Sri Lanka Looks to Soros, Mobius to Bolster Market

By Cherian Thomas,June 5 (Bloomberg)

Sri Lanka wants George Soros, Mark Mobius and other top fund managers to invest in the country and help the Colombo Stock Exchange “take off” after the end of a 26-year civil war.

“The exchange is at a very primary level and foreign participation is critical for it to grow,” Channa de Silva, director general of the Securities and Exchange Commission of Sri Lanka, said in an interview in Colombo yesterday.

The commission is working “to create liquidity and depth” in the market by starting derivatives trading and persuading the nation’s biggest companies such as Brandix Lanka Ltd. and Dilmah Tea Co. to list on the stock exchange. Almost three decades of war with Tamil Tiger rebels curbed the island’s economy and reduced the need for companies to seek funding by selling shares.

“It will happen now as the level of economic activity picks up after the war,” said Malik Fernando, a director at Dilmah Tea, among the best-known Ceylon tea brands in the world.

Sri Lankan troops defeated the Liberation Tigers of Tamil Eelam last month, ending the rebels’ quest for a separate homeland in the Indian Ocean island nation. President Mahinda Rajapaksa said this week the country will find a political solution to the issue of Tamil separatism.

“Sri Lanka is now open for business,” de Silva said. “Opportunities are tremendous and it’s a country waiting to unfold its potential.”

Declared Victory

Daily average trading on the Colombo Stock Exchange surged 20 times to 1 billion rupees ($8.7 million) after the government declared victory over the Tigers on May 16, driven by demand from the local population, de Silva said. The key Colombo All- Share Index has climbed 12 percent during the period, taking its gains this year to 42 percent.

The exchange wants to double its capitalization to $14 billion in a year, he added.

Sri Lanka operates one of the most open economies in the world and no approvals are required for any overseas investor to buy shares in the country. Profits made on stock trading aren’t subject to capital gains tax and can be repatriated. Dividends are taxed at the rate of 10 percent at the withholding stage.

De Silva says the end of the war is a “paradigm shift” in the country’s history which could spark a lot of interest among overseas investors in Sri Lanka.

“Sri Lanka has been in the news, for right or wrong reasons, but at the end of the day it is in the minds of people,” de Silva said. “It’s like Vietnam -- there wouldn’t be many people in the world who don’t know Vietnam. In the same way, there wouldn’t be many who don’t know Sri Lanka.”

‘Wonderful Opportunities’

Investor Jim Rogers, who correctly predicted a commodity price rally in 1999, said May 21 he sees “wonderful opportunities” in the island nation and that he would like to go to the country to see “great, cheap” opportunities after the “dramatic” changes.

Governor Nivard Cabraal said this week the central bank will this month revise the nation’s growth forecast for 2009, and may almost double it to 5 percent because of the increase in business confidence and as the liberation of rebel-occupied land boosts farm production. The Board of Investment of Sri Lanka expects foreign direct investments to quadruple to $4 billion in three years.

De Silva said the Colombo Stock Exchange will start a trading floor in the next three months in Jaffna, located in the north of the country and the unofficial capital of the Tamil Tigers, who at one point controlled a third of Sri Lanka.

“The north was never tapped,” de Silva said. “A trading floor brings investors together at the retail end, which will help mobilize money.” He said Sri Lanka’s savings rate, at 23 percent of gross domestic product, “will not cater to the development agenda” the country envisages.

Derivatives, ETFs

He said the stock exchange will set up a clearing corporation soon, facilitating derivatives trading. The authorities are also working to start a real-estate investment trust and exchange traded funds to complement derivative operations, de Silva said.

Interest to set up a commodities market in Sri Lanka, a producer of tea, coffee and rubber, has also been made by investors in India and Nepal, de Silva said without naming them.

“Sri Lanka has a story to tell,” de Silva said. “If you look at our maps, you realize it can be a strong destination for logistics. Any vessel going from East to the West or from West to the East needs to virtually refuel in Lanka.”

Accordingly, the government has embarked on a three-year plan to increase Colombo’s port capacity by four times and bring it on par with Singapore.

“Then there is tourism, and if the government is clever, it can even turn Sri Lanka into a major financial center,” de Silva said. “It will take a while for people to realize the momentous change that has taken place in Sri Lanka and the massive opportunities that brings to the table.”

To contact the reporter on this story: Cherian Thomas in Colombo at Cthomas1@bloomberg.net.