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The evolution of The evolution of the Stock Exchange in Cambodiathe Stock Exchange in Cambodia

ForFor

The Club of Cambodian JournalistsThe Club of Cambodian Journalists

By Dr. Ghanty SamBy Dr. Ghanty Sam

June 26, 2012June 26, 2012

Dr. GHANTY Sam, Ph.D., CFPDr. GHANTY Sam, Ph.D., CFP

Dr. GHANTY Sam was the head of the finance program and Dr. GHANTY Sam was the head of the finance program and professor of Finance, Investment and Banking at the professor of Finance, Investment and Banking at the University of Wisconsin (USA) from 1977 to 1996. University of Wisconsin (USA) from 1977 to 1996.

He worked for ADB and the World Bank from 1996 to 2004 as He worked for ADB and the World Bank from 1996 to 2004 as advisor and training coordinator at the National Bank of advisor and training coordinator at the National Bank of Cambodia and Ministry of Economy and Finance. Cambodia and Ministry of Economy and Finance.

He served as an independent member of the Board of He served as an independent member of the Board of Directors at the Foreign Trade Bank of Cambodia (2001-Directors at the Foreign Trade Bank of Cambodia (2001-2005), Canadia Bank (2006-2007) and Arial Global Group of 2005), Canadia Bank (2006-2007) and Arial Global Group of Singapore (2004-2007). Singapore (2004-2007).

He currently serves as advisor at the National Accounting He currently serves as advisor at the National Accounting Council (NAC) of the Ministry of Economy and Finance, a Council (NAC) of the Ministry of Economy and Finance, a member of the Board of Directors at the Securities and member of the Board of Directors at the Securities and Exchange Commission of Cambodia (SECC) and a member of Exchange Commission of Cambodia (SECC) and a member of Board of Directors at the Parliamentary Institute of Board of Directors at the Parliamentary Institute of Cambodia. Cambodia.

Seminar OutlineSeminar Outline

1.1.IntroductionIntroduction

2.2.The players: regulators, listing The players: regulators, listing companies; securities intermediaries;companies; securities intermediaries;

investors.investors.

3.3.The process: The primary market (IPO) The process: The primary market (IPO) phase; secondary market phase.phase; secondary market phase.

4.4.The operation of the stock exchange in The operation of the stock exchange in Cambodia.Cambodia.

5.5.Conclusion and Q&AConclusion and Q&A

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I. Introduction: I. Introduction: Why do we need a stock exchange?Why do we need a stock exchange?

1. The financial sector development framework designed by 1. The financial sector development framework designed by the Royal Government of Cambodia (RGC) and the Asian the Royal Government of Cambodia (RGC) and the Asian Development Bank (ADB):Development Bank (ADB):

a. a. The financial sector blueprint 2001–2010The financial sector blueprint 2001–2010

b. b. The financial sector development strategy 2006-The financial sector development strategy 2006-20152015

c.c. Law on government securities and law on the Law on government securities and law on the issuance and trading of non-government issuance and trading of non-government

securitiessecurities

They are long-term financial sector development goals They are long-term financial sector development goals envisioned by the RGC after the election of 1998. envisioned by the RGC after the election of 1998.

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2.2. When Cambodia joined the ASEAN on April 1999, the When Cambodia joined the ASEAN on April 1999, the goal of the RGC to modernize the financial sector goal of the RGC to modernize the financial sector and to benefit from ASEAN financial sector and to benefit from ASEAN financial sector development became a priority.development became a priority.

3.3. A sustainable economic development requires an A sustainable economic development requires an access to long-term sources of capital by Cambodian access to long-term sources of capital by Cambodian enterprises and entrepreneurs.enterprises and entrepreneurs.

The reliance on short-term and intermediate sources The reliance on short-term and intermediate sources of capital that have been provided by commercial of capital that have been provided by commercial banks is not sufficient to fund long-term banks is not sufficient to fund long-term development.development.

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Major Sources of FinanceMajor Sources of Finance

Short-term debts Banks

Long-term debts Bonds (external financing)

Equity Common Stocks (external financing ) Retained Earnings: Internal financing

Corporation

TotalAssets

PropertyPlantEquipment

Banks

Advanced banking system is criticalAdvanced banking system is critical

The banking sector has played a major role in the development

of the financial sector in Cambodia from our independence in

1953 until year 2012:

Balanced Financial System

▪ Supplementation raises efficiency ▪ Competition raises competitiveness

Banks SecuritiesMarket

The banking sector and the securities market must

develop all together to better serve the economic

development starting from year 2012:

Balanced Financial System

Strengthening of sources of funds Providing funds for long-term finance

II. The major players in a stock exchangeII. The major players in a stock exchange

To transform from a state-owned enterprises or To transform from a state-owned enterprises or family-owned businesses to listed companies family-owned businesses to listed companies (issuing stocks that are traded on a stock exchange), (issuing stocks that are traded on a stock exchange), we need the following players:we need the following players:

1. 1. The legal framework regulator (SECC)The legal framework regulator (SECC)

2. 2. The security market regulator (CSX)The security market regulator (CSX)

3. 3. Issuing companies such as the PPWSAIssuing companies such as the PPWSA

4. 4. The intermediaries: investment companies, The intermediaries: investment companies, dealers, brokers, financial advisors, etc.dealers, brokers, financial advisors, etc.

5.5. The investors: both Cambodian and foreignThe investors: both Cambodian and foreign

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The Securities and Exchange The Securities and Exchange Commission of Cambodia (CSX)Commission of Cambodia (CSX)

Government body responsible for regulating, Government body responsible for regulating, supervising, controlling, and developing the supervising, controlling, and developing the securities sector in Cambodia.securities sector in Cambodia.

It is supervised by a board of directors and headed It is supervised by a board of directors and headed by a director general supervising a number of by a director general supervising a number of departments such as:departments such as:

(a) issuance supervision; (a) issuance supervision;

(b) securities market supervision; (b) securities market supervision;

(c) research, training, and market development, (c) research, training, and market development,

(d) securities intermediaries supervision(d) securities intermediaries supervision

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The ownership of CSX consists of the RGC (owning The ownership of CSX consists of the RGC (owning 55%) and the Korean stock exchange – KRX (owning 55%) and the Korean stock exchange – KRX (owning 45%).45%).

It provides trading place where securities can be It provides trading place where securities can be bought or sold.bought or sold.

It provides trading platform and market data.It provides trading platform and market data. It monitors securities trading and reporting to the It monitors securities trading and reporting to the

SECC.SECC. It supervises members and participants.It supervises members and participants.

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The Cambodian stock exchange (CSX)The Cambodian stock exchange (CSX)

Securities issuers such the PPWSASecurities issuers such the PPWSA1. PPWSA appoints an underwriter (licensed 1. PPWSA appoints an underwriter (licensed

securities company – Tong Yang Securities securities company – Tong Yang Securities Company)Company)

2. PPWSA applies for listing eligibility2. PPWSA applies for listing eligibility

3. CSX approves for eligibility3. CSX approves for eligibility

4. PPWSA applies for public offer from SECC4. PPWSA applies for public offer from SECC

5. SECC approves in principle5. SECC approves in principle

6. PPWSA prepares and submits term of sales6. PPWSA prepares and submits term of sales

7. SECC registers disclosure documents7. SECC registers disclosure documents

8. PPWSA opens for IPO subscription8. PPWSA opens for IPO subscription

9. PPWSA applies for official listing at CSX9. PPWSA applies for official listing at CSX

10.Trading of PPWSA stocks is taking place 10.Trading of PPWSA stocks is taking place 1212

Securities intermediariesSecurities intermediariesSecurities firms need a license from the SECC and Securities firms need a license from the SECC and conduct the following securities business:conduct the following securities business:

a. Securities underwriting businessa. Securities underwriting business

b. Securities dealing businessb. Securities dealing business

c. Securities broker businessc. Securities broker business

d. Investment advisory businessd. Investment advisory business

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Securities InvestorsSecurities Investors

1. Institutional Investors (Khmer and foreign)1. Institutional Investors (Khmer and foreign)

2. Individual Investors (Khmer and foreign)2. Individual Investors (Khmer and foreign)

Securities investors can be:Securities investors can be:

long-term investors long-term investors Short-term investorsShort-term investors

They can participate in:They can participate in:

the primary market (purchase of IPO)the primary market (purchase of IPO) The secondary market (stock trading)The secondary market (stock trading)

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Other participantsOther participants

Cash Settlement AgentCash Settlement Agent Securities RegistrarSecurities Registrar Transfer AgentTransfer Agent Paying AgentPaying Agent Professional Accounting Firms and External Professional Accounting Firms and External

AuditorsAuditors Asset Valuation Firms and Professional Asset Valuation Firms and Professional

ValuatorsValuators Credit Rating AgentCredit Rating Agent

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IPOTime

Sales(Profit)

Incorporation

PrivateCompany Public

Company

Bank Loans

StocksBonds

Equity/DebtFinancing

Corporate Life Cycle Corporate Life Cycle

IPO

Procedure of Stock Issuance and Trading

IPO(new issues)

Listing TradingClearing ,

Settlement, Depository

Disclosure

Secondary MarketsPrimary Markets

III. The process: The primary marketIII. The process: The primary market

Primary marketPrimary market: The Initial Public Offering (IPO): The Initial Public Offering (IPO)

An IPO is the selling of securities to the public in the An IPO is the selling of securities to the public in the primary market. primary market.

It can be made through the fixed price method, It can be made through the fixed price method, book building method or a combination of both. In book building method or a combination of both. In Cambodia, we use a book building method.Cambodia, we use a book building method.

Underwriting is the process by which the PPWSA Underwriting is the process by which the PPWSA worked with a securities company (Tong Yang) that worked with a securities company (Tong Yang) that assists PPWSA to raise capital by issuing stock. assists PPWSA to raise capital by issuing stock.

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PPWSA and Tong Yang first met to negotiate PPWSA and Tong Yang first met to negotiate the deal. Items usually discussed include:the deal. Items usually discussed include:

1.1. the amount of money a company to be the amount of money a company to be raised,raised,

2. the type of securities to be issued and all 2. the type of securities to be issued and all

the details in the underwriting the details in the underwriting agreement.agreement.

The main source of data is the The main source of data is the prospectusprospectus. .

Investors should examine this document Investors should examine this document

Carefully before investing in PPWSA stockCarefully before investing in PPWSA stock. .

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Process of IPO Listing Process of IPO Listing

Prior to applying for listing review

After applying for listing review

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DueDiligence

IPO

Choose lead manager

Receive Approval

TradingBegins

File registration statement

Apply for Listing Eligibility

Review

Listing Review

Book Building IssuesBook Building Issues

A 20 % price range was offered by PPWSA within A 20 % price range was offered by PPWSA within which investors were allowed to bid and the final which investors were allowed to bid and the final price was determined by PPWSA only after the price was determined by PPWSA only after the closure of the bidding.closure of the bidding.

10 % advance payment is required to be made by 10 % advance payment is required to be made by the first category of bidders along with the the first category of bidders along with the application, while other categories of investors have application, while other categories of investors have to pay 100 % advance along with the application.to pay 100 % advance along with the application.

70 % of shares offered were reserved for first 70 % of shares offered were reserved for first category of bidders, while the 30% of shares were category of bidders, while the 30% of shares were reserved for the second category, essentially reserved for the second category, essentially reserved for small investors and unsuccessful reserved for small investors and unsuccessful bidders from the first category.bidders from the first category.

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III. The process: The secondary marketIII. The process: The secondary market About two weeks after the book building and price About two weeks after the book building and price

determination for IPO shares, PPWSA and Tong determination for IPO shares, PPWSA and Tong Yang requested from the SECC and CSX the Yang requested from the SECC and CSX the authorization to trade PPWSA’s stock on the CSX.authorization to trade PPWSA’s stock on the CSX.

The CSX’s rules consist of (a) setting the trading The CSX’s rules consist of (a) setting the trading hours to two periods and (b) limit the daily price hours to two periods and (b) limit the daily price changes to +/- 5% for each trading period. changes to +/- 5% for each trading period.

All buying and selling of stock must be done All buying and selling of stock must be done through all licensed securities intermediaries such through all licensed securities intermediaries such as brokers and dealers.as brokers and dealers.

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To trade, an investor needs to open an account with a To trade, an investor needs to open an account with a broker or dealer.broker or dealer.

The orders to buy and sell stocks are then sent to the CSX The orders to buy and sell stocks are then sent to the CSX computerized trading system. Only securities computerized trading system. Only securities intermediaries have access to the CSX system.intermediaries have access to the CSX system.

Once the trade is processed, the CSX will proceed to: Once the trade is processed, the CSX will proceed to:

1.1. Operators of clearance and Settlement FacilityOperators of clearance and Settlement Facility:: Checking securities of seller; Checking securities of seller; Checking cash of buyers; Checking cash of buyers; Transferring the ownership of securities from seller to buyer;Transferring the ownership of securities from seller to buyer; Giving order to Cash Settlement Agent to settle cash from buyer to Giving order to Cash Settlement Agent to settle cash from buyer to

seller; seller; Informing Securities depository about the securities traded.Informing Securities depository about the securities traded.

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2.2. Operator of Securities Depository: Operator of Securities Depository: Safe-keeping of securities; Safe-keeping of securities; Changing the ownership of securities holders after Changing the ownership of securities holders after

settlement (updating the securities holders' book);settlement (updating the securities holders' book); Depositing and withdrawing of securities.Depositing and withdrawing of securities.

3.3. Other PlayersOther Players: :

a.a. Cash Settlement Agent; Cash Settlement Agent;

b.b. Securities Registrar;Securities Registrar;

c.c. Transfer Agent Paying Agent; Transfer Agent Paying Agent;

d.d. Professional Accounting Firms and External Professional Accounting Firms and External Auditors;Auditors;

e.e. Asset Valuation Firms and Professional Asset Valuation Firms and Professional Valuators;Valuators;

f.f. Credit Rating AgentCredit Rating Agent2424

IV. Operation of the securities market in CambodiaIV. Operation of the securities market in Cambodia

Important roles of the secondary market:Important roles of the secondary market:

a.a. create liquidity and create a more efficient create liquidity and create a more efficient environment for the primary market to environment for the primary market to

operateoperate

b.b. Need for the securities market index to serve Need for the securities market index to serve as as an economic indicator of the performance of an economic indicator of the performance of the the entire marketentire market

Different categories of stock investors:Different categories of stock investors:

a. Domestic investors (individuals and institutions)a. Domestic investors (individuals and institutions)

b. Foreign investors (individuals and institutions)b. Foreign investors (individuals and institutions)

c. Long-term investors and speculatorsc. Long-term investors and speculators

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V. ConclusionV. Conclusion Role of the capital markets to provide long-term Role of the capital markets to provide long-term

equity capital to the corporationsequity capital to the corporations Listed companies are more transparent and Listed companies are more transparent and

sustainable, and able to raise more capital sustainable, and able to raise more capital Importance of good corporate governance and Importance of good corporate governance and

separation between management and ownershipseparation between management and ownership Stocks are good long-term investments for investorsStocks are good long-term investments for investors Importance of a participation of institutional Importance of a participation of institutional

investors such as insurance companies pension plan investors such as insurance companies pension plan and other investment firms that support a smooth and other investment firms that support a smooth functioning of a stock exchangefunctioning of a stock exchange

Importance of a strong and effective regulatory Importance of a strong and effective regulatory body.body.

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Thank youThank youQuestions & AnswersQuestions & Answers

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