touchwood Invetments PLC) to safeguard Plaintiff.
On 17th October 2016, the District Court of Colombo pronounced the judgement in favour of the Plaintiff granting him the releifs prayed under a,c and d of prayer to the plaint,namely,
- An amount of Rs. 11,784,454.97 with interest in respect of the losses made by him due to the investments in shares of Touchwood;
- The aggregate interest up until the settlement of the dues as prescribed above;and,
- Legal fees.
The CSE, on 09th December 2016,filed a petition of Appeal in the High Court of Civil Appeal of the Western Province praying to set aside the judgement of the District Court dated 17th October 2016. CSE await the Appeal to be listed for Argument in the High Court of Civil Appeal of the Western Province holden in Colombo.
Based on the legal advice, the directors do not expect outcome of the pending litigations to have material effect on the Financial Statements.
Colombo Stock Exchange | Annual Report 2016 125
26.2 Tax Assessments Against the CSE
The Department of Inland Revenue has issued assessment notices for income tax amounting to Rs. 16.1 million for the Year of Assessment 2005/2006, Rs.17.6 million for the Year of Assessment 2006/2007, Rs. 0.3 million for the Year of Assessment 2007/2008 and Rs.0.4 million for the Year of Assessment 2009/2010. In addition to the above the Department of Inland Revenue has issued taxes in default notice for income tax amounting to Rs. 2.84 million, Rs.0.04 million, Rs. 0.027 million & Rs. 4.5 million for the Year of Assessment 1997/1998, 1999/2000, 2003/2004, 2008/2009 respectively. The CSE has appealed to quash the income tax assessments issued by the Department of Inland Revenue. Based on the consultant opinion, Board of Directors of the company is of the view that, no liability would arise to the company since the said assessments are outside the scope of chargeability of taxation.
26.3 Tax Assessments Against the CDS
The Department of Inland Revenue has issued assessment notices for income tax amounting to Rs. 3.94 million for the Year of Assessment 2008/2009 and Rs. 3.03 million for the Year of Assessment 2009/2010 respectively. The CDS has appealed to quash the income tax assessment issued by the Department of Inland Revenue. Based on the consultant opinion, Board of Directors of the company is of the view that, no liability would arise to the company since the said assessments are outside the scope of chargeability of taxation.
27 Capital Commitments
The Group and the Company has following purchase commitments in the ordinary course of business as at 31 December as follows:
Group Company
As at 31 December, 2016 2015 2016 2015
Rs. Rs. Rs. Rs.
Property and Equipment
- approved & contracted 23,945,128 13,388,763 23,945,128 13,388,763
23,945,128 13,388,763 23,945,128 13,388,763
28 Financial Instruments
28.1 Financial Risk Management
Overview
The Group has exposure to the following risks from financial instruments:
a) Credit Risk
b) Liquidity Risk
c) Market Risk
d) Operational Risk
This note presents information about the Group’s exposure to each of the above risks, the Group’s objectives, policies and processes for measuring and managing risk, and the Group’s management of capital.
126
Notes to the Financial Statements
Risk Management Framework
The Board of Directors has overall responsibility for the establishment and oversight of the Group’s risk management framework. In discharging its governance responsibility it operates through Risk & Audit Committee. The primary function of the Committee is to ensure the establishment of appropriate risk management framework within the Group. The Risk & Audit Committee is assisted in these functions by Internal Audit and the results are reported to the Risk & Audit Committee. The Risk & Audit Committee provides its assessment on the effectiveness of internal audit and external disclosure of accounting policies and financial reporting to the Board. Risk management policies and systems are reviewed regularly to reflect changes in market conditions, products and services offered. The Group has developed an Enterprise Risk Management framework & policy and currently in the process of reviewing the framework.
(a) Credit Risk
Credit risk is the risk of financial loss to the Group if counterparty to a financial instrument fails to meet its contractual obligations. The Group is exposed to credit risk primarily from investment in unit trust, investment in fixed deposit, staff loans receivable, trade & other receivables which are financial assets and cash and bank balances with financial institutions. Majority of the investments in unit trust as at the reporting date are invested in Gilt Edged unit trusts where 100% of its funds are invested in Government securities. Fixed deposit investments are in financial institutions which are having good credit ratings. Receivables are monitored to ensure that exposure to bad debts are minimised. Staff loans are given to permanent confirmed employees and are deducted from the salaries as per the terms of granting loans.
(b) Liquidity Risk
Liquidity risk is the risk that the Group will not be able to honour its financial obligations as they fall due.
Finance division monitors the cash flow forecasts of the Group to ensure sufficient cash availability to meet operational needs. The Group is able to meet all working capital requirements with its short term investments in Overnight Repo and money market unit trusts. Brokers’ Deposits in lieu of Bank Guarantee is the cash deposit maintained by broker firms as part of their Liquidity Requirement and have been invested in Overnight Repo investments in order to meet liquidity as and when required.
Surplus cash held over and above balance required for working capital management is invested in Overnight Repos and money market unit trusts.
The following are the remaining contractual maturities at the end of the reporting period of financial liabilities, including estimated interest payments.
Colombo Stock Exchange | Annual Report 2016 127
Carrying 03 Months or
Non -Derivative Financial Assets Amount Total Less 03-12 Months Over 01 Year
Rs. Rs. Rs. Rs. Rs.
Group
31 December 2016
Cash & Cash Equivalents 230,050 230,050 230,050 - -
Balances with Banks & Financial Institutions 757,916,702 757,916,702 757,916,702 - -
Financial Investments - Available-for-Sale 793,239,975 793,239,975 - - -
Investments in Corporate Debenture 779,979,389 779,979,389 - - 779,979,389
Investments in LFSB 1,000,000 1,000,000 - - 1,000,000
Trade and Other Receivables 249,910,235 249,910,235 249,910,235 - -
2,582,276,351 2,582,276,351 1,008,056,987 - 780,979,389
Finacial Liabilities
Brokers' Deposits in lieu of Bank Guarantee 124,799,018 124,799,018 41,299,018 - 83,500,000
Trade Payables 87,594,269 87,594,269 87,594,269 - -
Bank Overdraft 16,534,611 16,534,611 16,534,611 - -
228,927,898 228,927,898 145,427,898 - 83,500,000
Carrying 03 Months or
Non -Derivative Financial Assets Amount Total Less 03-12 Months Over 01 Year
Rs. Rs. Rs. Rs. Rs.
31 December 2015
Cash & Cash Equivalents 230,050 230,050 230,050 - -
Balances with Banks & Financial Institutions 158,049,682 158,049,682 158,049,682 - -
Financial Investments - Available-for-Sale 2,152,111,164 2,152,111,164 1,637,355,526 252,871,698 261,883,940
Investments in Corporate Debentures 183,500,000 183,500,000 - - 183,500,000
Investments in LFSB 1,000,000 1,000,000 - - 1,000,000
Trade and Other Receivables 215,711,651 215,711,651 215,711,651 - -
2,710,602,547 2,710,602,547 2,011,346,909 252,871,698 446,383,940
Finacial Liabilities
Brokers' Deposits in lieu of Bank Guarantee 115,019,970 115,019,970 32,330,000 - 82,689,970
Trade Payables 88,817,889 88,817,889 88,817,889 - -
Bank Overdraft 770,032 770,032 770,032 - -
204,607,891 204,607,891 121,917,921 - 82,689,970
128
Notes to the Financial Statements
Carrying 03 Months or
Non -Derivative Financial Assets Amount Total Less 03-12 Months Over 01 Year
Rs. Rs. Rs. Rs. Rs.
Company
31 December 2016
Cash in Hand 225,050 225,050 225,050 - -
Balances with Banks & Financial Institutions 757,916,702 757,916,702 757,916,702 - -
Financial Investments - Available-for-Sale 624,310,213 624,310,213 624,310,213 - -
Investments in Corporate Debentures 779,979,389 779,979,389 - - -
Trade and Other Receivables 220,957,571 220,957,571 - - -
2,383,388,925 2,383,388,925 1,382,451,965 - -
Finacial Liabilities
Brokers' Deposits in lieu of Bank Guarantee 84,439,970 84,439,970 - - 84,439,970
Trade Payable 84,157,688 84,157,688 84,157,688 - -
Bank Overdraft 16,534,611 16,534,611 16,534,611 - -
185,132,269 185,132,269 100,692,299 - 84,439,970
Non -Derivative Financial Assets
31 December 2015
Cash in Hand 225,050 225,050 225,050 - -
Balances with Banks & Financial Institutions 136,085,541 136,085,541 136,085,541 - -
Financial Investments - Available-for-Sale 1,736,805,877 1,736,805,877 1,483,934,179 252,871,698 -
Investments in Corporate Debentures 183,500,000 183,500,000 - - -
Trade and Other Receivables 178,286,717 178,286,717 - - -
2,234,903,185 2,234,903,185 1,620,244,770 252,871,698 -
Finacial Liabilities
Brokers' Deposits in lieu of Bank Guarantee 82,689,970 82,689,970 - - 82,689,970
Trade Payable 86,671,942 86,671,942 86,671,942 - -
Bank Overdraft 421,449 421,449 421,449 - -
169,783,361 169,783,361 87,093,391 - 82,689,970
(c) Market Risk
Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates that will affect the Group’s income. The objective of the market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return. The CSE has placed a special emphasis on the effect of market risk on fixed income securities and investments. Further, a board approved investment policy and an investment procedure mannual are in place at the group to mitigate the market risk. The Group has set up a risk management division.
Colombo Stock Exchange | Annual Report 2016 129
Currency Risk
The Group is exposed to currency risk on purchasing of assets and obtaining of services that are denominated in a currency other than the respective functional currency of the Group. The currency in which transactions primarily are denominated in U.S. Dollars. The currency risk is limited by the short term nature of the period between the dates of the purchase and the settlement of the related liability.
However, the Group is not exposed to a significant currency risk due to the reason that there are no foreign currency exposures as at the reporting date.
Interest Rate Risk
Interest rate risk arises due to fluctuations in the interest rate resulting in advers impact to future cash flows or the fair values of financial instruments of the Group.
The Group’s approach in managing interest rate risk is to continuously monitor positions on a daily basis to a level that are viable and prudent. When analysing impacts of interest rate movements on profitability, Management resorted to the techniques of sensitivity analysis carried out on group financial assets and liabilities, taking into account various interest rate scenarios.
Given below is a sensitivity analysis carried out as at 31 December 2016 that demonstrates possible impact to Group profitability due to a given change in interest rates, keeping all other variables constant.
Market Rates Market Rates
up by 1% drop by 1%
Effect to Effect to
the Interest the Interest
Income Income
Effect on Profit or Loss 740,783 (740,783)
(d) Operational Risk
Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the Group’s involvement with financial instruments, including processes, personnel, technology, infrastructure and from external factors other than credit, market and liquidity risks such as those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour. The Group is in the process of developing the procedure manuals in order to strengthen the systems, processes and internal controls.
130
Notes to the Financial Statements
28.2 Accounting Classification and Fair Values
Other Total
Held to Loans and Available for Financial Carrying
GROUP Note Maturity Receivables Sale Liabilities Amount Fair Value
Rs. Rs. Rs. Rs. Rs. Rs.
As at 31 December 2016
Assets
Cash in Hand 19 - 230,050 - - 230,050 230,050
Balances with Banks &
Financial Institutions
19
- 757,916,702 - - 757,916,702 757,916,702
Financial Investments -
Available-for-Sale
14
- - 793,239,975 - 793,239,975 793,239,975
Investments in Corporate
Debenture
13
779,979,389 - - - 779,979,389 779,979,389
Investment in Fixed Deposit 19 - 152,980,105 - - 152,980,105 152,980,105
Investments in LFSB 15 - - 1,000,000 - 1,000,000 1,000,000
Trade and Other
Receivables
18
- 249,910,235 - - 249,910,235 249,910,235
Total Financial Assets 779,979,389 1,161,037,092 794,239,975 - 2,735,256,457 2,735,256,457
Liabilities
Due to Customers - - - 2,367,790 2,367,790 2,367,790
Due to Brokers - - - 126,704,764 126,704,764 126,704,764
Due to Banks - - - 16,534,611 16,534,611 16,534,611
Other Financial Liabilities - - - 83,320,734 83,320,734 83,320,734
Total Financial Liabilities - - - 228,927,898 228,927,898 228,927,898
As at 31 December 2015
Assets
Cash in Hand 19 - 230,050 - - 230,050 230,050
Balances with Banks &
Financial Institutions
19
- 158,049,682 - - 158,049,682 158,049,682
Financial Investments -
Available-for-Sale
14
- - 2,152,111,164 - 2,152,111,164 2,152,111,164
Investments in Corporate
Debenture
13
183,500,000 - - - 183,500,000 183,500,000
Investments in LFSB 15 - - 1,000,000 - 1,000,000 1,000,000
Trade and Other
Receivables
18
- 215,711,651 - - 215,711,651 215,711,651
Total Financial Assets 183,500,000 373,991,383 2,153,111,164 - 2,710,602,547 2,710,602,547
Liabilities
Due to Customers - - - 17,226,700 17,226,700 17,226,700
Due to Brokers - - - 116,225,151 116,225,151 116,225,151
Due to Banks - - - 770,032 770,032 770,032
Other Financial Liabilities - - - 70,386,008 70,386,008 70,386,008
Total Financial Liabilities - - - 204,607,891 204,607,891 204,607,891
Colombo Stock Exchange | Annual Report 2016 131
Other Total
Held to Loans and Available for Financial Carrying
COMPANY Note Maturity Receivables Sale Liabilities Amount Fair Value
Rs. Rs. Rs. Rs. Rs. Rs.
As at 31 December 2016
Assets
Cash in Hand 19 - 225,050 - - 225,050 225,050
Balances with Banks &
Financial Institutions
19
- 557,886,172 - - 557,886,172 557,886,172
Financial Investments -
Available-for-Sale
14
- - 624,310,213 - 624,310,213 624,310,213
Investments in Corporate
Debenture
13
779,979,389 - - - 779,979,389 779,979,389
Trade and Other Receivables 18 - 220,957,571 - - 220,957,571 220,957,571
Total Financial Assets 779,979,389 779,068,793 624,310,213 - 2,183,358,395 2,183,358,395
Liabilities
Due to Customers - - - 2,241,269 2,241,269 2,241,269
Due to Brokers - - - 86,332,306 86,332,306 86,332,306
Due to Banks - - - 16,534,611 16,534,611 16,534,611
Due to Related Parties - - - 51,791,438 51,791,438 51,791,438
Other Financial Liabilities - - - 80,024,083 80,024,083 80,024,083
Total Financial Liabilities - - - 236,923,707 236,923,707 236,923,707
As at 31 December 2015
Assets
Cash in Hand 19 - 225,050 - - 225,050 225,050
Balances with Banks &
Financial Institutions
19
- 136,085,541 - - 136,085,541 136,085,541
Financial Investments -
Available-for-Sale
14
- 1,736,805,877 - - 1,736,805,877 1,736,805,877
Investments in Corporate
Debenture
13
183,500,000 - - - 183,500,000 183,500,000
Other Receivables 18 - 178,286,717 - - 178,286,717 178,286,717
Total Financial Assets 183,500,000 2,051,403,185 - - 2,234,903,185 2,234,903,185
Liabilities
Due to Customers - - - 17,226,700 17,226,700 17,226,700
Due to Brokers - - - 83,890,985 83,890,985 83,890,985
Due to Banks - - - 421,449 421,449 421,449
Due to Related Parties - - - 121,439,970 121,439,970 121,439,970
Other Financial Liabilities - - - 68,244,227 68,244,227 68,244,227
Total Financial Liabilities - - - 291,223,331 291,223,331 291,223,331
132
Notes to the Financial Statements
28.3 Fair Values of Financial Instruments
28.3.1 Valuation Models
The Group measures fair values using the following fair value hierarchy, which reflects the significance of the inputs used in making the measurements.
� Level 1: Inputs that are quoted market prices (unadjusted) in active markets for identical instruments.
� Level 2: Inputs other than quoted prices included within Level 1 that are observable either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques in which all significant inputs are directly or indirectly observable from market data.
� Level 3: Inputs that are unobservable. This category includes all instruments for which the valuation technique includes inputs not based on observable data and the unobservable inputs that have a significant effect on the instrument’s valuation. This category includes instruments that are valued based on quoted prices for similar instruments for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments.
28.3.2 Financial instruments Measured at Fair Value – Fair Value Hierarchy
The following table analyses financial instruments measured at fair value at the reporting date, by the level in the fair value hierarchy into which the fair value measurement is categorized. The amounts are based on the values recognized in the statement of financial position.
GROUP Level 1 Level 2 Level 3 Total
Rs. Rs. Rs. Rs.
31 December 2016
Assets
Financial Investments - Available-for-Sale - 793,239,975 - 793,239,975
Total Financial Assets - 793,239,975 - 793,239,975
Liabilities - - - -
31 December 2015
Assets
Financial Investments - Available-for-Sale - 2,152,111,164 - 2,152,111,164
Total Financial Assets - 2,152,111,164 - 2,152,111,164
Liabilities - - - -
Colombo Stock Exchange | Annual Report 2016 133
COMPANY Level 1 Level 2 Level 3 TotalRs. Rs. Rs. Rs.
31 December 2016AssetsFinancial Investments - Available-for-Sale - 624,310,213 - 624,310,213Total Financial Assets - 624,310,213 - 624,310,213
Liabilities - - - -
31 December 2015AssetsFinancial Investments - Available-for-Sale - 1,736,805,877 - 1,736,805,877Total Financial Assets - 1,736,805,877 - 1,736,805,877
Liabilities - - - -
Level 2 fair Value Measurements
28.3.3.1 Reconciliation
The following table shows a reconciliation from the beginning balances to the ending balances for fair value measurements in Level 2 of the fair value hierarchy.
Unit Trust Available for SaleGroup Company
Rs. Rs.
Balance at 01 January 2016 2,152,111,164 1,736,805,877Total gains or losses:- in profit or loss 31,498,622 24,335,926- in OCI 37,349,772 25,507,538Purchases 50,000,000 50,000,000Redemption (1,477,719,583) (1,212,339,128)Balance at 31 December 2016 793,239,975 624,310,213
Total gains or losses for the year in the above table are presented in the statement of profit or loss and OCI as follows.
Unit Trust Available for SaleGroup Company
Rs. Rs.
Total gains and losses recognised in profit or loss:Net trading income 31,498,622 24,335,926
Total gains and losses recognised in OCI:Net change in fair value of available-for-sale financial assets 37,349,772 25,507,538
134
Notes to the Financial Statements
28.3.3.2 Unobservable Inputs Used in Measuring Fair Value
The fair value of Unit Trust investments are determined by the relevant Unit Trust Fund Management Company. The Unit Trust Fund Management Company provides the fair value of the Group's investment portfolio monthly.
Financial Instruments Not Measured at Fair Value
This table sets out the fair values of financial instruments not measured at fair value and analyses them by the level in the fair value hierarchy into which each fair value measurement is categorised.
Total Fair Total Carrying
GROUP Level 01 Level 02 Level 03 Values Amount
Rs. Rs. Rs. Rs. Rs.
31 December 2016
Assets
Cash & Cash Equivalents - - 230,050 230,050 230,050
Balances with Banks & Financial Institutions
- - 757,916,702 757,916,702 757,916,702
Investments in LFSB - - 1,000,000 1,000,000 1,000,000
Other Receivables - - 249,910,235 249,910,235 249,910,235
Total Financial Assets - - 1,009,056,987 1,009,056,987 1,009,056,987
Liabilities
Due to Customers - - 2,367,790 2,367,790 2,367,790
Due to Brokers - - 126,704,764 126,704,764 126,704,764
Due to Banks - - 16,534,611 - -
Other Financial Liabilities - - 83,320,734 83,320,734 83,320,734
Total Financial Liabilities - - 228,927,898 212,393,287 212,393,287
31 December 2015
Assets
Cash & Cash Equivalents - - 230,050 230,050 230,050
Balances with Banks & Financial Institutions
- - 158,049,682 158,049,682 158,049,682
Investments in LFSB - - 1,000,000 1,000,000 1,000,000
Other Receivables - - 298,102,631 298,102,631 298,102,631
Total Financial Assets - - 457,382,363 457,382,363 457,382,363
Liabilities
Due to Customers - - 17,226,700 17,226,700 17,226,700
Due to Brokers - - 116,225,151 116,225,151 116,225,151
Due to Banks - - 770,032 421,449 421,449
Other Financial Liabilities - - 70,386,008 70,386,008 70,386,008
Total Financial Liabilities - - 204,607,891 204,259,308 204,259,308
Colombo Stock Exchange | Annual Report 2016 135
28.3.3.3 Financial Instruments Not Measured at Fair Value
This table sets out the fair values of financial instruments not measured at fair value and analyses them by the level in the fair value hierarchy into which each fair value measurement is categorised.
Total Fair Total Carrying
COMPANY Level 01 Level 02 Level 03 Values Amount
Rs. Rs. Rs. Rs. Rs.
31 December 2016
Assets
Cash & Cash Equivalents - - 225,050 225,050 225,050
Balances with Banks & Financial Institutions
- - 557,886,172 557,886,172 557,886,172
Other Receivables - - 220,957,571 220,957,571 220,957,571
Total Financial Assets - - 779,068,793 779,068,793 779,068,793
Liabilities
Due to Customers - - 2,367,790 2,367,790 2,367,790
Due to Brokers - - 86,332,306 86,332,306 86,332,306
Due to Banks - - 16,534,611 16,534,611 16,534,611
Other Financial Liabilities - - 80,024,083 80,024,083 80,024,083
Total Financial Liabilities - - 185,258,789 185,258,789 185,258,789
31 December 2015
Assets
Cash & Cash Equivalents - - 225,050 225,050 225,050
Balances with Banks & Financial Institutions
- - 136,085,541 136,085,541 136,085,541
Other Receivables - - 259,900,090 259,900,090 259,900,090
Total Financial Assets - - 396,210,681 396,210,681 396,210,681
Liabilities
Due to Customers - - 17,226,700 17,226,700 17,226,700
Due to Brokers - - 83,890,985 83,890,985 83,890,985
Due to Banks - - 421,449 421,449 421,449
Other Financial Liabilities - - 68,244,227 68,244,227 68,244,227
Total Financial Liabilities - - 169,783,361 169,783,361 169,783,361
Assets for which Fair Value approximates Carrying Value
For Financial assets and Financial Liabilities that have a short term maturity (original maturity less than a year), it is assumed that the carrying amount approximate their values.
136
Notes to the Financial Statements
29 Related Party Disclosures
29.1 Transactions with Key Management Personnel
According to Sri Lanka Accounting Standard (LKAS 24) “Related Party Disclosures”, Key Management Personnel, are those having authority and responsibility for planning, directing and controlling the activities of the entity. Accordingly, the Board of Directors (including Executive and Non-Executive Directors) and Senior Management who can influence the planning & decision making process have been classified as Key Management Personnel of the Company.
Close Family Members (CFM) of the KMPs are those family members who may be expected to influence or be influenced by that KMPs in their dealing with the entity.They may include KMPs domestic partner and children of the KMPs domestic partner and dependants of the KMPs domestic partner.
CSE paid Rs. 11,507,000 during the year as Directors’ Expenses. (Rs. 7,183,000 /- in 2015)
The Company has incurred following costs for the CEO, CIO, AGMs, Senior Managers and Managers during the year.
Company
2016 2015
Amount Rs. Amount Rs.
Short Term Employee Benefits 111,245,816 87,123,049
Long Term Employee Benefits 15,698,003 8,418,206
29.2 Transactions with Group Companies and Director Related Entities
Company Relationship Nature of Transaction 2016 2015
Amount Amount
Rs. Rs.
a) Mr. Vajira KulatilakaNDB Securities (Pvt) Ltd.
Director CSE Member fees, data communication charges & other charges received 1,123,783 977,794
Interest paid for Member Firms' liquidity deposit 215,555 200,660
Member Firms' liquidity deposit & entrance deposit receivable as at year end 2,290,000 2,290,000
Interest payable for Member Firms' liquidity deposit as at year end 47,340 33,056
Member fees and data communication charges receivable as at year end 168,434 197,936
Order Management systems & Broker Back office Systems - Subsidy 525,000 -
Colombo Stock Exchange | Annual Report 2016 137
Company Relationship Nature of Transaction 2016 2015
Amount Amount
Rs. Rs.
CDS Sale of CDS Forms 6,156 14,238
Amount receivable for sale of CDS Forms 294 3,398
Interest paid for Member Firms' margin deposit 68,549 53,064
NDB Wealth Management Ltd.
Director CSE Redemptions during the year 400,808,415 493,000,000
Investment in Unit Trusts as at year end - 620,817,978
Dividends received from Unit Trusts 8,474,658 32,799,834
CDS Redemptions during the year 265,380,454 261,883,940
Investment in Unit Trusts as at year end - 150,000,000
Dividends received from Unit Trusts 6,757,389 19,951,396
NDB Capital Holdings PLC
Director CSE Reiumbursement of Marketing Expense 35,893 -
Resus Energy PLC Director CSE Annual listing fee & Subscription for CSE Ticker data received 113,265 227,765
CDS Listed Company fee 25,510 73,913
Listed Company fee receivable as at year end 25,510 73,913
Computer Information Charges 13,726 135,639
Computer Information Charges Receivable as at year end 11 6,807
NDB Investment Bank Ltd.
Director CSE Receipt for MY CSE Subscription - 24,000
Receipt on Sponsership Income for SAFE Conference - 671,250
138
Notes to the Financial Statements
Company Relationship Nature of Transaction 2016 2015
Amount Amount
Rs. Rs.
b) Mr. M. R. PrelisCapital Trust Securities (Pvt) Ltd.
Director CSE Member fee, data communication charges & other charges 2,407,764 2,038,895
Member fee, data communication & other charges receivable 170,867 313,332
Interest paid for Member Firms' liquidity deposit 187,558 45,735
Member Firms' liquidity deposits & entrance deposit as at year end 3,540,000 -
Interest payable for Member Firms' liquidity deposit as at year end 230,077 -
Order Management systems & Broker Back office Systems - Subsidy 600,000 -
Receipts for advertising on CSE Mobile apps 60,000 -
CDS Sale of CDS Forms 4,988 1,529
Amount receivable for sale of CDS Forms 1,760 -
Interest paid for Member Firms' margin deposit 3,165 32,440
Dialog Axiata PLC Director CSE Annual listing fee & fee for high speed data signal fee 2,835,034 2,831,633
Amount receivable for high speed data signal Income 141,582 -
Payment made during the year for E1 link charges, mobile phone chrgaes & broad band charges 1,228,986 2,422,848
Amount payable for mobile phone charges as at year end 112,526 125,793
CDS Listed Company fee 96,903 205,959
Listed Company fee receivable as at year end 96,903 205,959
Computer Information Income & SMS Alert revenue share 2,038,625 -
Amount receivable for Computer Information Income & SMS Alert revenue share 371,838 298,969
Colombo Stock Exchange | Annual Report 2016 139
Company Relationship Nature of Transaction 2016 2015
Amount Amount
Rs. Rs.
c) Mr. Ray AbeywardenaAcuity Stockbrokers (Pvt) Ltd
Director CSE Member fee, data communication charges & other charges 1,417,703 1,117,152
Member fee, data communication & other charges receivable 108,129 131,080
Interest paid for Member Firms' liquidity deposit 262,943 143,352
Member Firms' liquidity deposit & entrance deposit as at year end 3,540,000 3,540,000
Interest payable for Member Firms' liquidity deposit as at year end 73,640 51,420
CDS Sale of CDS forms & Other CDS Charges 9,461 11,768
Amount receivable on sale of CDS forms as at year end - 765
Interest paid for Member Firms' margin deposit 37,234 30,727
Lanka Ventures PLC Director CSE Annual listing fee received 113,265 113,265
CDS Listed company fees 25,510 25,510
Receipts for computer information & other CDS Charges 9,061 12,235
Amount receivable for computer information provided as at year end - 4531
Listed company fees receivable as at year end 25,510 -
Softlogic Life Insurance PLC
Director CSE Amount receivable for computer information provided as at year end - 182,216
Annual listing fees 203,878 -
CDS Listed Company fee 115,225 125,597
Amount receivable for computer information provided as at year end 36,378 -
Computer information & other CDS Charges 210,795 23,245
Listed Company fee receivable as at year end 115,225 125,597
140
Notes to the Financial Statements
Company Relationship Nature of Transaction 2016 2015
Amount Amount
Rs. Rs.
Acuity Securities Ltd Director CSE Member fee, data communication charges & other charges 717,656 619,228
Member fee receivable as at year end 56,877 82,348
Guardian Acuity Asset Management Ltd
Director CSE Investment in Unit Trust made during the year 50,000,000 -
Investment in Unit Trust as at year end 50,890,403 -
d) Mr. A. C. SeneviratneNation Lanka Equities (Pvt) Ltd
Chairman CSE Member fee, data communication charges & other charges 1,449,132 1,084,610
Member fees and other charges receivable as at year end 183,331 249,930
Interest paid for Member Firms' liquidity deposit 189,303 143,352
Member Firms' liquidity deposit & entrance deposit as at year end 3,540,000 3,540,000
Interest payable for Member Firms' liquidity deposit as at year end 73,640 51,420
Order Management systems & Broker Back office Systems - Subsidy 525,000 -
CDS Interest Payment on Marging Deposit Balances 2,476 27,277
Sale of CDS forms 1,188 12,529
Computer Information Charges Receivable as at year end - 3,511
Nation Lanka Finance PLC
Director CSE Annual listing fee received N/A 113,265
Quotation fees received for initial listing of shares N/A 200,000
CDS Listed Company fee receivable as at year end N/A 203,571
Computer Information Charges Received N/A 10,965
Computer Information Charges Receivable as at year end N/A 5,663
Anilana Hotels & Properties Ltd
Director CSE Annual listing fees received 113,265 132,423
Colombo Stock Exchange | Annual Report 2016 141
Company Relationship Nature of Transaction 2016 2015
Amount Amount
Rs. Rs.
CDS Listed Company fees receivable as at year end 125,235 154,898
Computer Information Charges 10,235 17,671
Computer Information Charges Receivable as at year end 6,837 6,853
Listed Company fee receivable as at year end 125,235 154,898
e) Mr. A. PereraS C Securities (Pvt) Ltd Director CSE Member fees, photocopy charges & data
communication charges 1,548,026 1,296,730
Member fees and other charges receivable as at year end 326,987 193,794
Interest paid for Member Firms' liquidity deposit 200,405 136,600
Member Firms' liquidity deposit & entrance deposit as at year end 1,790,000 1,790,000
Interest payable for Member Firms' liquidity deposit as at year end 36,819 51,420
Order Management systems & Broker Back office Systems - Subsidy 525,000 -
CDS Sale of CDS Forms 4,190 8,297
Amount Receivable for Sale of CDS Forms 792 765
Interest paid for Member Firms' margin deposit 49,783 17,636
Dex Liquidity deposit as at year end 120,000 -
Siyapatha Finance Ltd. Chairman CSE Annual listing fee received 226,531 226,531
Quatation fee and My CSE income 114,041
CDS Listed Company fee 25,510 25,510
Listed Company fee receivable as at year end 25,510 -
Computer Information Charges 15,400 3,398
Computer Information Charges Receivable as at year end 6,395 1,133
New Listing Fee 56,632 -
142
Notes to the Financial Statements
Company Relationship Nature of Transaction 2016 2015
Amount Amount
Rs. Rs.
Sampath Bank PLC Managing Director (Until 12/9/2016)
CSE Annual listing fee
1,916,456 1,768,531
Additional Listing fee 306,122 150,000
Advertising on C.S.E banner 114,500 -
Investment made during the year in overnight Repo
2,994,823,000
5,561,920,000
Investment in overnight Repo - Closing Balance 15,152,000 18,847,000
Interest earned from investments 905,141 1,136,112
Interest receivable for investment in Overnight Repo 3,150 2,582
Investment in Debenture 150,000,000 -
CDS Participants Fees 102,755 132,551
Sale of CDS forms & Other CDS Charges 263,457 725,610
Listed Company fee 123,038 221,663
Listed Company fee receivable 123,038 221,663
Computer information chrages 523,131 181,054
Amount Receivable for computer information & Other chrages - 181,054
Lanka Financial Services Bureau Ltd
Director (Until 12/9/2016)
CDS Investment
1,000,000 1,000,000
Dividend received during the year 27,000 -
SWIFT connectivity charges 965,821 1,320,726
Amount payable as monthly SWIFT connectivity charges 59,092 58,834
f) Central Depository Systems (Pvt) Ltd
Fully owned Subsisiary
Fund Transfer In
(461,604,931) (244,828,672)
Fund Transfer Out 390,898,384 78,609,372
Expenses transferred 105,491,627 121,425,629
Dividend received 2,700,000 9,000,000
Cheque received on behalf of CDS (1,570,631) (1,608,601)
Cheque received on behalf of CSE 24,348,952 -
Interest Expense (780,960) (632,948)
CDS Rental Income & Management Fee 10,166,092 49,008,154
Colombo Stock Exchange | Annual Report 2016 143
30 Events Occuring after the Reporting Period
There were no material events after the Reporting Period, which require adjustments to or disclosure in the Financial Statements.
31 Dirctors' Responsibility Statement
The Board of Directors of the Company is responsible for the preparation and fair presentation of these Financial Statements in accordance with LKASs and SLFRSs.
32 Comparative Figures
To facilitate comparison, relevant balances pertaining to the previous year have been reclassified to confirm to current year classification and presentation where necessary.
144
Notice of Meeting
The 32nd Annual General Meeting of
the Colombo Stock Exchange (CSE) will
be held on 26th May 2017 at 5.00 p.m.
at the CSE Auditorium for the following
purposes: -
AGENDA
1. To receive and consider the Annual
Report of the Directors and Financial
Statement of the Company for the
year ended 31st December 2016
together with the Report of the
Auditors thereon.
2. Election / Re-election of Directors
a) To re-elect Mr. Asanga
Seneviratne who retires in terms
of Article 50 of the Articles of
Association. (Mr. Seneviratne
being eligible is offering himself for
re-election).
b) To elect a Director to fill the
vacancy created by the retirement
of Mr. Vajira Kulatilaka in terms
of Article 50 of the Articles of
Association. (Mr. Kulatilaka is not
offering himself for re-election).
c) To elect Mr. M. R. Prelis as a
Director in terms of Section 211
of the Companies Act No 7 of
2007 by passing the following
resolution.
“Resolved that Mr. M R Prelis of
3/3 Maitland Crescent, Colombo
7, who is 80 years of age is hereby
elected a Director in terms of
Section 211 of the Companies
Act No 7 of 2007 and it is further
specially declared that the age
limit of 70 years referred to in
Section 210 of the Companies Act
No 7 of 2007 shall not apply to the
said Mr. M. R. Prelis.”
3. To re-appoint the retiring Auditors
Messrs. KPMG, Chartered
Accountants, as the Auditors of the
Company, to hold office until the
conclusion of the next Annual General
Meeting of the Company, to audit the
Financial Statements of the Company
for the ensuing year and authorize
the Directors to determine their
remuneration.
4. To authorize the Directors to
determine donations for the year
ending 31st December 2017 and up
to the date of the next Annual General
Meeting.
5. To consider and if thought fit to pass
the following resolution as a Special
Resolution
IT IS HEREBY RESOLVED THAT the
Articles of Association be and are hereby
amended as follows:-
1. THAT Article 16 be amended (i) by
deleting the words ‘the minimum level
of net capital’ in the first paragraph of
the Article and substituting the words
‘ongoing capital and other prudential
requirements’ therefor, as the current
requirement of maintaining a minimum
net capital by Member Firms will not
be applicable with the introduction
of proposed Capital Adequacy Ratio
(CAR) for Member Firms, and (ii) by
amending the wording of the Article
to be strictly in line with the rules
pertaining to liquidity requirements
contained in the CSE Stockbroker
Rules, so that the revised Article 16
shall read as follows:-
“Every member shall at all times
maintain ongoing capital and other
prudential requirements as the Board
shall from time to time determine to
satisfy the provision of Article 4(iii) and
in addition maintain with the Exchange
the liquidity deposit in compliance
with the liquidity requirements as
the Board shall from time to time
determine for the due performance
and observance of its obligations to
the Exchange.
Without prejudice to the powers of the
Board herein or otherwise contained
the Board shall appropriate the
liquidity deposit to defray-
(i) the subscription fees, entrance
fees and other charges and dues
payable by the member to the
Exchange
(ii) any sum due and payable by the
member to any client of such
member; and
(iii) any sum or sums of money due
by such member to any fellow
member during the course of
the members dealing with the
Exchange as a licensed Broker.
On the basis that the member
concerned shall hold the Exchange
indemnified and saved harmless at
all times in respect of the bona fide
application thereof on behalf of the
member making payments under (i),
(ii) and (iii) above.
Provided however the exercise by the
Colombo Stock Exchange | Annual Report 2016 145
Exchange of the foregoing powers of
appropriating the liquidity deposit shall
not in any way prejudice the member
concerned from having recourse to
Arbitration (without impairing and/or
defeating the exercise of the foregoing
powers by the Exchange) and seeking
such relief as is available under the
provisions in that behalf contained in
these presents.”
By order of the Board
DirectorCORPORATE SERVICES (PRIVATE) LIMITEDSecretariesCOLOMBO STOCK EXCHANGE
At Colombo, on this 02nd day of May 2017.
Note:
(1) Any member entitled to attend and vote is entitled to appoint a corporate representative instead (please see attached form of resolution).
146
Corporate Representation
COLOMBO STOCK EXCHANGE
In terms of Article 46 of the Articles of Association of the Colombo Stock Exchange a body corporate, which is a member of the Exchange, may by resolution of its Board authorize any such person to act as its representative at a general meeting of the Exchange.
Specimen Resolution
A certified true copy of a Resolution passed by the Board of Directors of .................................................................. on .........................................
............ day of .................................................................. 2017.
IT IS HEREBY RESOLVED that pursuant to Article 46 of the Articles of Association of Colombo Stock Exchange to appoint ......................
................................................................................. (holder of National Identity Card No. ......................................................) of ..................................
.................... to act as our representative, to vote for us and to speak on our behalf and to exercise the same powers on our behalf which
we would exercise if we were individual Members of the Colombo Stock Exchange, at the Annual General Meeting of the Colombo
Stock Exchange to be held on .......................................... 2017, and at any adjournment thereof.
...................................................... ......................................................Director Director/Secretary
NOTE:
A copy of the Board Resolution as set out above, certified as specified by the Articles of the Member Firm should be deposited at the Office of the Colombo Stock Exchange, 04 – 01, West Block, World Trade Centre, Echelon Square, Colombo 1, either before or at the time of the meeting.
Colombo Stock Exchange | Annual Report 2016 147
Notes
148
Notes
Corporate Information
Name
Colombo Stock Exchange
Legal Status
A Company Incorporated in Sri Lanka and Limited by Guarantee
Company Registration Number
GL12
Subsidiary
Central Depository Systems (Private) Limited.
Registered Office
# 04-01, West Block, World Trade Center, Echelon Square, Colombo 1, Sri Lanka.
Secretaries
Corporate Services (Private) Limited
Auditors
KPMG
Lawyers
M/s Julius & Creasy, Attorneys-at-Law M/s FJ and G de Saram, Attorneys-at-Law
Bankers/ Settlement Banks
Bank of Ceylon Commercial Bank of Ceylon PLC Sampath Bank PLC
Colombo Stock Exchange Contact
Tel : +94 11 2356456FaxClearing and Settlement : +94 11 2440396 Finance : +94 11 2448921 Administration : +94 11 2325804 Information Technology : +94 11 2440162 Trading and Market Surveillance : +94 11 2448925 Market Development : +94 11 2445279 Listing and Corporate Affairs : +94 11 2391128 Human Resources : +94 11 2440163 Legal : +94 11 2440539 Email : [email protected] Website : www.cse.lk
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Colombo Stock Exchange Annual Report 2016
About Us 2Corporate Maxims 3Member Firms 4Market Highlights 8Operational Highlights 11Envisioning Full Service Offering 14Stakeholder Interaction Matrix 15Value Creation and Sustainability 19Strategy Update 22Chairman’s Statement 26Chief Executive Officer’s Review 30Board of Directors 38Management Structure 43Operational Review 44Corporate Governance Framework
of the CSE 76Corporate Sustainability Statement 90
Financial Information
Annual Report of the Board of Directors on the Affairs of the Company 94
Directors’ Responsibility for Financial Reporting 97
Risk and Audit Committee Report 98Independent Auditors’ Report 100Statement of Profit or Loss and other
Comprehensive Income 101Statement of Financial Position 102Statement of Changes in Equity 103Statement of Cash Flows 105Notes to the Financial Statements 106Notice of Meeting 144Corporate Representation 146Notes 147Corporate Information Back Inner
Cover
Contents
Designed & produced by REDWORKS
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Annual Report 2016
Tomorrow Together Towards
# 04-01, West Block,World Trade Center, Echelon Square,Colombo 1, Sri Lanka.Web: www.cse.lk
Colombo Stock Exchange | Annual Report 2016