Revving up our capital market

Apart from the flooding and ghost projects that have been in the headlines lately, another concern that has been the buzz in business news — primarily because of the recent appointment of Atty. Francis Edralin Lim as Securities and Exchange Commission chairman who has been quite vocal about it and who in his former life in the private sector had been a leading stalwart in financial markets — is the apparent dismal state of our capital market.

For the benefit of the not-too-financially savvy readers out there, what is this capital market anyway that is of concern to the government moneymen, particularly the SEC, Department of Finance and the Bangko Sentral ng Pilipinas?

Simply, a capital market is a virtual venue where buyers and sellers converge to transact an exchange between one who owns an asset in demand, in this case money, meaning an investor with a lot of spare cash, and another who is in need of that commodity, meaning a business or the government itself, looking for long-term capital to shore up an expanding business enterprise or to meet the fiscal needs of the country. Asset prices are set in an exchange based on an openly disclosed bid and offer method.

Technically defined, capital markets are financial systems where investors, both individuals and institutions, provide capital either by acquiring part of the ownership of an enterprise in need, or lending to the enterprise similar to the symbiotic relationship between a depositor, a bank, and a borrower.

The big difference is that companies and the government raise the money directly from investors, bypassing the intermediary banks, by trading financial instruments such as stocks, bonds, and other forms of derivative securities. The advantage of dealing in the capital market is that by bypassing the intermediary bank, the investor should receive a better yield, while the borrower should be paying a much lower interest rate.

For the economy, the capital market mobilizes idle savings into long-term investments. It supports enterprises, which in turn generate more employment for the people and much-needed tax revenues for a cash-strapped country like ours.

Significantly, even if the nature of the investment is for the long term, the capital market provides liquidity and price discovery of the financial instruments that are listed in the virtual exchange and that are being constantly openly traded which enable an investor to cash in prior to the maturity of the investment commitment.

SEC Chair Francis, who is definitely no stranger to the business community, having been the president of the Philippine Stock Exchange, the Management Association of the Philippines, the Financial Executives Institute of the Philippines, and the Shareholders Association of the Philippines, in his maiden speeches before various business associations declared his agenda for revving up the capital market.

He is keenly aware that we are laggards compared to our regional neighbors in terms of number of listings, market capitalization, trading volumes, and market depth, but unfortunately ahead of our neighbors in regulatory bureaucracies such as which delay the approval of increases in authorized capitalizations, the processing of listing approvals, and the high friction costs of listing fees and transaction taxes, which discourage the participation of much needed foreign funds in our markets.

To promote wider choices for investors, Lim is pushing for more listed companies by providing significant discounts for various required forms and even listing fees for small businesses. He is espousing the listing of profitable, market-ready government-owned and controlled corporations for greater diversity of investor selection. This will go hand in hand with the streamlining and automation of SEC regulatory processes to facilitate turnaround time to comply with SEC requirements.

He is similarly keen on cleaning up governance concerns through stricter enforcement of rules such as scrapping the exemption rule for qualifying independent directors to go beyond a nine-year tenure and tightening up on the numerous fairly lax and often disregarded comply-or-explain provisions of the governance code. Promoting the financial literacy of the investing public is another pillar he has recognized that is imperative to ensure trust and confidence in our capital market.

Chair Francis, however, is keenly aware that these reforms and a host of other concerns cannot happen without the active support of all market stakeholders. And certainly, most of these issues have literally been bandied about for decades but with very little progress to show.

In this regard, Chair Emeritus Dr. Jesus Estanislao of the Institute of Corporate Directors recently initiated a private sector-led roadmap by calling on all stakeholders both in government and the private sector to pitch in, and for the nth time, hopefully put to rest these numbing concerns. Let’s keep our fingers crossed that this latest effort will finally succeed.

Until next week… OBF!