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Logo of Phnom Penh Post newspaper Phnom Penh Post - Firms question SECC prakas

Firms question SECC prakas

111013_08
The trading room at the Cambodia Securities Exchange, which officially opened in July in Phnom Penh.

The Kingdom’s securities firms have raised concerns about an impending regulation that they said may stunt growth in the country’s fledgling financial markets.

The Securities and Exchange Commission of Cambodia is considering a regulation, or prakas, that will require all market participants to maintain a certain amount of net capital in reserve, among other measures intended to guarantee the financial soundness of these companies.

However, the firms themselves have taken issue with the way the net capital valuations will be determined. Most foreign assets, or those not sold in the Cambodian market, will be excluded from the value of a company’s total asset holdings under rules set out in the prakas, they said.

As a result, companies with smaller amounts of capital may find their holdings tied up largely in Cambodian assets in order to meet the SECC’s requirements, rather than what insiders have said are safer international investments.

Cambodia Capital managing partner Morten Kvammen this week told the Post the general concept of the prakas was “very good,” as “we want this measure of financial soundness to be an ongoing measure.”

However, he did note the risks involved for the Kingdom’s brokers, dealers and underwriters.

“If we’re struggling to meet net asset requirements, we’ll be forced to keep our money in local Cambodian securities. So it skews our assets in at least how we see it as more risky Cambodian assets rather than less risky overseas assets,” he said.

The SECC’s risk weighting of domestic investments, in effect, doesn’t reflect the true risk of those assets, he said. Still, Kvammen reckoned there was potential to work with the SECC to change the prakas.

“I don’t think anything is set in stone. It’s the beginning of a regulatory framework for the SECC,” adding the regulatory body has shown willingness to further develop the regulation as the market develops.

The prakas, if enacted, will require securities underwriters to set aside 40 billion riel (US$9.8 million), while dealers and brokers must hold 25 billion riel and 6 billion riel, respectively.

In addition, market participants would need to maintain a securities bond or securities instrument that would be used to further ensure a company’s financial viability. Underwriters would need a bond worth 4 billion riel, dealers 2.5 billion riel and brokers 1 billion riel.

However, only Cambodia-listed securities will be factored in – save foreign government bonds and other investment-grade bonds – when calculating those required amounts.

Tong Yang Securities Cambodia representative Han Kyung-tae this week said the regulation would limit companies’ ability to grow their business because Cambodia so far has few investment options for market participants. That in turn could possibly open participants to more risk than if money put to work outside the Kingdom was recognised. “To enhance the [financial] soundness [of companies], we need to diversify our investments,” he said, pointing to other markets such as Hong Kong and South Korea.

Also, he said companies with limited capital at the start of operations may find it difficult to both meet the SECC’s capital requirements and meet the necessary cash reserve to, say, underwrite an initial public offering, thereby hampering their business.

SECC director general Ming Bankosal said this week the prakas was designed to boost investment in Cambodia at a time when the domestic market needed it.

“The object is to do business in Cambodia, so we’d like that capital to stay in Cambodia,” he said. He also pointed to the risks inherent in any type of investing, whether in the Kingdom or overseas, especially given the present troubles in the United States and European Union.

“You cannot invest anywhere where there is no risk,” he said.

Ming Bankosal agreed with Kvammen that the regulation could be altered as Cambodia’s financial markets develop and grow, but he was unable to offer a timeline for when that would happen.

At the same time, he said he was “disappointed” that none of the companies raised the issue during a public consultation last Friday.

He urged all market participants to contact the SECC with any concerns so that they may be included in the prakas before it is finalised, which he said should be by the end of the month.

Kvammen said Cambodia Capital has in fact submitted its concerns to the SECC “in a private consultation earlier, but they do not appear to have been reflected in the final draft” of the prakas.  

Also, “The case in general with the public consultations is that they have minimal impact on the final outcome. It is primarily a procedural step,” he said.

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