Colombo Stock Exchange and Technology

Hello tech enthusiasts, Covid-19 pandemic has forced many countries around the world to go on a locked down and Sri Lanka is no different. As a result the civilian life, government and private sector organizations came to a standstill. However this situation has bought many weaknesses in the system to light. The Colombo Stock Exchange (CSE) is one such institution which started taking a terrible hit due to not being adopted the technological advancements in their core operations.

Colombo Stock Exchange is one of the most prominent institutions in Sri Lanka which portraits the country’s business value to the world. Unfortunately Covid-19 has completely paralyzed CSE as it has been closed for trading from 20th March 2020 until now being one of the three stock exchanges which is closed. Yes that’s right, only 3 exchanges are closed down in the world as all the other exchanges are operating digitally. This has been a major hit on Sri Lankan businesses, investors, foreign investors as well as the country’s economy as a whole.

Where did they go wrong? Even though CSE operates as an electronic trading platform, all the other core functions are not digitized. Majority of local investors still make and collect payments via cheques sent through post. Shocking? This is because connecting investor’s bank account details to investment account and enabling online transfer is not mandatory.

Not only bank account details, but also an email address is not mandatory to open a share trading account. Therefore most of the investors get their contract notes via post. Even though it’s hard to believe CSE is still heavily dependent on postal service which is not currently available due to curfew.

Most of the core functions of CSE and Central Depository System (CDS) are still paper based. From an investor’s point of view; CDS account opening, trading settlements, contract notes and other correspondence etc are not digitized.

This paper based ancient systems have been suffocating the businesses which are listed on CSE for a long time. The listing process is completely paper based and any company would waste many bundles of A4 papers going up and down in the process. Not only listing, but also any corporate action requires so much of paper based procedures to get through.

All the listed entities are still required to send out their annual report to shareholders in CD format, again via post. Any circular to the shareholders requested to be circulated via post. Also an entity should submit 35 printed copies of annual report to CSE while the soft copy is freely available on the website.

Most of CSE functions are heavily depend on its employees as they are not digitized. There is no proper system in place to continue the operation when employees are unable to report to office due to curfew.

With the prevailing systems and procedures it is obvious that CSE simply cannot function in a locked down situation. While this has been continuing as a pressing issue for investors and businesses, The Securities and Exchange Commission of Sri Lanka (SEC) appointed a joint committee to save the day.

As per the letter sent by SEC to CSE, this committee’s objective is to identify the mechanisms required for CSE to conduct their core activities digitally and to enable clearing and settlement electronically and to make recommendation to have those mechanisms in practice. The committee consists of responsible officers from both CSE and SEC.

This initiative is finally giving some hope to CSE investors and businesses that CSE might start operating as it should be. Even though these measures should have been taken many years ago, it’s better done now than later.  However we are still uncertain what will be the exact changes which are going to take place and how long it will take to implement the changes.

As a result of CSE being completely shut down for a considerable period of time, most investors including both foreign and local have lost faith in the market. Therefore there is a concern that once the market opens for trading there will be a high selling pressure which may eventually cause a market crash. SEC has issued a directive introducing a three tire circuit breaker structure to strengthen the capital market in this challenging time.

Most of the exchanges in the world including Asia offer not only equities but also Forex, Corporate Bonds, commodities and Futures to its investors whereas CSE is limited to Equity. Most of the exchanges around the world are operating without disruption under locked down. That means the technology, systems and procedures are readily available. CSE has a long way forward as it has not been moving forward for many years.

What needs to change? Well all the ancient methods and procedures being practiced in CSE needs to be changed without a doubt. But that’s not enough.

Let me tell you a story. The company Kodak was at its peak of commercial powers in 1980s, controlling the photography industry with Kodak film roles. In 20th century the company went bankrupt. Why? It was reluctant to embrace change on time. Even though their own employee invented the digital camera, Kodak leadership was reluctant to invest in the new technology because they did not want that to compete with their film role business. So eventually other players in the market such as Cannon came forward with digital camera and Kodak went bankrupt. What an irony huh?

It is extremely important to have futuristic forward thinking leadership for any organization. CSE is no different. Embrace change and make improvements with the technological advancements is not an option for CSE. It’s necessary to survive. CSE also needs to have the correct leadership with correct mindset to take this initiative and move forward. A significant part of country’s economy depends on that. Let’s hope that Colombo Stock Exchange will finally embrace technology and digitize with the involvement of SEC.

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