Cambodia lays foundations for capital markets

via CAAI

Under the Regulations for the Public Issuance of Equity Securities adopted in January this year, companies offering shares to the public must have shareholder equity of at least five billion riel (US$1.25 million) when they file an application.

For companies with shareholder equity of less than 20 billion riel (US$5 million) on their latest balance sheet, the size of the issue must be equivalent to at least 20% of their equity. For larger companies, the minimum issue size is 15%. When the application is lodged for a public offering, minimum earnings requirements are at least 500 million riel (US$125,000) in net profit for the latest financial year and at least one billion riel (US$250,000) for the previous three years.

These requirements don’t apply to private placements of shares as long as such offerings are made to fewer than 30 people and are not publicly advertised by any means. SECC documentation still has to be completed beforehand, however, and results reported “without delay” to the commission, or “immediately” in the case of a company that is already listed.

Among the disclosure requirements for public offerings are risk factors and management’s perception of risk, including those related to interest and exchange rates. In addition, disclosure documents have to include industry risks, operational risks, non-operational risks, market and technology-related risks as well as risks related to changes in rules and regulations, in national and in international policies.

Fees for initial submission and registration of disclosure documents are 12 million riel (US$3,000) for initial public offerings and 8 million riel (US$2,000) for additional issues. (See table below.) Other disclosure requirements include details of executive compensation, options granted to directors or staff and the identities of shareholders holding more than 5% of the company. In theory, 20% of any public offering is reserved for Cambodian citizens with the remaining 80% open to foreigners or Cambodians. In practice, however, the SECC may reallocate subscriptions to ensure the success of a public issue.

Today, the only Cambodian business listed anywhere is NagaCorp Limited, a Malaysian-controlled company which runs the sole casino in Phnom Penh. Incorporated in the Cayman Islands, NagaCorp is listed on the Hong Kong Exchange. One foreign bank in Phnom Penh says it already has about 10 corporate customers ready to apply for a listing.

Other possible candidates are expected to include Acleda Bank, which has branches in Laos as well as having the largest network in Cambodia, and Sokimex, a petroleum importer and luxury hotel operator with subsidiaries in Vietnam and a joint venture with Marubeni in Sihanoukville servicing oil tankers. The only names to emerge publicly so far, however, are four state-owned enterprises including the Phnom Penh Water Supply Authority, a once decrepit utility which has been radically transformed since 1993.

Others are Port Autonome de Sihanouk­ville, Electricité du Cambodge and Telecom Cambodia, a recently-incorporated company that operates the country’s fixed-line network and an international gateway as well as providing internet services. Amid public mutterings that listing require­ments are too onerous and that there is no need to raise capital anyway, government officials remain adamant. The main reason for forcing state-owned enterprises to list at this stage, they say, is to increase efficiency and transparency.

Indeed, transparency is something of a buzzword in Cambodia these days. In its latest public opinion poll of global corruption in 2009, Transparency Inter­national ranked Cambodia alongside Indonesia and Mongolia in the second-worst group of countries, where between 23% and 49% of respondents reported paying a bribe in the previous 12 months.

But the survey found too that local public perceptions of corruption were less pronounced than those of experts in the field. Moreover, the survey found that 67% of Cambodian respondents believed that government action in fighting corruption was effective and that this perception had increased since 2007.

Corporate governance

The Regulations on Corporate Governance for Listed Com­panies adopted by the SECC in January outline shareholder rights in considerable detail, including the right to access information, a somewhat contentious issue in Cambodia. In addition to basic shareholder and voting rights, the regulations cover rights related to shareholder meetings, minority share­­­holders and equitable treatment. Company boards must respect the rights of minority shareholders to seek information, voice opinion and seek redress. Boards have to ensure “good communications and appropriate interaction” bet­ween minority shareholders and senior company officers as well as board members.

In addition, companies are prohibited from providing information selectively to any subset of shareholders. In theory, all companies must have a website accessible to the public. Information on the website is supposed to include audited annual financial statements, operating results, quarterly financial reports and details of the directors and senior officers of the company.

In the absence of a website, shareholders can ask for hard copies of this information in exchange for a fee to cover printing and distribution costs. The regulations have a provision against “unfair insider trading” by directors, senior officers or shareholders. From 10 working days before until one day after the release of financial information, company directors and senior officers are prohibited from trading the company’s shares. The trading ban extends to seven working days before until one day after a board meeting.

Under the regulations, company boards must have between five and 15 members of which one-fifth have to be independent directors. Foreigners employed as independent directors have to have worked in the country for at least six months. Individual directors or small groups of directors are prohibited from dominating board decisions. To qualify as an independent director, the regulations list six general conditions to guard against conflicts of interest and nepotism, which is widespread in both the public and private sectors in Cambodia. In addition, independent directors are subject to six somewhat overlapping qualification criteria which apply to family members too.

All listed companies are required to have audit committees and those with assets of more than 200 billion riel (US$50 million) must have a risk management committee. In both cases, committees are required to have at least three members and be chaired by an independent director. Nomi­nation committees to review executive compensation have the same structure but are optional unless required by the SECC.

In the case of risk management committees, risk analysis is defined as describing, identifying and estimating risks. Other duties include risk evaluation, reporting, treatment and monitoring. In addition to various conditions to avoid conflicts of interest with external auditors, listed companies are required to change their auditing firm every three years.

Companies are required to protect the rights of “stakeholders”, defined as creditors, related parties and those with contracts with the company. In addition to having clear management strategies that support and protect stakeholder rights, companies have to ensure compliance with local labour laws and be socially responsible in areas such as consumer and environmental protection. Compa­nies have to recognize and protect the separate rights of those who are both shareholders and stakeholders.

As for disclosure and transparency, listed companies are required to prepare information in language that is easily understood, a growing problem in Cambodia where increasing amounts of “development” jargon have crept into the language.

According to the regulations, ambiguous and technical terms are supposed to be avoided and complex information has to be accompanied by explanations that can be easily comprehended by the general public. Information disclosed to the public must be accessible at minimal cost. In the case of foreign language disclosures, translations into Khmer must be done by SECC-recognized agents (to its credit, the commission already has an English-Khmer glossary of financial terms on its website).

Companies have to designate a person to oversee disclosure matters through an internal information control system. Information disclosures related to corporate governance have to include details about the board, management structure, policies regarding incentives and conflicts of interest, and code of conduct for company directors and senior officers.

Corporate bonds and MTNs

With the absence of any significant issues of Cambodian government securities to develop a market in debt instruments, what are the prospects for corporate bonds? Given the profile of potential issuers and investors, Yutaru Oku, a consultant with the Nomura Research Institute, reckons the priority for corporate bonds should be private placements.

In a presentation to a SECC seminar in Phnom Penh last year, Oku noted that most private companies in Cambodia are family-owned. Most funds come from the owners themselves or their foreign partners, although some funds come from banks as well, especially in the case of working capital. Since companies seeking to expand their external sources of funding beyond banks would need to have audited accounts, an exchange listing may serve as a first step to issuing bonds. “

Listing would be a good opportunity to raise their recognition and brand which privately-owned companies often lack,” Oku says. Given that no companies are currently listed, however, public offerings of corporate bonds seem a distant prospect. In the meantime, private offerings of corporate bonds can fill the gap.

With virtually no institutional investors in Cambodia, Oku sees the most likely investors as high net worth individuals and companies related to issuers. Although detailed regulatory filings for private placements may not be necessary, he notes that issuers may have to supply information to fulfil due diligence requirements of investors such as high net worth individuals. They may also need to appoint trustees in case of default. Other potential investors such as creditors are considered to know issuers well, even without audited financial statements and may not require trustees.

Another option for Cambodian companies would be to issue medium-term notes (MTNs) under the Asean+3 Bond Market Initiative launched in 2003 which is supported by Japan and the ADB. Once they have set up a MTN programme, by registering with the authorities, for example, issuers can issue paper instantaneously. While MTN programmes and shelf registrations are similar in offering simplified procedures, Oku notes that the latter typically apply to public offerings in local currency markets.

Under the Asian Medium-Term Note Programme, procedures for private placements in local markets are universally applied to cross-border and multi-currency issues. For the time being, however, bank certificates of deposit remain the only transferable debt securities to have been issued in Cambodia. The National Bank of Cambodia has issued small amounts of 91-day treasury bills, mainly to state-owned banks.

In addition, the Ministry of Economy and Finance has issued recapitalization bonds with maturities of two to three years as part of the restructuring of the Foreign Trade Bank of Cambodia and insurance companies Caminco and Cambodia Reinsurance. But in both cases, these instruments have been non-transferable. As for institutional investors, one of the long-term goals of the government’s financial sector development strategy is to have a pension and provident fund scheme operating between 2012 and 2015.

CSX: the KRX affiliate in Cambodia

Cambodia Securities Exchange (CSX) was in the final stages of being incorporated in early March with the Ministry of Economy and Finance holding 55% and Korea Exchange (KRX) the remaining 45%. Under a sub-decree issued by Prime Minister Hun Sen in May last year, the seven-member board of CSX comprises four Cambodians and three Koreans and is chaired by Hean Sahib, deputy secretary-general of the ministry.

The chief executive officer of the exchange is Hong Sok Hour, an aide to secretary of state Aun Porn Moniroth, who is also minister attached to the prime minister. The chief operating officer is Min Kyoung-hoon, who KRX appointed along with two other Korean board members in December 2009. The two other Cambodian board members are from the National Bank of Cambodia and the Ministry of Commerce.

“We expect to inaugurate the exchange soon,” Hong says. In addition to providing a trading platform for buying and selling securities, CSX is expected to act as a front-line regulator. The Cambodia-Korea venture dates back to 2006 when KRX signed a memorandum of understanding with the ministry to assist Cambodia in setting up a securities market and exchange staff. In 2007, KRX signed a separate memorandum of understanding with Bank of Lao PDR to help set up a securities market in Laos and exchange information.

Cambodia sanctions private enterprise before Vietnam

A vibrant private sector

A common misconception about Cambodia among both foreigners and Cambodians too young to remember is that the market economy is a relatively recent phenomenon. If securities market development lags Vietnam by 10 years, the logic goes, the private sector must be less developed too.

In fact, the private sector has been flourishing in Cambodia for more than three decades and was officially recognized by the ruling party well before Vietnam launched its new economic policy of doi moi (renovation) in 1986. With the establishment of a new government following the overthrow of Pol Pot forces in 1979, the most urgent priority was to feed people.

Markets accordingly sprang up almost immediately. Rice measured in rusted milk cans served as the main medium of exchange, along with the Vietnamese and Thai currencies (the Khmer Rouge had outlawed currency between 1975 and 1978). As Australian historian Margaret Slocomb has noted, “there was no attempt to regulate the market at this stage, because there was urgent demand for essential items which the state could not provide”.

At the same time, gold was used to import goods from Thailand and Vietnam. “In fact, this amounted to state-sanctioned smuggling by petty traders,” Slocomb says. “In the early days, the smugglers fulfilled an important economic function.” So too did the “family economy”, which complemented the state-­owned sector and half-hearted attempts to form collectives, known as “solidarity groups”.

Planning Minister Chea Soth, today dean of the National Assembly, noted as early as 1983 that the private economy had not only “regained its shape” but that there were too “some who had become capitalist businessmen already”. He reported that by the end of 1983, Cambodia had more than 100,000 solidarity groups comprising 1.3 million households. But about 90% were based on some form of private enterprise and only about 10% were run along purely collective lines.

Soviet caviar

By 1985, the private sector was officially recognized at the fifth congress of the Khmer People’s Revo­lutionary Party, the forerunner to the Cambodian People’s Party that rules the country today. In a report to the congress, President Heng Samrin, currently president of the National Assembly, acknowledged “weaknesses” in the state-owned sector, which was modelled along Soviet lines. “We advocate the development of our economy encompassing four components: economy of the state-run sector, collective economy, family-run economy and private economy,” he told the congress.

At that stage, Vietnam’s economic reform policy was still a year away and Hanoi’s markets were virtually bare, the main imported products being Soviet caviar, vodka and condensed milk. In Phnom Penh, according to Vietnamese soldiers returning from the Cambodian front in 1987, markets were brimming with merchandise from Thailand, notwithstanding a US-led Cold War embargo supported by Asean and China.

A few years later, most of Cambodia’s state-owned enterprises were privatized with port operators and the water and power utilities being notable exceptions. A handful of state-owned financial institutions have since been privatized, or at least partly. It may be a footnote in history but it turns out that Cambodia was the third socialist country in the world to embrace the market economy after Hungary and China, which began their reforms in the 1970s under communist party leaders Janos Kadar and Deng Xiaoping.

Overhauled water supply system reaches farther and more

Outstanding public utility

In 2004, the Asian Development Bank awarded the Phnom Penh Water Supply Authority the ADB Water Prize. Described by the bank as an “outstanding public utility in the region”, the authority has since become one of four state-owned enterprises that have been named as likely candidates for issuing securities. In 1993, when

Cambodia’s political isolation came to an end with UN-supervised elections, water was available only 10 hours a day in the Cambodian capital and less than half of the city’s households were connected, at least officially. With water pressure so low, those that were connected often had to use diesel pumps to transfer water to rooftop storage tanks during the brief periods when supplies were actually available. The utility was heavily subsidized and only 28% of the water sold contributed to revenues, the remaining 72% being lost through waste or illegal connections that were often supplied by employees on the take.

Households without connections, legal or otherwise, were forced to buy water at a considerable cost from private vendors who walked the streets of Phnom Penh with mobile tanks. According to the ADB, it was a “decrepit war-torn water supply system with missing water and missing customers.”

By 2006, the utility was operating 24 hours a day and covered 90% of the city. 94% of the water being pumped was contributing to revenues and full cost recovery had been achieved. During the same period, annual revenues swelled from 700 million riel (US$175,000) to 34 billion riel (US$8.5 million). By 2006, the amount of water being pumped every day had risen to 235,000 cubic metres, up from 65,000 cubic metres in 1993 and 155,000 in the sixties. The number of connections jumped from 27,000 to 147,000 during the 13-year period. Most strikingly, however, was the change in the ratio between staff and connections.

In 1993, the ratio was 22 staff for each 1,000 connections. By 2006, it had dropped to a mere four. By this stage, the water utility faced a new challenge – persuading people to drink the water directly from the tap and get rid of all those redundant rooftop tanks with their dead insects and birds. At the time, tests showed that tap water had become potable and that drinking water in 20-litre plastic bottles, still commonly sold by private wholesalers, was often contaminated with high levels of bacteria due to sloppy processing or unsanitary installation into water dispensers.