CDB announces LKR 1 Billion Debenture Issue

CDB Debenture 2016 - Managed by First Capital Limited

Colombo, 17 May 2016 : Citizens Development Business Finance PLC (CDB), one of the leading Licensed Finance Companies in Sri Lanka announced its intention to issue Listed Rated Subordinated Guaranteed Redeemable Debentures worth LKR 1 billion.

The debenture issue has received [SL] ‘A-‘(SO) with Stable Outlook by ICRA Lanka Ltd., and the Rated 5 year debentures are guaranteed by Seylan Bank PLC. The issue opens for subscription on 27th May 2016 and will close in 14 days of its opening date unless oversubscribed before the closing date.

With a 10 million debentures at a face value of LKR. 100/- each. The issue will offer two types of 5-year debentures, Type A with a fixed rate of 12.75%p.a paid semi-annually and Type B with a floating rate of, the 6-month net Treasury Bill plus 1.5% paid semi-annually (the floating rate has a cap of 15% and a floor of 10%). Further enhancing the investors’ return is the tax concessions applicable to listed debentures.

CDB is a company rated [SL] ‘BBB’ with a stable outlook by ICRA Lanka Limited and is a licensed finance Company registered under the Finance Business Act No. 42 of 2011 and a Company registered under the Finance Leasing Act No. 56 of 2000. Also a Public Limited Company registered under the Companies Act No. 17 of 1982 and re-registered under the Companies Act No. 7 of 2007.

The main objective of the debenture issue is to raise funds for CDB to strengthen its Tier II Capital and grow its lending book.

First Capital Limited and Citizens Development Business Finance PLC will act as joint Mangers to the issue and is geared to handle queries regarding the debenture. The Prospectus and Application Form can be downloaded from www.cdb.lk | www.­firstcapital.lk | www.cse.lk.

Interested in the Stock Market? – Basic Terms You Should Know – Part 02

A knowledge investor is a wise investor. Awareness is the key to making positive gains through the Colombo Stock Exchange (CSE) – Stock Market in Sri Lanka, by making the correct choices, intelligent observations and by doing your investment homework. There are many reports and resources freely available to help evaluate your investment decisions.

First Capital believes that an educated investor contributes to develop the market, this article is the second part of a series covering the key terms that an investor needs to be familiar with before investing in shares.

Stock Broker – Is a regulated professional agent associated to a licensed Stock Brokering Firm that executes trades to buy and sell stocks and other securities on behalf of an investor.

A regulated commission or fee is charged by the Stock Broker for each buy or sell transaction made on behalf of the client.

With effect from 15 April 2016 transaction cost applicable for transactions upto Rs. 50 Mn for both equity securities is 1.12% divided as follows;

Brokerage Fees – 0.640%
CSE Fees – 0.084%
CDS Fees – 0.024%
SEC Cess – 0.072%
Share Transaction Levy – 0.300%

Central Depository System (CDS) – functions as a specialist market intermediary and clearing house, holding the securities of publicly listed companies such as shares, to smoothly transfer ownership between buying and selling investors.

As of 2011 securities of all listed companies have been converted from physical certificates to dematerialized form or electronic paperless format. As such an investor buying and selling shares will not be given a physical share certificate, instead an equivalent number of securities in electronic form will be credited in the CDS account registered under the investors name through a Stockbroker.

When an investor trades using his CDS account, he is given a ‘bought or sold note’ at the end of the day indicating details of the transaction as a confirmation. This is not a share certificate.

In Sri Lanka the CDS is licensed by the Securities and Exchange Commission of Sri Lanka (SEC).

CDS Account – is a paperless account maintained for an investor by the CDS in order to facilitate trading through the CSE. Investors are required to open a CDS account through a preferred Stock Broker.

There are specific account opening forms for individuals (resident and non-resident) and corporates (local and foreign). In addition to the account opening forms an investor is  required to provide the following documentation.

  • Copy of National Identity Card or a copy of a valid Passport as proof of identity.
  • Three (3) months utility bills or any other accepted document with address as proof of residence.

Once the completed application along with the above documents are submitted, the newly registered CDS Account Number is sent to the investor via post.

Securities and Exchange Commission of Sri Lanka (SEC) – is the regulator of the capital market appointed by the Government to proactively promote, develop and maintain a capital market that is fair, efficient, orderly and transparent.

The SEC was established to achieve the following objectives;

  • The creation and maintenance of a market to issue and trade securities in an orderly and fair manner.
  • Protecting the interest of the investors
  • Operation of a Compensation Fund to protect investors from financial loss arising as a result of any licensed stock broker or licensed stock dealer being found incapable of meeting his contractual obligations
  • The regulation of the securities market and to ensure that professional standards are maintained in such market.

Over the years the duties, functions and the powers of the SEC has expanded and it is currently bestowed with the following responsibilities;

To grant licenses for the operation of a stock exchange, stock brokers or unit trust managers, and to ensuring its proper conduct. To grant a certificate of registration to carry on business as a market intermediary and to ensure the proper conduct of such business. To give general or specific directions to all entities under its governance, periodically.

To grant compensation to any investor who suffers pecuniary loss arising as a result of any licensed stock broker or licensed stock dealer being found incapable of meeting his contractual obligations.

To regulate the listing and issuing of securities in the licensed stock exchange, and holds the authority to suspend the listing or trading of securities for the protection of investors.

To conduct investigations into any alleged violation or contravention of the provisions of the SEC Act or any rule or regulation made there under. Advising the government of developments in the securities market, while implementing the policies and programmes of the Government with respect to the market. In addition to a multitude of regulatory and governance undertakings listed out at www.sec.gov.lk.

(Sources: www.investopedia.com / www.cse.lk / www.sec.gov.lk)

Interested in the Stock Market? – Basic Terms You Should Know – Part 01

A knowledge investor is a wise investor. Awareness is the key to making positive gains through the Colombo Stock Exchange (CSE) – Stock Market in Sri Lanka, by making the correct choices, intelligent observations and by doing your investment homework. There are many reports and resources freely available to help evaluate your investment decisions.

First Capital believes that an educated investor contributes to develop the market, this article series covers the key terms that an investor needs to be familiar with before investing in shares.

Shares – are a proportionate piece of ownership of a PLC company that are issued to the public as a means of raising capital. An investor who buys a share of a company is therefore entitled to a quantity of its assets and earnings but will be the last to be settled on liquidation of the company. Shares of some companies are subcategorized as Voting and Non-Voting Shares.

Investors (shareholders) can freely buy and sell shares on the CSE through a licensed Stock Broker.

Earnings for shareholders come from the growth in share price (capital gains) and dividend payments (share of the company’s profits) both of which are subject to the performance of the company and market conditions.

Publicly Listed Companies (PLC) – Companies incorporated under the Companies Act or any other statutory corporation, incorporated or established under the laws of Sri Lanka or established under the laws of any other state (subject to Exchange Control approval) are eligible to seek a listing on the CSE to raise Debt or Equity.

Companies interested to be admitted to the official list of the CSE and to secure a listing of their securities are required to comply with the relevant provisions of the above act and the Securities & Exchange Commission Act and the Listing Rules of the CSE. This process of obtaining a listing is facilitated through an investment bank.

Additionally, the CSE regularly monitors listed companies as part of ongoing listing requirements to ensure the company abides by its listing rules (corporate governance, disclosures, financial reporting, transparency etc.). CSE also facilitates the trading (buying and selling) of the publicly held shares of the company.

As at 29 March 2016 CSE has 294 listed companies representing 20 business sectors.

Market Indices – The All Share Price Index (ASPI) and the S&P SL20 (Standard & Poor’s Sri Lanka 20) are the two main price indices used by the CSE.

The ASPI is a market capitalization weighted index where the weight of any listed company is taken as the number of shares listed in the market, while the S&P SL20 gives a measurement of the value of 20 selected stocks.

The ASPI indicates the price fluctuations of all the listed companies and covers all the traded companies during a market day.

Where,

Base values are established with average market value on year 1985. Hence, the base year becomes 1985.

This weighting system allows the price movements of larger companies to have a greater impact on the index. Such a weighting system was adopted on the assumption that the general economic situation has a greater influence on larger companies than on smaller ones.

The indices are calculated on an on-going basis during the trading session by computing the prices of stocks, with the closing values published at the end of each trading day. In addition to the above the CSE also calculates Sector Price Indices and Total Returns Indices.

Investors and financial managers use market indices as a tool to describe the market, and to compare the return on investments.

Market Capitalization – is the total Rupee (LKR) value of a company’s listed shares and is calculated on a daily basis by multiplying the current market price of one share by the total number of shares listed.

In calculating the sum of all companies listed on the CSE the market capitalization of the exchange is derived, this total market capitalization is utilized to indicate the relative size of the exchange.

The investor community and financial managers Market capitalization is used by the investment community in ranking the size of companies, as opposed to sales or total asset figures.

As at 29 March 2016 the Market Capitalization of 294 listed companies on the CSE stood at Rs. 2,591,06 Bn.

Boards – Listed companies are separated to either the Main Board or Diri Savi Board (for Equity) operated by the CSE based on listing criteria.

The Main Board consists of companies with a stated capital of not less than Rupees Five Hundred Million (Rs.500, 000,000/-) at the time of listing, net profit after tax for three (3) consecutive years immediately preceding the date of application, positive net assets as per the consolidated audited financial statements for the last two (2) financial years immediately preceding the date of application, and, a minimum public holding of 25% of the total number of shares for which the listing is sought which shall be in the hands of a minimum number of 1,000 public shareholders holding not less than 100 shares each.

The Diri Savi Board companies necessitate a stated capital of not less than Rupees Hundred Million (Rs.100, 000,000/-) at the time of listing, positive net assets as per the consolidated audited financial statements for the financial year immediately preceding the date of application, a minimum public holding of 10% of the total number of shares for which the listing is sought which shall be in the hands of a minimum number of 100 public shareholders holding not less than 100 shares each, and, an operating history of at least one (1) year immediately preceding the date of application.

Diri Savi Board companies are entitled to graduate to a Main Board listing, once such companies meet the Main Board listing criteria.

(source : www.investopedia.com / www.cse.lk)

Investing in Corporate Debt

By Naveen Samarasekera, Manager – Corporate Finance First Capital Limited

Steering through diverse investment tools can be perplexing for the average investor. Investor education is crucial as knowledgeable and empowered investors contribute towards a vibrant market. Corporate Debt instruments are one of many investment options available to investors and the following explores the mechanisms of listed debenture investment options in the Sri Lankan market.

What is a debenture?

In general, debt instruments may be issued by the Government or a Corporate. Government debt is termed Treasury Bills and Bonds. Corporate debt comprises of instruments such as debentures (secured/unsecured, rated/unrated, listed/unlisted), securitized paper, promissory notes and commercial paper. The specifications are important when considering an investment and will also determine the risk, return and liquidity of the investment.

A debenture is a medium to long-term corporate debt instrument, issued by a company (issuer) to borrow money with the aim of fulfilling capital requirements, sourced at a fixed rate of interest or floating, usually pegged to a Government Treasury Bill rate. Debenture investments are considered a fixed income asset as it produces a fixed income to the holder(s) (lender) by paying a specified percentage of coupon payment on designated dates and repaying the principal value of the borrowing at maturity.

Is it different from buying shares of companies?  (How does debt differ from equity?)

Yes it is different.

The process of buying shares of a company refers to buying securities or a stake of a particular company that has listed its equity capital for investors to purchase through the Colombo Stock Exchange (CSE). Earnings for shareholders come from the growth in share prices and dividend payments (share of profits) if and when the company declares a dividend.

However, shareholders are the last to get settled on liquidation if the company goes into default. The share prices of companies that are under performing may also result in the price of shares declining and the investors losing the value of their investment.

In contrast, debt holders of a company cannot claim ownership or have any claims to future profits of the business. The investor will only be lending capital to the company and the borrower’s only obligation is to repay the loan with interest.

Unlike dividends which will generally depend on the earnings made by the company, the issuer is contractually obliged to pay the lender interest payments until their obligations are met.

Listed debt can also be traded in the secondary market similar to shares. In Sri Lanka this process is facilitated by the DEX System of the CSE. The secondary market trading of debentures are a means of transferring of asset from one lender to another. The swift transferring of debentures increases liquidity and gives lenders a way of trading debt instruments in the market.

Is it a popular investment option?

The average Sri Lankan is generally aware of the equity (stock) market than of the debt market. However, in 2015 Sri Lanka saw LKR 83,414,408,000 being raised through debt IPOs and in 2014 the value was LKR 54,234,870,000, compared to LKR 329,564,800and LKR 2,693,834,800 in equity IPOs in 2015 and 2014 respectively.

As mentioned above, listed corporate debt is traded through the CSE and anyone interested in debentures can find upcoming issues on the CSE website.  Further, investment banks will have information regarding listed debentures available for trading and unlisted corporate debt instruments such as securitized paper, promissory notes and commercial paper currently available in the market.

Who does these investment option suit the most?

Currently, there are high-net-worth individuals, corporates, unit trust funds, provident funds trust /endowment funds and a small base of retail investors.

The key is to understand your investment objectives. Although there are risks such as credit and interest rates risks to be aware of, a competent intermediary such as an investment bank will guide you through the process of identifying the best investment for you based on your risk appetite and overall investment portfolio.

What are the risks and benefits for investors investing in corporate debt?

The most significant benefits of investing in corporate debt are the tax holidays (for listed debt) and flexibility of transferring through the secondary market.

Additionally, debt instruments are considered less risky than investments in the stock market as the market is less volatile, and if the company is liquidated it’s debtors come before the shareholders.

It is important to remember that investors in debt instruments are subject to credit risk arising from a borrower failing to make required payments, liquidity risk limiting the transferability of your debt portfolio and interest rate risk, by which the value of instruments rise or decline based on interest rate changes.

The Role of Regulators

The capital market of Sri Lanka is regulated by the Securities and Exchange Commission (SEC) which is the authority that consents to a corporate listing their debt, while the CSE through its corporate affairs arm monitors and ensure that the company complies with all listing requirements.

Debentures must carry a minimum BBB credit rating to list on CSE and comply with the applicable sections of the companies act.

-END-

Note

This article is a part of First Capital Holdings PLC’s Investor Education Series. The Investor Education Series is aimed at improving investment education and financial literacy in Sri Lanka and enabling investors to make informed decisions about investments and the financial market and is not an endorsement of specific products.

About the Writer

Naveen Samarasekera, Manager – Corporate Finance First Capital Limited

Naveen counts more than 12 years of experience in various business areas both overseas and in Sri Lanka. Prior to joining First Capital he was working as a Business Development Consultant engaging in Financial Planning and Advisory Services for Corporates and High Net-worth Individuals.

He holds a Diploma in Business from the Auckland University of Technology, Diploma in Management from NZIM, a Bachelor of Commerce Degree from the University of Auckland, New Zealand and is an Associate Member of the Chartered Institute of Management Accountants UK
(CIMA).