CMDA is working to introduce a formalized platform/market for private placements as a new access to finance avenue for local companies.
There are 3 main ways through which companies access their financing requirements in the Maldives; Bank loans, Private placements and via Going public through the Capital market.
A very small percentage of Maldivian businesses can be considered large with most being small to medium sized family owned businesses. Bank loans are the preferred method to raise finance but is proving to be inaccessible to cater to the financing needs of a significant number of companies.
Going public is considered a harder choice for most of these companies, having to part with control and equity, the added costs related to going public such as marketing, restructuring & credit rating is too high for it to be a viable option for most of the local companies, this coupled with regulatory requirements for timely disclosures and compliance makes this path impractical at growth stage.
Due to these reasons, businesses are moving towards ‘Private Placement’ where they choose to approach high net worth individuals/entities with investment offers for their projects. Even large well-established local PLCs are preferring to go with private placement – the August 2015 USD bond issued by STO Plc. to commercial banks @5.25%, Tenure 8 years.
Private placements are largely unregulated in the Maldives and have immense room for customization and flexibility. It allows businesses to choose their own investors increasing the chances of having investors with similar objectives and means to provide business advice and assistance, as well as funding. It also allows the business to remain a private entity, rather than having to go public to raise finance and provide flexibility in the amount and type of funding. It requires less investment of both money and time than public share flotations and as a result, private placements are sometimes the only source of raising substantial capital for more risky ventures or new businesses.
Private Placement is deemed to be riskier than public securities market, due to the reduced regulatory nature of the market, investors may demand a higher return for their investments. To counter this, although it isn’t a mandatory requirement, having a credit rating can be an advantage. In spite of this, financing cost in a private placement arrangement can still be more attractive compared to other sources of financing.
The CMDA believes that officially recognizing Private Placements and introducing a marginally regulated common platform/ market where buyers and sellers can come together, find each other without the need for middlemen, would eliminate most of the drawbacks mentioned. It will enable easy access to capital, increase participation by institutional and private investors, encourage the entry of new market participants such as investment banks, credit rating agencies, increase activity and healthy competition in the financial market ensuring a greater contribution to the economy via accelerated business activities in the country.
The framework is expected to be launched early 2019. The regulatory package is currently under development.
Full details are available at the link below:
Source URL: Corporate Maldives