The country’s new stock market, which has been in development since 2008, has been designed to approach or meet international standards in terms of listing rules, intermediation, market infrastructure and supervision. It will be well supported and promoted and will likely make a significant difference in Myanmar. The new bourse will allow for companies in the fast-growing economy to raise capital more easily, and it is seen as contributing to transparency, accountability, efficiency and liquidity. Bond trading is evolving as well, and progress on the debt side is expected to follow achievements in equity markets.
Equity trading in Myanmar began in the 1930s on the Rangoon Stock Exchange, a secondary over-the-counter (OTC) market that focused on shares listed overseas. The market shut down during the Second World War and was revived in the late 1950s to trade the shares of nine joint venture companies the government formed with private partners. However, this iteration of the market lasted only until 1962, when the listed firms were nationalised.
The country would have to wait three decades before another market was launched. The Myanmar Securities Exchange Centre (MSEC) was established in 1996 as a 50:50 joint venture between Japan’s Daiwa Securities Group and Myanmar Economic Bank (MEB), a commercial bank with a history dating back to 1954. About 60 companies in the country also engage in OTC trading outside of the MSEC.
However, the MSEC has not flourished. The exchange has just two listed equities, Myanmar Citizens Bank and Forest Products Joint Venture Corporation. It also hosts two-, three- and five-year government bonds. Trading hours are between 9.30am and 3.00pm. At the time of the purchase, buyers must put down a 10% deposit and pay a 0.3% stamp duty, and settlement is within one week. Commissions range from a flat MMK200 ($0.18) fee for orders less than MMK10,000 ($9) to 1% of transactions in excess of MMK1m ($900). Work on improving the stock market began just before the democratic reforms in 2011. A roadmap was published in 2008 that called for the development of a trading floor by 2015.
The Central Bank of Myanmar (CBM), the Tokyo Stock Exchange and the Daiwa Institute of Research Group signed a memorandum of understanding (MoU) in 2012 to form a stock exchange, while the CBM and the Policy Research Institute, which is under Japan’s Ministry of Finance, started to develop supporting legislation that same year. The Securities and Exchange Law (SEL) was published in 2013, and the Ministry of Finance and Revenue signed an MoU with Japan’s Financial Services Agency in 2014 for the development of market infrastructure.
Brokers & Underwriters
The Yangon Stock Exchange (YSE) is 51% owned by MEB and 30.25% owned by Daiwa Securities, with the rest held by the Japan Exchange Group. It will be located at Myawaddy Bank’s former headquarters in Yangon. The SEL is vital to the success of the new exchange. According to a report put out by Singapore-based law firm Duane Morris & Selvam, the existing market failed to gain volume because it lacked a solid regulatory underpinning. The new law fills in many of the gaps by establishing the Securities and Exchange Commission (SEC), setting out the classes of licences that are available (dealing, brokerage, underwriting, investment advisory and company representative), discussing how the stock exchange should be established and listing prohibited acts. The SEL also covers OTC trading and the depository and clearing businesses.
Work on the exchange continued in 2015 ahead of the launch target, and considerable progress has been made. At least 57 companies expressed interest in being involved as intermediaries or service providers – 20 as underwriters, seven as stockbrokers, and 30 as advisory and consultancy firms. In October 2015 eight companies received conditional underwriting licences, with two additional licences reportedly awarded in December. A list of the 10 was leaked early that month, but as of mid-December only KBZ Stirling Coleman Securities, a joint venture between KBZ Group and Singapore’s Stirling Coleman Capital, had been officially endorsed. Underwriters will need MMK15bn ($13.5m) in paid-up capital, direct traders MMK10bn ($9m) and brokers MMK7bn ($6.3m).
The SEC was formed in October 2014 and will be under the Ministry of Finance and Revenue for at least five years. Its first task is to develop securities rules for the new market. Kanbawza Bank (KBZ Bank) has been chosen as the settlement and clearing bank for the new exchange. It won the appointment from among five banks. The planned platform will be a modern one, with the system operating on a delivery-versus-payment basis, where cash and securities move together. In the event of a default on the part of a broker, the bank can step in and make sure the transaction is settled. For KBZ Bank this is a new business and it may seek assistance from Sumitomo Mitsubishi, one of its foreign partners. On the cash side, the CBM will handle payments on a real-time gross settlement basis, though this capability may not be available in 2015 given the lack of IT infrastructure.
Listing rules were issued in August 2015 and are comprehensive and strict, although the rules recognise that many companies in the country do not yet have highly sophisticated accounting and governance practices in place. Prospective firms will need two years of profit history, paid-up capital of MMK500m ($450,000) and a system that prevents insider trading, among other things. The directors, owners and company itself cannot be on any blacklists. Businesses must also be tax-compliant and have a minimum of 100 shareholders in order to list.
Despite these regulations, there are areas of concern. One is the lack of a minimum float requirement, in terms of percentage of total shares outstanding. Without this, a few large shareholders could have undue influence on prices. Other concerns include the lack of disclosure and governance requirements.
Forms for initial public offerings (IPOs) were made available in late September 2015, and it seems that some transparency concerns may have been addressed in the offering process. Companies wanting to list will have to issue a prospectus, in which they will be required to provide considerable information. The document must detail the history of the company, its plan to raise money, its business structure, market risks and its position in the market. The authorities may also request additional information. Once the prospectus is approved, it must be advertised in the press.
One of the first candidates for listing will be First Myanmar Investment (FMI), a company known for its high levels of disclosure and transparency. The shares of the diversified conglomerate, with interests in banking, real estate, health care and retail, are already being traded OTC at one of the company’s subsidiaries, FMI Trading Centre. Other possible candidates are Asia Green Development Bank (AGD Bank) and the Myanmar Agribusiness Public Corporation. A number of other candidates have said they want to wait until the market is up and running before they commit to an IPO. It has also been suggested that larger conglomerates within the country may prefer to list on foreign exchanges, such as in Singapore.
The authorities are optimistic that founding the exchange will be significant for the economy and allow firms to raise funds without going through the banking system. They also see the exchange itself as increasing employment and creating economic activity of its own after it is opened. Once the YSE is operational, Brunei Darussalam will be the only country in the ASEAN without an exchange. U Maung Maung Thein, deputy finance minister and chair of the SEC, told local press, “YSE will be a good turning point for our economy, as it will change the style of fund-raising for most companies here.”
Trouble Along The Way
The project has run into some trouble along the way, however. The deadline has repeatedly changed, and it was finally decided that the market would be launched in December 2015. In the months ahead of its opening, questions were raised about whether it would be ready in time and what will happen once it is up and running. Human resources are one major issue. Daiwa Securities has said it has been difficult to train and keep qualified staff, as local officials brought in to develop the exchange prefer government work and tend to leave the YSE for public positions. The securities company has also said it has been difficult to develop a computer system for the bourse. The Duane Morris & Selvam report questioned how ready Myanmar is for a stock exchange, as it does not have the capacity and resources to properly oversee an equities market.
The exchange officially opened on December 9, 2015. The first six public companies are: FMI, First Private Bank, Myanmar Citizens Bank, Myanmar Thilawa SEZ Holdings Public, Myanmar Agribusiness Public Corporation and Golden Land Public. Trading is expected to commence in March 2016.
Once the exchange is operational, it is not clear who will list. Daiwa Securities worries that companies will prefer to stay private as a listing requires the publication of disclosures. It also noted that the exchanges in Laos and Cambodia have only succeeded in listing a few companies after being open for a number of years. Some concerns have also been raised about the role of Daiwa Securities in the exchange. While the Japanese company has committed many years to the development of the local capital markets and has made a significant contribution, it is so involved in the value chain that the potential for conflict of interest does exist. It is both an underwriter and the owner of the exchange. Daiwa, however, defended its position in a statement to The Myanmar Times in March 2015, saying it is only a minority shareholder in the exchange, with the majority owned by local interests.
Legal observers also have questions about the SEL, stating that the law itself is not enough. Implementing regulations are needed and related laws must be amended so they do not conflict with the operations of the exchange. A 2013 legal update on the law from the Swiss-Thai Chamber of Commerce stated, “While this is encouraging, implementing regulations are also required, as are an update of the Myanmar Company Law and robust regulatory and reporting framework which will withstand the scrutiny of domestic and international investors.” According to the Duane Morris & Selvam report, the greatest legal bottleneck may be the Myanmar Companies Act, a 100-year-old law restricting the ownership of shares to local citizens. Similar restrictions on foreign ownership have slowed growth of other exchanges, like in Vietnam. A draft law is in the works that could provide more flexibility. Under the old law, a company would only be considered local if it were 100% Myanmar owned. Under a new draft of the law, the determination would be made by setting percentage ownership limits.
Another common concern is whether the YSE could be used for money laundering. In March 2015 U Soe Thein, executive director of AGD Bank, told The Myanmar Times, “[Preventing money laundering] will be much more difficult on the stock exchange, as cash can change hands every minute or second, much more than happens in banks.” While banks are currently required to report any transaction above MMK100m ($90,000), enforcement has been weak and Myanmar remains of concern to the Financial Action Task Force. The worry is that many new intermediaries will be involved that are less qualified to check transactions and that their speed and frequency may create opportunities to wash money.
The local bond market has been developing over time as well. For many years, it was not much of a market, although reforms started about the same time as the authorities began to address the deficiencies of the equity markets. In 2010 the government began issuing two-year bonds and started allowing the MSEC and MEB to be sales agents for government securities. Secondary market trading has been permitted since April 2013. The authorities received significant technical assistance from donor partners, including Japan and ASEAN.
Still, the government bond market has remained illiquid, and the country has no corporate bond market. Major liberalisation reform came in 2015 when Myanmar began government bond auctions through a public bidding system. This was a major change from the existing system whereby securities were basically transferred to state institutions at a fixed price. But in the first sale, only about half of the MMK50bn ($45m) worth of securities offered were purchased.
Derivatives have also been discussed, but they will only be allowed only after stock and bond products are available. Trading in Myanmar will likely remain “plain vanilla” for quite some time, both by necessity and design. Pilot programmes in commodity futures have also been tested, but the authorities are showing little interest in allowing a free-for-all to develop. In May 2015 local online commodity exchange MICEx was informed by the Ministry of Commerce that it was not permitted to operate. The exchange said the Ministry of National Planning and Economic Development issued it a permit in 2013, but added that it was still in discussions with regulators about the business.
The markets in Myanmar are undergoing sudden and dramatic development. While the new stock market is sure to face difficulties ahead, the authorities are making great efforts to structure it in the best possible manner. Myanmar is in need of considerable capital to support upcoming projects. The key will be the participation of foreign investors. Creating market infrastructure strong enough to handle inflows and credible enough to be acceptable to international funds will be essential, as will legal clarity regarding foreign ownership of stock.
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