PNG prepares to restructure its exchange to encourage competition

Of all the sub-sectors within Papua New Guinea’s financial system, the capital markets are the least mature. The banks are strong, growing and becoming increasingly competitive. The insurance sector has been active for more than a century and is substantial for a developing country. The superannuation funds are large, stable and vital to PNG society. On the other hand, the stock market has only two brokers, two owners (the brokers themselves), 18 securities and little liquidity. The lack of capital markets development has not gone unnoticed, and the exchange has been targeted for major upgrades, while the reform of the debt market is being discussed (see analysis). These efforts have support at the highest levels, with Prime Minister Peter O’Neill backing the transformation of the stock exchange.

History of the Bourse

The idea of a stock market was first mentioned shortly after independence in 1975, but nothing immediate came of the discussions. In the 1980s a stock exchange company was formed under the PNG Holdings Corporation, an entity created for the purpose of privatising state-owned companies. A market was not created at that time due to the lack of legislation and a shortage of local capacity to go ahead with implementation. In 1994, a committee was formed to oversee the creation of a market, and in 1997 a number of laws were passed for it, including the Companies Act 1997 and the Securities Act 1997. The Port Moresby Stock Exchange (POMSoX) was incorporated in 1998 and trading began in 1999.

Trading on the exchange is fully automated through the use of the POMSoX Electronic Trading System, which is based on Australia’s legacy Stock Exchange Automated Trading System. The exchange is open from 10.00am to 4.00pm each day and settlement is T+3. At present, the Pacific region has only two exchanges outside Australia and New Zealand: the POMSoX in PNG and the South Pacific Stock Exchange in Fiji.

The POMSoX adopted the listing and business rules of the Australian Stock Exchange (ASX). To become a listed company, an applicant must have assets of at least PGK1.5m ($567,600) and three years of profits over PGK600,000 ($227,040) a year. The initial listing fee starts at PGK10,000 ($3780), for companies with equity value up to PGK3m ($1.1m). The fee increases with equity value, topping out for those worth more than PGK1bn ($378m), who pay PGK216,000 ($81,734) plus 0.01% times the excess over PGK1bn ($378m). An annual fee must also be paid: from PGK5000 ($1892) for firms with equity value below PGK3m ($1.1m) and up to PGK100,000 ($37,840) for those with equity value above PGK1.25bn ($473m). Debt securities are charged PGK25,000 ($9460) on listing and an annual fee of PGK10,000 ($3784). Dual-listed companies are charged based on 30% of their total market capitalisation.

Listed companies are required to publish half-year reports, full-year reports and hard-copy annual reports, while mining firms must also publish quarterly reports. All trading is exempt from the capital gains tax, the goods and services tax and stamp duties.

Australian Rules

The Securities Commission of PNG (SCPNG) regulates the capital markets, approves listings and listing rules, and monitors trading. It can investigate the violation of the Securities Act 1997, the Securities Regulation 1999 and the Takeovers Code 1998. However, its powers are limited. It does not license stockbrokers, underwriters, fund managers or advisers. It is a division of the Investment Promotion Authority (IPA). The stock exchange is a self-regulatory body, and can set rules for its member and discipline them if necessary. It is owned by its members, Kina Securities (37.5%) and BSP Capital (62.5%), with the latter being the stock broking and funds management arm of Bank South Pacific (BSP). The market has two benchmark indexes, the Kina Securities Index (KSi) and Kina Securities Home Index (KSHi). The former reflects the trading of all public firms in PNG, including dual listings, while the latter is an index of companies that are focused on PNG. Both indexes are capitalisation-weighted.

Governing Legislation

The Securities Act 1997 is based on similar laws in Australia and New Zealand. It is a broad document that lays out the creation, powers and functions of the SCPNG; discusses the establishment of a exchange; details the establishment of fidelity funds (guarantee funds insuring investors for up to PGK250,000, or $94,600); establishes offences (some deemed criminal) and punishments; instructs on offerings and prospectuses; defines insider trading and fraud; lays out liability; and provides other guidelines and rules. It also deals with substantial shareholdings (and requires that notice be given when thresholds are breached) and beneficial ownership. The Securities Regulation 1999 supplements the act, with new guidelines and rules on prospectuses, misleading information, audited accounts, unit trusts and guarantees.

The Companies Act 1997 lays out basics, such as registration, transfer of shares, dividends, liability, interested parties disclosure, financial reporting, auditing, duties of directors and shareholder meetings. It too was followed by supplemental regulations: Companies Regulations 1998 and the Companies Rules (issued 2006). The original Companies Act, known as Companies Act (Ch 146), was basically a copy of the English Companies Act 1948, while the Companies Act 1997 was essentially the New Zealand Companies Act 1993.

The Takeovers Code 1998 protects the interests of a company’s shareholders in the event of an acquisition. It will be in effect after the buyer has purchased more than 20% of the target’s stock. Until the passing of the Securities Act, takeovers had been covered by the Companies Act, while mergers and acquisitions were more or less unregulated. After the Securities Law was enacted, the Takeover Code was formulated. The code has been seen as inadequate; it does not provide for a takeover panel, for example, so any disputes must be heard in court. In 2013 it was amended to include a national interest clause, which allows the SCPNG to prevent a takeover if it believes the transaction is not in the interest of PNG, for example, in terms of reduced competition and the loss of jobs.

17 Securities but low Volume

Despite a solid foundation, the POMSoX has not performed well by most measures. Although the number of listed companies has increased from eight in 1999, just 17 securities were listed as of June 2015 (16 stocks and one debt instrument). One firm, Airlines of PNG, was suspended in May 2015. Of the trading shares, three are financials (BSP, Kina Asset Management and Credit Corporation) and 10 are resources-related. Others include Steamships Trading and City Pharmacy, two well known local names, with Steamships being the first company to list.

A total of 10 companies also have listings overseas; eight on the ASX, one on the New York Stock Exchange (NYSE) and one on the Toronto Stock Exchange (TSX). Of the dual-listed companies, InterOil is on the NYSE and Marengo Mining is on the TSX. In April 2015, Marengo Mining delisted from the ASX and now is only traded on the TSE and POMSoX.

The most recent new listings took place in 2013, first with Indochine Mining joining the PoMSoX in September. The ASX-listed company is developing a gold mine at Mt Kare in Enga Province. Later in the year, on October 30, 2013, ASX-listed Niuminco Group also started trading in PNG. The firm has interests in three mineral sites in PNG and one in Tasmania, Australia. In terms of other activity on the bourse, BSP started a share buyback programme in July 2014, saying it would purchase up to PGK15m ($5.7m) worth of shares and keep the offer open for a maximum of 12 months. In late June 2015 Kina Securities launched an initial public offering for a dual listing on the ASX and the POMSoX, aiming to raise PGK202m ($76.4m). Part of the capital raised is set to be used to fund the acquisition of PNG’s Maybank, and the firm is expected to list on July 30, 2015.

Overall, stocks have not performed particularly well. The benchmark indexes peaked in 2010 and are down considerably since then. The KSi topped out above 7000, while the KHSi briefly touched 14,000 that same year. Since then, they have been in almost steady decline. The KSi was trading at about 3500 in mid-2015 after a years-long rough patch. While it was up 1.7% in the year through mid-June 2015, it had fallen in the previous three years: down 21.3% in 2012, 14.9% in 2013 and 9.7% in 2014, according to Kina Securities data. The KHSi has fared better. It was at 9800 at mid-2015 and had a good few years since it crashed. It was up 2.5% by mid-June 2015 and had climbed 16.9% in 2014. Despite the downturn, one bright spot in the market is that overall trading value increased 231% in 2014.

Market capitalisation is down as well. For the KSi, it peaked at around PGK110bn ($41.6bn) in 2010, with this falling to PGK53.5bn ($20.2bn) by end-2014. The number of listed companies has also fallen from 22 in 2011 to 17, and most shares on the board have limited liquidity. Usually only the financials and Oil Search change hands, and even then only a few trades are made.

Local Companies

Some stocks have performed well recently, especially those more domestic demand-related and not directly involved in resources. In its Australian listing, Steamships Trading was up 22.9% in the three years to end-2014, while Credit Corporation, City Pharmacy and Kina Asset Management were up 65.5%, 38.4% and 8.8%, respectively. These firm’s stock prices have to a great degree reflected increasing economic prosperity and the rise of a consumer culture.

The POMSoX is in part being used to give investors exposure to the growth in PNG without having to engage in foreign direct investment. It is also a potentially useful tool for firms in PNG to get financing. The banking sector is strong, liquid and well capitalised, but PNG enterprises need an attractive, transparent and efficient way to raise equity, and the bourse could provide this. However, it is now neither large nor liquid enough to be attractive to investors or issuers. “The shares don’t trade a lot. There’s no liquidity in the system,” Michael Van Dorssen, general manager of Kina Finance, told OBG.

For the market to get to where it should be, a number of reforms are needed. The legal foundation and framework are strong on paper, but not strong enough for PNG to be accepted as a truly up-to-date financial jurisdiction. The stock market legislation is relatively old and the value chain is not fully developed in terms of processing, depository, custody and settlement.

PNG has been a member of International Organisation of Securities Commissions (IOSCO), the international standards body for securities regulators, since 1998. The SCPNG is known as an appendix B signatory. According to the IOSCO, the regulator has committed to becoming a full appendix A signatory but has not yet provided the final signature. PNG has completed almost all the steps necessary to sign the IOSCO’s guiding multilateral memorandum of understanding (MMoU). In 2009 the SCPNG expressed a commitment to complying with the terms of the MMoU, and it has also submitted the necessary documentation in terms of regulations and legislation. Furthermore, in May 2015, the SCPNG provided an implementation timeline.

Plans for Change

The government and the relevant authorities have long discussed the need for an upgrade of the capital markets and of securities legislation. Various plans have been floated to reform the system and some action has been taken. But the efforts have been limited in nature and have not done much to make the market more attractive. A new index was talked up for introduction in 2013 but failed to materialise. The idea was to develop a benchmark that accurately represents the market and is better aligned with international standards, so that POMSoX would be of more interest to foreign investors. Emerging markets funds need an accurate index so they can gauge performance against a standard. Currently available indexes have flaws, either under-representing local shares or skewing the index towards a few very large companies. If properly constructed, a new index could be included in many of the global sub-indexes or regional indexes, and that could positively affect trading.

Other changes discussed include the easing of listing rules or the establishment of a secondary board for smaller firms. While the bar is currently fairly low for new companies to trade on the POMSoX, the standards are stringent enough to preclude many local firms that may want to raise capital for early-stage growth. Also discussed were electronic links to the international markets so foreign investors can more easily access PNG shares and government bonds. Neither of these plans has come to fruition yet, however.

Overhaul

The government is starting to contemplate more aggressive action, aiming for a wholesale restructuring. In early 2015, the prime minister said in a statement that legislation has been introduced and approved by the National Executive Council that will reform the structure of the market so that trading and supervision are dramatically improved. The new laws that will supersede the Securities Act 1997 are: the Securities Commission Act 2015, the Capital Market Act 2015 and the Central Depository Act 2015. While the details are sparse, it is clear from the type of legislation proposed that the market will be different after the laws are enacted. Importantly, the SCPNG will be made independent and be given greater powers of enforcement. As it stands now, the commission is too weak to be effective, according to the prime minister. “The legislation will position the SCPNG as an independent office, moving away from its current status as a division of the IPA,” O’Neill said in June 2015. “Currently, the securities commission does not have an independent organisational and administrative structure. This has meant the commission is unable to perform its regulatory functions by providing oversight of the PNG capital markets.” Judging by the titles of the new laws, it appears as though a more robust and internationally acceptable value chain is being contemplated. A depository will be set up, and that will increase security and transparency. The prime minister also talks of upgrading anti-money-laundering provisions and adding to the range of products. The list includes investment funds, unit trusts, debentures and private equity. But the most significant change being proposed is to introduce more competition. The prime minster says that the current duopoly is unacceptable and must be addressed so that the markets function better. “These two brokers also own the Port Moresby Stock Exchange, so we need reform in this arrangement,” O’Neill said. “There are many qualified Papua New Guineans and foreigners in the country who are able to provide competitive broking services and we will open the market to competition.”

Since financial reforms were introduced in 2000, the banks and the non-bank financial institutions have done well. The relevant firms are stable and profitable. The prime minister believes that the capital markets have lagged behind the rest of the financial services sector and need to be improved. While other financial sub-sectors need to change in certain respects, the capital markets may be holding back development.

Outlook

The POMSoX has a solid foundation but is not currently large or liquid enough to act as an effective source for raising funds or attracting large numbers of investors. As long as the capital markets remain as they are, the PNG economy will suffer a serious gap in terms of funding and investment options. Thankfully, this has been recognised at the highest levels, with the prime minister stating that he wants to see the POMSoX improved. If sufficiently accomplished, the impact on the markets and on the country could be significant. Indeed, given the expected growth in the country as new energy projects come on-line, the POMSoX could play a key role in stimulating economic activity.