Joint Ventures Likely to Lead Future Exchange

Cambodian companies partnered with multinationals are likely to be the weightiest components of any future Phnom Penh stock exchange, say business experts in the capital. However, the same experts say, the practices and running of those companies should give market boosters pause for thought.

Moves toward the country’s first stock exchange have often been met with guffaws, given Cambo­dia’s status as one of the world’s poorest countries. But the pace is picking up, proponents promise. Cambodian officials say formation of a Securities and Exchange Regulation Working Group, which is now up and running, is “by no means either premature or unrealistic.”

The foundation of a stock exchange would be companies like the Royal Group, which en­joys a booming mobile telecommunication business with Sweden-based MobiTel as its partner, ac­cording to an informal survey of prominent lawyers, accountants and business figures in Phnom Penh.

“Companies like Royal Group have had the benefit of the learning process that comes with being part of a joint venture,” said Senaka Fernando, senior manager at PriceWaterhouseCoopers in Phnom Penh and president of the British Business Association.

“They know how multinationals operate and have usually seen transfer of technology and management experience that comes with that relationship.”

Cambodia’s exchange could be up and running some time after 2003 and well before 2010, with many believing it will be a robust vehicle for harnessing existing savings otherwise kept in gold or hidden ‘under the bed’.

Sorn Sokna, the vice president of the Phnom Penh Chamber of Commerce and the vice president of Sokimex, which is one of Cambodia’s biggest companies, says he’s been pushing for establishment of a market for more than two years.

“All countries in Asia already have stock exchanges except Cambodia,” Sorn Sokna said. “We need an exchange to develop the economy and to tap the money held by our middle classes.”

But many warn that poor transparency in official and business dealings will undermine exchange transactions, encouraging fraud and even social instability.

“I don’t want a capital mobilization tool to become a rip-off tool,” says Sok Siphana, secretary of state at the Ministry of Commerce. “Let’s face it, the public doesn’t even have confidence in the banking system where they’ve already lost money. Do we want them to run the risk of losing more in a stock market?”

One of the key aims behind creation of a domestic exchange is to slow any flow of funds out of the country while luring overseas players, who often base investment decisions on the presence of an exchange where they can sell with relative ease in case they want to make a quick exit. Privatizations would also be a prominent feature of any stock exchange’s early operations.

Analysts say the kinds of companies that are exposed to global business norms are frequently the path breakers in former command economies restructuring along free market lines. Asked about the groups that would be likely to list on a Phnom Penh exchange, business experts working in the capital mention the names of about 10 companies and industrialists, most of which enjoy cooperation agreements with international players.

According to a mid-1990s study on creation of a Cambodian market, the main conditions for listing are likely to be that the company’s foreseeable market capitalization will exceed a prescribed minimum, and that the company have an adequate trading record as shown by annual accounts for a specified number of years.

At present, however, that kind of information can be hard to obtain, and that helps fuel skepticism that a stock exchange will ever get off the ground in Cambodia.

Chea Somaly, the deputy general director of the Phnom Penh Chamber of Commerce, says she has little information on members firms’ turnover and profits. The Chamber of Commerce has already asked the Ministry of Commerce to promote greater disclosure of such information, she said.

Lawyers working in Phnom Penh say companies registered in Cambodia have little obligation—and even less incentive—to issue regular financial statements. Those that do are likely to under-report to avoid greater tax liability, according to Ministry of Commerce officials. “I don’t think [companies] will issue their figures on expenditures and income to the public in the current situation,” Chea Somaly adds.

A western lawyer, who spoke on condition of anonymity, points out that the majority of Cambodian companies likely to be eligible for listing are secretive, closely held, and led by bucaneering traders who helped bring Western goods and much-needed foreign currency into the decimated economy during the US-led embargo in the 1980s. In many cases, a successful entrepreneur is behind a group of companies where the owner and management are likely to be the same person, allowing for relatively little delegation of power, experts say.

With transparency and corporate misdeeds major problems in even the most advanced and liquid markets, there are fears that Cambodia’s investors could fall prey to insider trading and other manipulations. Meanwhile, the leap of faith required to invest in a company in return for a piece of paper, or an electronic acknowledgment of share holding, is likely to make the buy side of the equation equally troublesome.

“This is a cash-flow economy and people still put their confidence in gold and currency and don’t really trust checks,” the lawyer said. “In such an environment, it’s going to take a while for both companies and investors to take shares seriously.”

But the most widely acknowledged hurdle is Cambodia’s skeletal regulatory environment. The country does not have a securities law, let alone a law governing company formation.

Laws on commercial agency, arbitration, business enterprises, contracts, property leasing, secured transactions and trademarks make up 50 pages of the Ministry of Commerce Business and Investment Handbook 2000—but none of those laws have been approved yet by the National Assembly.

Meanwhile bankruptcy provisions are rudimentary and few companies follow common accounting and auditing regimens.

“I don’t think any of the [biggest Cambodian] companies would qualify as a public company,” Sok Siphana said, emphasizing that markets only function properly when financial statements can be relied on to asses a company’s financial position.

But the launch of a capital market for Cambodia is moving forward, with champions of the plan pointing out that a number of other developing countries including Bhutan, Mongolia and Vietnam have stock exchanges.

Early stock exchanges in formerly held British colonies Hong Kong and Singapore accelerated their economic development, said David Carrad, a former legal adviser to the Ministry of Commerce, in a report on the formation of the exchange.

Proponents say that an exchange could also provide some sort of pension provision for an aging Cambodian population that doesn’t drain the country’s already pinched budget, says Bit Seanglim, the chairman of Cambodia’s Capital Markets Working Group.

“Over the next 20 years, the proportion of old people is going to grow significantly,” Bit Seanglim said at last month’s Globalization Conference in Phnom Penh. “They will not, however, be able to rely on public resources to fund their retirement needs.”

But some observers say that the onerous reporting requirements of any future securities law may turn many investors off the idea of listing altogether.

“For sure these guys are already under-declaring [their turnover], because they don’t want more attention from the tax department,” Sok Siphana said.

Others say that the implications of corporate governance may also dampen incentives to raise funds by going public. Under most securities laws, shareholders gain rights to dismiss directors and vote for corporate takeovers in return for their investment.

In Vietnam, fears about auditing, publicizing business information and loss of control means eligible companies are reluctant to apply for listing licenses. Only five companies are listed on the country’s year-old exchange in Ho Chi Minh City.

If plans for Cambodia’s market advance further, questions about its viability are likely to focus on whether companies are ready to embrace the commitment to transparency and fluid ownership that comes with flotation on a stock market.

While many of Cambodia’s top tycoons back the rapid creation of an exchange for now, it remains to be seen whether they are genuinely prepared to run the risk of dismissal at the hands of their shareholders, or to open their books to the kind of scrutiny that accompanies public ownership.

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Some the groups, along with the Royal Group of Companies, thought most likely to meet  any future eligibility requirements include:

 

OMC Group: Suzuki motorcycles and Sharp office products distribution;

companies operated by businessman Kong Triv: joint ventures with British American Tobacco and agreements with the Thai President Food and Japan’s Sumitomo;

companies led by businessman Mong Reththy: agro-industrial operations including palm oil production;

Khaou Chuly Group: joint ventures with Japan’s Maeda Corporation and agreements with Northbridge International School;

Meng Srieng Express: runs bus routes in Cambodia and has a joint venture with Malaysia’s Management Knang Port;

Royal Air Cambodge: joint venture with Malaysia Airlines;

Sokimex: fuel distributor that owns the former T3 Prison site, has the fee collection concession for the Angkor temples and has agreements with Japan’s Marubeni;

Thai Boon Roong Group: shipping interests and owns the Hotel Inter-Continental building;

Canadia Bank: has a wide network of correspondent banks in Europe and the US.

 

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