At a glance
- Amendments to Mexico’s Securities Market Law look to boost growth for SMEs and develop investment opportunity, likely generating more widely used banking services
- Reforms include simplifying the listing process and giving investors access to new high-yield instruments, which is expected to drive the participation of issuers in Mexico’s securities markets
- At least 100 SMEs could enter Mexico’s equity and capital markets, with the influx of new issuers catalysing a market that has faced stagnation
Reforms to Mexico’s Securities Market Law enacted in December 2023 are set to catalyse a shift in the country’s financial landscape. Facilitating market entry and opening opportunities for investment, the amendments look to boost growth for small and medium-sized enterprises (SMEs) and increase banks’ appetite for risk, according to Moody’s Investors Service.
Key reforms include the introduction of a simplified registration procedure to expand the participation of SMEs in Mexico’s public markets. The amendments also give investors access to new, high-yield instruments and reallocate some supervisory responsibilities from the National Banking and Securities Commission (CNBV) to Mexico’s stock exchanges.
As such, participation of issuers in Mexico’s securities markets is expected to surge as a simplified listing process comes into force. Activity on the country’s stock exchanges — Bolsa Mexicana de Valores (BMV) and Bolsa Institucional de Valores (BIVA) — will also increase, according to Moody’s.
As of September, there were only 138 local and foreign issuers in the BMV despite Mexico having more than 4 million SMEs, reports Moody’s.
Better access to financing
As small companies in the country struggle to get bank financing, Mexico’s capital reforms open up alternatives for SMEs to fund projects and participate in its nearshoring phenomenon, says Felipe Carvallo, senior credit officer at Moody’s.
Loans to SMEs accounted for just 6.6% of the Mexican banking industry’s loan book last year, equivalent to only 2.3% of gross domestic product (GDP), Moody’s reports. Brazil’s ratio, in comparison, stands at 10% of its GDP.
“Mexico’s banking system has remained relatively small in comparison to GDP. For example, the largest Brazilian bank is about the size of the whole banking system of Mexico, and that calculation includes development banks,” says Mr Carvallo.
The country’s loan-to-GDP gap is “bewildering” given comparative regional progress, he adds, in part caused by the challenges SMEs face in accessing formal lending. Companies traditionally rely on supplier financing, or funding from family and friends — “not so much on the banks”.
Additionally, Mexico’s Congress predicts the amendments could double the number of issuers, with more than 100 SMEs eligible to enter the country’s equity and capital markets, Moody’s reports.
As the country’s capital markets face stagnation in public equity offerings and listings, and with its SMEs still recovering from the pandemic, Mr Carvallo says the reforms could “revive part of the market that has been lost”.
If the reforms prove successful, predicts Adrián López, partner at law firm Nader, Hayaux & Goebel, further regulation could be on the horizon that is designed to expand the pool of eligible investors. Currently, the offering of securities through simplified registration is only available to institutional and qualified investors.
“Opening SMEs to investment from qualified and institutional investors may not be enough to create an active market, as many of these investors may not typically have a mandate aligned to invest in Mexico’s SMEs,” he says.
As such, Mr López says the restriction on investors may reduce the potential capital that SMEs can access and somewhat diminishes the impact of smaller investors, “although it demonstrates a natural, prudent first step”.
Stock exchange governance
The simplified registry for companies seeking capital will enable Mexico’s two stock exchanges — the BMV and BIVA — to boost trading in smaller, less sophisticated markets.
Under the new law, registration is no longer governed by the CNBV, but by the BMV and BIVA, which will now determine minimum requirements and criteria for SMEs to apply for financing.
The BMV and BIVA will also oversee information dissemination to the market, which is set to improve market discipline and transparency for listed companies, according to Moody’s.
“Companies listed on Mexico’s stock exchange are usually very large and sophisticated entities. The reforms address some of the barriers to SMEs accessing financing and will allow smaller, simpler entities to enter the market,” says Mr Carvallo.
Less information and documentation will be required from simplified issuers to obtain the registration of the securities, compared with that required for traditional securities registration. “The reform is designed for listing to be simpler and quicker,” adds Mr Carvallo.
As SMEs increasingly look to be listed and likely become more institutional, Mr López says companies will require more sophisticated banking services.
“The ripple effect of this amendment — if successfully implemented — may pose an opportunity for other financial services providers like the banking sector. It can act as a catalyst for better, more utilised banking services,” he adds.
Now, the CNBV has one year to issue a set of secondary rules together with the complete regulatory framework before the law comes into full effect.
