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> Update on the Status of the Upcoming Yangon Stock Exchange

The recent opening of Myanmar's economy has generated strong investor interest in Asia's last untapped frontier market. Myanmar is currently in the process of establishing the Yangon Stock Exchange (YSE), a modern stock market intended to replace the underutilized Myanmar Securities Exchange Centre. While the YSE is likely to represent a significant improvement over the existing exchange, it remains to be seen whether Myanmar can support a viable exchange. Conversely, the global modernisation and technological advancements carried out by the world's stock exchanges would allow the YSE to bypass issues that those exchanges faced.

In May 2012, the Central Bank of Myanmar, the Japan Exchange Group (former Tokyo Stock Exchange) and the Daiwa Institute of Research Group signed a Memorandum of Understanding to open an exchange. Subsequently, the Securities Exchange Certificate Transaction Law (SEL) was enacted by parliament in July 2013 to facilitate the creation of the bourse. The SEL provided a broad framework for the establishment of stock exchanges, including the creation of the Securities and Exchange Commission (SEC); licensing for securities-related businesses (such as brokerage, underwriting, investment advisory, etc.); and a list of prohibited activities relating to securities trading (such as insider trading).

October 2015 has been set as the aspirational target launch date of the YSE, but commentators have mostly deemed this start date as rather ambitious. As of November 2014, regulations to implement the securities law have still not been issued. The SEC was finally officially formed in October 2014 with Deputy Finance Minister U Maung Maung Thein announced as chairman. The government recently announced that the Commission would operate under the direct oversight of the Ministry of Finance and Revenue for at least five years before becoming autonomous.

The challenges in setting up the regulatory framework play into the general sentiment that it is premature for Myanmar to establish a stock market. Some experts have expressed concerns on whether Myanmar has the expertise and resources to effectively monitor a securities market, and they contend that the banking sector is better qualified to police investment.

Furthermore, there may not be enough public companies in Myanmar at this time to justify the creation of a stock exchange. It is believed that only a small number of Myanmar's 200 public companies are currently capable of meeting the requirements for listing on the exchange. Only six companies have applied to be listed so far, of which two have been approved for listing by the Ministry of Finance (the Ministry hopes to approve between three to five companies for listing at the October 2015 launch).

Perhaps the greatest challenge facing the new exchange is the minimal access to foreign investment. Limits on foreign ownership imposed by the Myanmar Companies Act (MCA), a 100-year-old British law that has not been updated since 1914, pose a significant obstacle to foreign investment. In order to comply with the MCA, only Myanmar citizens will be eligible to buy stock on the YSE. With the exchange limited to local investors, it is suggested that companies will have less incentive to join.

Limits on foreign ownership have hindered the growth of other stock exchanges in the region. In Vietnam, for example, a 49-percent cap on foreign ownership has contributed to the anemic growth of the nation's exchanges. Exchanges in Cambodia, Laos and Sri Lanka, which have similar limits on foreign ownership of stock, have also struggled to recruit companies. Unless Myanmar provides opportunities for foreign investors to participate in the YSE, the exchange will likely struggle to attract IPOs.

With the many challenges facing the YSE, expectations are modest. Investors, however, may want to keep an eye on the exchange's progress in the coming months. The success or failure of the exchange could have a significant effect on the local investment landscape. If the YSE struggles, Myanmar businesses will continue to look to markets such as Singapore for international investment dollars. If the exchange takes off, Myanmar businesses will likely choose to take the less-complicated route of raising funds locally.

Written by Krishna Ramachandra, Benjamin Kheng and Billy Raley.

This article is prepared and published for informational purposes only and should not be construed as legal advice. The views expressed in this article are those of the authors and do not necessarily reflect the views of the authors' law firm or its individual partners.

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