The Malta Stock Exchange organised a highly topical event last week bringing together a number of market participants in the presence of the Minister of Finance and also the Malta Financial Services Authority as the single regulator of financial services in Malta.

The event was organised to discuss measures to increase trading participation and market liquidity. The Chairman of the MSE Mr Joseph Portelli acknowledged that equity market trading volumes have decreased over the years thereby dampening market liquidity. The Chairman unveiled a number of initiatives and recommendations that will hopefully increase participation in the Maltese equity market. These proposals focus on lower trading costs on all equity trades through the removal of the €4.50 transaction fee, introducing improved research tools on the MSE website and enhancing market communication with the investing community.

The MSE is also proposing financial compensation for liquidity providers and will be encouraging the use of share buy backs and executive share compensation. Mr Portelli stated that buy backs have clearly created shareholder value across international markets. The MSE intend to assist companies in implementing studies on whether share buyback programs can add value and enhance liquidity particularly “if repurchased shares are held as treasury stock for future resale”.

During his brief intervention, the Minister of Finance Hon Clyde Caruana indicated that some initiatives related to the capital markets will feature in the upcoming budget to stimulate further equity participation. The Minister reached out to market participants to assist the Government in reviving the equity market and augured that the encouraging volumes across the bond market will be mirrored in the equity market.

On his part, during a panel discussion on share buy backs, the Chairman of the MFSA Mr Jesmond Gatt stated that the authority is aware of the challenges being faced by the Maltese equity market and acknowledged that share buy backs are an important tool especially due to the demographics of the investor community in Malta.

Mr Gatt claimed that the authority is accessible to discuss procedures on share buybacks with issuers to reduce any uncertainty due to regulatory obligations.

I was honoured to have been given the opportunity to deliver a keynote address tackling the state of the market and catalysts for change. Over recent months, through my weekly column in this newspaper, I have been highlighting the serious challenges being faced by the Maltese equity market and also mentioning a number of initiatives to help improve the situation as well as the consequences of this moribund equity market.

Nowadays, the primary concern for investors is having a possible exit route to enable them to liquidate part or all of their investment if circumstances so require. In my view, the main initiative to increase trading participation and market liquidity is to have a ‘buyer of last resort’ in place wherever possible. The key liquidity providers overseas are companies themselves buying back their own shares coupled with participation by company insiders and also participation by institutional players.

During my keynote address I stated that if several companies whose shares are listed on the MSE (especially the larger ones) have an annual share buy-back programme in place (assuming their cash flow and capital structure can permit this), then such a programme should be sufficient to begin to encourage various types of investors to participate in the market once again.

Participation and activity by company insiders (directors and top management) is another important tool for market liquidity and this is common practice in many of the larger developed capital markets. As such, the recommendation by the MSE for partial share-based compensation for C-suite executives and board members in order to align their interests with shareholders is a step in the right direction and could potentially help improve investor sentiment.

During my intervention I also mentioned that the investor relations efforts of equity issuers is another important aspect in order to improve trading participation across the equity market. Apart from increased communication by issuers to the wider market through MSE company announcements, issuers need to dedicate time to conduct roadshow presentations to institutional investors (at least annually) to present their investment case.

Upcoming changes to the free float regulations (the amount of shares in public hands) across the EU which are expected by the end of this year should also help trading participation since this facilitates share buybacks and insider participation. The reduction of the minimum freefloat requirement to 10 per cent will also enable strategic or financial investors to participate more frequently in the market since a few companies are close to their current 25 per cent minimum freefloat requirement.

Another very important initiative to create a regular flow of funds are fiscal incentives for savings products. In many countries such schemes are hugely popular. The UK has the Individual Savings Account (ISA) which comes in various forms to cater for different investor needs. Over recent months, there was a lot of coverage across the international business media of these schemes with particular reference to Sweden and I had mentioned this in one of my articles some weeks ago. These savings accounts were portrayed as one of the key success factors behind the popularity of the equity culture evident nowadays.

In my view, the outcome of the MSE event was a very positive one indeed. It is reassuring to note the efforts being made by the MSE and the MFSA and the commitment by the Minister of Finance that initiatives for the capital market will feature in the upcoming Budget which is normally delivered in October. If all market participants and the Government of Malta tackle the capital markets in the correct manner, we can indeed create a revival of the equity risk culture in Malta that was prevalent over the 1990s and the years immediately prior to the pandemic.

This is of critical importance in order to assist existing issuers to raise additional capital and also other companies to approach the capital market for their own requirements. This is indeed the basic function of a capital market.

Read more of Mr Rizzo’s insights at Rizzo Farrugia (Stockbrokers).

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