Is the Securities Trading Alternative to Bank Loaning in Laos? From a Lao law perspective
By: Xaypaseuth Phomsoupha, PhD-PA&PL, LL.M-ICL, LL.M-IF&CL, MA, BA
Managing Partner
Principal Solicitor-at-Law
Licensed Insolvency Practitioner
The advent of project financing has made Laos an emerging market in Southeast Asia’s sub-region since the early 1990s. However, financing has recently shifted from a public-private partnership to a more private nature due to the evolution of capital sources. This passage seeks to explain how commercial infrastructure projects were financed. The author would like to explore whether there is an alternative to conventional direct borrowing regarding raising debts in the future.
BANK-BASED FINANCING
The starting point is to make project documents bankable before incorporating a Lao project company (the “Lao Co”) to sign and enter into a concession agreement with a responsible GOL agency. Lao Co, in its capacity, as a borrower company, offers collateral to a securities agent as a way to be eligible for bank loans. The collaterals, including without limitation concession rights, leasehold, future cash flow, insurance proceeds, and mortgages on physical assets, are pooled and repackaged as tradable securities and then sold by the securities provider/the borrower to securities agents/lenders. The ultimate borrower-lender relationship requires several internationalised contracts signed by and entered into by multiple counterparties, including but not limited to the Lao government, Lao Co, investors, off-takers, securities agents, insurers, and creditors. Collectively, the agreements are referred to as financing agreements, many of which are governed by, interpreted, and construed in accordance with Lao PDR law. However, the transaction costs have been perceived as high and time-consuming, from gathering collateral to achieving financial closure.
FINANCING IN THE NEW ENVIRONMENT
To date, financing of the foregoing mode has become lingering due to diverse factors surrounding the products and services markets, on the one hand, and/or sources of funds have evolved on the other. Meanwhile, mergers and acquisitions and restructuring finance within existing businesses are on the increasing trend and have become ordinary business changes. Many juristic investors have explored an alternative way of raising capital.
MARKET-BASED FINANCING
Although LSCO has yet to gain membership in IOSCO, the LSCO and LSX started and developed their functions concurrently in 2011. According to a recently available report, LSX has traded with four securities companies, eleven listed trading companies, and some intermediary financial institutions.[1] Noting that developing markets for equity and debt financing is nascent, the Lao regulatory authorities have introduced a few governing laws, including the Law on Securities, the Law on Enterprise, the Law on Accounting, and several secondary legislations.[2] Specifically, the Law on Securities (amended 2019) allows juristic investors to issue corporate bonds in the domestic securities market.[3] IFC, ADB, and ASEAN + 3 countries have actively countenanced an effective securities market in Laos by initiating cross-border settlement and good corporate governance.[4] Thus, the legal infrastructure inherent in the securities transactions demonstrates that market-based financing is willing to move on.
RECOMMENDATIONS
Our observation suggests that the institutional arrangement and legal frameworks for enriching the Lao capital market are relatively fledgling. The Lao regulatory authorities need to enhance a statutory environment and tweak the modus operandi of the capital market to meet the needs of the emerging environment.[5] Whole-sale investment banks may be segregated from retail and commercial banks. Clearing banks providing clearing and settlement services must be strengthened to facilitate outbound and inbound capital more effectively. Mutual funds existing in the country must be fully commercialised for equity funding in private corporations. Credit rating agencies shall be institutionalised in the countries and provide public confidence therein.
The Law on Enterprise (2022) may need a revision to allow foreign entities to participate in listed companies actively without onerous requirements.[6] Articles regarding public companies under the current Law on Enterprise should entail more comprehensive, operative provisions to foster listed companies to flourish. The Law on Commercial Banks shall legislate effective provisions for shadow banking (non-bank financial institutions).
Regulation and supervision must be reactivated when information disclosure has failed. Theoretically, regulating authorities shall define “insider” precisely to restrain people from insider trading.[7] Pragmatic legal instruments, for instance, market abuse regulations prohibiting insider dealing and sanctioning violations, must be in place. Furthermore, the market needs to mobilise more institutional investors to support capital expansion over the long-term liquidity increase. As substantive law exists in the contractual arrangement regarding securities vis à vis credits under the Lao jurisdiction, the parties undoubtedly need to engage Lao law firms in contract formulation and negotiation to ensure compliance.
To be resilient following the Covid19 shock, investors’ confidence in market-based financing has yet to be built up in Laos soon.
[1] LSX, “Report: LSX Market Performance Quarter I Year 2020” [2020]
[2] IFC & LSCO, “Promoting Best Corporate Governance Practices” [2020]
[3] Law on Securities, [2019] Arts 27-33
[4] ADB, “ASEAN + 3 Central Securities Depository and Real-Time Gross Settlement Linkages: A Progress Report of the Cross-Border Settlement Infrastructure Forum” [2020]; IFC and LSCO, “Guidelines on Corporate Governance for Listed Companies” [2019]
[5] LSCO, “The corporate governance landscape and capital market development in Lao PDR 3rd meeting of the OECD-Southeast Asia Corporate Governance Initiative” [2016] pp 16, 17
[6] Law on Enterprise (2013)
[7] OICV-IOSCO, “Fact Sheet” [2021]