Devising an Equity Market Development Programme

Malta’s equity market has not developed as one would have hoped for over the past decade with very little new issuance over recent years. As I mentioned in several articles of mine and also made reference last week, the equity market suffers from chronically thin trading volumes especially in the aftermath of the pandemic. This has created a circular challenge with investors failing to participate in the equity market due to limited trading activity and instead seeking to exit current exposures which in turn is making companies hesitate to list on the MSE due to restricted market depth and weak trading volumes.

The lack of new IPO’s (by companies needing to raise capital or address succession planning issues) is surely not due to any lack of incentives given the highly beneficial tax-free status for shareholders listing their company on the Borża. Equity issuers are clearly being deterred by the lack of appetite from institutional and retail investors seeking to participate in the market which is driven by the miserable trading volumes across most companies.

This is not an isolated phenomenon for small equity markets. There are many case studies on an international level which led to specific measures to generate a revival. One in particular that caught my attention was Singapore’s Equity Market Development Programme. In my view, it offers a compelling blueprint that Malta could study carefully and seek to emulate in some aspects.

The Singapore experience

In 2023, Singapore’s Ministry of Finance and the Monetary Authority of Singapore (MAS) launched the Equity Market Development Programme (EMDP). The programme was conceived in direct response to a period of sluggish listing activity, declining retail participation and growing concern that Singapore’s equity market was losing ground to other rival bourses in the region.

The EMDP was based on a number of pillars. First, the Singapore Exchange (SGX), working alongside MAS and various government-linked investment entities, introduced a series of measures to deepen liquidity in the secondary market. These included a market-making programme under which designated liquidity providers were obliged to maintain continuous bid and offer prices in qualifying equities, thereby reducing the bid-offer spread that had historically deterred retail investors from trading these securities.

Secondly, the authorities introduced targeted tax incentives for retail investors who invested through equity funds or who held SGX-listed shares for a minimum qualifying period. Essentially, the incentives were directed to encourage and reward long-term equity ownership.

The MAS took deliberate steps to expand the universe of institutional demand for SGX-listed equities. The Central Provident Fund (CPF), Singapore’s mandatory pension savings scheme, was permitted to invest a greater proportion of its assets in SGX-listed equities, creating a structural anchor of demand that stabilised valuations and provided companies with the confidence that there was a reliable investor base available that could support their equity issuances. Additionally, the government in Singapore encouraged the participation of its sovereign wealth vehicles in anchor investor roles for qualifying IPO’s.

A framework for urgent reform in Malta

Given the very successful outcome of the EMDP in Singapore, a framework for the Maltese capital market ought to be devised by the Government of Malta, working in close coordination with the Malta Financial Services Authority (MFSA), the Malta Stock Exchange (MSE) and relevant tax authorities.

1. A market-making programme

One of the major frustrations among Maltese investors is the great deal of difficulty in executing trades (currently mainly on the sale side due to the scale of the share overhang) at reasonable prices across most Maltese equities. Since the MSE has not yet succeeded in attracting dedicated market-making activity, the equity market is dominated by wide bid-offer spreads and long periods of illiquidity across many equities. The corporate share buybacks by Bank of Valletta plc, Malta International Airport plc and M&Z plc (which could be followed by Plaza Centres plc and AX Real Estate plc following last week’s announcements) are a very important first step in that they enable small shareholders who wish to exit, a liquidity route that will avoid share prices from dropping to unrealistically low levels since some retail investors input orders to sell at market and there are a lack of buyers in the market to absorb even low volumes of sale orders.

However, to satisfy the needs of high net worth and institutional investors, a formal market-making framework needs to be established for qualifying listed equities, in exchange for a defined package of incentives such as reduced MSE fees, access to borrowing facilities if required and possibly also direct subsidisation by a Government-backed liquidity fund.

2. Tax incentives for retail investors

Apart from the tax-free status from a capital gains perspective (unless one is classified as a trader under the Income Tax Act), retail investors need to be incentivised further to allocate a greater proportion of their savings toward equity investment rather than bank deposits or real estate. This comes out clearly from the Household Budgetary Survey which shows a huge allocation of personal wealth towards the property market. The Government should consider introducing Savings and Investment Accounts (SIA’s) as is being recommended by the EU. There are many successful frameworks to follow in this respect in the UK, Sweden and also Singapore’s CPF Investment Scheme. Under Malta’s Individual Equity Savings Account (IESA), for example, Maltese residents would receive tax relief on dividend income arising within the account (up to a defined annual limit) in respect of investments in qualifying securities listed on the MSE. This measure would directly address the shrinking retail investor participation on the MSE.

3. Enhancing institutional investor mandates

The Government should examine the feasibility of expanding the universe of institutional demand for equities listed on the MSE. The generally active two-way market and strong volumes across the MSE very evident between 2015 and 2019 was undoubtedly brought about by the injection of liquidity by the National Development and Social Fund (NDSF) as it built its portfolio of local securities under its wider mandate. The role of the NDSF or other Government-backed vehicles in supporting the equity market and new IPO’s ought to be debated. Moreover, one should consider specific one-time injections from Government-backed entities into some qualifying prescribed equity collective investment schemes (having at least 85 per cent assets invested in Malta) following a very long-period of declining assets under management by the three main asset managers.

Other measures that were successful in Singapore and could be replicated in Malta could include (i) a well-funded, active and professionally managed early-stage and growth equity programme that provides qualifying companies with the capital, governance support and investor credibility ahead of pursuing an IPO. Essentially, building a potential pipeline of companies by co-investing alongside private investors; and (ii) the introduction by the MSE of more aggressive benefits for new IPO’s enabling them to claim a grant of say up to 50 per cent of the upfront costs to conduct a listing mainly made up of professional fees and regulatory costs.

Singapore did not transform its equity market through a single measure. The EMDP was a sustained, coordinated and well-resourced programme of interventions, implemented with the full commitment of the government, the regulator, the exchange and the private sector acting in concert. Malta must devise a similar EMDP since the cost of continued inaction is not merely a missed opportunity for the capital markets but a broader economic cost borne by Maltese businesses and retail investors. The measures that are required in Malta are neither too ambitious nor excessively costly. 

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