Taiwan's second Over The Counter (OTC) board will be launched in April, it was announced yesterday. With significantly easier listing requirements than are currently in place on the main Taiwan Stock Exchange and OTC boards, the new board will be a boon to the budding Internet industry in Taiwan, choc-full of young, ambitious companies. Though this newspaper continues to be cautious in its assessment of what good this will do for the economy, it's better late than never.
Taiwan's financial market regulators have been extremely slow in following world trends, and have been forced to watch as some of Taiwan's most promising software and Internet entrepreneurs have left for pastures where capital is more easily raised. With the surge in investor enthusiasm for "e-commerce" stocks in Asia, however, the Ministry of Finance has finally been given compelling reason to drop its guard against companies that don't have a proven track record of earnings but do have a promising business plan based around the Internet: that is, if they don't open up, Taiwan will lose out to countries with more open-minded regulators. Where people like Daniel Ng, wildly successful founder of Trend Micro (an anti-virus software firm) and Sina.com (one of the biggest Chinese-language Web portals) have gone (Tokyo and Hong Kong), other Taiwanese stars-in-the-making would be certain to follow.
By taking the initiative, the finance ministry has not only pre-empted such a scenario unfolding, but it has taken a step toward leveling the playing field in Taiwan's economy for small-and-medium enterprises. There are more than 7,000 companies which are eligible for listing on the new board. If even a tenth of those eventually make it through, it will result in an important "democratization" of the country's capital markets. Previously, only big and well-connected companies had any chance of raising the kind of capital needed to pursue high-risk but promising business plans. Now, there will be a move toward a broader spread of financial resources among a wider section of the population. This not only augurs well for the discovery of a new class of entrepreneurs, but should spread the risks associated with stock market investing, too.
At the same time, by moving 150 qualified companies up to the main TSE board, it raises their profile and broadens the choice for international investors, who generally steer clear of the OTC. This should help to internationalize Taiwan's capital markets and, as a result, attract more foreign investment.
That said, those who will benefit the most from the new board will be local investors. Though foreigners are generally dissuaded from investing on the OTC by its inherently higher risk factor, Taiwan's institutional investors have as much as 19 percent of their funds under management in the OTC. And, as volumes have shown in recent weeks, the heavy weighting of the OTC toward technology companies, especially those with Internet-related units, has attracted hordes of retail investors. With greater choice at their disposal, the threat of a bubble being blown up in a few high-demand stocks will be lessened.
At the end of the day, however, this much must be kept in mind: the Internet is a risky business the world over. So goes NASDAQ, so goes South Korea's KOSDAQ, so goes the Growth Enterprise Market in Hong Kong. If the US retail investors who, thanks to the Internet, have made day-trading an art form and have contributed heavily to the NASDAQ's surge in the past six months, get tired of playing with their 401k pension plans and decide to retire with cash in the bank, the effects will certainly be felt in Taiwan. And if that happens, who will have the gun pointed at their heads? The very same regulators we are now slapping on the back.
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