March will be a landmark month in Myanmar's history, as military rules gives way to a democratically elected government. But the historic handover of power also marks a deadline for the development of the country's stock market.
The Myanmar Securities and Exchange Commission, which is controlled by the outgoing administration, wants the first companies listed on the fledgling Yangon Stock Exchange by the time the government leaves power.
Six companies were named as listing candidates at the launch of the exchange in December (see table). But while the SEC is pressing ahead, there’s little certainty about which company will list first, or exactly when. Indeed, few of the organisations slated to list appear ready.
“The companies are still making important preparations, such as due diligence, corporate governance structure and other legal requirements,” Daw Tin May Oo, an official at the SEC, told the Myanmar Times on January 21.
She estimated that only one or two companies would be ready to list shares and begin trading by March.
“The government will want to list at least one company before it leaves but that’s only a few weeks away,” a private equity executive who is closely watching Myanmar’s market development told FinanceAsia. “So far we’ve seen no announcement and no prospectuses, in a market that is unfamiliar with stocks.”
The lack of information is particularly concerning for two reasons. First, local companies typically reveal limited financial information, and the lack of a credit bureau plus the existence of a large informal banking sector makes it hard to ascertain their solvency without more information.
Secondly, most of Myanmar’s larger businesses form part of even larger conglomerates, some of which are run by individuals still on US sanction lists. In April 2015 Washington removed Win Aung, founder of two companies and head of Myanmar’s Chamber of Commerce, from the list. He is just the fourth person removed since 2012 from a list of over 100 names.
“A major constraint to stock listings here is that some big conglomerates won’t want to go public, while some mid-cap companies may struggle to find the means to do so because it could cost them around $500,000,” said the private equity executive. “Plus, the accounting books of some firms may require extensive auditing work.”
What’s more, the YSX hasn’t even made clarified its minimum financial hurdles for listing companies.
“Company law in Singapore requires listed companies to have a certain level of turnover and assets,” Michael Sien, a Yangon-based lawyer who advises many foreign companies, told FinanceAsia. “This is not yet clear here.”
In fairness, the Myanmar Accountancy Council oversees a 2010 version of the International Financial Regulatory Standard and the SEC has said locally listed companies must abide by them. But these rules are five years behind modern standards.
TOO MUCH, TOO SOON
Even if the 10 approved and budding brokers are all ready and the six designated companies are fit to list (which most aren’t), a stock exchange only functions well when supported by an engaged investor base.
Myanmar doesn’t have any institutional investors, while foreign investors won’t be let in until after the nation’s Foreign Investment Law and the Myanmar Citizen’s Investment Law are combined (Msien said a draft version of the combined law is ready to be approved).
Added to this, the country’s due diligence frailties are likely to slow the entrance of institutional and corporate investors alike.
“The need for due diligence here is substantial, if foreign investors are to take a larger role,” said Nick Freeman, a Yangon-based consultant who advises Myanmar Capital Partners. “If multinational enterprises want to do business here and not risk falling foul of remaining sanctions, they must expect to do more due diligence work than they might in most other countries. And some of the shareholding networks here are quite complex, so it’s not always abundantly clear what’s under the hood.”
As a result, it will be up to local retail investors to support the exchange for the time being.
The country already has an over-the-counter stock market, which trades shares in several companies. So the concept of shares isn’t entirely unfamiliar to the Myanmarese.
But a senior businessman advising a company that is considering listing said the SEC has made minimal efforts to educate the populace about how publicly-traded shares work. “I don’t think local investors are ready yet,” he said.
Instead, brokers and law firms have conducted roadshows to help train would-be investors.
Takashi Takahashi, deputy director for Myanmar Securities Exchange Centre, said MSEC has conducted five open seminars on stock trading, four in Yangon and one in Myanmar’s second-largest city of Mandalay. About 200 to 300 people attended each one.
But five million people live in Yangon and 1.2 million are in Mandalay. It’s very unlikely all potential buyers will have been briefed by the time the first stocks trade.
