The development of capital markets is a closely related matter to the economic growth of the countries. Hence the importance that governments tend to develop efficient and deep financial systems, not only for the transformation of terms and the transfer of risks, but also, in general, for a proper allocation and distribution of the society resources.
With this in mind, the Colombian President, Iván Duque Márquez, convened a group of experts for develop the Capital Markets Mission. The task assigned was to conduct a study of the Colombian capital market, in order to identify the barriers that have not allowed market development and make recommendations that, if adopted, could result in the achievement of a solid, deep and efficient capital market for the Colombian economy.
The mission started in late 2018 and the results were presented the last August. The results of the analysis concluded with more than 50 recommendations, grouped into 8 sections, as follow: (i) Institutional Arrangement, (ii) Market Structure, (iii) Regulation and Incentives, (iv) Public Asset Management, (v) Products, (vi) Market Promotions and Financial Education, (vii) International Scope and (viii) Tax Scope.
This document will focus on studying section two, making special emphasis on the recommendation regarding to the regulatory framework of the non-intermediated market. Not for considering other to be smaller, but for believing in the potential to reactivate capital markets and for its relationship with what is proposed in the “Plan Nacional de Desarrollo 2018-20222” regarding the rules to reach a dynamic, inclusive and sustainable economy.
Section two of the Capital Markets Mission Report is divided in several subheadings. However, as noted above, this document focus on the recommendation regarding to the regulatory framework of the non-intermediate market. This recommendation is based on the premise that one of the principal problems of the Colombian capital market is the lack of offer, so the importance of structuring the market for alternative issuers is highlighted.
The Capital Markets Mission point out that the regulation must recognize this reality and rearrange capital markets structure. The recommendation is to establish clear differences between what is known today as the main market and the second market. Additionally, the recommendation suggests modifying these names by public market and private market, respectively, as well as create a second modality of the non-regulated market called balcony market. These modifications are due to the need to distinguish both the issuers that qualify to participate in each market segment, as well as the instruments and the investors that can participate in each of these.
Maybe the modification in the language seems minor. However, the fact that a reform to the denomination of the main and second markets is proposed goes far beyond a simple linguistic issue. Going from main market to public market recognize a reality and is that the public offer is aimed at any investor without considering their special qualities, which means a real public market to which virtually anyone has access; while moving from second market to private market, recognize that these kind of issues that are instrumentalized through a private offer are aimed at qualified investors, which gives reason that this is a closed market that not everyone can enter, that is, a real private market.
Fundamentally, what this recommendation generates is clarity in the participants. As the regime according to which the issuers of the principal market – or public market under the recommendation – have higher demands in terms of information disclosure, handling and administration of conflicts of interest and corporate governance, among others, than the issuers of the second market – or private market under the recommendation – remain in force. The above, is correct in our consideration to the extent that it includes the type of investors participating in each segment and seeks to ensure that investor have the necessary information to make decisions.
Reviewing the recommendation more carefully regarding the regulation of the public market, there are some suggestions that are well worth mentioning. For example, highlights the recommendation, that should exist a Public Issuers and Securities Registry in which should be inscribed the issuers prior to the issuance process and likewise, the minimum content of the prospectus and the public offer must be set and should be approved prior to the issuance process. On the other hand, among other suggestions of the regulation of the private market, it should be highlighted that neither the private offer nor the memorandum – which acts as a prospectus – must be subject to prior or subsequent authorization by the Superintendence of Finance of Colombia.
This division between the mentioned segments is not new. The financing scheme through the second market was created by the Government in 1995 with the expedition of the Resolution 400 and modified by the Decree 1019 in 2014. In its beginning, this segment was intended to facilitate the capital markets access to issuers. Despite this objective, this segment of the market has not taken off.
Well, the committee of experts that made the Capital Markets Mission stressed the importance of having a segment like the one mentioned above in the Colombian market. For that reason, recognizing that both the public market and the private market fulfill a specific role within the Colombian market and that neither is enough to cover nontraditional issuers, the commission recommended the creation of the so-called “Mercado balcón” or balcony market. This, also in line with the purposes of the Government in the “Plan Nacional de Desarrollo” or National Plan of Development, about entrepreneurship, formalization and productivity for an inclusive, dynamic and sustainable economy. La re
The recommendation in this regard is to create an exclusive segment for small and medium businesses whose issues do not exceed 584.000 TVU (tax value unit) and whose issuance process should be simplified to facilitate its access to the market. In terms of regulation, it is recommended that it be much laxer than that of the other two segments, which is logical considering the kid of issuer that is targeted, without this meaning reducing professionalism and responsibility standards.
As this market is oriented to small and medium issuers, the consequence is that the participation of investment clients is restricted, and they can only acquire the instruments issued in this segment under certain special conditions and with the mandatory participation of a Broker. While the participation of institutional investors, which is essential for the market segment develop, is total. The recommendation even suggests authorizing that with the resources of pension funds, severance funds, reserves of insurance companies and capitalization, up to 100% of an issue from de balcony market can be acquired.
Among other recommendations to highlight, it should be mentioned that, regardless of having to register in a Register of the Balcony Market, these issues can only be negotiated through the extra-stock exchange, that is, in the over the counter market. And one point that cannot be mentioned is that it is suggested that the balcony market issuers cannot have property link relationships with issuers participating in the public or private market nor can they register in either of these two markets. The above, in order to prevent possibilities of regulatory arbitration.
There is no doubt about the importance of this recommendation for the market, because as it has been argued, one of the main ailments that the market afflicts is the lack of supply. Problem that can be solved in some way through the proposal of the balcony market, which important small and medium businesses will be able to turn to as an alternative source of financing, which today they do not do because it is not very effective. And to the extent that there are more and better supply options, demand will increase and the market will develop.
