Long and winding road

The refrain, “…the long and winding road that leads to your door…” sings of trust because the journey for the weary traveler is littered with twists, turns and bends of fragility. Each curve is a desired reform full of promise yet unfulfilled; each detour, largely self-inflicted, a delay in trust.

So the investors tread carefully, paying not much heed to our promises, as they wait and see until the path has finally been cleared.

But the obstacles abound. Our stock exchange is shrinking in the number of listed companies and in market capitalization, the fewest and the lowest among comparable ASEAN exchanges. More firms are choosing to delist as dismal post-initial public offering experiences fail to live up to the expectations of enhanced valuations of the listed shares.

On the contrary, typically, listless post-IPO secondary trading after the initial flurry of speculative purchases by “tsupiteros” — short-term traders out for a quick buck — particularly for second liners, embarrassingly results in an undervaluation of the shares notwithstanding excellent operating results.

And why is this so? There is a lengthy list of market to-dos needed but space limitations allow only some critical issues to be pointed out for this installment.

There is little to no market-making support for any listed shares because stock prices, particularly of second liners post-IPO, usually drop to below book value and, of late, even below the IPO price.

But who will want to take up the cudgels? Nobody wants to get burned holding on even to valuable shares, on paper, with likely no takers for any semblance of a prudent mid to long term invest and exit strategy of a reasonably sized position.

In a recent meeting between the head of a large institutional investor and the lead convenors of an informal task force initiated by the Institute of corporate directors — at the prompting of ICD founder and chair Emeritus Dr. Jesus Estanislao — together with FINEX and the Capital Market Development Foundation Inc. with the secretarial and staff support of the Center for Research and Communication, I thought this institution’s observations and suggestions were right on target. Apart from constraining investment guidelines, no decent sized long term thinking institutional funds stand ready to trade leaving post IPO purchases potentially marooned.

He advised that market making on both the buy and sell sides of any issue must be handled by a circle of professional long term market makers motivated by commercial considerations; incentivized with fees and tax breaks; with controlled bid and offer spreads; and specially empowered to do so by its charters, particularly for investments in promising start-ups.

This resulting apparent injustice to shareholders who dilute themselves to list, and investors, particularly the early retail IPO takers, perhaps the mom and pop types or Gen Zs eager to partake of the economic mainstream of the nation, is a deterrent to the growth of the breadth and depth of the stock market.

We need to have an easing of underwriting and listing rules and shorter regulatory compliance timelines to attract more reputable mid-market issuers who have very little reason to venture into the public market and go through an intensive, expensive, and lengthy process. The bank debt window is a much easier, less tedious and less expensive route to raise money.

With such a scenario, why would any mid-sized firm want to list? And yet certainly our government economic planners and agencies overseeing the financial industry who could be on the opposite ends of the issue are fully aware of the need for a robust capital market for the long term development of our economy.

There is clearly a need to have a coordinating central monetary authority to balance between the revenue needs of the government — meaning more taxes and fees — versus safeguarding the stability of the financial system — meaning more regulatory guardrails.

Until next week… OBF!

(To be continued)