The Colombo Stock Exchange (CSE) positions itself as a key driver of Sri Lanka’s economic recovery and long-term growth. It focuses on strategic reforms, digital transformation, and diversified financial products to broaden market participation and inclusivity, foster capital mobilization for enterprises of all sizes, and create wealth for ordinary citizens and high-net-worth individuals alike.
In an interview with Echelon, CSE Chairman Dilshan Wirasekara highlighted the exchange’s strong performance in 2024, driven by political stability, macroeconomic reforms, and growing domestic investor activity. Looking ahead to 2025, the CSE plans to attract foreign investment, integrate ESG principles, and leverage opportunities through the Port City Colombo. Central to this strategy is the vision of aligning the exchange more closely with the broader economy to sustain wealth and ensure the benefits of market growth reach a wider population.
Sri Lanka’s equities market still needs to be utilized despite its potential. The All Share Price Index (ASPI) surged to a record high of 14,654.26 points on December 19, 2024, yet the number of investor accounts at 930,072 remains strikingly low for a country where 88% of the population holds bank accounts. With a price-to-earnings (P/E) ratio of approximately 9x, the CSE is undervalued compared to regional peers, presenting opportunities for long-term capital appreciation. Additionally, the market capitalization, at just 20% of GDP, is far below the global average of 76%, indicating substantial untapped potential.
Several factors contribute to this underrepresentation, including limited public understanding of equities, perceived risks, and inconsistent policies that have hindered the stock market’s role as a mainstream investment avenue. However, efforts are underway to address these challenges. The CSE has introduced programmes to improve accessibility through investor education, regional outreach, and simplified account-opening processes.
Greater access to the stock market offers significant benefits for citizens, including wealth creation, financial security, and long-term growth potential through investments in equities, pension funds, and unit trusts. Dividends and the knowledge gained from market participation empower individuals to make more informed financial decisions.
Wirasekara emphasized the CSE’s commitment to increasing retail participation, encouraging more Sri Lankans to hold diversified equity portfolios rather than relying solely on fixed-income investments. Reflecting on 2024’s performance and laying out the 2025 outlook, he noted the CSE’s role in driving inclusivity, strengthening market infrastructure, and ensuring the exchange becomes a vehicle for sustainable economic growth.
Can you take us through the equity market performance and outlook for 2025?
The market has performed strongly in 2024, with a year-to-date increase of over 37.5%. The bull run began following the presidential elections and has contributed to a market capitalization increase exceeding one trillion rupees of wealth creation for the Colombo Stock Exchange investors this year.
Several factors have supported this performance. Political stability and the expectation of policy consistency under a new president and government with a full five-year term have been significant contributors. Additionally, declining interest rates have made stock investments more attractive, and the rupee’s stability and appreciation have enhanced dollarized returns for investors.
Macroeconomic reforms under the IMF programme have also played a role. The government’s commitment to these reforms and the completion of debt restructuring—both rupee securities and foreign currency loans—have further strengthened investor confidence. The recent rating upgrade would attract foreign investments as the country becomes eligible for global funds again.
On the global front, favourable conditions have influenced the market. With the Federal Reserve lowering interest rates, investors have shifted focus to frontier and emerging markets, including Sri Lanka, resulting in increased foreign inflows and boosting market performance.
Looking ahead, the outlook for 2025 remains positive. We expect the continuation of reforms, low interest rates, a stable exchange rate, and improved credit ratings to drive foreign direct investments (FDI) and market growth. Fixed-income returns are currently around 8–10%, but the exchange could deliver better returns, supported by strong fundamentals.
Despite a nearly 40% rally in 2024, market valuations remain low, with a price-to-earnings (P/E) ratio of approximately 9x and slightly over one-time book value. Improved company earnings, driven by a growing economy of 5% GDP growth compared to contractions in 2022 and 2023, suggest further room for valuation increases. These factors indicate the continued potential for value creation in 2025.
The Colombo Stock Exchange has facilitated significant capital-raising efforts over the past year. Can you share some highlights from these efforts, including standout IPOs and their impact on the broader economy?
Capital mobilization on the CSE in 2024 has reached an all-time high, close to Rs170 billion. This figure includes funds raised through IPOs, rights issues by existing companies, and debt issuances. Notable transactions include rights issues by John Keells Holdings and Commercial Bank, each raising approximately Rs20 billion. Four to five IPOs were also completed, with more in the pipeline. This trend will continue, with the number of IPOs likely to increase in 2025.
A key challenge for IPO activity is the relationship between market valuations and company decisions to list. Companies are reluctant to launch IPOs when market valuations are low, as they cannot realize their full value. As market valuations improve, driven by re-rating, more companies may choose to go public.
We have actively worked with issuers to encourage listings, focusing on family-owned businesses and SMEs. These segments traditionally rely on bank financing and are encouraged to explore capital market funding as an alternative.
With these efforts and improving market conditions, 2025 will see increased activity in IPO issuances.
Despite the macroeconomic challenges, the CSE has demonstrated resilience. What strategies have been key to maintaining investor confidence and market stability?
We attribute the CSE’s revaluation and increased turnover levels in 2024 to economic improvements and macroeconomic reforms under the IMF programme.
These changes have strengthened market fundamentals, though most turnover—88.8%—has come from domestic investors, including retail and high-net-worth individuals. Foreign investors have contributed 11.2% of turnover, limited by the country’s default status earlier in the year.
With the completion of the debt restructuring exercise, we expect foreign investor participation to increase in 2025. Historically, domestic and foreign investors evenly contributed to turnover before disruptions such as the 2019 Easter attacks, the COVID-19 pandemic, and the economic crisis. Returning to this balance could boost market activity, complementing retail investors’ enthusiasm.
Efforts to broaden market participation are ongoing. A small segment of domestic investors dominates the market, with limited involvement from the wider population. To address this, we are conducting regional investor education programmes and promoting the stock market as an alternative investment option to encourage more Sri Lankans to include equities in their investment portfolios, traditionally weighted towards fixed-income instruments.
Technology plays a key role in expanding market access. Recognizing the shift away from physical branches, we are enhancing digital platforms to streamline account opening and improve user experience. Collaborating with market intermediaries, we drive digital adoption across capital markets, including the Stock Exchange and Unit Trusts, to facilitate growth and accessibility for a broader audience.
How is the CSE continuing to support SMEs in accessing public capital, and what role do they play in driving economic growth?
Small and medium-sized enterprises are a critical component of the economy, and we have sought to support their growth through the Empower Board, launched three years ago. We designed the platform to facilitate capital raising for SMEs while guiding them through the transition to meet higher corporate governance and reporting standards.
The platform addresses challenges SMEs face, such as the absence of audited accounts or adequate capital positions, by providing an investment manager who advises on corporate finance and ensures compliance with listing requirements. While this process can initially be challenging for SMEs, some companies have successfully transitioned from the Empower Board to the Diri Savi Board and could eventually list on the Main Board.
We actively promote the Empower Board through forums and engagement with SMEs and family-owned businesses, highlighting the advantages of equity financing over debt financing. Unlike borrowing from banks, which often require collateral and incur interest costs, equity financing allows companies to raise capital by offering ownership stakes, providing a cost-effective alternative for growth and scaling.
In addition to capital access, the Empower Board introduces SMEs to corporate governance practices that enhance public confidence in the business. By adhering to these standards, companies can improve their market credibility and attract investment, enabling sustainable growth and integration into the broader capital markets.
Digital transformation has been a priority for the CSE. Can you elaborate on the key advancements and how they have expanded accessibility and operational efficiency?
We have implemented several initiatives to streamline client onboarding and promote investment activity. Clients can open accounts seamlessly through the CSE mobile app integrated with market intermediaries and brokers. While brokers have their e-onboarding platforms, the CSE app complements these, allowing brokers to utilize the CSE’s infrastructure without investing in separate digitization efforts. A new version of the app, offering faster onboarding and greater accessibility via smart devices, is under development to ensure nationwide access.
Encouraging active trading is a core focus. While onboarding simplifies account creation, we also want to promote informed investment decisions. Many investors currently rely on speculative trends rather than fundamentals. To address this, the CSE, in collaboration with brokers, is enhancing platforms to provide research and insights, equipping users with the tools needed to trade based on market fundamentals.
We also upgraded our market infrastructure from IT systems to automated trading platforms, Central Depository System (CDS), and Clearing House support trading and settlement processes. In late 2023, the settlement cycle was reduced from T+3 to T+2, improving efficiency. We are now exploring a move to T+1, which would require further infrastructure enhancements. The transition to a Central Counterparty (CCP) settlement system minimizes settlement risks, further strengthening market reliability.
Efforts to standardize financial reporting are underway through adopting XBRL (eXtensible Business Reporting Language). This initiative will ensure timely and uniform reporting of listed company financials, enabling investors to access and analyse data more effectively. To support broader understanding, the CSE is exploring using artificial intelligence (AI) to simplify financial analysis, allowing users to query financial statements and receive accessible explanations. We expect to roll out this feature by early 2026.
What initiatives are you planning or implementing to attract greater foreign investor participation in the coming year?
Local-foreign investor participation in the CSE has declined from a balanced 50/50 ratio to the current 89/11 ratio, mainly due to events since 2018. Political uncertainty, the 2019 April bombings, two years of COVID-19 disruptions, and the subsequent economic crisis and default eroded investor confidence, prompting foreign investors to exit the market.
Despite the economy’s recovery, with growth exceeding 5%, the country’s restricted default (RD) status continues to deter foreign investment. Fund managers are typically unable to allocate portfolios to countries in default, regardless of improving conditions. Completing the debt restructuring process is expected to resolve this issue, with the anticipated removal of the RD status in January 2025, enabling fund managers to reallocate investments to Sri Lanka.
A stable government, consistent policies, a stable exchange rate, and favourable corporate growth and profitability conditions are essential to attract foreign investors. These factors and the completion of key macroeconomic reforms will help restore foreign investor confidence and participation.
We are supporting this effort by increasing global outreach. After a hiatus due to Covid, we have resumed roadshows to showcase the Sri Lankan market abroad and are planning larger-scale initiatives in 2025. One key strategy is to host foreign investors in Sri Lanka, leveraging the country’s appeal as a tourism destination to combine investment forums with experiential visits. This approach rebuilds interest and trust in the market, providing a platform for reconnecting with foreign investors.
The CSE has recently introduced several new financial products. How do you plan to encourage wider adoption and usage of these offerings?
The success of new financial products depends on issuers and investors actively adopting them. Over the past few years, the Colombo Stock Exchange (CSE) has established the necessary framework, including listing rules and regulatory adjustments, to reduce barriers to entry and diversify product offerings.
Historically, Sri Lanka’s capital market was limited to listed debt and equity. Recently, the CSE has introduced several new products, including stock borrowing and lending, regulated short selling, sustainable bonds (e.g., green and blue bonds), infrastructure bonds, perpetual bonds, high-yield bonds, and Sukuks. These initiatives have expanded the options available for issuers to raise capital and for investors to diversify their portfolios.
Sustainable bonds are a prime example. Companies engaged in environmentally sustainable practices can issue bonds, such as green bonds for renewable energy projects, tapping into the global ESG investment market, valued at $41 trillion. Even securing a small fraction of this market could provide significant capital inflows to Sri Lanka at competitive rates. For instance, DFCC Bank recently issued a sustainable bond at a lower rate than Sri Lanka’s government Treasury bonds, demonstrating the potential for cheaper financing through ESG-compliant instruments.
Looking ahead, we are preparing additional products to enhance market diversification, including an ESG index and futures and derivatives. These offerings will align Sri Lanka with regional markets for breadth and depth of product variety, enabling issuers to access a broader range of capital-raising tools and allowing investors to choose products that match their risk-reward preferences.
As an exchange, what are your plans for leveraging opportunities at the Port City Colombo?
We have signed a memorandum of understanding (MoU) with the Port City Colombo to explore opportunities for collaboration. Among the key initiatives under consideration is establishing a derivatives exchange, for which the Securities and Exchange Commission (SEC) has issued a request for proposal (RFP). The CSE has partnered with a global exchange to advance this project, with plans to base the derivatives exchange within the Port City Commission, leveraging its legislative framework.
The CSE views Port City Colombo as a strategic asset and is actively pursuing multiple opportunities to expand its presence within the project through direct collaboration or other means. These efforts align the CSE’s growth with Port City Colombo’s development as a financial and investment hub.
Sustainable Finance and ESG: How is the CSE integrating sustainable finance and ESG principles into its operations and strategic vision?
Progress on integrating ESG standards among listed companies has been gradual. Many companies need to improve in meeting globally recognized ESG standards, which has delayed the development of ESG-related products.
We initiated programmes to help listed companies align with these standards and address this, establishing a foundation for structuring ESG-related financial products and enhancing compliance.
One key initiative is the development of an ESG index similar to global indices like the S&P 500 ESG Top 20. The index would rank companies based on ESG compliance, providing investors with a clear pathway to focus on sustainable investments. However, the need for more familiarity with ESG reporting standards and compliance among local companies has delayed the rollout.
We began laying the groundwork for this initiative in early 2024. We plan to launch the index in 2026 and attract investment flows targeting ESG-compliant opportunities, aligning Sri Lanka’s capital market with global sustainability trends.
What are the key milestones and goals for the CSE in the next year, and how do you see its role evolving as a critical driver of Sri Lanka’s capital market development?
The stock exchange often reflects a country’s economy, but this correlation does not hold for Sri Lanka. While the Colombo Stock Exchange’s market capitalization recently surpassed Rs5 trillion, it represents only about 20% of the country’s overall economy. This limited representation stems from the absence of large corporations, state-owned enterprises (SOEs), and government agencies on the exchange.
To address this, the CSE is encouraging more companies, including government entities such as state banks, the Ceylon Petroleum Corporation, and the Ceylon Electricity Board, to list. Listing these entities is not equivalent to privatization; the government would retain control while benefiting from improved transparency, governance, and the potential to attract strategic minority investors.
The CSE’s broader goals are to align the exchange more closely with the wider economy and ensure broader participation among Sri Lankans. While the exchange created approximately Rs1 trillion in wealth by the end of 2024, it primarily benefited a small group of investors. We are pursuing initiatives to make the CSE more inclusive, such as encouraging the Employees Provident Fund (EPF) to invest in equities, thereby significantly expanding the pool of beneficiaries compared to the current 260,000 investors who hold portfolios.
A sustainable market requires both broader issuer participation and increased investor activity. Recent improvements in market turnover, rising from Rs1 billion earlier in 2024 to Rs5–6 billion daily, indicate growing activity, but further steps are needed. We are committed to building confidence, attracting foreign investment and ensuring trading activity reaches pre-2018 levels, creating a more inclusive and robust market.
The CSE’s strategy focuses on expanding the market in terms of issuers and investors while enhancing infrastructure and governance. The vision remains straightforward: to create wealth and value sustainably and ensure the benefits of market growth are shared more widely across the population.