Potential for Capital Market Financing for SMEs and Challenges in Asia ABAC Malaysia - SME Finance Forum Workshop on Innovative Financing for SMMEs Session 4: Building a Conducive Environment for Equity- Based Financing & Innovative Financing Platforms 21 May 2015, Kuala Lumpur Shigehiro Shinozaki Financial Sector Specialist (SME Finance) Regional and Sustainable Development Department Asian Development Bank This presentation was prepared under the author s responsibility. The views expressed here do not necessarily reflect the views or policies of ADB, its Board of Directors, or the governments they represent. ADB does not guarantee the accuracy of the data included in this presentation and accepts no responsibility for any consequences of their use.
Agenda I. SME Capital Markets in Asia II. Demand on SME Capital markets III. Critical Factors to Create an SME Market IV. Brainstorming V. The Ways to Move Forward 2
SME Capital Markets in Asia - Equity A trial and error for creating an equity financing venue for highend SMEs in Asia. % of GDP 10.0 Market Capitalization (% of GDP) Number 1,000 Number of Listed Companies KOSDAQ/KOR 8.0 KOSDAQ/KOR 800 SME Board/PRC 6.0 SME Board/PRC GEM/HKG 600 4.0 400 ChiNext/PRC 2.0 0.0 CATALIST/SIN ChiNext/PRC mai/tha ACE/MAL 200 0 GEM/HKG CATALIST/SIN ACE/MAL mai/tha 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014* GDP = gross domestic product; SME = small and medium-sized enterprise. *Data as of 31 Oct for KOSDAQ, 28 Nov for ACE, and end-2014 for others. Note: Emerging Asia comprises the People s Republic of China; Hong Kong, China; the Republic of Korea; Malaysia, Singapore, and Thailand. Source: Author s calculation based on data from respective stock exchange websites and the ADB Asia SME Finance Monitor 2014 database (Provisional). 3
SME Capital Markets in Asia - Equity Challenges to Developing SME Capital Markets in Thailand Market Performance - mai Number of Listed Companies - mai (B mil.; mil. shares) (Index) 900,000 800 (No. of listed companies) 110 (Number) 20 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 700 600 500 400 300 200 100 100 90 80 70 60 50 40 30 20 10 15 10 5 - (5) - 0 - (10) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Market capitalization (B mil.) Trading volume (mil. shares) Trading value (B mil.) mai index Initial public offerings Move to main board Move from main board Delisted No. of listed companies Source: Author s compilation from the ADB Asia SME Finance Monitor 2014 database (Provisional). 4
SME Capital Markets in Asia - Bonds A new movement of creating an SME bond market. China, People s Rep. of Korea, Rep. of (CNY bil.) (%) (W tril.) (%) 8.0 0.16 2.5 6.0 7.0 6.0 0.12 2.0 5.0 5.0 1.5 4.0 4.0 0.08 3.0 3.0 1.0 2.0 2.0 1.0 0.04 0.5 1.0 0.0 2009 2010 2011 2012 2013 2014 0.00 0.0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014* 0.0 SME Joint Bond SME Collective Note SME bonds to total (%) SME bond issuance SME bonds to total (%) * Data as of 31 Oct 2014. Source: Author s compilation from the ADB Asia SME Finance Monitor 2014 database (Provisional). 5
Economy Regulators Laws and Regulations SME Markets Market Type China, People s Rep of Hong Kong, China India SME Capital Markets in Asia - Regulations China Securities Regulatory Commission (CSRC) People s Bank of China (PBOC) National Association of Financial Market Institutional Investors (NAFMII) National Development and Reform Commission (NDRC) Securities and Futures Commission (SFC) Securities and Exchange Board of India (SEBI) Law on Funds for Investment in Securities (2005) Law on securities (2005) Regulation on the Administration of Futures Trading (2007) Securities Investment Fund Law (2012) SME Board/Shenzhen Stock Exchange (SZSE) ChiNext (venture board)/szse SME Private Placement Bond market SME Collective Note market Bond/OTC market Bond/inter-bank market SME Joint Bond market Bond/inter-bank and exchange market Securities and Futures Ordinance Companies Ordinance Securities Laws Ordinance (2013) Depositories Act (1996) SEBI Act (1992) and Regulations Securities Contracts Act (1956) SME = small and medium-sized enterprise. Source: Author s compilation from various laws and regulations, and stock exchange websites. Growth Enterprise Market (GEM)/Stock Exchange of Hong Kong (SEHK) SME Exchange/Bombay Stock Exchange (BSE) Emerge/National Stock Exchange of India (NSE) 6
Economy Regulators Laws and Regulations SME Markets Market Type Korea, Rep. of SME Capital Markets in Asia - Regulations Financial Services Commission (FSC) Financial Supervisory Service (FSS) Financial Investment Service and Capital Markets Act (2011) Act on External Audit of Stock Companies (2010) Certified Public Accountant Act (2011) Secured Bond Trust Act (2011) Registration of Bonds and Debentures Act (2011) Asset-Backed Securitization Act (2011) KOSDAQ/Korea Exchange (KRX) KONEX/KRX FreeBoard/Korea Financial Investment Association (KOFIA) Freebond/KOFIA Equity/OTC market Bond/OTC market (qualified institutional buyer [QIB] system) Malaysia Securities Commission Malaysia (SCM) Capital Markets and Services Act (2007) and Amendments (2010, 2011, 2012) ACE Market/Bursa Malaysia MyULM (online trading platform) [concept launched in May 2013] Unlisted securities/otc market (not yet established) Singapore Monetary Authority of Singapore (MAS) Securities Industry Act (1973) Catalist/Singapore Exchange (SGX) Thailand Securities and Exchange Commission (SEC) Securities and Exchange Act (1992) and Amendments (1999, 2003, 2008) Securities Exchange of Thailand Act and Regulations Market for Alternative Investment (mai)/securities Exchange of Thailand (SET) SME = small and medium-sized enterprise. Source: Author s compilation from various laws and regulations, and stock exchange websites. 7
Demand on SME Capital Markets More than half of SME survey respondents in China, India, Korea, and Malaysia interested in tapping equity markets, with several reasons. China, People s Rep. of Funding alternative besides banks increased Social credibility of the company increased Easiness of funding increased Opportunity of bank borrowing increased (synergy) Production level increased Employee s incentive to work enhanced More employees hired 0% 20% 40% 60% 80% 100% Social credibility of the company increased Easiness of funding increased Funding alternative besides banks increased Opportunity of bank borrowing increased (synergy) Production level increased Opportunity of intl. trade increased More employees hired India 0% 20% 40% 60% 80% 100% Opportunity of intl. trade increased Employee s incentive to work enhanced yes somewhat yes yes somewhat yes Korea, Rep. of 0% 20% 40% 60% 80% 100% Malaysia 0% 20% 40% 60% 80% 100% Funding alternative besides banks increased Easiness of funding increased Social credibility of the company increased Opportunity of intl. trade increased More employees hired Funding alternative besides banks increased Easiness of funding increased Social credibility of the company increased Opportunity of intl. trade increased Production level increased Opportunity of bank borrowing increased (synergy) Production level increased Employee s incentive to work enhanced yes somewhat yes Employee s incentive to work enhanced Opportunity of bank borrowing increased (synergy) More employees hired Valid samples: the People s Republic of China: 303; India: 40; the Republic of Korea: 28; and Malaysia: 60. Source: S.Shinozaki (2014), ADB Working Paper Series on Regional Economic Integration, No.121. pp.25-27. yes somewhat yes 8
Critical Factors to Create an SME Market More than 80% of supply-side respondents in China, India, Korea, and Malaysia recognized the importance of an SME capital markets, with visions. China, People s Rep. of 0% 20% 40% 60% 80% 100% India 0% 20% 40% 60% 80% 100% Well-established regulatory & supervisory framework A mechanism supporting SMEs to prepare disclosure documents Simplify listing procedures A mechanism enhancing liquidity of SME stocks/bonds Small amount funding available for SMEs Information dissemination of SME capital markets Tax incentive schemes for issuers & investors Raising fund speedily for SMEs Low cost for establishing & operating SME markets Low cost for listing & maintenance for SMEs Simplify disclosure requirements Exclude foreign issuers Exclude foreign investors yes somewhat yes Raising fund speedily for SMEs Simplify listing procedures Information dissemination of SME capital markets A mechanism enhancing liquidity of SME stocks/bonds Low cost for listing & maintenance for SMEs A mechanism supporting SMEs to prepare disclosure documents Well-established regulatory & supervisory framework Small amount funding available for SMEs Low cost for establishing & operating SME markets Simplify disclosure requirements Tax incentive schemes for issuers & investors Exclude foreign issuers Exclude foreign investors Valid samples: the People s Republic of China: 22; India: 37. Supply-side includes government authorities, market organizers, securities firms, rating agencies, accounting firms, venture capitals, investment companies/funds, institutional investors, business development services, banks, and other financial institutions. Source: S.Shinozaki (2014), ADB Working Paper Series on Regional Economic Integration, No.121. p.17. yes somewhat yes 9
Critical Factors to Create an SME Market Korea, Rep. of Malaysia Simplify listing procedures Low cost for listing & maintenance for SMEs Low cost for establishing & operating SME markets A mechanism enhancing liquidity of SME stocks/bonds Small amount funding available for SMEs Well-established regulatory & supervisory framework Tax incentive schemes for issuers & investors Information dissemination of SME capital markets Simplify disclosure requirements 0% 20% 40% 60% 80% 100% Tax incentive schemes for issuers & investors Low cost for establishing & operating SME markets Raising fund speedily for SMEs A mechanism enhancing liquidity of SME stocks/bonds A mechanism supporting SMEs to prepare disclosure documents Information dissemination of SME capital markets Low cost for listing & maintenance for SMEs Well-established regulatory & supervisory framework Simplify listing procedures 0% 20% 40% 60% 80% 100% Raising fund speedily for SMEs Small amount funding available for SMEs A mechanism supporting SMEs to prepare disclosure documents Simplify disclosure requirements Exclude foreign issuers Exclude foreign investors yes somewhat yes Exclude foreign issuers Exclude foreign investors yes somewhat yes Valid samples: the Republic of Korea: 20; and Malaysia: 26. Supply-side includes government authorities, market organizers, securities firms, rating agencies, accounting firms, venture capitals, investment companies/funds, institutional investors, business development services, banks, and other financial institutions. Source: S.Shinozaki (2014), ADB Working Paper Series on Regional Economic Integration, No.121. p.18. 10
Brainstorming: Exercise Equity Market for SMEs What is the Exercise market? Public-Private Partnership (PPP) Framework on financing SMEs Private sector-led equity finance venue for unlisted SMEs that are willing to raise growth capital Crowdfunding platform, supported by a public apex fund Independent from the exchange market Learning venue on market rules & responsibility for SMEs before tapping the exchange market (SME incubation market) A mechanism supporting SMEs in equity finance through collaboration with various stakeholders Channel investment capital into smaller but growing firms Lead high-end SMEs to business growth cycle 11
Brainstorming: Exercise Equity Market for SMEs I SME recruiters Banks Venture capital Regional incubation center/bds II II I - Funded by the govt., bi-or multilateral donor(s) Public APEX Fund (SME Incubation Fund) III III I Crowdfunding platform management company I. Growth capital financing to SMEs via partner financial institutions & the Exercise Market II. Capacity building programs via partner institutions III. Connect SMEs with good business models to the Exercise Market Invest III Exchange market Promising SME pool Selected/Prioritized Businesses (seed/startup/early-stage firms) Exercise Market SRO-operated OTC B. SME incubation segment Agri-business Woman-led SME Social enterprise SME cluster Financial return Financial return Financial return Financial return Invest Fund 1 Invest Fund 2 Invest Fund 3 Invest Fund 4 A. Crowdfunding segment Investors (mainly individuals/supporters for the business) 12
The Ways to Move Forward Developing SME capital markets can be a priority policy area as part of national growth strategies. A comprehensive policy to create investor base and enhance market literacy for SMEs is needed to develop a new market. Appropriate market type for SMEs (exchange market or organized OTC) is different by country. Securities firms & investors having interest in SMEs exist, while size & cost issues create a barrier to involve them in the SME market. PPP Framework on financing SMEs is worth exploring: combined instruments of public SME incubation fund, crowdfunding platform, and organized-otc. Critical factors to create an SME market: (i) simple, (ii) low cost, (iii) fast transaction, (iv) liquidity, (v) supporting professionals, (vi) policy framework, and (vii) market literacy 13
The Ways to Move Forward Growth Capital Funding and Risk Capital Providers Growth capital needed Exchange markets IPO Formal & informal lending Private equity, mezzanine finance, etc. Organized OTC -Trading venue for unlisted SME shares (non-exchange markets) Seed/Start-up/Early Expansion Steadily growing -Domestic market for emerging corporations (SME board) -International market for smaller growing firms (AIM) Firms life cycle Size of investment capital Founders, family & friends Angel investors Venture capital Sophisticated investors -VC funds -Financial institutions -Institutional investors -Listed large firms with sufficient investment experiences, etc. Source: Author s illustration. 14
The Ways to Move Forward Core Elements to Develop an SME Market Source: Author s illustration. 15
Thank you for your attention. For further questions: Shigehiro Shinozaki Financial Sector Specialist (SME Finance) Regional and Sustainable Development Department Asian Development Bank Email: sshinozaki@adb.org 16