How important is the capital market?


This week, the Business Help Desk will highlight the importance of capital markets in the country and how they can benefit the economy over the next two and a half years when the capital market transformation work is finalized.

Acting Chairman of the PNG Securities Commission, Robert Salmon-Minak (RSM), will answer some general questions in this post about how the recent announcement of an ADB (Private Sector Development Initiative) partnership of the Pacific) with SCPNG will transform capital markets.

PC: How important is the capital market?

RMS: Well-developed capital markets act as means of raising additional funds for bank loans. Simply put, businesses and individuals have traditionally turned to the banking system to borrow money to do business. What the capital market does is it provides an alternative to bank lending. A functioning capital market provides alternative fundraising mechanisms where investors invest and businesses in need of money use the invested funds to advance their business interests.

For example, either the investor buys part of the company and becomes a shareholder, or he lends money and receives periodic payments and recovers the capital (corporate bonds), etc. There are many possibilities. We just need to establish the enablers first. And that is what we have undertaken.

PC: Why has the capital market stagnated?

RMS: The securities industry (or capital markets as they say) is a system with too many moving parts. There are several corporate interests at stake. To regulate such a complex industry with a melting pot of competing interests, an effective legislative environment is first necessary. When laws are narrow in scope, they are unable to support effective regulation. PNG Capital Development therefore stagnated due to an unsuitable legal and regulatory environment. It was not until 2015 that Parliament passed the current new securities laws. They came into effect two years later, in 2017.

Then, a leadership struggle bogged down the regulator in a long and messy litigation. Prime Minister James Marape was able to intervene last November to break the deadlock. So when you actually look at it, it will be 12 months by November of this year. And with the value of the work we’ve done over the past nine months, that’s pretty substantial. We are actually working with the PNG National Stock Exchange to open up the debt securities market.

Our new Minister Henry Amuli will be signing the orders this month to ensure the corporate bonds are traded. This in effect means that PNG will, for the first time in 24 years, open up as a debt market (we have always been an equity market).

It is understood that work to transform PNG’s capital market began this month at the PNG Independent Securities Commission.

Under a Memorandum of Understanding with the Asian Development Bank signed in May this year, a range of technical assistance work will be carried out at the SCPNG by integrated consultants from the Pacific Private Sector Development Initiative (PSDI) of the AfDB.

The Australian Department of Foreign Affairs and Trade (DFAT) is providing financial support for this initiative with $1.3 million.

Assistance is strategically designed to address three critical segments: capacity development, regulatory regime improvement and strategy development.

PC: If you could develop the 3 segments of critical needs by giving us some practical examples. Capacity development; Improving regulatory systems; and strategy development.

RSM: CAPACITY DEVELOPMENT: As a financial services regulator, we deal with a range of complex financial data. Financial market participants meet compliance requirements and disclosure obligations under our securities laws. This interaction between regulator and market player reflects effective regulation. You will therefore accept that our work is part corporate finance, part company law, part accounting, part business law, etc.

These are complex subjects. Imagine a capital market regulator lacking a suitably educated, skilled, skilled and experienced workforce to assist the SCPNG in overseeing the conduct of market participants. A capacity development initiative therefore aims to train and develop staff and create an administrative system capable of effectively and efficiently performing the regulatory functions of the SCPNG. Thus, the AfDB technical program that SCPNG is currently receiving will last 2.5 years and we need to further integrate our staff to benefit from this rare assistance.

IMPROVING THE REGULATORY REGIME: Our securities laws (Securities Commission Act 2015, Capital Market Act 2015 and Central Depositories Act 2015) provide the legal framework to support capital market development. Investors find comfort in doing business in a marketplace where there is market independence, fair disclosure systems, effective reporting requirements, fair legal systems, and effective judicial mechanisms. They also ensure the existence of market functions such as easy access to high quality information, a diverse investor base, openness to international investors, efficient ecosystems for trading, hedging and funding securities and a robust market infrastructure.

We are currently working with the AfDB to address these issues under the regulatory reform component.
They are key drivers of capital market development. Note that these enablers that I just mentioned, some of them are market specific functions and can be handled by the regulator and capital market participants. As part of this, we are working with the AfDB to review our securities laws to make them contemporary (for example, we need to streamline the provisions relating to the collection of prospectuses.

Suppose an Australian company already listed on the ASX is deemed to comply with the advanced compliance requirements in that jurisdiction. But if they want to register in PNG or raise capital, it is unfair to expect them to start over just to satisfy our laws. Currently, our Capital Market Law does not contain deeming provisions. We want to modernize it by requiring less documentation. We are in the process of reviewing the entire regime of securities laws. The goal is to ensure that we create a regulatory regime that is forward looking, fair, just, efficient and resilient. We also want to create provisions that will create a new range of financial services.

DEVELOPMENT STRATEGY: PNG is currently a frontier market. This is the lower end of the capital markets stacking order. We need to evolve to become an emerging market. This will require work, time, men and money. We have set our vision for Port Moresby to become the financial hub of the Blue Pacific by 2040. That’s a big ask. We are working with the AfDB’s Pacific Private Sector Development Initiative (PPSDI) team to develop a capital market development plan that will integrate our raw thinking into an academic framework that we can then use to become a emerging market. We’ll have a long-term plan, say 10 years, and then we’ll have a new strategic plan compartmentalized into shorter chunks.

PC: How can the capital market help the PNG economy over the next 2.5 years?

RMS: We have a small but robust capital market that is stable. We have detailed securities laws. What we lack are the drivers of market development some of which I mentioned earlier. We strive to ensure that our enabling environment is best in class. We have independence from the market, we work with development partners (ADB) to make our legal and judicial systems fair and efficient, and we review our laws to ensure we have a world-class regulatory regime. Although macroeconomic stability is a key enabler, it is beyond the control of the SCPNG or the securities industry.

But we are working hard to ensure we have a robust market infrastructure, efficient market ecosystems to trade and raise funds, we are working to internationalize our market and diversify the investor base. In 2.5 years, we will complete this series of reforms and hope that our efforts will lead to transforming our capital markets in the future. Thus, in two and a half years, we will finish laying the foundations to support the development of a viable capital market.


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