SEC SECURITIES AND EXCHANGE COMMISSION OF SRI LANKA

ශ්‍රී ලංකා සුරැකුම්පත් සහ විනිමය කොමිෂන් සභාව இலங்கை பிணையங்கள் மற்றும் பரிவர்த்தனை ஆணைக்குழு

4th October 2024

Ref: SEC/SUP/2024/10/477

TO: ALL MANAGING COMPANIES AND TRUSTEES OF COLLECTIVE INVESTMENT SCHEMES (CIS)

DIRECTIVE ISSUED UNDER SECTIONS 16(c) and 16(d) OF THE SECURITIES AND EXCHANGE COMMISSION OF SRI LANKA ACT, NO. 19 OF 2021

The Securities and Exchange Commission of Sri Lanka (SEC) at its 505th Meeting held on 06th August 2024 extensively deliberated on the additional measures required to protect the interests of investors as well as mitigate risks within the securities market and resolved to impose additional regulatory requirements in terms of the provisions of the SEC Act No. 19 of 2021 and the Collective Investment Scheme Code 2022, published in the Government Gazette (Extraordinary) No. 2278/27 pertaining to the following:

1. liquidity requirements for CIS;
2. limitations on borrowing of a CIS; and
3. limitations on investments of CIS.

Accordingly, the SEC hereby directs the Managing Companies and Trustees of CIS to implement the additional regulatory requirements in terms of Sections 16(c) and 16(d) of the SEC Act No. 19 of 2021 as stipulated below.

1. LIQUIDITY REQUIREMENTS FOR A COLLECTIVE INVESTMENT SCHEME

In terms of Rule 15 (1) (b) of the CIS Code, the Commission hereby specifies that a CIS shall maintain a level of liquidity amounting to at least three per centum (3%) of the Net Asset Value (NAV) of the underlying securities of the fund, in Liquid Securities.

For this purpose,

Liquid Securities means:

(i) unencumbered cash or investments which can be readily converted to cash such as bank/call deposits; (ii) deposits with banks and finance companies licensed by the Central Bank of Sri Lanka with a maturity of less than three (3) months; (iii) repurchase agreements on corporate debt securities with a term to maturity of less than three (3) months; (iv) listed corporate debentures with a remaining maturity of less than three (3) months; (v) unlisted corporate debt securities which are guaranteed by a Licensed Commercial Bank or Licensed Specialized Bank or unlisted corporate debt securities which carry a minimum rating of BBB- or above that is rated by a Credit Rating Agency licensed by the SEC with a term to maturity of less than three (3) months; and (vi) treasury bills, treasury bonds and repurchase agreements on government securities with a term to maturity/remaining maturities of one (1) year or less.

The above Liquidity Requirement shall not apply to approved Money Market Schemes, Interval Schemes, Close-Ended Schemes and Hedge Funds.

Money Market Schemes shall at minimum, maintain the liquidity levels specified in the CIS Code of 2022.

An Interval Scheme shall maintain adequate liquidity levels in order to meet its redemption obligations at the time of redemption of units at intervals specified in the Key Investor Information Document.

2. LIMITATIONS ON BORROWING OF A COLLECTIVE INVESTMENT SCHEME

In terms of Rule 41 (1) (b) of the CIS Code, the Commission hereby specifies limitations on borrowing of an Open-Ended or Interval Scheme that is offered to the public.

An Open-Ended or Interval Scheme that is offered to the public shall not borrow by any method whatsoever except where the borrowing of a CIS does not exceed fifteen per centum (15%) of the NAV of the Scheme.

The above limitation on borrowing shall not apply to the Hedge Funds approved by the SEC.

The aforementioned requirements shall apply in addition to all the other requirements stipulated under Rule 41 of the CIS Code.

3. LIMITATIONS ON INVESTMENTS OF A COLLECTIVE INVESTMENT SCHEME

In terms of Rule 40 (1) of the CIS Code, the Commission hereby specifies the following limitations on investments by an Open-Ended and Interval Scheme offered to the public:

Issuer and Class of Security	Requirement
(A) Listed Entity<br>• Listed Equity Securities	Fifteen per centum (15%) of the NAV of the CIS; or percentage of the NAV which is equivalent to the ‘Market Capitalization Percentage’ of the Security;<br>whichever is higher,<br>subject to a maximum of ten per centum (10%) of the issued voting share capital of the Listed Entity.<br>For this purpose, ‘Market Capitalization Percentage’ shall mean the Market Capitalization of the security as a percentage of the total Market Capitalization of the Exchange.
• Unlisted Equity Securities	No investment shall be made in unlisted equity securities of a Listed Entity.
(B) Listed Entity<br>• Listed Debt Securities<br>• Unlisted Debt Securities	25% of NAV<br>If guaranteed (security) from a Licensed Commercial Bank; 15% of NAV<br>If rated (entity/security) BBB – (minimum rating); 15% of NAV
(C) Unlisted Entity<br>• Listed Debt Securities<br>• Unlisted Debt Securities	25% of NAV<br>If guaranteed (security) from a Licensed Commercial Bank; 10% of NAV.<br>If rated (entity/security) BBB- (minimum rating); 10% of NAV.
(D) Listed Entity – Aggregate Exposure<br>Listed equity, listed debt and unlisted debt	Aggregate value of investments made in securities specified under (A) and (B) above in a listed entity shall not exceed twenty five per centum (25%) of the NAV.
(E) Unlisted Entity – Aggregate Exposure<br>Listed debt and unlisted debt (subject to disclosure Requirements)	Aggregate value of investments made in an unlisted entity as specified in ‘C’ above shall not exceed twenty five per centum (25%) of the NAV.
(F) Total exposure with a Commercial Bank, Specialized Bank or a Finance Company Licensed by the CBSL<br>Whether through investments inter alia Equity, Debt Security, Deposits, REPOS and Guarantees	No investment shall be made with a Commercial Bank, a Specialized Bank or a Finance Company licensed by the Central Bank of Sri Lanka unless such Banks and Finance Companies carry a minimum rating of BBB- or above rated by a Credit Rating Agency licensed by the SEC and shall not exceed twenty-five per centum (25%) of the NAV.
(G) Investment in Equity Securities through IPO’s, Offers for Sale and Rights Issues	Investments made in Initial Public Offers (IPOs), Offers for Sale and Rights Issues of Equity shall not exceed fifteen per centum (15%) of the NAV at the initial subscription.
(H) Investments in CIS	Investments in CIS’s managed by:<br>(i) the same managing company shall not exceed five per centum (5%) of NAV.<br>(ii) other managing companies shall not exceed ten per centum (10%) of NAV.
(I) Islamic Products	Investment limitations as applicable similar to conventional products within the aforesaid regulatory framework

The above investment limitations are extended to all Schemes governed by the CIS Code, excluding Hedge Funds, Exchange-Traded Funds and Index Funds, to ensure that a CIS is not unduly exposed to risks from a single entity or security.

General Conditions

• The restrictions stated herein shall be applicable notwithstanding anything contrary in the Trust Deed and the Key Investor Information Document.
• Any entitlement of the CIS to Unlisted Equity Security or Unlisted Debt Security consequent to a restructuring of a Listed Entity or an Unlisted Entity shall be forthwith informed to the SEC.
• In relation to investment limitations stipulated above, any investment held by a CIS at the time of issuing this Directive, below a rating of BBB- or any investment in unlisted debt security where the Listed Entity or the security has not been rated, may be held only until the maturity of such investments.
• No rollovers are permitted beyond 397 days for investments and/or repurchase agreements on commercial papers and other non-collateralized unlisted debt securities.
• Money Market Schemes shall comply with the limitations on investments as specified under Appendix 5 of the CIS Code of 2022.
• A “Listed Entity” shall have the same meaning as defined in the Listing Rules of the Colombo Stock Exchange.

This Directive shall be effective from the date hereof and all other previous Directives issued by the SEC in relation to the limitations on investments in CIS are hereby rescinded.

(Signature)

CHINTHAKA MENDIS DIRECTOR GENERAL