The successful development of the capital markets in Myanmar amid a period of sweeping reforms is a significant achievement. After decades without a full exchange and years with little more than over-the-counter (OTC) trading, the country now has a robust platform for fundraising and trading in the Yangon Stock Exchange (YSE). It also has the market infrastructure in place to support it.
Amid the widespread economic and political changes over the past several years, including the historic election of 2015, Myanmar has continued to advance the development of its markets. The launch of the YSE in December 2015 is highly significant because of what it means for the country going forward. It stands to help in the achievement of further reforms, such as the privatisation of state-owned enterprises, and help to fund rapid growth as the economy recovers from its long period of isolation.
Building The Market
Trading began in the 1930s on the Rangoon Stock Exchange, an informal OTC market where shares of foreign-owned companies changed hands. Stocks on the Indian markets were quoted in Yangon as well. The local exchange folded with the advent of World War II. Unofficial OTC trading of joint-venture companies started in the 1950s, but the activity again ceased with the nationalisation of the economy in the early 1960s. A market for treasury bonds never developed despite the securities being available since shortly after independence.
The country began to look into creating a securities exchange in 1991, seeking the assistance of the IMF, the UN and the International Finance Corporation. A committee was established the next year, and seminars were held in 1994 with financial services firm KPMG, economic and financial capital markets think tank Daiwa Institute of Research, and the UN Development Programme. A memorandum of understanding between Daiwa and Myanma Economic Bank (MEB) to form a market was then signed in 1995.
The Myanmar Securities Exchange Centre (MSEC) was established in 1996 as a joint venture equally owned by local and Japanese interests. It was hoped that some companies formed under a privatisations programme would populate the market. But the MSEC never developed beyond the initial stages. In 2015 it had just two companies listed, namely, Myanmar Citizens Bank (MCB) and Forest Products Joint Venture. Trading was almost non-existent. The exchange still exists, but now acts as mainly an underwriter and a broker, trading shares on the YSX, bonds and the Forest Products Joint Venture on an OTC basis.
A Real Exchange
The YSX has been in discussion for some years, though serious preparations only started in 2012. The exchange is jointly owned by the Japan Exchange Group (JEX), the Daiwa Securities Group and MEB. The local partner owns 51% of the exchange and the two Japanese entities share the rest, with Daiwa holding 30.25% and JEX 18.75%.
Six companies were initially slated for listing on the exchange: First Myanmar Investment (FMI), MCB, Myanmar Thilawa SEZ Holdings (MTSH), Myanmar Agribusiness, First Private Bank and Great Hor Kham. Trading commenced on the YSX in March 2016, when the shares of FMI started to change hands. The company did not sell stock in an offering, instead transferring already-issued equity to the public listing.
By the end of 2016 a total of three companies had listed. The first, FMI, was founded in 1992. It is an investment group with core holdings in the sectors of financial services, real estate and health care. FMI’s companies include Yoma Bank, founded 1993, and Pun Hlaing Siloam Hospital, which opened in 2005 as the country’s first ISO-certified hospital. It is also an investor in the airline FMI Air.
While FMI’s revenues more than tripled to hit MMK110bn ($89.3m) for fiscal year 2015/16, according to the group’s financial results, net profit declined from MMK73.1bn ($59.4m) to MMK8.9bn ($7.2m). The group said that the increase in revenue was due to the financial consolidation of Yoma Bank and Pun Hlaing Siloam Hospital, and attributed the decline in profit to a weak property market.
MTSH, the second listing on the YSX, came to market in May 2016. According to its YSX company profile, MTSH, which was founded in 2013, is primarily involved in the development of Thilawa Special Economic Zone (SEZ), a development that is backed by the Myanmar and Japanese governments. Specifically, MTSH is an investor in Myanmar Japan Thilawa Development (MJTD), has marketing and management contracts with MJTD and is an investor in Thilawa Property Development, which will be involved in residential and commercial development in Zone A of Thilawa SEZ as well as other projects related to the zone, as they present themselves. MTSH was founded by nine shareholders, including FMI.
MTSH had an advantage in that it was formed with an eye to listing and was thus organised to meet exchange requirements. Many other companies in the country are not so well prepared, according to local press reports. Their structures are often complex, involving holdings companies and a web of subsidiaries, while restructuring can be complicated and expensive, due in part to the tax implications.
Brokers have been particularly positive about MTSH, saying that it is in an ideal position. The firm will be able to market assets without having to make major capital expenditures, as much of the infrastructure at the SEZ is being built by other parties. Some concerns have also been raised regarding the company’s many major shareholders, who could start to cash out as the stock price rises, leading to a rise in the supply of equity and a cap on gains. According to MTSH’s results for fiscal year 2015/16 the company saw a rise in comprehensive income from MMK16.2bn ($13m) to MMK21bn ($17.1m). Per share earnings also rose from MMK4612 ($3.75) to MMK5317 ($4.32).
MCB was the third company and the first bank to list on the exchange. It completed its prospectus and sent it to the regulators in June 2016. Trading in the shares began on the YSX the following August. As with the other companies, no new stock was issued. The bank was originally controlled by the Ministry of Commerce, but ownership by the ministry was down to 10% by the time of listing, according to the press.
Listing Rules Outlined
The market is guided by a wide range of regulations issued by several bodies. Listing rules were published by the stock exchange in 2015, covering management, governance, compliance, disclosure, insider trading and internal controls.
For companies applying to list on the exchange, a two-year history of profit is required, as is MMK500m ($406,150) of capital. The candidate must have 100 shareholders, but no minimum float requirement is mentioned in the rules. Companies seeking a listing must also provide evidence that they are tax compliant. Neither the entity nor any of its owners or directors may be on any blacklists.
According to the listing rules, the total number of shares after the listing should be at least 5000, and accounts should be prepared according to Myanmar Financial Reporting Standards. The shares of the company must also be free of any restriction on their transfer. In the case where new shares have been issued within six months of the listing, these shares will have a lock-up period of three months. Firms can be delisted for a number of reasons, including bankruptcy or restrictions placed on share transfer.
According to YSX guidelines, a charge of MMK1.5m ($1218) is payable for the initial listing examination. An additional 0.05% of the market capitalisation is also payable (unless the offering is of existing shares, in which case it is 0.01%). An annual fee of 0.005% is payable to maintain the listing.
Trading participants must pay an examination fee of MMK1m ($812) and an admission fee of MMK10m ($8123). They must also pay a monthly fee of MMK900,000 ($731) plus 0.2% of their trading carried out by value. The fees have been discounted through 2017. Shareholders must pay a registration fee of MMK1000 ($0.81).
Normally, all stock transfers must be done on the exchange. Off-exchange trading is not allowed, through some transfers may be done directly in special situations. For example, shareholders may trade with themselves without actually conducting an on-market transaction. Special procedures nevertheless have to be followed, including notification being sent to the exchange.
Both market orders and limit orders are allowed. Price limits for stock movements have been set, and these limits vary depending on the price of the security. For shares trading between MMK10,000 ($8.12) and 20,000 ($16.25), the daily limit is MMK2500 ($2.03). For shares trading between MMK20,000 ($16.25) and MMK40,000 ($30.75), the limit is MMK5,000 ($3.84). For those between MMK40,000 ($32.49) and MMK100,000 ($81.23), the limit is MMK10,000 ($8.12). For shares trading between MMK100,000 ($81.23) and MMK200,000 ($162.46), the limit is MMK25,000 ($20.31). The minimum tick, or minimum stock price movement, ranges from MMK500 ($0.41) for shares trading between MMK10,000 ($8.12) and MKK40,000 ($32.49), and MMK5000 ($4.06) for shares trading between MMK100,000 ($81.23) and MMK400,000 ($324.92).
Securities & Exchange
The Securities Exchange Law, published in 2013, called for the establishment of the Securities and Exchange Commission of Myanmar (SECM), with the YSX laying out the framework for regulation. The commission has the power to regulate public companies, securities companies, OTC markets, stock exchanges and anyone who acts as a responsible person for regulated entities.
The 2013 law outlines the various licences that are available, including a permit for securities dealing, in which a company buys and sells for its own account; securities brokerage, in which a company buys and sells on behalf of its clients; securities investment advisory, in which investment advice is provided for a charge; and securities deposit and clearing, in which a company receives, holds and delivers securities on behalf of its customers, and assists customers in exercising their rights of ownership.
According to a client note issued by the law firm VDP Loi Myanmar, underwriters – which can provide all services – must have MMK15bn ($12.2m) of capital, securities dealers MMK10bn ($8.1m), brokers MMK7bn ($5.7m) and advisors MMK300m ($244,000). A security deposit must also be made, which is equal to 10% of the capital requirement.
In addition to the law, the SECM has also issued a number of notifications, which have covered a wide range of issues. It has published rules for securities companies opening branch offices, procedures for reducing capital, information on the amount that needs to be put aside for a reserve fund (2.5% of annual net profits), rules for the use of shares for collateral and guidelines for advertising.
A notification on initial public offerings (IPOs) was issued in September 2015. In the notice, the SECM said that a company seeking to make an IPO must submit a prospectus that includes an offering plan, details about the shares being sold, information about the issuer, company history and structure, details about the business and an outline of the investment plan. Information about shareholders and the management structure are also required, as are basic corporation documents, such as the Articles of Association and copies of the minutes authorising the offering. The company must also provide two years of audited financial statements.
In June 2016 templates were issued for prospectuses. For small companies in which the shares will be offered to 100 or fewer people, and the total equity value on offer is under MMK500m ($406,000), Form A should be used. Companies using Form A need to provide the standard items required under the law as well as a simplified balance sheet and an income statement. Larger companies need to use to Form B, which requires more detail, including precise information about the offering timetable (opening date, closing date, notification date and listing date), more granular financials and more information about the underwriters, directors and shareholders.
In early 2016 a notification was issued on continuous disclosure. In the notification the SECM said that all listed companies, public companies trading OTC and public companies with more than 100 shareholders must submit yearly and half-yearly reports. They must also issue reports if significant events occur, such as a change of ownership, a major change of shareholders, a disaster which affects the company, the filing of a lawsuit against the company or changes made to management or the auditor.
The dematerialisation of shares is covered under a notification issued in December 2015. According to the notification, the stock exchange is authorised to provide book-entry ownership records for shares, while an account for each securities company must be opened. The notice adds that no share certificates will be issued for stock listed on the exchange and that any share certificates presented will become void and be replaced by a book entry.
In October 2015 the SECM issued rules regarding the fees to be charged by securities companies. Transactions involving less than MMK500,000 ($406) will attract a fee of MMK5000 ($4.06), while a commission of 1% of the amount traded will be charged for transactions between MMK500,000 ($406) and MMK1m ($812). For transactions ranging from MMK1m ($812) to MMK10m ($8123), the fee will be 0.8%, and between MMK10m ($8123) and MMK100m ($81,230), the commission will be 0.6%. For transactions above MMK100m ($81,230), the fee will be 0.5%.
Instructions were also published on anti-money laundering (AML). In them, the SECM calls for securities companies to develop AML practices to be used both at the time of account opening and at the time of an order. Suspicious transactions include those conducted by a person on a blacklist, those involving over MMK10m ($8123), a large number of smaller transactions or those in which the customer forces the securities company to accept cash.
In addition to requiring basic identifying information from customers, securities companies are instructed to deny an application from a foreigner, check whether the customer has access to insider information and assess the client’s investment objectives. Insider trading instructions prohibit securities company employees from trading in shares they underwrite, and the companies should have internal policies regarding insider trading. Specific attention must be paid to accounts owned by listed company directors, directors of the parent company of a listed entity, government officials with access to information about listed companies and immediate family members of these people. In January 2016 the SECM set criteria for a securities representative licence. Candidates must be 22 years of age, have a university degree, be recommended by a securities company, be of good character and pass an examination covering the capital markets, regulation and the YSX. The twoyear licence costs MMK5000 ($4.06) and the examination fee is MMK15,000 ($12.18).
In late 2015 a list of 10 underwriters was published. The provisional licences were dependent upon registering a subsidiary with the Directorate of Investment and Company Administration. By late 2016 a total of six firms were on the YSX’s official list of trading participants. These were MSEC, KBZ Stirling Coleman Securities, CB Securities, AYA Trust Securities, KTZ Ruby Hill Securities and Amara Investment Securities.
Foreign brokers are allowed to own up to 50% of a securities company, but control must be kept in the hands of the local partner. KTZ Ruby Hill is a joint venture between KT ZMICO, a Thai securities company, and Myanmar’s Loi Hein Group. KBZ Stirling Coleman, which received its licence in October 2015, is a joint venture between Kanbawza Group and Stirling Coleman, which is a Singapore-based corporate advisory company founded in 2001. Market infrastructure is fast developing. In April 2015 Kanbawza Bank was chosen to build a settlement and clearing system for the exchange. One more bank may also receive permission to operate as a settlement institution if the market is in need of a second player to offer those services. Settlements on the market take three business days after the trade date and are conducted using the delivery versus payment system. The minimum order is one share. The YSX acts as the Central Counter Party, and it nets out obligations between securities companies. Trading may be suspended by the exchange for any number of reasons, including market-sensitive news, irregular trading and problems with the trading system.
The exchange has issued rules regarding settlement, including the times and methods of payment, the rules for the use of due bills in the case of non-payment, the use of settlement collateral, the conditions under which settlement can be delayed and the procedures to be used in the case of default.
According to the settlement rules, a special clearing charge can be issued against all the trading participants in the event of a failed trade if other sources of funds – such as collateral from the defaulting participant and clearing funds of the defaulting participant – are not available for use.
Three Issues, Low Volume
Share trading has dropped off since the initial frenzy, and observers say that it will take some time for the market to develop. In March 2016, when only one company was listed, the share volume reached 670,000. In August this dropped to 150,000 shares, and the following October a total of 126,000 shares changed hands for a total value of MMK4bn ($3.2m).
The Myanmar Stock Price Index (MYANPIX) was introduced on March 25, 2016 with a base value of 1000. It is capitalisation-weighted and includes all companies trading on the market. MYANPIX peaked at around 1300 at the end of March before dropping to about 561 by the close of the year.
Concerns have been raised about the lack of institutional investors in the market, and a lack of education among the retail investors. So far, trading tends to be seen as a form of gambling, with buying and selling largely based on sentiment and trends. Sector executives say that it is important to encourage investors to understand and analyse companies. Market manipulation has also been observed, with large orders being placed in an apparent attempt to move stock prices, according to press reports. In early June 2016 YSX issued a warning covering this practice. It said that brokers should not be making large orders and then cancelling them, as this sort of activity can lead to a rapid change in sentiment among the retail investors. Market manipulation is punishable by up to 10 years in jail and a fine. In mid-2016 rumours spread that YSX shares would be opened to foreign investors. This was seen as having potential to boost sentiment. However, the exchange said that investment of this sort would not be possible until the Companies Act is amended which, according to the Myanmar Times, is expected to happen in 2017.
Delays & Governance
The market has expressed some concern about capacity at the regulatory level. MTSH’s listing was much slower than FMI’s, though the exchange noted that this was in part a result of official holidays and the larger number of shareholders at MTSH (each shareholder must be registered with a broker). The rules themselves have also been brought into question. According to legal experts quoted in the local press, despite the volume of regulation and notifications, they are very basic in content and unclear in certain areas.
However, the main challenge facing the market is the fact that the transactions undertaken have been simple and straightforward, involving the listing rather than the sale of shares, with no real IPO carried out. The sense is that more work is needed before the market, the regulators and the issuers are ready for a real offering. Taking a private company public and selling new shares is likely to take time and may be beyond the current capacity of the relevant players, according to observers. “An IPO will take 18 months to two years,” Neville Daw, director of financial institutions and strategy, of Amara Investment Securities, told OBG. “We really are starting from basics.”
In mid-2015 the country began taking steps to secure a credit rating so that an international bond can be sold. In early 2016 a workshop was held in cooperation with the Asian Development Bank and the Asian Bond Market Initiative to promote the competitive auction process. No secondary trading in government bonds has taken place as yet, but the Central Bank of Myanmar (CBM) is hopeful that the new Real Time Gross Settlement System, which is known as CBM-NET, will help facilitate this sort of activity and aid in collateral management. “If we can get a government market up and running and a government rating, that would make a substantial difference,” Neville Daw told OBG.
The YSX is a good platform on which to build an effective capital market. While currently under-utilised, once IPOs are conducted volumes will increase and the exchange will become an important part of the fundraising ecosystem. Over time the market will mature, as retail players gain experience, and institutional investors develop and purchase equity.
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