1 The evolution of the Stock Exchange in Cambodia For The Club of Cambodian Journalists By Dr. Ghanty Sam June 26, 2012

Dr. GHANTY Sam, Ph.D., CFP Dr. GHANTY Sam was the head of the finance program and professor of Finance, Investment and Banking at the University of Wisconsin (USA) from 1977 to He worked for ADB and the World Bank from 1996 to 2004 as advisor and training coordinator at the National Bank of Cambodia and Ministry of Economy and Finance. He served as an independent member of the Board of Directors at the Foreign Trade Bank of Cambodia ( ), Canadia Bank ( ) and Arial Global Group of Singapore ( ). He currently serves as advisor at the National Accounting Council (NAC) of the Ministry of Economy and Finance, a member of the Board of Directors at the Securities and Exchange Commission of Cambodia (SECC) and a member of Board of Directors at the Parliamentary Institute of Cambodia.

Seminar Outline 1.Introduction 2.The players: regulators, listing companies; securities intermediaries; investors. 3.The process: The primary market (IPO) phase; secondary market phase. 4.The operation of the stock exchange in Cambodia. 5.Conclusion and Q&A 3

I. Introduction: Why do we need a stock exchange? 1. The financial sector development framework designed by the Royal Government of Cambodia (RGC) and the Asian Development Bank (ADB): a. The financial sector blueprint 2001–2010 b. The financial sector development strategy c.Law on government securities and law on the issuance and trading of non-government securities They are long-term financial sector development goals envisioned by the RGC after the election of

2.When Cambodia joined the ASEAN on April 1999, the goal of the RGC to modernize the financial sector and to benefit from ASEAN financial sector development became a priority. 3.A sustainable economic development requires an access to long-term sources of capital by Cambodian enterprises and entrepreneurs. The reliance on short-term and intermediate sources of capital that have been provided by commercial banks is not sufficient to fund long-term development. 5

Major Sources of Finance Short-term debts  Banks Long-term debts  Bonds (external financing) Equity  Common Stocks (external financing ) Retained Earnings: Internal financing Corporation Total Assets Property Plant Equipment

Banks Advanced banking system is critical The banking sector has played a major role in the development of the financial sector in Cambodia from our independence in 1953 until year 2012: Balanced Financial System ▪ Supplementation raises efficiency ▪ Competition raises competitiveness

Banks Securities Market The banking sector and the securities market must develop all together to better serve the economic development starting from year 2012: Balanced Financial System  Strengthening of sources of funds  Providing funds for long-term finance

II. The major players in a stock exchange To transform from a state-owned enterprises or family-owned businesses to listed companies (issuing stocks that are traded on a stock exchange), we need the following players: 1. The legal framework regulator (SECC) 2. The security market regulator (CSX) 3. Issuing companies such as the PPWSA 4. The intermediaries: investment companies, dealers, brokers, financial advisors, etc. 5.The investors: both Cambodian and foreign 9

The Securities and Exchange Commission of Cambodia (CSX) Government body responsible for regulating, supervising, controlling, and developing the securities sector in Cambodia. Government body responsible for regulating, supervising, controlling, and developing the securities sector in Cambodia. It is supervised by a board of directors and headed by a director general supervising a number of departments such as: It is supervised by a board of directors and headed by a director general supervising a number of departments such as: (a) issuance supervision; (b) securities market supervision; (c) research, training, and market development, (d) securities intermediaries supervision 10

The ownership of CSX consists of the RGC (owning 55%) and the Korean stock exchange – KRX (owning 45%). The ownership of CSX consists of the RGC (owning 55%) and the Korean stock exchange – KRX (owning 45%). It provides trading place where securities can be bought or sold. It provides trading place where securities can be bought or sold. It provides trading platform and market data. It provides trading platform and market data. It monitors securities trading and reporting to the SECC. It monitors securities trading and reporting to the SECC. It supervises members and participants. It supervises members and participants. 11 The Cambodian stock exchange (CSX)

Securities issuers such the PPWSA 1. PPWSA appoints an underwriter (licensed securities company – Tong Yang Securities Company) 2. PPWSA applies for listing eligibility 3. CSX approves for eligibility 4. PPWSA applies for public offer from SECC 5. SECC approves in principle 6. PPWSA prepares and submits term of sales 7. SECC registers disclosure documents 8. PPWSA opens for IPO subscription 9. PPWSA applies for official listing at CSX 10.Trading of PPWSA stocks is taking place 12

Securities intermediaries Securities firms need a license from the SECC and conduct the following securities business: a. Securities underwriting business b. Securities dealing business c. Securities broker business d. Investment advisory business 13

Securities Investors 1. Institutional Investors (Khmer and foreign) 2. Individual Investors (Khmer and foreign) Securities investors can be: long-term investors long-term investors Short-term investors Short-term investors They can participate in: the primary market (purchase of IPO) the primary market (purchase of IPO) The secondary market (stock trading) The secondary market (stock trading) 14

Other participants Cash Settlement Agent Cash Settlement Agent Securities Registrar Securities Registrar Transfer Agent Transfer Agent Paying Agent Paying Agent Professional Accounting Firms and External Auditors Professional Accounting Firms and External Auditors Asset Valuation Firms and Professional Valuators Asset Valuation Firms and Professional Valuators Credit Rating Agent Credit Rating Agent 15

IPO Time Sales (Profit) Incorporation Private Company Public Company Bank Loans Stocks Bonds Equity/Debt Financing Corporate Life Cycle IPO

Procedure of Stock Issuance and Trading IPO (new issues) Listing Trading Clearing, Settlement, Depository Disclosure Secondary MarketsPrimary Markets

III. The process: The primary market Primary market: The Initial Public Offering (IPO) An IPO is the selling of securities to the public in the primary market. An IPO is the selling of securities to the public in the primary market. It can be made through the fixed price method, book building method or a combination of both. In Cambodia, we use a book building method. It can be made through the fixed price method, book building method or a combination of both. In Cambodia, we use a book building method. Underwriting is the process by which the PPWSA worked with a securities company (Tong Yang) that assists PPWSA to raise capital by issuing stock. Underwriting is the process by which the PPWSA worked with a securities company (Tong Yang) that assists PPWSA to raise capital by issuing stock. 18

PPWSA and Tong Yang first met to negotiate the deal. Items usually discussed include: PPWSA and Tong Yang first met to negotiate the deal. Items usually discussed include: 1.the amount of money a company to be raised, 2. the type of securities to be issued and all the details in the underwriting agreement. the details in the underwriting agreement. The main source of data is the prospectus. Investors should examine this document Carefully before investing in PPWSA stock. 19

Process of IPO Listing Prior to applying for listing review After applying for listing review 0 Due Diligence IPO Choose lead manager Receive Approval Trading Begins File registration statement Apply for Listing Eligibility Review Listing Review

Book Building Issues A 20 % price range was offered by PPWSA within which investors were allowed to bid and the final price was determined by PPWSA only after the closure of the bidding. A 20 % price range was offered by PPWSA within which investors were allowed to bid and the final price was determined by PPWSA only after the closure of the bidding. 10 % advance payment is required to be made by the first category of bidders along with the application, while other categories of investors have to pay 100 % advance along with the application. 10 % advance payment is required to be made by the first category of bidders along with the application, while other categories of investors have to pay 100 % advance along with the application. 70 % of shares offered were reserved for first category of bidders, while the 30% of shares were reserved for the second category, essentially reserved for small investors and unsuccessful bidders from the first category. 70 % of shares offered were reserved for first category of bidders, while the 30% of shares were reserved for the second category, essentially reserved for small investors and unsuccessful bidders from the first category. 21

III. The process: The secondary market About two weeks after the book building and price determination for IPO shares, PPWSA and Tong Yang requested from the SECC and CSX the authorization to trade PPWSA’s stock on the CSX. About two weeks after the book building and price determination for IPO shares, PPWSA and Tong Yang requested from the SECC and CSX the authorization to trade PPWSA’s stock on the CSX. The CSX’s rules consist of (a) setting the trading hours to two periods and (b) limit the daily price changes to +/- 5% for each trading period. The CSX’s rules consist of (a) setting the trading hours to two periods and (b) limit the daily price changes to +/- 5% for each trading period. All buying and selling of stock must be done through all licensed securities intermediaries such as brokers and dealers. All buying and selling of stock must be done through all licensed securities intermediaries such as brokers and dealers. 22

To trade, an investor needs to open an account with a broker or dealer. To trade, an investor needs to open an account with a broker or dealer. The orders to buy and sell stocks are then sent to the CSX computerized trading system. Only securities intermediaries have access to the CSX system. The orders to buy and sell stocks are then sent to the CSX computerized trading system. Only securities intermediaries have access to the CSX system. Once the trade is processed, the CSX will proceed to: Once the trade is processed, the CSX will proceed to: 1.Operators of clearance and Settlement Facility: Checking securities of seller; Checking securities of seller; Checking cash of buyers; Checking cash of buyers; Transferring the ownership of securities from seller to buyer; Transferring the ownership of securities from seller to buyer; Giving order to Cash Settlement Agent to settle cash from buyer to seller; Giving order to Cash Settlement Agent to settle cash from buyer to seller; Informing Securities depository about the securities traded. Informing Securities depository about the securities traded. 23

2.Operator of Securities Depository: Safe-keeping of securities; Safe-keeping of securities; Changing the ownership of securities holders after settlement (updating the securities holders' book); Changing the ownership of securities holders after settlement (updating the securities holders' book); Depositing and withdrawing of securities. Depositing and withdrawing of securities. 3.Other Players: a.Cash Settlement Agent; b.Securities Registrar; c.Transfer Agent Paying Agent; d.Professional Accounting Firms and External Auditors; e.Asset Valuation Firms and Professional Valuators; f.Credit Rating Agent 24

IV. Operation of the securities market in Cambodia Important roles of the secondary market: Important roles of the secondary market: a.create liquidity and create a more efficient environment for the primary market to operate b.Need for the securities market index to serve as an economic indicator of the performance of the entire market Different categories of stock investors: Different categories of stock investors: a. Domestic investors (individuals and institutions) b. Foreign investors (individuals and institutions) c. Long-term investors and speculators 25

V. Conclusion Role of the capital markets to provide long-term equity capital to the corporations Role of the capital markets to provide long-term equity capital to the corporations Listed companies are more transparent and sustainable, and able to raise more capital Listed companies are more transparent and sustainable, and able to raise more capital Importance of good corporate governance and separation between management and ownership Importance of good corporate governance and separation between management and ownership Stocks are good long-term investments for investors Stocks are good long-term investments for investors Importance of a participation of institutional investors such as insurance companies pension plan and other investment firms that support a smooth functioning of a stock exchange Importance of a participation of institutional investors such as insurance companies pension plan and other investment firms that support a smooth functioning of a stock exchange Importance of a strong and effective regulatory body. Importance of a strong and effective regulatory body. 26

Thank you Questions & Answers 27