With the enactment of the Securities and Exchange Law at the end of August, Myanmar has laid the foundation for the development of an active stock market. While the law has been held rather general, the details are expected to be fleshed out in the rules and regulations, to be issued within 90 days after the enactment of the law. Towards the end of the year, we can expect to see the appointment of at least five persons to the Securities and Exchange Commission (SEC), a newly formed independent body in charge of overseeing and regulating the securities market in Myanmar. The Japanese Daiwa Institute of Research and the Japan Exchange Group (former Tokyo Stock Exchange) together with Myanmar authorities are currently developing the infrastructure of the Yangon Stock Exchange, to go online at the end of 2015. At the initial phase of the exchange, a number of 5 to 10 public companies are likely to be listed.
Myanmar is in a peculiar situation. For the past many years, no new public companies were allowed to register. With the policy change of the new government, however, we saw a surge in registration of new public companies in the last two years even before the securities law has been issued. There are now more than 80 registered public companies in Myanmar. With the absence of the law in the past and missing facilities for the secondary trading of shares, public companies have been operating in an unregulated market, resulting in some public companies operating their own over-the-counter (OTC) exchange centers. For instance, new shares have been offered to the public in booths at supermarkets.
The Yangon Stock Exchange and the OTC Market
Unfortunately, the stock exchange will not be the solution for many of the over 80 public companies in Myanmar. In order to instill trust in the exchange and to protect its reputation, the Yangon Stock Exchange will have to be very selective about which public companies will be admitted for listing. In a worst-case scenario, a public company collapses within a short period after listing at the exchange and destroys the confidence of investors in the stock market for many years. Therefore, likely candidates for a listing at the exchange will be companies with high capitalization and a proven track record of profitability. However, shareholders of public companies not listed at the exchange still need transparent channels to trade their shares in a secondary market. In order to cater the needs of unlisted public companies, the Securities and Exchange Law explicitly foresees OTC markets. Under the law, a minimum number of three securities companies can jointly apply for a license to operate an OTC exchange. It is to be expected that the OTC market in Myanmar will be significant for at least a couple of years. In Vietnam, for example, there is a large OTC market operated by securities companies in addition to the two official stock exchanges. It is therefore important to understand that the stock market in Myanmar will be much more than just the Yangon Stock Exchange.
Securities Companies and Requirements
The exact requirements for establishing a securities company are not published yet. However, one basic principle is that a Limited Liabilities Company has to be formed with the term Securities in its name. The SEC will grant different kinds of securities licenses: dealing, brokerage and underwriting. Each of these licenses is likely to have different levels of capital requirement. In Vietnam, a license covering all business areas, including underwriting, requires around USD 14 million. For the next couple of years, it is very unlikely that a securities company in Myanmar can make any reasonable return on investment in the underwriting business with a similarly high capital requirement as that in Vietnam. Unlike in more developed countries, securities companies in developing markets are rarely committing any true underwriting. Often, unsuccessful public offerings will either be pulled or closed with the raised amount. Moreover, most of the revenues for Vietnamese securities companies arise from the brokerage business.
Building an Optimal Stock Market from Scratch
The possibility of Myanmar leapfrogging is often mentioned with regards to the IT and telecommunications sector. But as the country does not have any legacy stock market, it has the unique opportunity to design an optimal architecture from scratch. Advising experts from developed countries might be not able to devise innovative solutions adapted to Myanmar’s market, and might instead be confined in their thinking to familiar solutions. Therefore, it would be advisable that the government consults securities experts with various backgrounds for the development of the stock market.
For example, historically, the process of listing has usually been undertaken by the respective stock exchanges. However, there is no reason why the listing process could not be separated from the exchange. The SEC could define minimum listing requirements for the exchange and the OTC market. Authorized listing agencies, such as accounting and auditing firms or consultancies, could then be hired for the listing process. This would create a competitive market and reduce the listing costs for companies going public. Once an agent has approved a company for listing, any stock exchange or OTC market in Myanmar could start trading the stocks. The process would be quite similar to the rating of debt instruments by rating agencies.
To build up a functioning stock market, a Central Securities Depository (CSD) has to be established. The CSD is an organization holding securities, such as shares, in the owner’s name so that transfers from one person to another can be done just through book entry instead of physical transfer. In many countries, CSDs are owned by a stock exchange. By controlling the CSD, an incumbent stock exchange makes it virtually impossible for any new competitor to enter the market. The regulator should therefore take care that the CSD is independent of the stock exchange and gives equal access to the exchanges and OTC markets in the country.
What Needs to be Done?
A stock market is more than just the technical infrastructure of a stock exchange. In order to create a successful exchange with enough liquidity, a whole system including infrastructure, market participants and listed companies has to emerge. Brokers, dealers and market makers have to be trained while investors need to understand the concept of stocks, dividends and the risks associated with investing. Entrepreneurs have to be educated about the potential of raising funds through the capital market. Companies need assistance in valuation of their assets, capital structuring, writing the prospectus, and finally in the public offering of the shares.
The SEC will most likely be composed of members without actual working experience about the stock market. In order to ensure a strong and competent SEC, training has to be given to the members. The SEC can only remain independent if it does not accept any offers of training by companies or organizations that will be regulated by the SEC at a later stage. Much work still has to be done to develop the stock market in Myanmar. If the Yangon Stock Exchange is to open in late 2015, no time is to be wasted.