How the 2020 pandemic spurred digitalisation for the Sri Lankan stock market

By: Rajeeva Bandaranaike, CEO, Colombo Stock Exchange Dec 2020

A year typically has a few defining moments which are etched in the memory of every individual. The year of 2020 thus far has contained so many paradigm changes, which has changed the lifestyles of people like never before. The pandemic outbreak within Sri Lanka in March led to in a lockdown imposed by the government to curb the spread of the virus, which resulted in the stock market being forced to close for 32 days

During this  period the Colombo Stock Exchange (CSE) was in the media for all the wrong reasons, with questions raised regarding the functionality of the exchange and our inability to operate during the pandemic. Arising out of the closure and in order to cope with what was now becoming a new normal, discussions were immediately held between the regulator, the operator of the market and market intermediaries, and a strategy was put in place to make the transition into a post-Covid era by introducing a new and revolutionary process which would re-define the operations of the Sri Lankan stock market.

A CSE and SEC joint committee was appointed by the Chairman of the SEC with the objective of digitalising the core activities of market participants, and together we embarked on a digitalisation drive, to digitalise all stakeholder touchpoints, enabling end-to-end electronic connectivity with an interactive user interface and user experience to be rolled out in four phases.

When the second wave of the pandemic hit us in August and more lockdowns were imposed as an industry we rose to the occasion exceptionally well and operated completely remotely despite the closures. Markets also recovered and we are now seeing record volumes despite operating remotely and turned the corner by moving into YTD positive returns on the indices for the first time in the year.

During phase one of the initiative, paper-based statements were converted to electronic form and listed companies were encouraged through rules to pay dividends electronically to shareholders. Furthermore, listed companies were further encouraged to dispatch annual reports electronically to shareholders through a rule change.

The second phase of the initiative introduced a mobile app-based online account opening feature, which has eliminated the need for an investor to physically visit a branch  of a stockbroker and has enabled seamless pre-trade, trade and post trade connectivity. The CSE mobile application has been relaunched with this new feature along with a range of new user-friendly options. Users can now stay up-to-date with access to live market data, the latest updates and news, and also have access to listed company information which will help them make informed investment decisions.

Since launching the mobile app, over 5,500 new securities accounts were submitted within the first two months of introducing this feature and nearly 80% of the accounts were from local investors below the age of 40, which is a significant shift in the age demographics of investors to a younger segment .

Our journey thus far 

The Colombo Stock Exchange was one of the first exchanges globally to enter the scripless age with the establishment of a central depository system in 1991, which was followed by the installation of a state-of-the-art screen-based trading system (ATS), the introduction of a market surveillance system, internet-based trading and the distribution of live market data through electronic feeds and through the website.

The CSE functions are based on internationally recognised standards and achieved three International Organization for Standardization (ISO) certifications in the areas of information security (ISO 27001), business continuity (ISO 22301) covering trading, registry and depository services, and IT service management (ISO 20000). The exchange now operates in compliance with globally accepted market operator standards and has been a member of the World Federation of Exchanges (WFE) since 1998.

The digitalisation and its impact to our stakeholders

The key element of the digitalisation drive is to make the exchange more accessible to investors in any part of the country and from overseas, including the the Sri Lankan diaspora. Given the high level of competition in the financial services space, digitalisation is imperative to create accessibility and top-of-the-mind brand recall which will enable the conversion of a prospect into an investor as a result of easy accessibility. This strategy will become more relevant as digital adoption deepens.

The digitalisation drive is enabling the exchange to effectively reach a broader section of the community and engage in investor education activities to promote the concept of savings versus investment

Stockbrokers now have an opportunity to broaden their investor base and remove a cumbersome process of client onboarding and makes it seamless. This has eliminated the paperwork and now enables investors to digitally sign all the connected documentation and for stockbrokers to perform an on-line know-your-customer (KYC) compliance and the verification of customer identification through an online connection to the identity card issuing authority. These measures have resulted in an overall cost benefit to stockbroker firms and a potential increase in industry productivity.

For listed companies, the benefit largely revolves around access to a larger number of investors which translate into a larger pool of capital. Furthermore, through the mobile app the exchange has enabled a platform through which listed companies can make available their corporate information , press releases and  corporate videos to their shareholders to stay informed.

Listed companies will now find it easier to pay out dividends to shareholders with updated bank account details, benefitting the company in terms of the cost savings associated with issuing cheques and the elimination of an extended manual process. As for shareholders, as a result of the electronic dividend payment option now being encouraged will mean that they receive the dividend proceeds within two market days. 

This initiative is a part of the broader vision by the SEC and CSE to bring the Sri Lankan stock market to the forefront within the regional economic landscape. The digitalisation strategy will see a number of additions over the next 12-month period, which would include e-IPOs for the benefit of listed companies and potential listings and e-voting for increased transparency at AGMs and EGMs, which would completely redefine the ease of operations of the Sri Lankan equity market.