MEASURES TO DISSEMINATE STOCK PROPERTY Report by the Emerging Markets Committee of the International Organization of Securities Commissions May 1999 Table of Contents Page • Introduction 1 • Conclusion 2 • Comparative Report 1. Market Statistics 9 2. Policies Towards Dissemination of Stock Property 17 3. Protection of Minorities 27 4. Developing a Culture of Investing 35 5. Employee’s Participation 41 6. Market – Liquidity and Practices 45 • Answers of the Members of the Emerging Markets Committee to the Questionnaire on Measures to Disseminate Stock Property 53 INTRODUCTION At IOSCO’s 1997 Annual Conference, the Emerging Markets Committee gave to the Working Group on Disclosure and Accounting (EMC-WG1) the mandate to study regulatory measures to facilitate the dissemination of stock property in emerging market countries. This comparative analysis focuses on enhancing the capital formation process among public companies or those willing to access capital markets, through regulatory policies that promotes incentives for a broader domestic investor participation in stocks of public companies. Fair distribution of wealth and granting citizens open access to property are paramount objectives of modern democratic societies. They also provide political stability for those nations, which is essential for sustained economic growth. The dissemination of stock property is one of the main tools available to achieve these goals. Developing a solid and diversified domestic shareholding basis is a key objective because it can act as a shock absorber during periods of international turmoils. In order to achieve liquidity and stability in stock markets, securities regulators can play an important role to facilitate a broad dissemination of stock property, mainly among retail investors. To achieve these goals certain conditions must be met and some regulatory tools are available to foster and encourage domestic retail investments. This report reviews the measures adopted by the jurisdictions surveyed and designed to promote the dissemination of stock property. Its contents neither intends to reach to a conclusion about which measures or policies are the best, nor to recommend any specific measures. The general objective of this report is to provide a comparative “checklist” of the different measures adopted by the jurisdictions included in the survey for the dissemination of stock property, with the expectation that it will be a useful tool for the Emerging Markets Committee member regulators when facing this complex issue. 1 CONCLUSION • Market statistics. The statistical information contained in charts 1 to 6 shows that a very low percentage of the total population of the emerging markets included in the survey invest in stocks. Except in Chinese Taipei and the Czech Republic, the level of dissemination of stock property is very low. Trading is concentrated in a reduced number of shares of big public companies, which are preferred by both local and foreign investors. We also note the lack of sufficient statistical data on this specific topic. • Policies towards dissemination of stock property. Most of the jurisdictions included in this survey adopted different types of policies in order to promote dissemination of stock property, except for Bulgaria, Jamaica, Korea, Morocco, Paraguay and Thailand, which have not yet done so. The identified measures are the following: • Specific legal provisions related, in particular: issuers’ capital requirements (in order to facilitate the distribution of primary offerings), maximum percentages of stock holdings for institutional investors, privileges granted to retail investors in order to facilitate their participation in public companies as shareholders; • Tax incentives; • Non-specific measures designed to directly improve markets liquidity and transparency, (considering that this improvement will increase investor participation and subsequently disseminate stock property). At the moment Argentina has no concrete measures in place to speciffically promote dissemination of stock property. By contrast to the Argentinian experience, in Venezuela, Singapore, Poland, Mauritius and Israel, the local regulation contains specific requirements (such as maximum percentages of shares that can be acquired by institutional investors, capital requirements for the issuers in order to be listed, first refusal choice granted to retail investors for the acquisition of new offerings) with the objective of ensuring dissemination of stock property from primary offerings. In Israel, the possibility of adopting an underwriting system, similar to the United States’ system, is under study. 2 Other jurisdictions, such as Chinese Taipei, Barbados and Chile, promote dispersion through measures that are designed to directly improve market operations, with expectations that they will also have a positive effect on the distribution of stock property. Privatization programs of state-owned companies adopted by Argentina, Tunisia, South Africa, Peru and the Czech Republic provide that a percentage of shares of privatized companies are to be sold in the domestic market in order to facilitate ownership by retail investors. Another percentage of these shares is also reserved for employees and company clients. Turkey offers a beneficial tax treatment related to the acquisition of shares in order to favor share distribution and also promotes the participation of retail investors in the market through mutual funds, which were recently regulated. • Incentives for small and family owned companies to go public. Requirements for their stock dissemination. Mechanisms to promote liquidity of small business. Half of the jurisdictions surveyed have not adopted incentives for small and family owned companies for going public. Those jurisdictions are Peru, Poland, Paraguay, Panama, Mauritius, Korea, Jamaica, Hungary, the Czech Republic, Chile, Bulgaria and Argentina. The other half of the jurisdictions surveyed adopted one or more of the following measures to stimulate small and family owned companies into going public: • Creation of special markets to negotiate shares and bonds of small businesses (Singapore, Brazil and Barbados). • Favorable requirements for small business listing at local exchanges (Thailand, South Africa, Morocco and Israel). • Legal provisions appointing special capital requirements for small and family owned companies as well as a minimum number of shareholders (Chinese Taipei) and flexible requirements for disclosure of financial information and presentation of financial statements (Turkey). • Advantageous tax treatment (Turkey, Venezuela). The following jurisdictions have not implemented any related measures: Argentina, Chile, Israel, Jamaica, Korea, Morocco, Panama, Paraguay, Peru, Thailand and Tunisia. Some specific measures were adopted in Brazil for small companies (regulation of market makers’ activities, which provides liquidity for companies listed in the Electronic Quotation System (SOMA)). In Mauritius small company shares are negotiated in the over-the-counter market which provides a fair liquidity. In Poland a market maker system provides increasing liquidity in the over-the- counter market designed for listing small companies. Other specific measures were also implemented in Singapore, South Africa, Chinese Taipei and Turkey. 3 • Ability to issue non-voting shares. The legislation of all the jurisdictions included in the survey, except for Bulgaria, Poland and Singapore, provide that public companies can issue non-voting shares. Not all shareholders are interested in exercising their voting rights. Most of the jurisdictions surveyed therefore provide the alternative of issuing non-voting shares, which can or cannot give the right to receive a preferred dividend. This provision affects the traditional relationship between capital and voting rights, but facilitates the flow of savings towards equity investments. • Main factors preventing investments in the capital market. Among the various common factors mentioned in response to the questionnaire circulated are: - Lack of investment culture and education; - Market volatility and low liquidity; - Deficiency in market transparency; - Stronger banking investment culture and related investment opportunities. These factors fall within the responsibility of domestic market regulators, whose missions are partly related to the general improvement of market activities. Several of them indicated that they are in the process of addressing them in light of the IOSCO Principles and Objectives of Securities Regulation. • Local corporate law provisions addressing the protection of minority shareholders from controlling shareholders’ abuse or misconduct. All the jurisdictions surveyed describe their domestic regulation related to the protection of minority shareholders (ref. Table 10). They also indicated which factors, in their opinion, could be considered the most relevant to foster investors confidence (chart 11): - Corporate law provisions (Argentina, Brazil, Poland); 4 - Provisions related to shareholders’ right to seek a court of law revision of decisions adopted by the general meeting of shareholders as well as the judicial protection of individual shareholder’s rights (Barbados, Bulgaria, Korea, Singapore, Paraguay, Chinese Taipei); - Provisions specially addressing minority shareholder protection (Mauritius, Morocco, Tunisia and Turkey); - All the capital markets’ regulatory framework (Chile, Hungary); - Provisions referred to the disclosure of company financial and